WESTERN STATES | TOTAL. | |
---|---|---|
1845........................ | 374 | 4,633 |
1846............................ | 419 | 4,930 |
1847........................... | 608 | 5,578 |
1848........................... | 679 | 5,996 |
1849........................... | 727 | 7,365 |
1850.......................... | 1,276 | 9,021 |
1851.......................... | 1,846 | 10,982 |
Finally, the discovery of gold in California in 1847 added another powerful element to the industrial development of the time.
The outlook in 1850, with abundant emigration, a new empire arising on the Pacific, the prospect of becoming the granary as well as the cotton-field of the world, ship-building increasing year by year, and no cloud of war or political disturbance visible, was very flattering. The only hindrances to a speedy realization of these golden dreams were want of capital and want of technical and scientific training. Railroad building at the West must, in the nature of things, outstrip the settlement of the region. It is the chief form in which capital is applied to the settlement of the country, but evidently it is a case in which the returns from the investment cannot be immediate, and in every such case in which the supply goes ahead of the demand there is especial need of care, foresight, and judgment.
For the supply of capital there was recourse naturally to the older countries. The injury done to American credit in 1837–40 had hardly yet been healed, but in 1854 it was estimated by the Secretary of the Treasury, on reports called for by him, that there were 200,000,000 dollars worth of State, railway, and other bonds and bank-stock held abroad. * In 1857 the amount of English capital invested here was estimated at 400,000,000. While naturally turning to the older countries for supplies of capital, there has always been a certain prejudice here against foreign investors. Our “foreign indebtedness” has been a cause of serious and sincere anxiety to many, but the more we can borrow, so long as we know how to invest it productively, the better, and our credit—our power to borrow abroad—is the possession which it is most essential for us to preserve intact.
Our other resource when straitened for capital, the one to which we had betaken ourselves before, was now also employed—a multiplication of the paper representatives of capital. Capital is that portion of all the previous product of a nation which at any given time is available for new production. This will be a certain amount of tilled land, houses, buildings, stock, tools, food, clothing, roads, bridges, etc., etc., which have been made and are ready for use in producing, transporting, and exchanging new products. These things are all the product of labor, and require time for their production. Nothing but labor spent upon them can produce others, and time is required for this labor to issue in new and increased possessions. Currency only serves to distribute this capital into the proper hands for its most efficient application to new production. Banks, it must be repeated, only facilitate the transfer of capital from hands where it is idle, or is distributed in too small quantities, into hands by which it will be usefully employed, being collected in the necessary amounts. Currency, therefore, is not capital, any more than ships are freight; it is only a labor-saving machine for making easy transfers. Banks do not create wealth, they only facilitate its creation by distributing capital in the most advantageous manner. If, therefore, currency is multiplied, it is a delusion to suppose that capital is multiplied, or, if “money is plenty,” by artificial increase of its representatives, it is only like increasing the number of tickets which give a claim on a specific stock of goods—the ticket-holders would be deceived and could, in the end, only get a proportional dividend out of the stock. If banks not only lend capital but also lend “ coined credit,” some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found that they represent nothing; then “ credit breaks down,” and there must be a settlement, a liquidation, a dividend, and a new start. We do not get away from the facts at all. The real amount of capital which we possess is divided up, and we have to make up our minds that we possess only 50 or 75 per cent. of what we thought we possessed. We put smaller figures for everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begins again.
Some have wondered that we go on in this way with a grand crisis only once in twenty years, while the oldest and most prudent nations have one every ten years. The explanation no doubt is, that the future which we discount so freely honors our drafts on it. Six months’ restraint avails to set us right, and our credit creations, as anticipations of the future product of labor, become solidified. So long as we understand that we have anticipated future production, and must apply that production to make good the anticipations, we run on without very great risk, but whenever we lose our heads in the intoxication of our own achievements, look on the credit anticipations, which are only fictitious capital, as if they were real, use them as already earned, build other credit expansions upon them, do away with our value money and export it to purchase articles of luxurious consumption, then we bring a convulsion and a downfall. The mistake is then; realized, the lesson is taken to heart for a little while, but a new generation grows up which forgets or never knew the old experience, and the mistake is repeated. The relations of trade are often spoken of as a machine, and such indeed they ought to be—a complex machine, with parts so regulated that it can go on at any speed and for any length of time, without danger of anything more than an occasional and temporary derangement; but this reckless, although skilful, extension of groundless credit is more like the performance of the juggler who keeps first three, then four, then five, and so on, balls in the air at once. If he goes on continually increasing the number, it is physically certain that he will sooner or later miss one of them, and the whole will fall to the ground in confusion.
The bank expansion from 1848–1851 was as follows:
CIRC. | DEP. | SPEC. | |
---|---|---|---|
1848.... | 128,500,000 | 108,200,000 | 46,300,000 |
1849.... | 114,700,000 | 91,100,000 | 43,600,000 |
1850.... | 131,300,000 | 109,500,000 | 45,300,000 |
1851.... | 155,100,000 | 128,900,000 | 48,600,000 |
These figures are not as trustworthy as one might wish. They represent the status on January I, or as near that date as possible, and minor fluctuations are not represented. A well-defined movement, however, was apparent before 1851. The currency set towards the financial centres, country banks keeping their balances generally in New York. These balances were required in the fall, and the withdrawal of them produced con traction and stringency at that season. Weekly bank statements were not made by any banks until August 6, 1853, when the New York banks began the custom, and others gradually followed.
In 1851 there was an export of gold with unfavorable exchange, and a drain upon the banks. As no reports were published, the extent of this drain was not known, but a writer in 1857 states that it amounted to twelve millions in June and July, and that the stock remaining in the New York banks was only six millions. The consequence was a sharp contraction and great suffering, which finally caused the Secretary of the Treasury to buy bonds for the relief of the market
The same course of events, more or less marked, occurred throughout this period. Currency flowed to New York during the summer, was loaned on call (interest being paid for deposits), was withdrawn in the fall, producing contraction of loans and stringency.
It was asserted at the time that the worse the currency the more mobile it will be, and the assertion is true; but it is still more true that when the currency is unequally bad it will flow to the financial centres. Gold was being exported as a commodity all the time, but the exchanges showed the pressure of the redundant paper at New York, and caused a demand of gold for export with chronic overtrading. This was, according to the doctrines of the Bullion Report (discussed in Chapter II), a warning that the issues were excessive. The New York banks of course felt the weight of the evil. The warning came to them in actual experience, but the pressure of the country issues, which were never regulated by the exchanges at all, continued, and the metropolitan banks do not seem to have taken measures to restrain them.
The usury law, although disregarded in private practice, made it impossible for the banks to publish a usurious rate, and thus control discounts by this means. They could only exert a direct contraction on their issues and loans whenever the drain upon them made it necessary, and the pressure of this was, of course, most severe in the city itself.
In 1853 the fears of war in Europe produced anxiety with regard to financial affairs both in England and here. The bank rate was at 5 per cent. throughout the autumn in London. Railroad building here amounted to 2,452 miles in that year. Stock speculation was unusually active throughout the winter and spring, and prices Were high. Undefined fears of the effects of a European war led to greater restraint in loans during the summer, and stocks suffered a fall. Many of the earlier speculations in exports to California had proved disastrous, and their results now accumulated. The discovery of a fraudulent issue of two millions of New York and New Haven Railroad stock was followed by similar discoveries in regard to some other stocks, and the result was a panic on the exchange,
CIR. | DEP. | SPECIE. | |
---|---|---|---|
Jan. 1, 1854 | $204,600,000 | 188,100,000 | 59,400,000 |
Jan. 1, 1855 | 186.900,000 | 190,400,000 | 53,900,000 |
“ The prosperity which prevailed almost universally up to the middle of last year [1853] had made our business men so confident in their own strength that all classes had expanded their engagements far beyond the protection of their own resources, and were exposed to the storm which began to gather on every side. The first great shock to credit was the discovery of the Schuyler fraud, which brought to a stand nearly all those works of internal improvement for whose successful completion a large share of public confidence was so necessary. From that moment sacrifice began... The war in Europe created more or less money pressure abroad, and capitalists there were less liberal in their investments here, at a time when their assistance would have been most acceptable.” The wheat crop was small and the cotton production lessened by the pressure of cholera. “ A worse panic began in the interior, and especially in the West and North-west. In Ohio, Indiana, Illinois, Michigan, Wisconsin, Iowa, and Missouri, and, to some extent, in the States on the south of the Ohio, a large circulation of bank-notes mostly of the free banks, had been obtained through expenditures for railroad purposes, and the general expansion of business. When the contraction began, this circulation came in rapidly, and found the banks wholly unprepared to meet it.... All the banks which held balances at the East drew for them, and borrowed to the extent of their credit besides, while between twenty and thirty, perhaps more, of institutions which were really solvent were compelled to suspend payment. A large number of private bankers were carried down in the crash, and the distress became general. During all this severe pressure in the money market, and general disturbance of public confidence, it is a cause for congratulations, that the mercantile community have stood the trial so nobly.... The reason of this may be found in the increased supply of metallic currency remaining in the country. Over one hundred millions in gold coin have been added to the circulation of the United States since the discovery of gold in California. Thus, although the rates of interest have been high for nearly eighteen months, there has been no such scarcity of money as has been felt in former periods of commercial embarrassment,... The banks have been severely tried, but those in our largest cities (with the exceptions before noticed) have mostly stood the shock unmoved.” *
In 1856 railroad building once more extended to 3,642 miles, nearly all in the Western States. The spring of 1857 being very late, and the prospect for the crops bad, many prophecies of trouble were published, but, as the season turned out well, the fears were dispelled, and scarcely any one seems to have apprehended the coming trouble. A fall in stocks, however, took place in the summer, to the great embarrassment of the large number of persons who held call loans for which they had given stock collateral. The first actual shock was the failure, on the 24th of August, of the Ohio Life and Trust Co., which had borrowed largely on call in New York, and loaned the funds where they were not immediately available. The liabilities were about seven millions. The credit of this institution had been very high, and its failure was followed by a general desire to test the foundations of credit. Such an attempt could not do otherwise than produce a general downfall.
1855–6. | 1856–7 | |||
---|---|---|---|---|
per ct. specie to cir. | Per ct. specie to cir. and deposits | Per ct. specie to cir. | Per ct. specie to cir. and deposits. | |
Eastern States | 14. | 8.4 | 13.4 | 8.18 |
Middle States ...... | 37.35 | 11.79 | 37.2 | 11.5 |
Western States ...... | 21.5 | 15.8 | 18.3 | 13.2 |
South-western States. | 50.4 | 28.7 | 41.6 | 24.2 |
Southern States ..... | 27.4 | 15.4 | 21.7 | 13.2 |
Average. | 30.13 | 16.01 | 26.44 | 14.056 |
At this period no rule seems to have governed issues save to keep one-third of the circulation in specie, and in some States even this dwindled down to one tenth or one-twelfth. Such a rule, however, is entirely fallacious, as any other arbitrary rule of reserve must be, and it proved in the time of trial that there was no strength to endure, any shock.
The New York banks expanded and contracted in 1857 as follows:
LOANS. | SPECIE. | CIRCULATION. | DEPOSITS. | |
---|---|---|---|---|
Jan. 3, 1857. | 109, 100,000 | 11,100,000 | 8,600,000 | 95,800,000 |
Apr. 4, 1857. | 114,800,000 | 11,500, 000 | 8,800,000 | 97,300,000 |
July 3, 1857. | 115,000,000 | 12,800,000 | 8,900,000 | 98,800,000 |
Aug. 8, 1857. | 122,000,000 | 11,700, 000 | 8,900, 000 | 94,400,000 |
Aug. 29, 1857. | 116,500,000 | 9,200,000 | 8,600,000 | 84,800,000 |
Oct. 17, 1857. | 97,200, 000 | 7,800, 000 | 8,000,000 | 52,800,000 |
Nov. 28, 1857. | 94,900, 000 | 24,300,000 | 6,500,000 | 79,500,000 |
Dec. 12, 1857. | 96,500, 000 | 26,000, 000 | 6,300, 000 | 75,300,000 |
The loss of the steamship “Central America” with over a million of treasure enhanced the stringency.
A large number of failures of banks and firms, especially brokers, produce dealers, and persons depending on Western collections, took place in September. Bills on the seaboard were hardly obtainable in the interior at 10 and 15 per cent. premium. On the 12th and 13th of September the banks of Philadelphia, Washington, Baltimore, and many interior towns suspended. Stocks fell 40 or 50 per cent., and 20,000 persons were thrown out of work in New York City within a fortnight. The universal demand of the banks was for relief by expansion, but the contrary course was pursued with the utmost vigor. There was indeed no room for expansion. The utmost resources had been employed in good times, and there was no reserve strength. The hoarding of currency which takes place at all such times still further enhanced the trouble.
The “panic” immediately followed, but, as was said often at the time, it broke out first inside the banks. When it was seen that no help was to be expected, and that the banks of New York and Boston were likely to suspend, there began a run on the deposits. On the 13th of October the New York banks (with one exception) suspended. They were followed in a few days by the Boston banks, and by the others who had hitherto held out, with only a few exceptions.
Exchange now fell to 100 and even to 90, and bills were not saleable. Exports almost ceased, and gold began to move this way. The increase in the stock in bank appears in the above table. The New York banks agreed to take country bills at par, interest to be charged after December 1st. The country issues, thus encouraged, formed remittances, which were redeemed by drafts against the produce which they caused to be forwarded.
The state of things was better in New Orleans than elsewhere. The banks there had been stronger than anywhere else. Of nine banks, only four suspended at all, and they only for a few days.
The Pennsylvania legislature authorized the suspension until May. In New York the Constitution forbade the legislature to authorize suspension of specie payments either directly or indirectly. The judges of the Supreme Court, however, met and agreed not to grant any in junction unless the bank was insolvent or guilty of fraud. Thus even a constitutional provision proved as ineffectual as any law had ever been— I will not say to prevent a suspension, for the suspension was inevitable, but to enforce a system of banking which would not lead to suspension, and the plan of securing circulation by pledge of stocks proved unavailing to allay a panic.
The Secretary of the Treasury interfered again in this case by purchasing bonds.
In the inquiries which were made as to the causes of the crisis, the state of the currency was generally recognized as the root of the trouble. The over-trading, over-importation, stock speculation, extravagance, etc., were generally ascribed to this, but there were some who found other causes for the crisis. One writer, after enumerating these secondary incidents as causes, gave another, as the immediate occasion, and that was —the telegraph. He thought nothing could cure the trouble permanently but a protective tariff. Others ascribed it almost entirely to the payment of interest on deposits, and some States passed laws forbidding this. The payment of interest on deposits is like every other business risk,—the man who undertakes it must measure his own ability to do it, and the lender or depositor must judge whether the person or institution to whom he lends can do what is undertaken.
The newspapers were also filled with homilies on extravagance and exhortations to “ confidence,” but the matter is, in a panic, that the confidence, so long entertained, is now recognized as unfounded. It is the force of the truth which makes the trouble, and how can it avail to try to make men still delude themselves? In general, however, the fact was recognized, that the great means of keeping the business of the country sound, so far as any thing can control haste for riches, is to keep the currency sound, and that the only way to keep the currency sound is to have it actively and actually converted into coin. Convertibility is not enough, if it is only nominal, and if no one tests its reality because public opinion frowns on such an act, or bank displeasure follows it.
The pressure passed away in the course of the winter. The liquidation was rapid, and by spring business was again in motion. The New York banks resumed on the 12th of December, and others followed gradually and informally. In the spring money was very easy, and United States Treasury notes were sold at an average of 4½ per cent. interest.
In the meantime the surplus revenue had been applied to the reduction of the public debt, which, in 1853, was 67,000,000, and in 1857 (July Ist), 29,000,000. In March, 1857, the tariff was reduced to an average of 20 per cent. on dutiable imports.
The law of 1834, having underrated silver in the coinage, had the effects described above (page 110). In March, 1853, a law was passed, * similar to the English law of 1816, to obviate the difficulty of throwing either one or the other metal out of circulation. On this plan, silver is purposely overrated in the coinage so that it is worth more as coin than as metal. There is, therefore, a loss in exporting or melting it. The silver dollar was not altered, but it had disappeared and ceased to be a coin of the country. The fractional coins were made to weigh: 50 cts., 192 grains standard (nine-tenths fine); 25 cts., 96 grains. At the rate of 15.625 to I for silver to gold, two half dollars are worth. 9533 of a gold dollar. This fractional silver was coined by the government out of purchased metal, and not upon demand of holders of bullion. These coins were therefore made legal tender only for sums less than five dollars. It is evident that this was no depreciation of the coinage.
The reaction from the crisis of 1857 was so rapid and complete that its lesson was only partially learned. Things went on until the war very much in the old way. The state of the currency is sufficiently shown by the following table:
ABOUT | CIRC. | DEPOSITS. | LOANS. | SPECIE. |
---|---|---|---|---|
Jan. 1, 1857 | 214,700,000 | 230,309,000 | 684,400,000 | 58,300,000 |
Jan. 1, 1858 .... | 155,200,000 | 185,900,000 | 583,100,000 | 74,400,000 |
Jan. 1, 1859 .... | 193,300,000 | 259,500,000 | 657,100,000 | 104,500,000 |
Jan. 1, 1860 .... | 207,100,000 | 253,800,000 | 691,900,000 | 83,500,000 |
Jan. 1, 1861 .... | 202,000,000 | 257,200,000 | 696,700,000 | 87,600,000 |
Jan. 1, 1862 .... | 183,700,000 | 296,300,000 | 646,300,000 | 102, 100,000 |
Jan. 1, 1863 .... | 238,600,000 | 393,600,000 | 648,600,000 | 101,200,000 |
In March, 1858, Mr. Balfour, of Boston, classified the note issues of the country as follows;
Notes for | $I | to the amount of | 7,000,000 |
Notes for | 2 | to the amount of | 4,000,000 |
Notes for | 3 | to the amount of | 3,000,000 |
Notes for | 5 | to the amount of | 15,000,000 |
Notes for | 10 | to the amount of | 5,000,000 |
Notes for | 20 | to the amount of | 13,000,000 |
Notes for | 50 | to the amount of | 12,000,000 |
Notes for | 100 | to the amount of | 8,000,000 |
Notes for | 500 | to the amount of | 35,000,000 |
Notes for | 1,000 | to the amount of | 30,000,000 |
Notes for | 5,000 | to the amount of | 2,000,000 |
Total.............134,000,000 |
No year in American history has been more prosperous than was the year 1860. The cotton crop of that year was unprecedented, reaching 4,600,000 bales. The grain crops, although not so extraordinary, were very good. After the election in November the attitude of the Southern States created great anxiety in commercial circles. Business was contracted, imports declined, and finances were arranged in anticipation of a coming storm. Foreign exchanges fell, and gold began to be imported, prices being low and imports suspended.
During the winter, the Southern members of Congress took their departure, and, after the inauguration of President Lincoln, increased revenues being required, the tariff was revised. The opposition to protection being withdrawn, this tariff revision, undertaken for revenue, was carried out in the interest of protection, and in a manner hostile to revenue, thus weakening the country at the very moment when it needed its utmost strength. This result being at once experienced, an effort was made at the extra session of Congress to secure a modification of the protective features, but without success. The country was once more embarked on the protective policy, which received an extension in the following years unexampled save by the most unenlightened nations on earth.
The opinion being circulated that the war was to be short, and that the people would not submit to taxation, the financial measures of the session were confined to the provision for 50,000,ooo of demand notes, 250,000,000 of 7 3/10 Treasury notes to run three years, and a six per cent. loan of 250,000,000 to fund the Treasury notes. A property tax was apportioned amongst the States, but part of it was repealed as impracticable, part was paid by charges for sums expended in fitting out troops, and it produced no active revenue to the general government. Its nett result was to establish the machinery which was afterwards used in collecting internal revenue.
The people were in the meantime contracting their expenses, closing up their engagements, practising economy, and in general adjusting their affairs to war circumstances in the manner which common-sense dictated. The banks were in a conservative position, and the weak ones were strengthening themselves to the utmost of their ability. The imports were small and the exports large, for, although cotton was no longer an available export, the grain crop was large and sold at good prices. The exports of merchandise exceeded the imports by 67,000,000, and the imports of specie exceeded the exports by 16,000,ooo. This movement began in November, 1860, and lasted until December, 1861. Evidently the natural laws which bring to every financial situation its own cure were here in full operation. In the fall of 1861 the government borrowed IOC,000,000 in gold of the banks, in two instalments, and 50,000,000 more in its own paper.
Such was the situation when Congress met in December, 1861. Never did any man have such an opportunity to win immortality as a financier as was now offered to Mr. Chase. The situation had at this moment few difficulties. The people were less sanguine that the war would be short than they had been in the previous summer. They had contracted their expenses to the lowest point, and production was reduced to the necessary supply for consumption. They held their disengaged capital ready to the demand of the government, if it should act with promptness and decision, and support its own credit. Nor was it the capital of the country alone which was available. War taxes must and always do trench upon income. It was the active productive power of the nation, which might be turned to war making, which was the great resource. The nation was not only willing to be taxed, but itself understood generally that only when it was being taxed could it give full credit to its own paper promises. The Congress, moreover, was ready to give to the Secretary all he asked. If he had been the minister of the Czar he could not have disposed more absolutely of the national resources. All that was needed was a firm, clear, bold policy, showing that he understood himself and the situation.
The Treasury report presented no such policy. It did not take the lead at all. It discussed government paper disparagingly, suggested a national banking system tentatively. It only showed that the nation was drifting into financial embarrassments for want of a policy. The real financial question of the day was: whether we should carry on the war on specie currency, low prices, and small imports, or on paper issues, high prices, and heavy imports. The alternative was not understood because no one distinctly comtemplated the latter course, but it was sure to be the result of drifting under no policy.
The complications with England about the Trent case came upon the reaction of disappointment at the message and report, and in December gold began to be exported. On the 17th of that month the New York banks stoutly resolved that suspension was unnecessary, but the drain upon their gold went on as follows:
December 7 | ........... | 42,300,000 |
December 14 | ........... | 39,400,000 |
December 21 | ........... | 36,800,000 |
December 28 | .............. | 29,300,000 |
January 4 | ............ | 23,900,000 |
From this time it began to increase again, and was 30,000,000 on March 8.
In the last days of December, 1861, all the banks suspended. This they did without any earnest attempts to avoid it, and certainly without any necessity. Instead of regarding a suspension as a calamity to be submitted to only after years of war, when the national resources should be actually exhausted (as the suspension of the Bank of England proved that it is), many looked upon it as the natural preparation for war.
This suspension greatly complicated the situation. Gold rose to a premium of one or two per cent., at which it remained until April. The 202,000,000 of bank paper, or rather the 150,000,000 in the Northern States, proved the stumbling block in the way of all sound financial measures. The influx of the precious metals in the previous year together with the supply from California, and the amount previously existing, gave 200 or 250 millions of gold in the Northern States on the 1st of December, 1861, together with 150,000,000 of bank paper, an amount amply sufficient to float government loans, or to allow 200,000,000 of government notes to be issued, if the bank-notes had been withdrawn. This specie, however, could not stay in the country, if the bank-notes remained, filling the channels of circulation, and not subject to redemption, so soon as the government made any additions.
The specie borrowed by the government from the banks, and expended, would have found its way back to the banks if unimpeded in its circulation, that is, if it had been the only currency; but, with irredeemable notes afloat and gold at a premium, this gold was withdrawn and hoarded, and only appeared again to be sold at the high premium two or three years after.
The government could not borrow more gold of the banks, having exhausted their stock, and, if it borrowed further, must take irredeemable notes which might be multiplied to any amount. This was made the great argument for the Legal Tender Act, and was another way in which the bank-notes clogged the movements of the government.
The economy of convertible paper issues is assumed and repeated by many persons who have never taken the pains to analyze that economy to see wherein it consists, and how great it is. I am not prepared to take “ total abstinence “ ground against paper issues, because I believe that they may be made useful and economical, though we have not yet learned how to do it, but whenever the account is made up of the advantage and cost to the American public of their bank issues, there will be a heavy charge on account of the loss and mischief they caused at the outbreak of the war, to say nothing of the previous losses from panics and commercial crises which they helped to bring about.
It would be tedious and unnecessary to follow here the various financial manoeuvres of the winter of 1861 and 1862. It is a simple record of temporary makeshifts alternating with one another, frittering away the credit of the government, disregarding its true resource in the patriotism of the people, and offering large profits to those who handled the government loans. Of the banks, those which clung to the old-fashioned principles of finance, disapproved of the course things were taking, and refused to participate, found themselves losing. Those which fell in with the new order of things made enormous profits.
The embarrassments of the government becoming greater and greater, the bill for an issue of legal tender notes was hastily prepared and offered in the House. Mr. E. G. Spaulding, of Buffalo, * claims to have been the author of this act, and no counter-claimant has ever arisen. The act was earnestly opposed by some of the oldest and best members of both houses, but it Was pressed as “ necessary,” and forced through with the energy and decision which, earlier in the session, so much needed to be exerted in another direction. So far as I know, Mr. Owen Lovejoy is the only man who is on record as having put his finger on the irredeemable bank-notes as the greatest evil in the situation. The bill was signed on the 25th February, 1862.
This act was passed, as the debate shows, as a temporary war measure. On the part of its advocates, Mr. Thaddeus Stevens at the head, it was urged and probably believed, that the legal tender clause would prevent depreciation and give credit to the notes.
Pelatiah Webster wrote in 1791: “The fatal error, that the credit and currency of the continental money could be kept up and supported by acts of compulsion, entered so deep into the minds of Congress, and of all departments of administration through the States, that no considerations of justice, religion, or policy, or even experience of its utter inefficacy, could eradicate it. It seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common sense, and even common safety. This ruinous principle was continued in practice for five successive years, and appeared in all shapes and forms, i. e. in tender acts, in limitations of prices, in awful and threatening declarations, in penal laws with dreadful and ruinous punishments, and in every other way that could be devised, and all executed with a relentless severity, by the highest authorities then in being, viz., by Congress, by assemblies and conventions of the States, by committees of inspection (whose powers in those days were nearly sovereign), and even by military force; and, though men of all descriptions stood trembling before this monster of force, without daring to lift a hand against it, during all this period, yet its unrestrained energy proved ever ineffectual to its purposes, but in every instance increased the evils it was designed to remedy, and destroyed the benefits it was intended to promote. At best its utmost effect was like that of water sprinkled on a blacksmith's forge, which indeed deadens the flame for a moment, but never fails to increase the heat and force of the internal fire. Many thousand families of full and easy fortune were ruined by these fatal measures, and lie in ruins to this day, without the least benefit to the country, or to the great and noble cause in which we were then engaged.
“ I do not mention these things from any pleasure I have in opening the wounds of my country, or exposing its errors, but with a hope that our fatal mistakes may be a caution and warning to future financiers, who may live and act in any country which may happen to be in circumstances similar to ours at that time.”
Here was a warning from our own history of what must be the tendency of any legal tender law, whether more or less stringent. So far from sustaining, it could only injure the credit of the paper.
The precedent of the English Bank Restriction was frequently and erroneously referred to, and inferences were drawn which were simply ignorant. The spirit of the debate was that of panic. The finances had been allowed to drift into a serious condition, and then, instead of applying, cool and calm reason to find out and correct mistakes, recourse was taken to the last and most desperate resources. The financial interests of a great nation for an indefinite future were staked upon a desperate resource, to tide over a temporary exigency. When the lessons of history were quoted they were answered by the flag and the eagle. When caution was urged in view of possible future exigencies, it was answered by prophecies of military success and denunciations of rebels. When the need of deliberation was urged, it was answered by clamor in regard to the necessities of the government. When it was said that irredeemable paper had always wrought ruin, it was answered that our resources were unlimited, and that these precedents did not make a rule for us. When it was prophesied that the paper would depreciate, and that we should not be able to retrace our steps, the prophets of evil were indignantly pointed to the “pledged faith” of the United States, and asked if they thought that would be violated. The inference that the notes must be made legal tender, because the government needed money, was never analyzed, and its fallacy never shown. The question whether it is necessary to issue legal tender notes is a question not of law, but of political economy, and political economy emphatically declares that it never can be necessary. The proposition involves an absurdity. Whatever strength a nation has is weakened by issuing legal tender notes. * One might as well say that it is necessary to open the veins of a weak man who has a heavy physical task to perform. All history shows that paper money with a forced circulation is not a temporary resource. It cannot be taken up and laid down as we choose. It is a mischief easily done but most difficult to cure. †
The notes were first issued in April, 1862. Gold began to rise and to be exported. The following table from the “ Merchants’ Magazine,” for July, 1862, shows how immediate and direct was the effect.
GOV. PAYT'S | BANK. DEPOSITS. | SPECIE. | EXPORT SPECIE. | GOLD. PREMIUM. | EXCH. ON LONDON. | |
---|---|---|---|---|---|---|
April 12 .......... | 4.6 | 93.7 | 34.5 | 1.5 | 1¾ | 111¾ |
April 19 ......... | 12.5 | 95.1 | 34.6 | .6 | 1¾ | 112 |
April 26 ......... | 24.7 | 101.8 | 35.2 | 1.1 | 1½ | 112½ |
May 3 ........... | 22.7 | 109.6 | 35.1 | .7 | 2¾ | 113½ |
May 10 ........... | 17.1 | 115.5 | 32.2 | 1.5 | 3¼ | 114 |
May 17 ........... | 9.8 | 120.0 | 30.2 | 1.0 | 3⅜ | 114 |
May 24 .......... | 10. 4 | 122.6 | 30.6 | .9 | 3½ | 115 |
May 31 ........... | 6.8 | 125.4 | 34.3 | .8 | 3⅝ | 114¾ |
June 7 .......... | 6. 5 | 125. 5 | 31.2 | 1.6 | 4¼ | 115 |
June 14 .......... | 9.8 | 125.6 | 31.1 | 2.0 | 6⅞ | 118 |
June 23 .......... | 8. 4 | 126.6 | 31.0 | 3.1 | 7 | 121 |
High gold and exchange stimulated exports, for high nominal prices were realized, but, as home prices advanced, and the foreign prices of export were governed by foreign circumstances, these. large returns proved fallacious, and the heavy pressure on the Western agricultural interest began, which led to an outburst, in 1873, of loud and ill-directed complaints. Heavy imports followed upon heavy exports of merchandise and gold, and the paper inflation and fictitious prosperity enabled people to pay heavy duties, large gold premium, and high exchange for the imported articles. The mills, forges, and factories were active in working for the government, while the men who ate the grain and wore the clothing were active in destroying, and not in creating capital. This, to be sure, was war. It is what war means, but it cannot bring prosperity.
One immediate effect of the Legal Tender Act was to destroy our credit abroad. Stocks were sent home for sale, and, as Bagehot shows, * Lombard Street was closed to a nation which had adopted legal tender paper money. No sales of bonds could be made in England until the war closed, and the amount of legal tender to be issued was finally fixed by facts. The loans at home were scarcely more successful. Much was said in Congress about the disgrace of “shinning “ through Wall Street to borrow money for national use, and a foolish pride of seeing the bonds quoted at par, led to such restrictions on the Secretary that he was obliged to resort to the most disadvantageous transactions with lenders, and to continue paper issues until a six per cent. bond sold at par indeed, but for a currency worth from 60 to 70 cents on the dollar. The notes he paid out to government creditors were accumulated in banks, and then deposited again in the United States Treasury at five per cent.
By August all specie had disappeared from circulation, and postage-stamps and private note-issues took its place. In July a bill was passed for issuing stamps as fractional currency, but in March, 1863, another act was passed providing for an issue of 50,000,000 in notes for fractional parts of a dollar—not legal tender. For many years the actual issue was only 30,000,000, the amount of silver fractional coins in circulation in the North, east of the Rocky Mountains, when the war broke out. In 1872 this issue was forced up to between 40 and 50,000,000, producing a redundancy and enhancing retail prices.
The Legal Tender Act provided for funding the notes in six per cent. 5–20 bonds. Very few were so funded even with money at four per cent., an instructive fact for those who now hope to fund the outstanding notes by simply allowing it to be done. However, this fixed the price of a six-per-cent. bond at par in paper, and, as the Secretary might not sell below the market price, he could not negotiate with bankers on terms which allowed them a profit. This clause was, therefore, repealed.
The interest on the bonds was payable in gold, duties being payable in gold, but the 50,000,000 of notes issued in August, 1861, and 10,000,000 in February, 1862, were receivable for all dues. They were at a premium just less than gold, for the payment of duties, and very little gold came in until these notes had all been paid in. During 1862, the government bought gold to pay interest. It was not until 1863 that the popular sales of bonds afforded a steady resource of means of payment, and the duties produced a gold income for paying interest. The advance of prices, however, had vastly increased the expenditure of the government, and the sum total of the debt is increased to an amount, which it would be idle to try to estimate, by the paper inflation.
On the 25th of February, 1863, the National Bank Act was passed, but it did not go into operation, and did not affect the situation, until two or three years afterwards.
On the 23d of March, 1863, Congress passed the 900,000,000 Loan Act, allowing the Secretary to borrow that sum in ten-forty bonds at not more than six per cent., or 400,000,000 of it in Treasury notes at not over six per cent., legal tender, redeemable in paper in three years, or 150,000,000 of it by issuing legal tender notes. All the old notes which were fundable in six per cent. bonds were called in, and exchanged for new notes not so fundable, and the Secretary was allowed to sell bonds below the market price.
Gold being at 140–150, that is, the paper dollar worth 65 or 70 cts., 75,000,000 ten-forties were taken at about par at six per cent. The Secretary was now led to try the ten-forties at 5 per cent., but the currency was not sufficiently depreciated to float them at or near par, and they were not taken. He then used his alternatives, issuing 175 millions one and two year Treasury notes. Gold rose to 200–220 or above, making the paper worth 45 or 50 cts., at which point the 5 per cent, ten-forties floated. The amount sold up to October 31st, 1865, was $172,770,100. Mr. Spaulding reckons up the paper issues which acted more or less as currency, on January 30th, 1864, at $1,125,877,034. 812,000,000 bore no interest. He disapproves of the 900,000,000 Loan Act on account of the discretion it allowed to the Secretary, and the inflation to which it led; but a policy like that of the Legal Tender Act collects errors as it advances, and those who inaugurate it should know that they can never control it, nor throw off responsibility for its ultimate consequences.
June 17th, 1864, Congress forbade time rates for gold. The effect was to enhance the premium, and, on July 2d, the law was repealed. The Legislature of New York had previously attempted to stop speculation in gold by forbidding banks to loan on bills of foreign exchange, one of the most legitimate operations in banking.
By an act of June 30, 1864, the greenbacks are not to exceed 400,000,000, and “ such additional sum, not exceeding 50,000,000, as may be temporarily required for the redemption of temporary loans.”
By successive amendments during the years 1861–1866, the tariff had been extended to cover over 1,500 different articles, and had been adjusted and readjusted, by those who had the manipulation of it, until it had established an iron-bound system of protection. The duties collected in 1865 were 54 per cent. of the dutiable imports. Such a rate was hostile to revenue. It produced 84.9 millions. *
The internal taxes had also been multiplied on what Mr. Wells aptly described as the Donny-brook Fair principle—wherever you see an article, tax it. In 1866 the receipts from internal taxes were 309.2 millions, and from customs 179,000,000.
The patriotism and devotion with which the American people recognized the necessity of taxation and submitted to it, are not surpassed in history; but their sacrifices were abused on the one hand by interested parties, so that the taxes were paid without accomplishing the object, and, on the other hand, their sacrifices were wasted by unscientific taxation.
The increase of internal taxation was made a pretext for increase of duties, but when, under Mr. Wells’ recommendations, internal taxes were gradually abolished, no reduction of duties followed. After 1870 some reductions were made, but now, in 1874, with a threatened deficit of revenue, the great need of the country is for some man to introduce thorough and comprehensive reforms in the interest of revenue—to perform the role of Sir Robert Peel in the early forties.
The people of the United States have a patriotic attachment to the “ greenback,” because they think that it “ saved the country.” A gallant Senator, who is an advocate of inflation, recently grew indignant at the opponents of paper money for reflecting on the “blood-stained green-back.” Under the contagion of the poetry, one might reply that the fear now is, lest, if the Senator has his way, the greenback may not yet also be stained with tears.
On the 31st of October, 1865, the total debt was, $2,808,549,437.50; the greenbacks issued, $428,160,569; the National Bank notes, 185,000,000; State Bank notes, 65,000,000; fractional currency, $26,057,469.20 * ; total currency, $704,000,000.
The war being ended, the financial question took this form: Shall we withdraw the paper, recover specie, reduce prices, lessen imports, and live economically until we have made up the waste and loss of war, or shall we keep the paper as money, export all our specie which has hitherto been held in anticipation of resumption, buy foreign goods with it, and go on as if nothing had happened?
Mr. McCulloch, who was now Secretary of the Treasury, proposed to contract the inflated paper, and pursue the former alternative. On the 18th of December, 1865, the House voted, 144 to 6, to authorise a contraction of 10,000,000 in the next six months, and of 4,000,000 per month after that. This operation went on until January, 1868, but, in the meantime, the National banks were going into operation, being allowed 300,000,000 of circulation, 150,000,000 apportioned by population, and 150,000,000 by banking capital, and their notes more than compensated for the greenbacks withdrawn. During the year 1867, also, war fears being laid aside, speculation had sprung up and begun to absorb the redundant paper. The turning point at which the greenback contraction met the bank-note expansion was January, 1868. On January 1, 1866, the banks stood as follows:
CIRCULATION. | DEPOSITS. | LOANS. |
---|---|---|
213,200,000. | 513,600,000. | 498,800,000. |
During the whole year 1866, there was a superabundance of currency at New York, and money ruled at 5 to 7 per cent. for the best 60 day two name paper.
January Ist, 1867, the banks stood:
CIRCULATION. | DEPOSITS. | LOANS. |
---|---|---|
291,000,000. | 555,100.000, | 608,400,000. |
In January there was a crisis in stocks, and the rate was 8 to 10 for the same paper as above. For the next six months the money market was dull and easy. In July many dry-goods firms failed, and rates were 8 to 10. August and September were easy, but in October the rate was again 10.
On the first day of January, 1868, the banks stood:
CIRCULATION. | DEPOSITS. | LOANS. |
---|---|---|
294,300,000. | 531,800,000. | 616,600,000. |
At this juncture outcries were raised against contraction by those who were engaged in the movement of expansion, though, in regular business, credit was still kept in the narrow bounds to which it had been reduced during the war, and the people at large, understanding that the Legal-Tender Act was a war measure, and expecting in good faith that resumption must follow peace, had made their arrangements accordingly. Congress forbade any further contraction, and we turned to the second of the above alternatives, which we have since consistently followed.
The era of paper money on which we then entered has one peculiar feature, unprecedented, so far as I have been able to learn, in the history of paper money. Our paper money is redundant, but fixed in amount. The greenbacks stood, when Mr. McCulloch's contraction was arrested, at 356,000,000. The bank-notes were fixed at 300,000,000, but subsequently, July, 1870, 54,000,000 more were authorized. The fractional currency was fixed at 50,000,000. The bank-notes have never quite reached 350,000,000, and the fractional has never reached its limit. The withdrawal of the three-percent. compound interest notes, which had been held as bank reserves, operated as a contraction, but the allowance to the country banks to keep ⅗ of their reserves in the redemption cities operated as expansion. Allowing for these variations, the limit of legal currency was fixed, until the Fall of 1873, at 750,000,000. Nearly every nation which has ever used paper money has fixed its amount, and set limits which it has solemnly promised again and again not to pass, but such promises are vain. The intention, when they are made, is honest, but it is impossible to keep them. A man might as well jump off a precipice intending to stop half way down. It remains to be seen whether we too, when the redundancy is absorbed by high prices and excessive credit, will break over the limit, as every other nation has done, under the inevitable constraint which it then imposes,—but the phenomena thus far, are those of a redundant paper with a fixed limit.
To trace out its operation would require a history of the money market for the last six years. The inflation of credit which went on all over the country so soon as it was understood that specie payments were indefinitely postponed, is only imperfectly presented in the following table showing the state of the National Banks at different dates.
In 1868 the market was easy, save in March and April, when the rate varied from 8 to 12, and in October, November, and December, there being a lock-up in November, and the Western demand making itself felt. In 1869, the market was stringent throughout the year. It was declared in October, to be “worse than for eight years.” Stock speculation was active, and it was remarked that it was continually absorbing more and more currency. The redundant paper in New York was absorbed, and the state of things was realized which was to come three years later for the country at large.
The high rates of 1869 drew funds to New York for loan on stock security. The year 1870 was marked by great ease. Money flowed into New York in abundance. Rates on call were from 4 to 6, and on best paper 6 to 7½ throughout the year. The only excitement was in July and August, at the breaking out of the war in Europe.
In 1871, the demand of funds for railroad ‘ building became very marked. The market was easy until September, when it was quoted stringent, though rates were not high. This lasted during the autumn, and was ascribed to the “movement of the crops.”
In 1872, there was nothing remarkable until the crop movement began again, when the rates advanced sharply, and commercial paper could not be quoted. The Secretary of the Treasury issued 5,000,000 of the 44,000,000 withdrawn by Mr. McCulloch. His efforts to withdraw these 10 again kept the market stringent, and rates excessive, throughout the winter.
During these years large quantities of American securities were negotiated in Europe. These were very moderately estimated—for the first three-quarters of 1873—at 100.000.000.
In 1873, the farmers’ movement against the railroads impaired confidence in railroad bonds as an investment. When the crop movement began again the demand of the country banks led to a demand from the city banks upon the brokers, and precipitated a panic on the stock exchange. The failure of several large banking houses engaged in the sale of railroad bonds increased the excitement. The closing of the stock exchange, and suspension of the city banks, obliged the country banks to contract their loans, and brought the industry of the country to a standstill. There was little or no “panic” outside of New York, but it is evident that a crisis in the operation of the paper money had been reached, and that crisis involved a reduction of prices and business. As the stock exchange was the place at which the redundent currency was employed, the crisis was first developed there, by the demand for the return of the surplus. The shock, however, was transferred to the regular industries of the country. The expansion by the issue of a part of the 44,000,000 gradually restored the prices of stocks, but production was restrained, and the effect which lasts yet, and promises to last longest, is the reduction of wages.
During the crisis greenbacks were hoarded, which was thought to prove “how good they were.” If the currency consisted of clam-shells, and a crisis should come, in which it was to be feared that clam-shells might be scarce, clam-shells would be hoarded; much more if there was fear that the next currency might be pebbles.
Studying these facts in the light of the previous history, we perceive that the annual pressure in the autumn, increasing in force from year to year, was a premonition of the effect which must be apprehended whenever the expansion of credit and prices should have absorbed the entire redundancy of the currency. We have seen in the history of the Massachusests colony that each new issue was followed in a few years by a new crisis, and an outcry about hard times and scarce money. The law which governs this is apparent. The rise of prices and multiplication of credit operations will go on to absorb any amount of currency whatever. If then, the amount be fixed, the expansion must come up to and press against this fixed barrier. This pressure will become apparent first at that season of the year at which the normal requirement is greatest. At that time there will be great distress occasioned by the need of withdrawing currency from the use in which it is engaged. As it cannot be imported, and the law forbids its increase, there is no relief. It must be withdrawn, and the consequences must be endured. Then it is said that the currency is not elastic, and schemes are invented for making it so; but no device whatever can make it elastic. An elastic body is one which will both expand and contract, but a paper currency never contracts itself. Any device which has elasticity for its object will have expansion for its effect.
In its more general effects, the paper currency with a fixed limit produces a steady advance in the rate of interest, and also a reduction of prices. These effects are both traceable in the history of the last five years. The whole story which precedes goes to show that the value of a paper currency depends on its amount. At the time Of issue, or during a war in which the issuer is engaged, it depends in some degree on his credit; but when it settles down in peace as the normal medium of exchange, its value comes to depend almost purely on its amount. This amount, of course, is relative to the requirements of the country for the purpose of performing its exchanges. What the requirement is, however, no man can tell. There is no rule for finding it. It does not depend on population, or wealth, or the amount of the exchanges. It bears no fixed relation to any known or ascertainable quantity. An agricultural country wants more, for the same population and wealth, than a manufacturing country. A sparsely populated country wants more, other things being equal, than a densely populated one. A country in which the means of communication are poor wants more, other things being equal, than a country with good means of communication. It is idle to attempt to compute it at so much per head, or so much per thousand of wealth. Currency is economized also by banking arrangements and clearinghouse processes; the requirement is reduced by railroad extension, and all facilities of communication.
How far these conflicting influences have affected the actual requirement of the United States for circulating medium on a specie basis no one can even guess. It is properly an empirical question. We can only try. If we had a currency of specie value, we should get just as much as we need, and then we should know how much that is, but then, too, we should no longer care. Statisticians would be interested in it, but the finance and business of the country would not hang upon it.
If, then, we assume that, on the whole, this country does require more than it had in 1861, this increase of the normal requirement goes on inside of and under the paper expansion. It produces a pressure on the inflated speculative prices from within, at the same time that they are restrained without by the fixed limit of the paper. The effect must be a reduction of prices; and such a reduction having occurred within the last five years is the best proof that the currency requirement is greater than it was. *
In view of all this, the notion of “ growing up “ to the fixed volume of the currency receives its just appreciation. The London “ Economist” unfortunately seemed to lend some countenance to this notion during the month of October, 1873, and it was taken up on this side of the water by some who enjoyed considerable influence as conservative authorities.
If we suppose the requirement of currency to increase from the growth of wealth and population faster than it decreases from improved communication and banking facilities, then a certain growing may be admitted, but, as it goes on, it exerts a slow, gradual, and pitiless contraction on prices, broken only, in Spring and Fall, by a succession of commercial crises. If then, there was backbone enough in the nation to endure this without having recourse to expansion, the growth might go on for ten or twenty years, by which time perhaps 750,000,000 of currency might be the specie requirement. No historical precedents exist to guide us in judging whether this process would indeed go on under such circumstances. As a matter of speculation, I am inclined to believe that the actual course of things would be that after every crisis wages would fall, industry would be checked, and the country would be slowly and gradually arrested in its entire industrial life. The nearest analogies are in the history of Massachusetts, * and in the history of England from 1812 to 1819. * Evidently, before any such state of things came about we should break out of the restraints in some way, but then there would be an end of the growing up. According to present appearance, the first shock is to push us into inflation, and so the hypothesis falls to the ground.
However, to pursue the supposition, granting everything, when we grow up to 750,000,000, we cannot resume. At that point there may be no premium on gold, and prices may be at specie level, but there would still be no specie in the country. To carry on specie payments would require at least 250,000,000 of gold. We must either buy this, and cancel an equal amount of ’ paper to make room for it, or wait to grow up 250,000,000 more.
No notion which has been propounded in regard to our situation is more plausible, or involves more practical impossibilities than this of resumption by “ growing up.”
If, now, anyone is disposed to believe that there are any circumstances in this country, which are so different from those of other countries that inferences from the history of the latter are of no value for the former, here is.∼ the history of the currency of this country, briefly and cursorily presented, but sufficiently to show how, from the very outset, our industrial development has been crippled by bad arrangements in this respect. English writers have lately given up the discussion of currency questions, and have taken the tone of passing by people who bother their heads about this subject as “ possessed.” The same tone has been borrowed here by a certain school which imports its tone even more than its ideas. No one knows what a sick and weary subject paper money is unless he has made it a specialty. I have stated, below, * in its more proper connection, the distinction which is here to be observed; when the currency is sound it takes care of itself, and other considerations of far higher scientific character come in to require attention: when the currency is redundant, irredeemable paper, it floats everything, and becomes a prime consideration. The English are fortunate in having experience only of a sound currency, and being able to make light of evils they do not know, although they must yet again take up the subject, for, that the Bank Act of 1844 is not a scientific settlement of the currency question, is proved by the fact that it could not be imitated by any other nation.
For us, the currency question is of the first importance, and we cannot solve it, nor escape it, by ignoring it. We have got to face it and work through it, and the best way to begin is, not by wrangling about speculative opinions as to untried schemes, but to go back to history, and try to get hold of some firmly established principles, from which we can proceed with some confidence and a certain unanimity.
We often boast of the resources of our country, out we did not make the country. What ground is there for boasting here? The question for us is: What have we made of it? No one can justly appreciate the natural resources of this country until, by studying the deleterious effects of bad currency and bad taxation, he has formed some conception of how much, since the first settlers came here, has been wasted and lost.
The heavy line being taken as zero point, or equality of exports and imports, the—— line shows the excess of exports or imports of mer chandise, by its variations above or below that line, exports being reckoned downwards, and imports upwards. The line——marks the excess of imports or exports of specie in the same manner. The dotted line............ denotes the amount of bank or other paper per capita. The light dotted line between the year 1848 and the end shows the production of gold in California.
The line of prices at the top of the diagram is made by adding the lower annual averages given in the Finance Report of 1863 down to that year. From 1864–1873 the line is formed by adding the January quotations from the table given in the Finance Report for 1873. Over eighty articles are included in each, but they are not the same articles. Therefore the scale is rewritten to bring the starting point in 1864 even with the ending point in 1863, and the two parts should only be compared for relative fluctuations. In the last-mentioned table a hundred-weight of iron and of hemp was taken, instead of a ton of each, as given, and railroad bars were struck out because not given in 1864. Evidently the relation between the prices of 1863 and 1864 does not appear at all.
In the year 1795, the currency of the British Islands consisted of the notes of the Bank ol England, the English country banks, the Scotch banks, the Bank of Ireland, and the Irish country banks, and of coin. By the monopoly clause of the charter of the Bank of England, no banking firm consisting of more than six partners could issue demand notes in England. Strong joint stock banks were therefore illegal, but tradesmen of every grade set up as “ bankers,” and issued notes. These were the “ country banks.” They were not chartered banks, but private bankers who issued notes. The Scotch system was a perfectly free one. There were three great chartered banks. The others were joint stock companies and free partnerships, and they conducted their business solely on business responsibilities. After some unlucky experiments in fancy banking, during the last century, they settled down to solid, conservative methods of operation. They meet with encomiums on every hand, and they deserve them, but the reason why they deserve them is lost sight of by those who fix their attention on the system. The system is the best conceivable; but it involves one indispensable condition of success. It requires vigilance, sagacity, science, and moderation on the part of the bankers. The freer any system is, the more it requires these characteristics. The Scotch banks have succeeded because their managers have possessed these qualities. The same system, on a “ paper basis,” or managed by unreasoning and ignorant avarice, is a short road to ruin. The Bank of Ireland and the Irish country banks were very similar in their organization and relations to the English banks.
The circulation of the Bank of England, in February, 1795, was £14,017,510; its specie,.£6,127,720. The circulation of the English country banks at this time is not known, no statistics having been collected. It was estimated in the parliamentary debate of 1811 to have been from four to six millions. The amount of specie in circulation in 1795 was estimated in the same debates at from twenty-five to forty millions. The Lords' Committee, in 1819, gave this estimate for the circulation before the Restriction:
Coin......................... | £25,000,000 |
Bank of England notes......... | 10,500,000 |
Country notes and Scotch notes... | 7,000,000 |
Total for England and Scotland.. | £42,500,000 |
Lord Liverpool estimated the coin, in 1797, at thirty millions; Mr. Rose, at forty millions; Tooke, after reviewing the evidence, thinks it was at most twenty-two and a half millions.
In 1796, the great powers being allied against France, and England assisting chiefly by subsidies, Pitt began to draw upon the Bank for the necessary supplies. Originally the Bank was forbidden to lend to government, except by permission of Parliament, but Pitt took advantage of an act of indemnity which was asked for in 1793 to cover previous cases in which the Bank had done this, to make the act so read as to repeal the prohibition entirely. His drafts becoming more and more exhaustive to the specie of the Bank, it proceeded to contract its notes. To the alarm thus occasioned, came, in addition, a rumor of intended invasion. A run on the country banks followed, which precipitated a demand on the Bank of England. In February, 1797, the specie reserve was but little over one million. The Bank was meanwhile contracting its circulation with all its energy, and had reduced it in February, 1797, to nine millions. The directors declared to the Bullion Committee, in 1810, that they thought this had been a grave error and had greatly enhanced the crisis. The necessities of the government, in the meantime, were greater than ever.
Under these circumstances an Order in Council was issued forbidding the Bank to pay specie until the will of Parliament could be known. This order was issued on the 27th of February, and was extended to the Bank of Ireland on the 2d of March, 1797. Tooke (“Prices.” I. 204), says that the suspension might have been avoided by one or two days' more perseverance, and that the run on the Bank of Ireland was over before the order to suspend was received. The directors of the Bank of Ireland did not want to suspend. On the 3d of May, Parliament passed an act suspending payments in England and Scotland until the 24th of June. Notes under £5 were at the same time allowed to be issued. From the manner in which this suspension came about, by an injunction of the government, it is known as the Bank Restriction.
On the 22d of June, 1797, the Restriction was continued until one month after the next meeting of Parliament. On the 30th of November, 1797, it was continued until six months after the war should close. On the 3d of Jan., 1799, the Bank, having over seven millions of bullion, declared itself ready to pay sums under £5 in coin, and to redeem its notes dated before January 1st, 1798. Its notes had increased from eleven to sixteen millions. April 30th, 1802, the Peace of Amiens having been concluded, the Restriction was extended until March 1st, 1803, although the Bank was ready to resume. February 28th, 1803, it was extended until six weeks after the next meeting of Parliament. On the 13th of December, 1803, war having been declared, the Bank Restriction was extended until six months after the ratification of a definitive treaty of peace. On the 18th of July, 1814, Napoleon having abdicated, and peace being anticipated, the Restriction was extended until March 25th, 1815. March 2d, 1815, it was continued until July 5th, 1816. March 21st, 1816, it was continued until July 5th, 1818, in order, as the preamble to the act stated, to give the Bank time to prepare for resumption. May 28th, 1818, this preamble was repeated before another act which extended the Restriction until July 5th, 1819. The Bank took no measures of preparation for resumption until after the act of 1819, to be mentioned below.
The bank-notes were never made legal tender. The question whether they were to be such was put to Mr. Pitt in the House when the Restriction was ratified. He replied that they were to be so from the Bank to the public When pressed on this point, especially by Mr Nicholls, who asked, “whether it was his intention that the notes of the Bank of England should be a legal tender from the Bank to the public creditor,” and declared that, if so, it was an act of insolvency, the minister evaded a reply.
In 1801, Mr. Grigby demanded of Oakes & Co., country bankers, gold for a five-guinea note issued by them. They offered a £5 Bank of England note and five shillings. He refused the note, and demanded gold, and as he could not get it, he sued. He gained the suit at the assizes, and the question of law being reserved for the four judges of Common Pleas, they all agreed that the plaintiff was in his rights, and that notes were not legal tender between man and man.
In 1810, a Jew named De Yonge, and a stage-driver, James King, were prosecuted for selling and buying guineas at a premium in paper. The cases were brought under an act of Edward VI. against trading in gold or silver at other than rates fixed by law. The men were convicted, the penalty being a year's imprisonment and fine, but they were admitted to bail, and sentence reserved. After long delay, the twelve judges in the Exchequer Chamber decided that their cases did not come under the statute cited.
In 1811, Lord King demanded his rents in specie or paper equivalent. No one denied his right to make this demand, but “he was vehemently abused for incivism.” In the same year, and with reference to this act of Lord King, Lord Stanhope introduced an act, which was passed, making it a misdemeanor to buy or sell guineas at more than their denominational equivalent in paper. If a debtor offered notes he was to be free from distraint, but the creditor retained all other remedies. How near this came to a legal-tender law it would be hard to define. The courts never passed upon it. By the force of public opinion, and a general disposition to make the best of circumstances, the notes were used universally.
The harvest of 1800 was almost a failure. In the summer of that year the exchanges became unfavorable, and gold, which might be legally exported ( i. e. , that obtained by melting foreign coin), rose to a premium. The mint law provided that bullion should be coined for any one who presented it. One ounce of gold was coined into £3 17s. 10½d. of the coinage, without charge to the individual who offered it. He therefore received again just what he gave, only in a manufactured form. The only loss or expense to him consisted in the interest lost while he was waiting. The market cash price for gold was, on account of this loss, £3 17s. 6d. per ounce. At the time mentioned, June, 1800, exportable gold rose to £4 5s. per ounce in notes, and in January, 1801, it was at,£4 6s.
The premium on gold which might be “sworn off” for exportation ranged generally during this period three or four shillings per ounce higher than non-exportable gold. Tables showing the gold premium differ, some of them quoting domestic and some of them exportable gold.
When the question of the Restriction came up at the Peace, in 1802, it was argued that resumption was impossible because the exchanges were adverse. Lord King and Mr. Fox argued that to resume was the way to make them favorable. Their doctrine was that the redundancy of the paper was the cause of the premium on gold and the adverse exchange, but they found no hearers. The bank-notes in February, 1802, were fifteen millions, the specie in bank seven millions.
In 1804, the exchanges with Dublin became ad verse to that place, and a parliamentary committee was appointed to investigate the cause.
They ascribed the outflow of gold from Ireland to England to the redundancy and depreciation of the Irish paper. The doctrines they laid down were the same which were afterwards embodied in the Bullion Report, but this Irish report never attracted much attention.
In 1806, Napoleon declared, by his Berlin decree, the coast of England under blockade, and forbade all trade with her. England retaliated by the Orders in Council blockading all ports of France and her allies. The Americans, who, as the chief neutral carriers, were the greatest sufferers, retaliated in the following year by the embargo, forbidding their ships to trade with either belligerent.
In 1806, the French invaded Spain. In 1807, Russia entered into an alliance with France. In the same year the English made an attack on Buenos Ayres and effected a lodgment there.
These political and military events had important effects on trade.
As the Baltic and Spain were closed, active speculations in timber and wool, of which the supplies were thus cut off, sprang up. The new opening in South America was also eagerly seized upon for speculative trade. At the same time great public works (bridges over the Thames, etc.,) were in progress, and a joint stock company mania broke out. The years 1808, 1809, and 1810 were marked by the progress of these speculative movements.
The Bank in the meantime was extending its issues. Following the February quotations still, we find that the note circulation in 1806 was 17 millions; in 1807, 16.9 millions; in 1808, 18. 1 millions; in 1809, 18.5 millions; in 1810, 21 millions.
This increase, however, is, in itself, a matter of very small moment. It is upon other incidental political and financial circumstances, which acted and reacted upon one another in the most complicated manner, and in regard to which our information is very meagre and unsatisfactory, that the results to be noticed depended. No one has ever made a thorough and comprehensive analysis of all the forces which were here in action, and divergent opinions have naturally arisen where men looked at the facts only in a certain point of view, or took account of only a certain limited range of facts. The present object is only to trace the broadest features of the situation, and deduce incontroverted inferences.
The country bank circulation is of the first importance amongst the factors which we have here to take into account, but unfortunately it is impossible to ascertain what it was. Its expansion, however, is certain, from the fact that the number of these banks, which had been 270 in 1797, was 600 in 1808, and 721 in 1810. Their circulation was estimated at 25 or 30 millions. That these issues were feeding the speculation is evident. It appears also that some very small notes were in circulation. Cobbett gives a representation of a seven-shilling note issued at Tunbridge Wells. (Vol. xviii. 172.)
The premium on gold was also steadily advancing during these years. In 1810, McCulloch puts the price of bullion at £4 10s. per oz., or 15 per cent, depreciation of the notes. The Bullion Committee put the depreciation at 15½ per cent. It makes a difference, as stated above, whether exportable or non-exportable gold is quoted.
The state of things above described attracted public attention, and in January, 1810, Mr. Horner moved for a committee “to inquire into the high price of gold bullion and to take into consideration the state of the circulating medium, and of the exchanges between Great Britain and foreign parts.” The report of this committee was published in August, 1810, but did not come up for discussion in the House until May, 1811.
As soon as the witnesses began to be examined, it appeared that there was a widespread belief that it was not the paper which had depreciated, but the gold which had advanced—a notion which has been advanced in other periods of paper money. The witnesses were bankers, merchants, and bullion brokers, and included the Governor and Deputy-Governor of the Bank of England. The first question to which the committee ad dressed itself was, therefore, this: Is the banknote depreciated in value? Is that the cause of the premium on gold, or is there some other? To us such a question may seem idle, but it certainly was not so when the Governor and Deputy-Governor of the Bank of England, and the Chancellor of the Exchequer, took the negative. As there was no public quotation of bullion, transactions being illegal, and men handled “guineas” and “shillings” in paper in ordinary trade, it is not so surprising that such a notion might at any rate be popular. It was assisted further by the great dislike to admitting that Bank of England notes were “depreciated” like the paper money on the continent.
There were facts also tending to show that disturbances in the value of the precious metals were taking place. Gold was growing dearer from obstructions in the supply, from hoarding, and from demand for war expenditures. *
Tooke (“Prices,” 1.130) infers that “there must have been a greatly increased demand for the precious metals and a consequently increased value of them during the war, more than sufficient to compensate for the utmost quantity spared from circulation as coin in this country, or even for the utmost rate of annual increase from the mines,” that is, that the enhancement of the value of gold equalled the depreciation of paper. J. S. Mill thinks that this is proved, but Chevalier ( Ec. Pol. III. 454) puts the matter in the right light. If gold had risen there ought to have been less of it, and prices should have been lower. The bank paper, therefore, even if not absolutely increased, was in excess relatively to what it ought to have been and would have been under specie payments. Prices, if not bellow old specie figures, were relatively inflated.
I abstain from pursuing this suggestion, but regard it as the key to a correct solution of the contradictions in which many of the best authorities on this subject have been involved.
The second question which the committee had to consider, was: Why are the exchanges 18 or 20 per cent, against England?
The importance of this inquiry for us may not be at once apparent. We have very wisely separated the quotations of exchange from those of gold. We quote exchange in gold, and thus the fluctuations of the two are kept separate and presented independently. But when there was no quotation of gold, evidently the exchange rates were the indicator on which the variations between paper and bullion were marked.
But this is not all. The witnesses, almost without exception (and the exceptions were not clear and precise in their opinions), maintained that the adverse exchange was due to an adverse balance of trade or of payments. The question involved was, therefore, this: Is an adverse balance of trade the explanation of an outflow of gold?—or: Is a favorable balance of trade the force to which we must look to bring an influx of gold? There is no question in finance which now demands our study so imperatively as this one. The false notions of the balance of trade infest almost every discussion of our present circumstances which one reads or hears. It is assumed that the movement of the precious metals from country to country is caused by the balance of trade one way or the other, and, as the movement of the metals is a phenomenon of the first importance in any question of resumption, the reasoning which starts with this doctrine is all fallacious. The balance of trade was exploded by Quesnay and his followers a century ago, and was gibbeted in the Bullion Report, but it stalks the money market and the national treasury to-day, an uneasy ghost, which it seems impossible to lay.
It is a vexatious task, and one which always makes a scientific man feel ridiculous, to set vigorously to work to demolish an old error which no well-informed man any longer holds, but, in our present situation, and under our political system, popular errors are of the utmost importance, and no pains should be spared in patiently exposing them. The fallacy here is in the word “balance.” If it means equilibrium , it may be used correctly to denote the equality of exports and imports, but then it regulates itself, and no power can control it. If it means remainder , and suggests analogies of book-keeping, it is a mere myth to which no fact corresponds, and is to be entirely rejected. This question will be noticed further when we come to speak of the debate on the report.
The third question which the committee had to consider was offered by the conduct of the Bank. It is to be noticed that the English inconvertible paper was a bank issue of no fixed amount, while our present paper money was issued to an arbitrary limit at which it was established. The question, therefore, was: How shall the Bank know when it has given the country just the amount which it requires, and when it passes the limit so that its issues become excessive? Under a convertible system they found out, of course, by a demand on them for gold for exportation (clandestine or open, as the case might be). They could not, generally speaking, press notes on the public beyond the requirement, though with a usury law and a law against export this would be possible to some extent.
They therefore went on during the specie times, to discount all good bills, at short date, for real transactions, at five per cent, and never troubled themselves about gold or the exchanges. They pursued the same course under the Restriction, and the question before the committee was: Whether these conditions were sufficient, in the absence of convertibility, to guard against inflation, or whether the Bank might inflate while observing this rule?
This question has the highest importance for us, if we are to have “free banking” on paper.
The report of this committee is perhaps the most important document in financial literature. Its doctrines have been tested both ways, by disbelief and by belief, by experiment of their opposites and by experiment of themselves. They are no longer disputable. They are not matter of opinion or theory, but of demonstration. They are ratified and established as the basis of finance. They may be denied, as the roundness of the earth was denied even five years ago, and as Newton's theory of the solar system was denied until within twenty-five years, but they have passed the stage where the scientific financier is bound to discuss them. *
The doctrines of this report may be summed up thus:
The value of an inconvertible currency depends on its amount relatively to the needs of the country for circulating medium (only to a very subordinate degree on the security on which it is based or the credit of the issuer).
If gold is at a premium in paper the paper is redundant and depreciated. The premium measures the depreciation.
The limit of possible fluctuations in the exchanges is the expense of transmitting bullion from the one country to the other. If it costs 2 per cent, to transmit bullion, the fluctuations of the exchange due to the ratio of imports and exports never can exceed two per cent, above or below par. Par of exchange is the par of the metals, weight for weight, in the two coinages.
If there is a drain of the precious metals, It is due, aside from exportations to purchase food or pay armies, etc., to the presence of an inferior currency of some sort in the country it leaves.
If the inferior currency be removed, the exchanges will be turned, the outflow will stop, and, if any vacuum is created, gold will flow in to supply it.
Gold will not flow in while the inferior currency fills the channels of circulation.
In the presence of a panic the duty of the Bank is to discount freely for all solvent parties.
The still more fundamental laws involved are these:
The amount of gold in the world will suffice to perform the exchanges of the world. If there be more or less, it will only affect the average level of prices the world over.
Every nation will have that portion of the stock of gold in the world which is proportioned to its trade. Each nation will have just as much as it needs.
A better and a worse currency cannot circulate together. The worse will drive out the better.
The committee also incidentally condemn the usury law and the law forbidding the exportation of the precious metals.
The discussion of these doctrines in the House and by the public will be noticed below. The reader will have a more correct impression of the attitude in which the doctrines of the report came up for discussion, if we present the events in their chronological order.
The Report of the Bullion Committee was ordered printed in June, 1810, and was before the public in August of the same year. Meantime, in July, 1810, the bubble burst. The accounts of the Bank were not published at this time and the amount of the discounts was not known. A motion of Mr. Huskisson on April 5th, 1811, to call on the Bank for such a return, was negatived. The Bullion Committee had called for a statement of discounts, and had received a paper under promise of secrecy. It leaked out in some way, and a set of figures were circulated, but their correctness seems always to have been in doubt. Macleod stated that the discounts in 1795 were £2,946,500; in 1809, £15,475,700; and in 1810, £20,070,600.
A report was made in 1832 of the state of the Bank from 1778 to 1831. It is given in Tooke's “Prices.” vol. II. There is a similar table (Feb. reports) in McCulloch's Adam Smith, p. 508, and Dickt, of Commerce, art. “Banks.” The two are combined in the diagram opposite p. 310, which presents the movements of the note circulation and bullion for each six months during the period 1790 to 1830.
Mr. Baring, in his evidence before the Bullion Committee, and Mr. Huskisson in his speech on the motion above referred to, bear ample testimony to the repetition of the old phenonemon of speculation under inflated paper issues. The enterprises undertaken were indeed of the most extravagant kind. For instance, speculations in South America took ludicrous shapes, being in no way adapted to the circumstances of that country. A company was formed to send out Scotch milkmaids to make butter in Buenos Ayres. But when the milkmaids saw the beasts they had to deal with they shrank from the encounter. A corps of laborers was required to secure the animals at milking time, and when the butter was made it was found that the people preferred oil.
The question of prices during this period leads to difficult and controverted questions which lie beyond the limits set for the present undertaking. The standard work on the subject is Tooke's “Prices,” in which a certain view is very ably defended. Mr. Tooke combated the popular notion, which seeks the explanation of all price fluctuations in the fluctuations of the amount of currency. It is permitted to doubt, however, especially in view of American experience, whether he made sufficient allowance for the radical differences between a convertible and an inconvertible currency, when he discussed the period of the Restriction on the same principles which he applied with so much justice to the convertible system. The popular metaphor of “floating,” although it is not well analyzed, is very apt. On a system of even nominal convertibility the motives of speculation and of price fluctuations lie outside of the currency in industrial and commercial circumstances. Speculation in the widest and best sense controls the amount of the currency. On an inconvertible system the amount of the currency controls speculation. If it is not redundant its effect is slight; if it is very excessive, it “floats” everything, and becomes the controlling consideration. No one believes that an inconvertible currency suspends the operation of any of the economic laws which govern prices, but, if it is redundant, it decides whether the fluctuations in price of a unit of a given commodity shall be above and below $1 or above and below $2. Every contraction or expansion alters this general level.
It is certainly erroneous to believe that redundant inconvertible paper increases all prices equally. It is one of its hardships that it increases prices of merchandise more than wages; of luxuries and comforts more than of staple articles; that is, it lessens the command of laborer, artisan, and farmer over comforts. The articles taken into account by Tooke are all staple articles, and he shows that these had not increased in price up to 1810. As a test of his argument, which cannot be regarded as conclusive, since it only shows in general that there were, ordinary economic causes to account for the direction up or down of every fluctuation of each article, but never measures the exact force of such causes, I have combined the prices given by him in his tables at periods corresponding to those for which the state of the currency is given in the diagram, (opposite p. 310) and inserted a line of prices. This balances off incidental causes, and ought to show whether the average of prices underwent any influence from the amount of the currency or not. There is no accord with the amount of the Bank of England circulation, but there is an unknown factor of country-bank circulation of which we have no estimate, save for the years 1810–1818. (See p. 284) The uppermost line in the diagram represents the total circulation during these years. The parallelism of the price line with it is evident. Also the general parallelism of the price line with the “price of gold” line is apparent, and, if the latter may be taken to indicate the fluctuation of the total amount of paper, then an influence of the amount of paper on the general average of prices seems undeniable. It is to be remembered that the English paper was never recklessly inflated, and that, up to 1810, it was managed very conservatively; secondly, that the control of the amount of currency over prices is more immediate and complete the more redundant it is (it seems that, up to 1810, at least, there had been no such inflation as to float prices); and thirdly, that political and military events were at this time exerting great and sudden effects on prices. The fluctuation of five hundred shillings on the price line in the first six months of 1817, was due to one article—oil. In the next six months, hops advanced two hundred shillings. The downfall in 1818 was due to the crisis.
The warehouse system had been introduced during the last four or five years, and large stocks of colonial produce were being carried by means of the expanded discounts above indicated. Manufactured goods found no market save as they could be smuggled to the continent. The raw materials on which speculation had fastened consequently fell in price. Commerce was almost at a stand-still. The goods exported to South America found no market, for the South Americans had nothing with which to buy, and the foolish enterprises in that direction could, of course, bring in nothing but shame and loss. British goods in the Baltic towns were confiscated, and the climax was reached when a period of fine weather restored hopes of the harvest, and ruined those who had been led by the bad weather early in the season to speculate for high prices in grain. “The crash began in July with the failure of some great commercial houses. In August a London bank stopped; and several country banks were brought down by its fall. Wild fluctuations in prices followed, and in November, the number of bankruptcies in England, which had usually been under one hundred, had risen to two hundred and seventy-three, ‘besides stoppages and compositions’ as the Commercial Report declared, ‘equal in number to half the traders in the kingdom.’ Manufacturers no longer trusted the merchants nor employed the operatives. In Manchester, ‘houses were stopping not only every day but every hour.’
“The commissions of bankruptcy for the year now amounted to two thousand three hundred and fourteen, of which twenty-six were against bankers. The hunger of the operative classes, and the outcry against machinery as the main cause, prepared the events of the succeeding dark years.” *
The Bullion Report falling in the midst of this period attracted universal attention. It was hotly discussed in all assemblages of merchants and bankers, and called forth a swarm of pamphlets. It was evident that the witnesses before the committee had fairly represented the opinions which were almost universal in the business community, and they were all contrary to those of the report. It was insisted that the paper had not depreciated; that paper was the best money; that to use gold and silver was barbarous and behind the age; that “guineas were an incumbrance” (although De Yonge was prosecuted for selling this incumbrance for export—a point which Cobbett was fond of reiterating); that a pound sterling was an “ideal unit;” that a pound sterling was the interest on £33 6s. 8d., at three per cent., which would be £1; that paper money supplied capital, made money plenty, and caused prosperity; that the country had grown up to the increased currency; that the war could not be carried on without paper; that the balance of trade “of course” drew off the gold; that it was impossible to resume while the exchanges were adverse; that Great Britain was in the debtor relation, and could not resume while she was so. In short, there is no possible fallacy now preached in the United States about paper money which was not then and there brought forward, with the single exception of the “elasticity” notion. * As their paper was not fixed in amount, that notion had no place. It seems that there can be no new fallacy to be discovered in regard to paper money. The field is exhausted.
On the 7th March, 1811, a committee of the House on Commercial Credit reported. They attributed the crisis to overtrading, failure of South American speculations, and also to the warehousing system. A meeting of merchants in London passed resolutions to the effect that the crisis was mainly due to storing a large stock of goods in bond which the warehousing system had encouraged. The wealth and credit of England thus seemed to them to have caused its calamity. It was proposed in Parliament to issue six millions of Exchequer bills in loans to merchants and manufacturers, to enable them to tide over the crisis. Those who favored this plan adopted the above explanation of the crisis, though nobody explained how the colonial producers had forced Englishmen to carry their stocks for them while the continent was closed. The opponents urged that the currency was really redundant and was the favoring circumstance of the speculation, and that the issue of Exchequer bills would cause further expansion and enhance the difficulty The bill was passed, but only two millions were ever taken up.
Mr. Horner opened the debate on his Report on the 6th May, 1811, in a very able speech, giving an elucidation of the principles of the report. He had entered upon the investigation with no prejudices and no special knowledge of the subject, but he brought to bear upon it the resources of a well-trained mind, and a single determination to accept such results as might appear upon a full and careful investigation.
The propositions he advocated had, therefore, the character of scientific results, and the man who could so undertake an important inquiry in the face of popular clamor and prejudice, gave promise of the highest statesmanship. “He died,” in 1817, “at the age of thirty-eight, possessed of greater public influence than any other private man.”
I know of no more instructive documents for the student of finance than the debates of 1811 and 1819. They do not cover the more abstruse questions in regard to the regulation of a convertible currency, questions which yet require attentive study and a definite solution, but they avail to establish those fundamental propositions in regard to the meaning and function of money, which, if a man once thoroughly grasps them, guarantee him against the most flagrant fallacies which obscure the subject of currency, and enable him to perceive these fallacies whenever they recur in the thousand and one “schemes” which are now daily set afloat.
Of the three questions involved in the report, as stated above: Is the paper depreciated? Why are the exchanges adverse? How ought the bank to regulate its issues?—the first and third have no great importance for us. No one denies that our paper is depreciated, unless it be those who think that we have “grown up” to the currency, though that notion seems to have gone out of fashion again. The question of regulating an inconvertible bank paper is not our question, because our paper is fixed in amount. But the second question of the Bullion Committee has great importance. It is the one in regard to which doctrines opposed to those of the Bullion Report are most frequently affirmed and most profoundly believed amongst us, and there is no hope of any exit from our circumstances until we get to understand the laws which govern the distribution of the precious metals and those laws of currency which are connected therewith. It will be remembered, as stated above, that the question about the exchanges is really this question: If the exchanges are adverse to such a degree as to produce a serious and prolonged outflow of the precious metals, where must we look for the cause? Is it due to the balance of payments or to some deterioration of the currency? Or, to put the same question in another form: If we desire to produce an influx of gold, to what force must we look to cause it? Must we look to the “balance of trade,” or can we do anything in the matter save sit still and wait for the balance of trade to turn? Can we bring it about by correcting some error in the currency?
The answer to these questions given in the report and by those who supported it is, that the balance of imports and exports never can move the exchanges either above or below par more than just enough to start a movement of bullion. On a specie system, any outflow of bullion would bring down prices and immediately make a remittance of goods more profitable than one of bullion, and, if the exportation of bullion was artificially continued (as, for instance, to pay the expenses of a foreign war), it would reduce prices until a counter-current would set in and restore the former relative distribution all the world over. If all nations used specie, or even paper and specie, in only due proportion, it would be as impossible for one nation to be drained of specie as for New York harbor to be drained of water by the tide, and, on the same supposition, it would be as absurd for the Secretary of the Treasury or a committee of Congress to regulate the currency as for the same powers to see to it that New York harbor gets its fair share of water on every tide. If a country produces gold, its surplus product goes out as a commodity, without an unfavorable exchange, and does not here come into account. If therefore, there is an outflow of gold, serious and long-continued, accompanied by an unfavorable exchange, it is a sign that there is an inferior currency behind the gold, which is displacing it. The surplus of imports of goods above the exports of goods is nothing but the return payment for this export of gold, and is not a cause, but a consequence. If, finally, we want to turn this tide and produce an influx, there is only one way to do it, and that is simply to remove the inferior currency. As for waiting for the balance of trade to turn and bring gold into a country which has a depreciated paper currency, one might as well take his stand at the foot of a hill and wait for it to change into a declivity before climbing it.
The authorities of the Bank strenuously denied that their issues, so long as they were made at 5 per cent, on bills representing real transactions, at three months' date, could become excessive, or that the bank issues could affect the exchanges. The committee and their supporters held that this rule would not be a guarantee against inflation, but that, if the exchanges were adverse and bullion was being exported, it was a sign that the paper was excessive, and that the Bank should check its issues. The Bank maintained that it had nothing to do with the exchanges, and could not govern its issues by any reference to them. The bullionists maintained that while the paper was inconvertible, the adverse exchange and the premium on gold were the only signs by which the Bank could judge when its issues were excessive. Thus the real issue was, whether, in case of a drain of specie, we must look at the ratio of imports to exports, or at the ratio of paper currency to requirement, for the explanation of it, and the means of checking it.
In reviewing the debate briefly, I confine attention mainly to those parts which bear on this question of the exchange.
Mr. Horner offered sixteen resolutions, of which the most important may be condensed as follows:
That the legal tender in England is gold and silver only.
That a shilling is 1/62 of a troy pound of silver, 925/1000 fine.
That a “guinea” is 2/89 of a troy pound of gold, 11/12 fine.
That Bank of England notes promise to pay pounds sterling, a pound being 20/21 of a guinea as above.
That Bank of England notes are depreciated—are not worth what they stipulate to pay.
That the reason of this is an excessive is sue.
That the exchanges have been greatly depressed (or, as we should say, very high * ), for a long time, partly owing to heavy payments abroad, but chiefly to the depreciation of the notes.
That the Bank ought to regulate its issues by the price of bullion and the exchanges.
That the remedy is to return to convertibility.
That the law extending the Restriction be amended so as to resume in two years.
Mr. Rose criticised the report paragraph by paragraph, showing that it was contradictory to the evidence offered to the committee. This was perfectly true; the committee took the facts of their witnesses, but interpreted them in the sense diametrically opposed.
Mr. Thornton (member of the committee) cited the experience of the Bank of Paris. In 1805 it advanced indirectly on government anticipations. “The consequence of this transaction was an augmentation of the paper of the Bank of Paris. A drain of their cash followed; the diligences were found to be carrying off silver into the departments, which the bank, with a view to its own safety, had continually to bring back, with much expense and trouble. The circulating medium of the metropolis had now become evidently excessive. Greater facilities were afforded for borrowing in that quarter than in other places, and the country wished to partake in those opportunities of extending purchases which the metropolis enjoyed. But the paper of the bank would not circulate in the departments. It was therefore necessary first to exchange it for coin, and the coin being then carried away from Paris, the plenty of circulating medium would equalize itself through the French territory.... There arose a premium on silver at Paris, and an unfavorable exchange between Paris and the departments of France, and this was proportionate to the expense and trouble of bringing back the silver from the departments.... The Bank of Paris at length stopped payment. The government was consulted. The bank was directed to reduce its paper, and in the course of three months, having pursued this principle, it opened without difficulty. The discount on its paper, or, in other words, the premium on coin, had varied from 1 to 10 or 12 per cent., but after the reduction of paper it ceased. The exchanges of France with foreign countries had also turned about 10 per cent against that country.”
Mr. Vansittart opposed the resolutions. He argued that the committee ought to have recommended the repeal of the restriction on the exportation of the metals, in order to carry out their own principles. This was true; but he argued that it was illegal to export, therefore the committee were in the position of recommending by implication what was illegal. He denied that there was any “standard” in England, or ever had been, consisting of any weight of metal of a certain fineness, but asserted that it was the prerogative of the Crown to regulate the value of money. The proof of this was that silver was legal tender by tale up to £25, but everybody knew that the current shillings were worn below weight; therefore, because a man might put off smooth shillings on his creditor for a debt under £25, there was no standard of what a shilling ought to be in England. Also the law allowed guineas to be legal tender until worn 1 grain and a fraction below weight, therefore there was no fixed weight from and below which this grain and a fraction was to be reckoned.
He also made a great point of demanding to know whether “depreciation” meant depreciation relatively to bullion or to commodities, or referred to the credit of the issuer. No one took the trouble to reply that it made no difference with the fact.
He became the hero of the occasion by proposing counter-resolutions, that the pound sterling has no relation to any weight of metal of a given fineness, and that bank-notes “have hitherto been, and are at this time, held in public estimation to br equivalent to the legal coin of the realm, and generally accepted as such, in all pecuniary transactions to which such coin is lawfully applicable.” Guineas were at the time at 15 or 20 per cent premium, and members of both houses testified in the debate that, although specie had disappeared, and all prices were set in paper, yet there were two prices everywhere, when metal was offered.
This gentleman afterwards became Chancellor of the Exchequer and champion of the Sinking Fund, which was kept up by borrowing at a higher rate than it yielded. He ended life as Lord Bexley.
Mr. Huskisson (one of the committee) pointed to the fact that Spanish dollars, which had been imported for use as “change,” and which were worth 4s. 6d. in English coinage, had been rated at 5s., and then, as the depreciation went on, that it had been necessary to rate them at 5s. 6d. to keep them in circulation. He asked whether the believers in “abstract currency” ever heard of an abstract payment or an abstract dinner. Adverting to the notion that £1 was 3 per cent, of £33 6s. 8d., he asked, pertinently enough, whether this would not fit any conceivable depreciation. The conception of £1 was necessary to define £33 6s. 8d., which again was necessary to the definition of £1.
Mr. Morris stated a case which occurred in 1801, in which a creditor had refused tender of notes, and the court unanimously sustained him in his position that gold only was legal tender.
Mr. Parnell (one of the committee) took more clear and decided ground in some respects than any one else. All parties generally agreed in sparing the Bank. He refused to join them. “If, instead of one bank having been established with so immense a capital, and such great exclusive powers, the trade of banking had been left free, and several banks had been allowed to grow up with the improving wealth of the country, the public would have derived equal accomodation, without any of the risk or any of the evils to which it has been exposed by the enormous power that has been given to this one establishment.” He declared that the paper was in an unsound state before 1797. He stated the fundamental doctrine that “a country will always have as much coin as it wants, provided no impolitic act of legislation interferes to force it out of circulation.” He attacked the small notes, declaring that the notes under, £5 displaced coin equal to their amount.
Mr. Manning, who spoke for the Bank, declared himself “one of those old-fashioned, practical men who thought the balance of payments an article of great importance in the regulation of the exchanges.” Showing that the foreign remittances had been £26,000,000 the last year, he argued that the price of gold must have advanced.
Mr. A. Baring, who had been on the committee, and enjoyed high authority, gave more weight to the balance of payments than the committee, but joined them to a certain extent in attributing the unfavorable exchange to the paper. He thought the true cause for anxiety was the debt and not the paper issue.
Mr. Sharp (of the committee) showed that at Hamburg and Amsterdam, where there was no suspension, but where military oppression was at its harshest, the exchanges were favorable, and that at Paris, the only other place on the continent where inconvertible paper had not been issued, but where war expenditures were highest, exchanges were favorable and there was no drain of the metals.
The Chancellor of the Exchequer, Mr. Perceval, did not enter very deeply into the question. His point was, that no excess of circulation had been proved. He said that gold was not the standard, nor silver, but gold and silver bound down by law to a certain relation to each other. Unfortunately for this notion, no law can possibly bind them together.
Mr. Canning made by far the most eloquent speech on the subject. He advocated the resolutions of Mr. Horner, but thought it inexpedient to resume at that time. He wanted the resolutions passed, except the one for resuming in two years, in order to place the House on the record for sound financial ideas. Referring to the Chancellor's assertion that the excess had not been proved, he said that it was impossible to prove any such thing. No relation exists between the aggregate transactions and the requirements for currency, nor, if there did, would it be possible to ascertain the aggregate transactions. The rise in prices is a symptom, but only a symptom. There is no excess unless there is depreciation, and if there is depreciation there is excess. The only pertinent question is, therefore, whether there is depreciation.
“The noble lord (Castlereagh) has indeed devised a singular definition of this measure [of value]. He defines it to be a ‘sense of value in reference to currency as compared with commodities.’... ‘A sense of value!’ but whose sense? With whom is it to originate? and how is it to be communicated to others? Who is to promulgate, who is to acknowledge, or who is to enforce it? How is it to be defined? and how is it to be regulated? What ingenuity shall calculate, or what authority control its fluctuations? Is the sense of to-day the same as that of yesterday, and will it be unchanged tomorrow? It does fill me with astonishment that any man of an accurate and reasoning mind should not perceive that this wild and dangerous principle (if principle it may be called) would throw loose all the transactions of private life, all contracts and pecuniary bargains, by leaving them to be measured from day to day, and from hour to hour, by no other rule than that of the fancies and interests of each individual, conflicting with the fancies and interests of his neighbor.”
“No dream, it must be owned, could be more extravagant than the visions of those practical men who have undertaken to refine away the standard of the currency of the realm into a pure abstraction. There is indeed something perfectly ludicrous in the inconsistency and injustice with which they impute a love of abstraction to their opponents, while they are themselves indulging in the most wanton departures from substance and reality. ‘Beware of abstractions,’ say they to the Bullion Committee when they find fact and law laid down as the foundation of its report. ‘Beware of abstractions’ say they, to the honorable and learned chairman of the committee, when they find in his first seven resolutions nothing like theory or imagination, but a clear, concise,—a dry and faithful recapitulation of those rules which the statutes of the country have established for the weight and fineness of its coin.... And this admonition comes from whom?—from the inventors and champions of ‘abstract currency’—from those who, after exhausting in vain every attempt to find an earthly substitute for the legal and ancient standard of our money, have divested the pound sterling of all the properties of matter, and pursued it, under the name of the ‘ideal unit,’ into the regions of nonentity and nonsense!”
“In addition to the motives of policy, there are, as I have heard this night, not without astonishment and dismay, considerations of justice which preclude any systematic reduction of the amount of our paper currency. Such a reduction, it is argued, would change the value of existing contracts and throw into confusion every species of pecuniary transactions, from the rent of the great landed proprietor down to the wages of the peasant and the artisan. Good God! what is this but to say that the system of irredeemable paper currency must continue forever! What is it but to say that the debts incurred, and the contracts entered into, under the old established legal standard of the currency, including the debts and contracts of the state itself, are now to be lopped and squared to a new measure, set up originally as a temporary expedient?”
Referring to Mr. Vansittart's resolution about paper and gold being equal, he said:
“Speaking impartially, I must say that if I had seen this proposition anywhere but where it is, fairly printed and numbered in the right honorable gentleman's series, I should have thought it an invention of his antagonists, calculated to place the fallacy of his doctrine in the most glaring and ridiculous point of view, but carrying the license of exaggeration beyond pardonable limits, and defeating its purpose by the grossness of the caricature.”
“Suppose, for instance, ten millions sufficient to carry on all the transactions of the country, fabricate fifteen millions of paper instead of ten, the whole fifteen will circulate. The only consequence will be that the commodities for which it is exchanged will rise fifty per cent, in their nominal price. Make those fifteen millions twenty— the addition will, in like manner, be absorbed into the enhanced prices of commodities. Excess of currency cannot be proved to the conviction of those who will not admit depreciation to be the proof of it.”
Mr. Horner's resolutions were defeated by a vote, on the first, of 151 to 75, and the one for resumption in two years by 180 to 45.
Mr. Vansittart's counter-resolutions were passed on the fifteenth of May, the one declaring gold and paper equal by 151 to 75; and so the House put upon its records that a guinea was equal to a one-pound note and a shilling, when £100 paper would buy only £86 in gold.
In this debate the “theorists” and the “practical” men found themselves in sharp contrast. The Bullion Committee took the evidence of their witnesses as to fact but gave their own explanation of the facts. They carried the best thinkers in the House with them, but found the practical bankers and city men, and the great mass who did not understand the matter, and who had an invincible dislike to admitting that bank-notes were depreciated, against them. In this case, as always, theory and practice are inseparable. The city men had a theory of their facts. It was really one theory against another; the one drawn from a narrow routine: the other a philosophical and scientific generalization from a broad range of facts. The theorists were beaten, and the nation went on for eight years' further experiment of the paper. We have now to pursue the verdict of history and experience as between the two parties.
“Nothing had been seen since the beginning of the century to compare with the distress of 1811 and 1812.... Our manufacturers were set fast, and could not pay wages on which their workmen could live; and workmen could not live on low wages when the average price of wheat was 112s, [the quarter, of 8 bushels], and that of meat 8d. or 9d. per pound. The ordinary course of manufacture, particularly of the hardware manufacture, was broken up. The factor * stepped in between the employer and the operative, and made his market of the necessities of both, leaving them discontented with each other. The employer sold off his stock at a loss, and the workmen made inferior wares by means of advances from the factor for materials.” †
Nature seemed to make common cause with war and bad finance. The winter of 1812 was extraordinarily severe, and the accidents by flood and fire were numerous. Crimes began to multiply in that accord between physical distress and moral decay so often noticed. Wages were down at starvation point. Spinners had 7s. 6d. per week in a time of high prices for the necessaries of life. The recent introduction of machinery and the extension of the factory system would have caused an inevitable period of pressure on hand-workers. Now these causes fell in with others to enhance the distress. The artisans, in striking analogy with our own farmers at the present time, sought their foe in the nearest and most palpable shape in which the bad circumstances of the time pressed upon them. They attacked the machines, burned the factories, and united in riotous disturbances. The corn laws were in full force, and prevented the relief which might have come from other countries in time of scarcity, while manufacturers were entangled in a mesh of restrictions of every description, more ruinous even than Napoleon's Decrees or the Orders in Council. “The war and famine price [of grain] of 1812 was reached again in the latter part of 1816, 1817, and 1818. The golden days of the deity that is found in no mythology—the anti-Ceres—were returned. But the people were starving. Misery and insurrection filled the land.” The harvest of 1815 was abundant, and to prevent importations, all such were prohibited when wheat was under 80s. In 1816, in spite of this law, the agriculturists were once more “in distress.” The years when they were not so, down to the repeal of the corn laws in 1846, were the few years when nature refused her bountiful returns.
In 1814 peace was restored, and it was believed that commerce must at once revive. Anticipating this, enormous exportations were made to the continent and to the United States, “The shippers found to their cost, when it was too late, that the effective demand on the continent for colonial produce and British manufactures had been greatly overrated, for, whatever might be the desire of the foreign consumers to possess articles so long out of their reach, they were limited in their means of purchase, and accordingly the bulk of the commodities exported brought very inadequate returns.”
They found that it is impossible to “inundate” a country with foreign commodities, or to “drain off its bullion” by foreign trade, if it does not want to be drained. As for a true exchange of goods, the laws hampered it by all sorts of restrictions and prohibitions.
Thus, in 1816, after the long endurance of the war, and the dragging misery of 1812, '13, and '14, broken only by fitful gleams of prosperity, this “overtrading” prostrated commerce and manufactures together, and agriculture was no better off.
Turning now to the currency to observe its movements contemporaneously with these expansions of speculation, we find a great difficulty in the impossibility of estimating the country bank circulation. The best information we have is given in the report of the Lords' Committee of 1819. They gave two estimates as follows. The rate of gold per oz. is added from McCulloch's Adam Smith.
Bank of England. | Country Banks, 1st Est. | Total. | Country Banks. 2d Est. | Total. | Gold per ounce. | |||
£. | s. | d. | ||||||
1810 | 22.5 | 21.3 | 43.9 | 21.8 | 44.3 | 4 | 10 | 0 |
1811 | 23.2 | 20.9 | 44.2 | 21.5 | 44.8 | 4 | 4 | 6 |
1812 | 23.2 | 20.0 | 43.2 | 19.9 | 43.1 | 4 | 15 | 6 |
1813 | 24.0 | 22.3 | 46.3 | 22.5 | 46.6 | 5 | 1 | 0 |
1814 | 26.9 | 21.6 | 48.5 | 22.7 | 48.6 | 5 | 4 | 0 |
1815 | 26.8 | 20.3 | 47.2 | 19.0 | 45.8 | 4 | 13 | 6 |
1816 | 26.5 | 15.5 | 42.0 | 15.0 | 41.6 | 4 | 13 | 6 |
1817 | 28.2 | 15.8 | 44.1 | 15.8 | 44.1 | 4 | 0 | 0 |
1818 | 27.2 | 20.0 | 47.2 | 20.5 | 47.7 | 4 | 0 | 0 |
The steady expansion until 1816 is at once apparent, and its effect on prices is distinctly shown by the gold premium, which advances with the expansion of the paper. In 1816, when the revulsion came, the country banks failed in great numbers. The contraction of their issues was so great that, though the Bank of England increased its issues in 1817, the gold premium fell, and the paper was within a few pence of par. Resumption at this time would scarcely have cost a struggle. However, no effort of this kind was made. On the contrary, no sooner was the immediate crisis over, than a new expansion commenced. (See the diagram at the end of this chapter.)
The harvest failing in 1817, the price of wheat rose above 80s., and the ports were opened; speculation in grain was active during that year. 1818 presented the same phenomena, but now were added speculations in silk, wool, cotton, and other raw materials. Imports were double or treble what they had been in 1816.
In 1817, the Bank voluntarily undertook to redeem its notes dated before Jan. 1st, 1817, but, adhering to the doctrine that the issues could not affect the exchanges, it continued to expand the circulation, while paying out gold. The laws against exportation having fallen into neglect, a run upon the Bank began, and a rapid exportation to France took place. The government ordered the Bank to cease paying specie. According to the doctrines of the Bullion Report, to expand the circulation with gold at a premium and the exchanges adverse, and then pay on demand, was as certain to produce exportation as it would be, if a tub full of water should be lifted on one side, that the water would run out. The fact seemed to fall in with this doctrine.
Another incident which co-operated in the financial situation of 1818 was the reduction of interest on the Exchequer bills. This, coming just at a time when several foreign nations were anxious to negotiate loans, led to a great exportation of coin for investment in such loans, the rate of interest offered being higher than the new rate for Exchequer bills. On a specie basis, and with no usury law, such a movement could have no perils; but in the existing circumstances, the Bank was led to make more advances on government securities and augment the inflation. It paid off by contract with government those who refused to hold the securities at the lower rate.
The most powerful cause, however, which was at work, and the one of which the last-mentioned was only a secondary form, was the reduction of paper issues on the continent. The loans were contracted to accomplish this. If it had not been that these issues had produced abnormal relations throughout Europe and America, which, as soon as they were rectified and the normal state of things restored, must produce a redistribution of the metals, the loans would have had no importance. The force of this cause it is impossible to estimate, but it lay at the bottom of the fluctuations of bullion at the Bank during the years 1816 to 1819.
The crash came in the fall of 1818, and numerous failures occurred during the winter. By February the Bank of England circulation had fallen to 25.1 millions. The subject of cash payments was now once more forced on public attention.
Both Houses of Parliament appointed committees on the Resumption. Each committee rendered two reports consecutively. These reports were not in themselves very able documents, but it appeared from the reports, and from the evidence of the persons examined, that the public conviction in regard to the questions discussed in 1811 had entirely changed. It was now admitted by all but very few that the currency was depreciated, and that the adverse exchanges and outflow of gold were consequences of the presence of depreciated paper, and must last so long as the paper remained—consequently, that, to resume specie payments, the whole problem was to get rid of the paper. These doctrines were disputed by no one save, strangely enough, the directors of the Bank of England. They passed a resolution that they could see no good ground for the opinion that the Bank had “only to reduce its issues to obtain a favorable turn in the exchanges, and a consequent influx of the precious metals.”
There was, however, a strong party of city men who opposed resumption, and petitioned against it on account of the ruin which contraction would bring upon the country. The Bank of England also offered a “Representation” opposed to any legislation fixing a time for resumption. The difficulties involved in contraction no one denied.
It was agreed on all sides that the movement must be gradual and careful, if made at all. Thus the question was narrowed down to this: Is it expedient, in view of the effects of the suspension which we have experienced, and in view of the benefits of a sound currency, to set to work manfully to endure the distress for the sake of the good? On that issue the city men took the negative, the statesmen the affirmative.
The plan proposed for resumption, was founded on Ricardo's theory of currency, more familiarly known as the Hamburg currency.
On this plan, metal may be deposited in the Bank, being weighed and assayed, and its value in a set denomination is put to the credit of the depositor. No coin is used, but generally business is done by transfers on the Bank's books of credits, thus made. When payments out of Bank are demanded, they are made in ingots, weighed, assayed, and stamped. It was proposed that the Bank should redeem its notes in ingots of sixty ounces weight after February 1st, 1820, and until the 1st of October, 1820, at £4 is. per ounce; from October 1st, 1820, to May 1st, 1821, at £3 19s. 6d.; from May 1st 1821, to May 1st, 1823, at £3 17s. 10½d.; and after May 1st, 1823, in coin on demand. This was amended so that it should pay in ingots at £3 17s. 10½d. after May 1st, 1822, instead of May 1st, 1821.
Mr. Peel opened the debate. He said: “He was ready to avow, without shame or remorse, that he went into the committee with a very different opinion from that which he at present entertained, for his views of the subject were most materially different when he voted against the resolutions brought forward in 1811, by Mr. Horner, as the chairman of the Bullion Committee. Having gone into the inquiry determined to dismiss all former impressions which he might have received,... he had resolved... to adopt every inference which authentic information or mature reflection should offer to his mind.... He conceived them [the principles of the. Bullion Report], to represent the true nature and laws of our monetary system.”
“All the witnesses examined before the committee strongly recommended the establishment of this [metal] standard, one witness alone excepted, who was an advocate for the indefinite suspension of cash payments. But when this witness was asked whether the indefinite suspension of cash payments was to exist without any standard of value, he answered: ‘No—the pound should be the standard.’ He was required to define what he meant by the pound. His answer was, ‘I find it difficult to explain it, but every gentleman in England knows it.’ The committee repeated the question and Mr. Smith answered, ‘It is something which has existed in this country for eight hundred years—three hundred years before the introduction of gold.’”
“Sir Isaac Newton... entered on the examination of this subject, but that great man came back to the old, the vulgar doctrine, as it was called by some, that the true standard of value consisted in a definite quantity of gold bullion. Every sound writer on the subject came to the same conclusion—that a certain weight of gold bullion, with an impression on it denoting it to be of that certain weight and of a certain fineness, constituted the only true, intelligible, and adequate standard of value, and to that standard the country must return, or the difficulties of our situation would be aggravated as we proceeded.”
“That the excess of commercial speculation which led to such evils was the consequence of an over-issue of paper currency was a fact not to be disputed.”
“If the continuance [of this system] should be sanctioned by the House, let it not be imagined that they ought to measure its future evils by its past.”
Silver had been demonetized in 1816, and the shillings since that time pass current at six per cent, above their value as metal. Gold is the only legal tender for sums above £2. The object of this law is to avoid the effect of fluctuations in the value of the two metals as compared with each other. The United States passed a similar law in 1853. (See p. 187.)
It was believed by many that this law would prove fatal to resumption in gold, and that only silver would circulate. The provision that silver should be legal tender only for 40s. precluded any such danger.
Mr. Tierney objected to the proposed scheme for resumption. He wanted to have the Bank thrown on its own responsibility to resume on a set day, the government repaying, as was proposed, £10,000,000 of the advances of the bank before the day of resumption. He was a very able man, with a reputation for pugnacity. For instance: “The House did not withdraw its confidence from the Bank from any doubt of its wealth or integrity, but from a conviction of its total ignorance of the principles of political economy.”
Alderman Heygate denied inflation and depreciation.
Sir H. Parnell said that any one who still denied this would pay little heed to any further elucidation. He said: “There was another subject so connected with the question before the House that he thought it peculiarly entitled to the consideration of Parliament. He meant the usury laws, for it was evident that if those laws remained in their present state they must operate very injuriously with regard to the supply of capital for the purposes of trade, by diminishing the means of obtaining discounts.”
Mr. Gurney (banker) opposed resumption He dreaded the effects of contraction, and wanted the standard lowered so that 1 oz. of gold should be £4. os. 6d.
Mr. Canning closed the debate, saying that it was “the unanimous determination of Parliament that the country should return, as speedily as possible, to the ancient standard of value in the establishment of a metallic currency.” [Loud and universal cries of “Hear! hear!”]
In the House of Lords, the Marquis of Lansdowne said: “He hoped the country would never again hear of the theories founded on the abstract idea of a pound sterling as a unit, or a bank-note and a shilling being in public estimation equal to a guinea; on the tendency of gold to fly to other countries where it was dearer, without producing any change of value, and other absurdities of that kind. These theories, which had been so ruinous to the country, deserved to be stigmatized as they were by the bill before their lordships, every enactment of which declared their falsehood. By acting on them the country had been overwhelmed by an oppressive mass of debt and grinding system of taxation, all the evils of which were augmented by the fluctuation of values.”
Lord Liverpool thought that the restriction had enabled the country to go through the war. Also, that the opposition to the plan proposed really raised the question, not of resuming sooner or later, but whether to resume at all.
Lord Lauderdale thought that the demonetization of silver had done great mischief, turned the exchanges, and driven out gold in 1817; that the paper was not really depreciated, but at par with silver coinage; that it was quackery to say the Clearing House economized currency; and that the plan proposed, together with the mint law, would bring ruin.
Lord King said that if no day was fixed, the Bank would not get ready, as it had not since the Peace.
Lord Grenville said that, “having considered this restriction as one of the greatest calamities under which this suffering country had labored; having frequently had occasion to lament and deplore the part which he had himself taken on its original proposition in prolonging it for the term of the then existing war... he could not help expressing his joy and satisfaction that the country was at last arrived at that period in which it could look forward with certainty to the repeal of this injudicious and unfortunate measure.” He declared that an irredeemable paper currency was, under any circumstances, a greater evil than good; that “he hoped it would be recorded of him as his decided conviction, that in proportion to the danger under which the country labored, he would almost say, in proportion to the extent of that danger, was the impolicy and desperate madness of such a measure as they were now considering how to rescind.... He could show how the miseries of 1816 followed on the issues of the preceding year; he could show how the excessive issues of country paper, which could not maintain itself like bank paper by legislative enactment, led to a fearful depreciation, and without any fault of individuals, by the mere force of the system, involved the whole kingdom in one general desolation. Not only its trade and commerce, but its agriculture, its landed interest, even classes the most remote from connection with, or even knowledge of, the paper system, found themselves suddenly consigned to total and inexplicable ruin. If their lordships could see at their bar, not merely the victims of commercial failure, but those numerous persons of all ages, sexes, and classes, who had unconsciously suffered without even understanding how or whence the evil fell upon them, such a spectacle would fill their lordships with horror; and he sincerely believed that not only would no voice be raised for the maintenance of such a system in commerce, but not even in war.”
He also urged strongly the necessity of making the Bank independent of government.
The bill was passed, and the government having repaid £10,000,000 of the advances of the Bank, which was recognized as an indispensable condition of resumption, the act went into operation. At the same time the law forbidding the exportation of the precious metals was repealed.
A great fall of prices took place in 1819 as a sequel to the operations of 1818. Tooke denies strenuously that the operation of the act caused this fall. There was no run upon the Bank for gold, partly because the people did not care for it, partly because the plan of ingot redemption did not tempt them to do so, but chiefly because the fall in prices turned the exchanges and there was no profit on exportation. The Bank steadily contracted its issues, and the country banks were forced to do the same. The issues and the price of gold were as follows:
Bank of England notes. | Bullion in Bank of England. | Price of gold per ounce. | |||
£. | s. | d. | |||
Feb. 1819 | 25.1 | 4.1 | 4 | 1 | 6 |
Feb. 1820 | 23.4 | 4.1 | 3 | 19 | 11 |
Feb. 1821 | 23.8 | 11.8 | 3 | 17 | 10½ |
Feb. 1822 | 18.6 | 11.0 | |||
Feb. 1823 | 18.5 | 10.3 |
The Bank resumed payment, by its own wish and the permission of Parliament, on May 1, 1821.
Peel's act would, under any circumstances of trade, have enforced contraction and accomplished resumption, but under the series of events of the following years, it is certain that it had no direct effect whatever. The revulsion and fall of prices, and shock to credit of 1819 repeated the opportunity of 1817. The exchanges became favorable, more currency was needed, as always in a time of crisis, and the Bank contraction which did not begin until late in 1819 (the circulation was higher in August than in February) took place easily, as confidence was restored and notes, becoming abundant, flowed to the Bank, without exerting any pressure on the market, unless it might be the negative one of restraining speculation. Peel's act had only the indirect effect of setting a time for resumption which was understood to be in earnest, whereas former dates fixed had been practically indefinite adjournments. England is the only country which, after falling into the use of inconvertible depreciated paper, has returned to specie payments save through bankruptcy. It did so by taking advantage of the revulsion following a commercial crisis to reduce the amount of the paper.
On issuing from the era of redundant and depreciated paper, it is necessary to turn to prices as the test and indication of economic circumstances. (See p. 253.) The inquiry into prices, however, is the most difficult and delicate which the economist is called upon to undertake, and one of the most perilous, whenever undertaken piecemeal, or without skill, or to support a theory.
Tooke investigated prices during this period with a skill which is universally acknowledged, and proved conclusively that the fall which took place was not due to contraction. Gold was continually coming into circulation and filling up guy vacuum caused by the contraction.
The years 1819–1822 were years of abundant harvests and low prices for grain, and the agricultural interest was accordingly in distress. There were, however, additional causes for this distress. During the war, the high prices had led the farmers to increase their expenditures and raise their style of living. Poor lands had also been hired at high prices and brought under cultivation. These injudicious ventures could not be sustained in times of peace and plenty, and those who had embarked in them found themselves ruined. In 1822 Mr. Western led an assault upon Peel's bill as the cause of the distress, and the resumption then went through its last and severest peril. It is true that the proposition of Mr. Western for a committtee of inquiry into the action of the bill was negatived by a heavy vote, out it appeared that there were some active and influential men who wanted to return to paper, and others who thought a great mistake had been made in not accepting the depreciation and reducing the standard, and they were supported by a clamorous party suffering under distress. They did at last secure the concession that the notes under £5 were allowed to circulate until 1832, instead of being withdrawn in 1824 as the law then provided.
Meanwhile manufactures were steadily recovering, and wages were advancing in purchasing power by the fall of grain and imported commodities.
In the year 1824 the interest on the government five per cent, stock was reduced to 4 per cent the Bank engaging to pay off the dissentients. One result of this was to lead to large investments in foreign loans. The prosperity of manufactures led to large importations of cotton and other raw materials. Joint stock companies were organized to engage in all sorts of enterprises, some of them fanciful and absurd, and a great speculation in South American mines began. The state of the Bank was:
Notes. | Bullion. | |
Feb. 1823 | 18.5 | 10.3 |
Feb. 1824 | 19.7 | 13.8 |
Feb. 1825 | 20.7 | 8.7 |
Feb. 1826 | 25.4 | 2.4 |
Feb. 1827 | 21.8 | 10.1 |
In 1823–4 the Bank, being strong in bullion extended its discounts, thus sustaining the advancing movement by the usual mode under the convertible system. But at the end of 1824 the exchanges became adverse, and an outflow of bullion began. The Bank, nevertheless, continued to extend its issues. In May, 1825, prices suddenly fell. The speculation came to a crisis; country banks failed in large numbers; one of the large London banking houses failed, and all had to undergo severe runs. It was not until some months later that the mercantile community sustained the shock, but it fell upon them with terrible force. The bank-note now came in to fulfil its office at such a period. During the rise of the speculation, the issues had been only gradually and slowly increased, but, in the breakdown of credit, notes were required in large numbers. The question was whether the Bank should extend its issues, and run the risk of ruining itself, or contract, and ruin the public. It adopted the former course, discounting freely at 5 per cent, for all solvent borrowers. The lucky discovery of a box of £1 notes which had been withdrawn, stored away, and forgotten, enabled them to pursue this policy to the utmost. It appeared, however, that very few of these last notes were needed. There are two elements in every commercial crisis, one the crisis of a false or exaggerated mercantile movement of some sort, and second, the panic of those who fear everything, but they do not know what. The plan here described is a specific remedy for the panic element. It was prescribed by the Bullion Report, and thus another of its doctrines was ratified.
The Bank found itself with only £2,459,510 in bullion in February, 1826. To the parliamentary Committee appointed to investigate the crisis, Mr. Horsley Palmer testified that the drain of gold was chiefly due to the £1 notes, these being in the hands of holders most liable to panic. Small notes were at this time subject to a stamp, and the government took the step of prohibiting any more stamps to be issued.
When Parliament met this step was blamed as unconstitutional, but the ministers declared that they had taken the step because, if any day had been fixed beyond which no stamps should be issued, or if the subject of small notes had come up for discussion, there would have been a rush for stamps. They proposed to allow the small notes already stamped to run until April 5, 1829, and then to allow no more notes under £5 in England. The debate on this proposition was long, and on the part of the opposition unclear and not to the point.
The proposition was advocated by Mr. Huskisson, who said that “a permanent state of cash payments and a circulation of one and two pound notes could not co-exist.” He urged that specie was the poor man's currency, and that, while there were no small notes, commercial crises might sweep over the mercantile community, but could not affect the laboring classes.
Mr. Grant said, that “in every wise system of currency it was a primary element that paper should be convertible at pleasure into a metallic currency, and that all small payments and the great bulk of the circulation should be in gold.”
Alderman Heygate said, that the country bankers would be forced to withdraw their small notes within three years, which would bring ruin. He said that the act of 1819 was intended to bring back the old standard, but that it had raised that standard. The proof was that the coins were exported on account of their “fineness and beauty.”
Mr, Attwood propounded a new law of the distribution of the precious metals: “The share of the precious metals which any country, rich or poor, could maintain, if there was any truth in experience, would be in the proportion of about half an ounce of gold against a quarter [8 bushels] of wheat, which gave 403. or 503. a quarter of this money, and no more.”
Thus the opposition ran over the whole history of the Restriction and the whole theory of money, but the question was, whether, having a convertible currency, they should have in it notes under £5.
Mr. Canning said: “If on the present occasion I am for withdrawing, within a limited time, the one-pound note from circulation, it is not from the mere love of theory, but because I have seen it practically proved in the experience of years which have elapsed since the Bullion Committee sat, that the circulation of the small notes cannot co-exist with a metallic currency.”
“It is vain to think of introducing gold amidst the overwhelming spread of small paper circulation. The small paper chokes up all the ordinary channels of circulation, so that the gold, though issued from the Bank, cannot flow into them, but is returned to the source from which it came.”
A test-vote, not directly on the question, showed two hundred and twenty-two in favor, and thirty-nine against. The small notes were withdrawn in 1829.
There have been fluctuations enough since then, and events which have illustrated and proved some weighty principles of currency, but they lie beyond the scope of the present under taking.
Specie payments could not be regarded as fixed on a solid basis until the small notes were withdrawn. In the year 1827, the Bank of England directors gave in their adhesion to the doctrines of the Bullion Report, and those doctrines, together with the exclusion of the small notes have been the foundation of the English convertible currency ever since.
The question how to regulate a convertible currency is still hotly disputed, and is far from a solution. It seems that art can help nature here as well as elsewhere, but we may be very sure that it can so help here only as it does elsewhere, —by following and assisting, not by supplanting and coercing.
A convertible currency is, like steel, not a natural product, but an artificial development, and in many respects superior, but it is as if we had not yet discovered the law by which to make the artificial product so that it should be neither too brittle nor too elastic, too hard nor too soft. One thing is very certain—that our blundering experiments have hitherto cost us far more than we have gained or saved.
So much, however, in regard to the laws which govern paper issues, as was laid down in the Bullion Report, is established beyond dispute. Its doctrines are the alphabet of modern finance.
The assertion has been many times made, in the United States, within the last year, that the period of the Restriction, in England, was a period of prosperity and financial success. A diligent reading of the appropriate documents, historical and legislative, has failed to bring to light any evidence at all to support this notion, or to lead to acquaintance with any English authority, contemporaneous or subsequent, who looks upon this period as anything else than a time of distress and humiliation.
In the following diagram, some of the movements of the period of the Bank Restriction are presented in a manner more distinct than any statistics can attain. The Bank of England circulation advanced steadily during the Restriction, under the rule adopted by the directors (p. 265). So soon as the crisis of 1818 brought a reduction, and Peel's act of 1819 enforced resumption, the Bank was forced to act upon the principles of the Bullion Report, though it still rejected them in theory, and retain its notes as they came back. So soon as the reduction of the issues began, everything conspired to assist it, and it went on until August, 1822, although specie payments were nominally resumed in May, 1821. The line at the top of the diagram, between 1810 and 1819, represents the total circulation of Bank of England and country-bank notes for the only period for which we have any estimate of them (see pp. 255 and 284). It shows the nett reduction in 1816, though the Bank of England kept up and increased its notes, and the increase in bullion (lowest line in the diagram) meets it exactly in accordance with the doctrine enunciated by the bullionists. When the total notes increased again in 1817, the bullion declined. When the Bank of England contracted, in 1819 and 1820, the country banks were forced to do the same, and the bullion increased. In 1824, under new inflation, it declined. The sudden increase and decrease of Bank of England notes in 1825, was in obedience to the doctrine of the Report in regard to the method of dealing with a panic (pp. 250, 304).
On the price line, see p. 255. The articles whose prices are summed up each six months are: I cwt. ashes; I cwt. bristles; 1 cwt. coffee; I lb. cochineal; I cwt. copper; 100 lbs. cotton; I ton flax; I ton hemp; I cwt. hops; 10½ cwt. lead; I lb. indigo; I ton iron; 252 gals, oil; I cwt. butter; 304 lbs. mess beef; I cwt. rice; I cwt. saltpetre; I lb. raw silk; I lb. cinnamon; 100 lbs. pepper; I gal. rum; I cwt. sugar; I cwt. tallow; I barrel tar; I lb. tea; I load timber; I cwt. tin; loo lbs. tobacco; I lb. wool; 8 bu. wheat. I have varied somewhat from the units of quantity in Tooke's tables in order that the fluctuations of each article might have an equal effect on the aggregate.
The price of gold is taken from the table in Tooke's “Prices,” VoL II,
The First Austrian National Bank was founded about the year 1700, but was transferred to the authorities of the city of Vienna very soon after. This bank issued notes in moderate amounts, which bore interest and commanded a premium. In 1762, this apparently rich source of wealth was seized upon as a resource for the distress of the government, and from that time to this Austria has been under the dominion of paper; from that time on, for more than a century, every year has seen a deficit in the Austrian finances.
The new notes bore no interest, and were for sums from five to one hundred gulden. They “were to be taken everywhere in payment.” It was forbidden to export coin, and base coins of small denominations were issued. The latter nevertheless, went to a premium in paper as the notes increased. This increase was at the same time persistently represented by the government as a temporary necessity, the Bank having been allowed to issue notes in return for its advances to the government. “In 1802, the country was flooded with counterfeit seven-kreutzer pieces.” They nevertheless were at a premium in paper. In 1807, copper coins were issued so base as to be on a level with the paper. Meanwhile the issues had been increasing; the government had found that there was no returning on the course on which it had entered. The wars with Napoleon demanded supplies, and there were no resources. The prohibitive system had crushed the indigenous industry of the country, made smuggling the most profitable of all forms of business, and created a few weak, exotic industries. Prices had risen so high that the nominal sums required for army supplies, etc., were enormous. The note issue in 1796 was 47,000,000; in 1800, it was 200,000,000; in 1806, it was 449,000,000. There were, besides, counterfeits in immense quantities. The laws against counterfeiting or being possessed of counterfeits were so severe, and the difficulty of detecting them so great, that people feared to take notes at all, and this of course enhanced the premium.
The succeeding years saw new “patents” in regard to the finances issued every few months; each project was more desperate or more tyrannical than the last. Trust funds were required to be invested in public securities or bank-notes, and deposited with the Bank; then these were taken by the State, which became responsible to the owners. All silver plate was ordered to be brought to the public offices to be assayed at a heavy charge. It would be tedious to enumerate these desperate and revolting financial measures; each was brought forward with pleas of necessity, loud protestations of desire for the national welfare, confessions of past faults, and promises that each measure should be final. All of them, however, proved unavailing.
In 1810, the next stage was reached, a stage which the student of paper money meets so regularly in its history, that he anticipates it sooner or later, in one form or another, in every new instance. A new class of notes was issued called “redemption-notes,” to represent coin, and to exchange for paper at the rate of one for three. By using these, the government prevented its expenditures from running up such enormous figures. This plan, and others intended to support it, failed to attract even the popular attention; all confidence in the promises of the government was lost. The misery was wide and deep, reaching even the well-to-do classes. Persons on salaries found themselves in the pecuniary position of day laborers; the peasants and country people who tilled the soil had its products for food, but trade was brought to a stand-still. Says Springer, whose history we follow and quote here and below:
The pecuniary corruptibility of the Austrian civil officers, and the opinion cherished by all classes, even by the Emperor, that the civil servants did not serve the state honestly, but would at any time sacrifice its interests to their own, took its origin in this period. The civil officers carried on afterwards as a habit what they had learned in a period of necessity.
The wretchedly paid custom officers connived at and shared in the smuggling. In 1810 the bank-notes fell to 500 for 100, then to 800, and finally to 1,095.
This state of things came to a crisis in 1811. On the 20th of February of that year a patent was issued, whose appearance and character the historian thus describes:
The secret document which was to decide the weal or woe of millions had been sent out sealed to the government authorities. They were to break the seals at five o'clock in the morning on the 15th of March, and to post up the document an hour later. Long before daybreak, crowds were collected in the streets of all the cities waiting for the fateful moment, and betraying as much excitement as if the report of a decisive battle were expected. With eager haste they drank in every word of the document. . which sowed the seeds of hate, and made distrust of the monarch a universal feeling. Some few could rejoice: they had unexpectedly become rich. Others, and by far the most, cursed and lamented. The fate of the beggar had befallen them in a night.
The bank-notes, of which there were over a thousand million gulden in circulation, were reduced by the proclamation to one-fifth of their nominal value, and were to be exchanged for redemption-notes, called the Viennese legal-tender. These latter became, and remain, the Austrian legal-tender currency. The government promised to issue of these only enough to convert the outstanding bank-notes, viz.: 212 million gulden. Taxes were to be paid in the new currency; government pensions and salaries in the same. The debased 30 and 15 kreutzer coins were to be rated at 6 and 3 kreutzers, and the interest on the national debt was to be reduced one-half. The smallest redemption notes were for 25 gulden, so that the poorest people who held 1, 2 and 5 gulden notes could not exchange them. On the other hand, it was believed that certain persons, who hastily adjusted their affairs just before the patent was issued, in a manner to avoid loss, had received secret information of its contents.
In the following May the redemption-issues were at 216, and in June at 338; the banknotes were at 1,690 to the 100 silver. The only recourse, in the midst of new necessities, seemed to be to issue more paper. The solemn promise of the Emperor in the patent from whose effects the country was still smarting, and on which the virulence of popular hate and the sharpness of popular wit had been expended, stood in the way of any such issue. The difficulty was obviated by giving the new notes a new name— “anticipation-notes.” In the decree for issuing them it was anxiously explained that they were only exchequer bills for anticipating the revenue. At first, 45 millions were issued, but the issues were secretly increased to 426 millions. In 1816, the amount of paper money was over 638 millions, and, says the historian:
Austria offered the strange spectacle of a State buried in the stillness of death—a grotesque conglomerate of States of different sizes, some of which did not dare, others of which did not know how, to breathe independently and freely…Undeniably, the paper money exercised the worst influence on the morale of the people. Frugality and diligence were lost virtues. Vulgar pleasure-seeking and wild extravagance became habitual even in the lowest classes. Of what use to care for the future? Why not enjoy to-day all the pleasures of the senses? How could any one hesitate to pay 200 gulden for admission to a ball? In fact the “money” had no value, and, if one stood reflecting, he might lose ball and money both. The very fact of speaking continually of large sums, which, however, in truth amounted to but very small value, stimulated to frivolity and folly. So the ground was prepared for developing the celebrated “Viennese” disposition; and the loafer-life, in which the hot-spiced pleasures of the palate seemed the highest good, became indigenous to “the unique city of the Emperor.”
In 1816, the Austrian National Bank was founded. It was intended to draw in the paper money, both as subscription to capital, and through the agency of the Bank in the conversion of treasury notes. Its relation to the government, which deposited 50 millions in silver to begin the operation, robbed it of confidence at the outset. It bought the notes at more than the current rate, so that there was a profit in buying them on the Bourse and taking them to the Bank. A run ensued which forced almost immediate suspension. Loans were then raised for redeeming the notes, and the mass of them was reduced to 181 millions.
In 1817, the Bank shares were once more offered, and with better success. The Bank went into operation and still remains, but government guarantees were given which were burdensome to the Treasury and robbed the Bank of independence. Its operations were mainly transactions with the government; its means could not be employed in furthering the industry of the country; and to this day a large part of its assets consist of government obligations, and until these are paid its usefulness is crippled. The “anticipation-notes” were reduced in number; their value improved, and their fluctuations were narrower. In 1827, these notes were reduced to ninety-nine millions, and in 1840 to ten millions. The period of peace was employed in this effort, and with a sound industrial system and no deficit, an equal amount of energy might have conquered the evil. As it was, however, the notes were redeemed by loans, the deficit was met by loans, and after 1830 Austria entered on a ruinous policy of armed peace. The relations with Hungary were bitterly hostile, and the policy of repression proved exceedingly expensive. New loans were continually required; the energy of reform died out; the power to decide on a policy was wanting; the dread of confession and of self-denial was deep-seated; the habit of putting off and of seeking temporary makeshifts was established.
In 1848, a run on the Bank, at the outbreak of the revolution, reduced the coin reserve from eighty-five to thirty-five millions. Forced circulation was given to the bank notes, and the events of that and the following years had the good result of rousing the nation. from its stupor. Baron Von Czoernig, chief of bureau in the department of commerce and industry, details fully the measures taken to regenerate the nation. Austria was in the position in 1850 in which Colbert found France. Efforts were made to reform the tax system, and important changes were made in the right direction, The currency also received attention, but the history consists of little more than a record of changes from one form of paper to another. The deficit still continued; the expensive repression in Hungary seemed more necessary than ever, and the Crimean war forced Austria once more to heavy military expenses. The war of 1859 in Italy, and of 1866 with Prussia, produced new emissions of paper, and Professor Bergius, of Berlin, quotes the Austrian finance minister as saying, in 1868, that if new complications should arise in Europe it would be necessary to issue more paper.
After 1866, however, the repressive policy in Hungary was abandoned, and a freer industrial system was adopted. The panic of the summer of 1873 is the latest incident in this miserable story. The Journal des Economistes for June last gave the following account and explanation of it:
The financial crisis at Vienna was not simply a stock exchange crisis, but a general one, an effect of extravagance in new undertakings, and of a fever of speculation which took possession of all classes of the population.
After the war of 1866, a large emission of paper money took place, both on the part of the State and on the part of the Bank, all legal tender. The abundance of paper led to a belief in the abundance of capital, and prompted to undertakings of all kinds. These influences were assisted by the abundance of the harvests of 1867 and 1868. Urged on by the opposition, the State encouraged by guarantees of dividends the construction of railroads which had been neglected during the war. Speculation also seized upon credit institutions of various kinds, which were multiplied in all the great centres, on industrial establishments, on constructions in the cities, and on land. Hence ensued a great quantity of bonds and securities, good and bad, which there was not time to classify, and which produced a glut. They led to all the financial expedients usual in such cases, advertisements, reports, emissions of paper, loans of all forms, tempting the prudence of buyers and provoking the distrust of the Bank of Vienna and of other credit establishments. The great speculators, finding their means surpassed, suspended. The smaller ones imitated them. Strong houses were shaken, and the panic followed. It was necessary to close the Bourse for a day to prevent violence amongst the speculators. There were great calamities and some suicides.
After the crisis measures were taken to find a remedy. The Chamber of Commerce, the directors of the great financial establishments, the municipality of Vienna, etc., called on the government, which, of course, could do nothing, By permitting the Bank to raise its emissions to 500 millions it put the same in a position to discount and to make advances on national securities. Fusions and combinations and guarantees are being planned. The most important relief, however, is given by the purchases of good securities, which the low prices induce. As for bad securities, they disappear in the general clearing up. Thus end all crises—offspring of delusion.
An able writer in the same journal for September gives as the circulation on the 30th of June, 1873, 380 millions of treasury notes and 340 millions of bank-notes. The Bank holds 144 millions in specie, “enough to bring its notes to par if it were not for the treasury notes and the debt of the State to the Bank, part of which cannot be realized.” In commenting on the character of the city of Vienna, outwardly grandiose and pretentious, but badly drained and otherwise provided, and upon the light and frivolous character of the people, the same writer refers these phenomena to the financial disorder and paper money as chief causes.
No one can deny that the above is a most instructive study in political and financial disease. The popular mind rests on instances like the French assignats, or our continental money, as showing the error of paper money where it absolutely perishes. It is thought that, short of this, only alarmists see danger. The story of Austria shows that an irredeemable paper currency is a national calamity of the first magnitude, of which one may indeed find greater or less examples, but of which the least is a peremptory warning to statesmen and financiers. It is like a disease in the blood, undermining the constitution and spreading decay through all the arteries of business. A young and vigorous nation, with a sound political system, may stand it far better than an old one, with feudal traditions; but in its measure and according to circumstances it is pernicious, if not fatal. It is not like an acute disease; It is like an invalid state with occasional fever.
We may also infer from Austrian experience what the “London Economist” recently inferred from ours, that the interference of government with banking is as mischievous as its interference with any other trade. The Emperor of Austria was not intentionally a liar. When he said he would issue so much and no more, he meant it. He only did not know that he was releasing a power which he could not curb again. He was promising to perform a financial miracle. His broken promises, however, cost him and his government all credit with his people, and it is now frequent subject of remark in Austria that the more solemn the asseverations of the government the more ludicrous they appear to the people. A government which interferes with banking exposes itself to great danger of error, and such errors cost it popular confidence sooner than any others.
IF these chapters of history have been narrated with any success, they carry their own lesson with them. There are many who sneer at history and foreign experience as inapplicable to our circumstances, and toss off the lessons of history with impatient contempt, but these very persons never talk on financial topics for five minutes without referring to what “the Bank of England does,” or what “England did” during the Bank Restriction. The only remarkable fact about their references is that the facts are often incorrectly stated, and the inferences illogically and unscientifically drawn. From this it appears that they object, not to the force of historical arguments, but to the trouble of correctly informing themselves about historical facts.
There are very many, however, who are willing to learn from history and science, and are led astray by the sweeping assertions, incorrect references, and dogmatism of those they are obliged to trust. It is for these that these chapters have been written.
It will be observed, then, that there is nothing new to be discovered about the operation of paper money. There is no new invention possible for making it “as good as gold,” no new device conceivable for making it elastic, no difficulty connected with it which has not been experienced, no phenomenon of its development for which we have not abundant analogies. If any qualification of these assertions is necessary, it is only this, that no scheme of intro-convertible bonds for giving elasticity to a currency of fixed amount has ever been tried, or, so far as I know, proposed. This scheme is the only one which fully illustrates what is derisively called “theory,” for it stands on no facts, appeals to no experience, is deduced from no observation, but is purely imaginary and speculative. It has a certain plausibility, but all the observed phenomena of paper money go to show that it would make the paper elastic only in one direction.
For a nation which has fallen into this mistake, there are only three courses of action which are even logically conceivable: to go on, to turn back, to stand still. The last is the “growing up” idea, and may be ruled out at once as impracticable. To try to stand still will inevitably end in drifting onwards into inflation. It will be much gained, therefore, if we come to face the situation as a grim alternative, for such is its actual character.
To go on to further inflation, whether by free banking, intro-convertible bonds, or direct issues, means simply bankruptcy and repudiation. Each new issue will produce, only for a time, ease and apparent prosperity, to be followed in a few years by a new crisis and new distress, then a new issue, and so on over again. Reform will then be no longer possible, and we must run the course to its end, in which the paper disappears as ignominiously as the continental notes.
If we choose the other alternative, it is useless to try to deceive ourselves at all in regard to what it involves. To talk of resumption and of issuing the 44 millions, or of establishing free banking on 5–20's, in the same breath, is a contradiction. If we want specie payments, we must have specie, and, if we want specie, the entire history before us repeats to weariness that we must get the paper out of the way. This is the first condition, and, until we are willing to face it, it is useless to discuss resumption at all. The doctrines drawn from the previous chapters are not doctrines of financial science so much as stumbling-blocks which lie at the door of that science. We have seen by abundant evidence, that the movement of the precious metals from country to country is not governed by the balance of trade, as is assumed in nearly all discussions of this subject. An economist of to-day who makes an assault on the “balance of trade” feels as if he were taking a sledge-hammer to break through an open door; but this doctrine is made the starting-point of discussing our finances in public documents, in speeches in Congress, and in most of the pamphlets and newspaper articles one meets with. We have seen, however, that the transaction is not one to which the term balance properly applies. Whenever a nation has complained that an adverse balance of trade was drawing off its specie, we have seen that an inferior currency of some kind was displacing the better one, and that the increased imports of merchandise were only the return payments for the gold or silver which had been dispensed with by employing a cheaper medium. We have seen also that prices alone govern the flow of the precious metal, or, more strictly stated, that the movement of the metals and the prices of commodities in different countries act and react upon one another in such a way as to keep up the exact natural relation of prices between different countries, and give to each country in the world's market its full relative advantage in production. If, therefore, a nation had a specie currency, a drain upon it by an adverse balance of trade, a foreign payment, or any other similar cause, would immediately produce a lowering of prices and a return current of specie until the natural level was once more restored. We have also seen that it is an error to say that there is not enough gold and silver in the world to perform the exchanges. Whatever gold there is, is enough. The only difference would be whether one grain of gold would buy one thousand grains of wheat or one hundred thousand We have also seen that the metals will distribute themselves amongst the nations in exact proportion to their requirements, if there is no interference in the shape of inferior currency. If a vacuum is left by the destruction of paper, specie comes in to take its place, as occurred here after the revolutionary war and after the bank crash of 1839. It may have to be bought back, however, very dear; that is, by giving many goods for it, or what is the same thing, goods at low prices. If the requirement rises above the supply, specie flows in to fill the gap, as we see after every commercial crisis.
These principles govern the question of resumption. If we want the specie, we here see how we must go to work to get it. It is not possible, save by withdrawing a portion of the paper. When we suspended, we overissued. The consequence was a rise of prices, increase of speculation, and export of specie. Large importations of merchandise followed, and exportation was loaded with disadvantages. The course of resumption is the opposite in every particular. When the paper is withdrawn, prices fall, speculation is restrained, specie flows in. Importations are discouraged, exportations increase and go to pay for the gold. It may be added that, as the former process was smooth and agreeable, so the latter is hard and distressing. When the specie is given up, large quantities of it, comparatively, are given for little merchandise; when it is sought again, it must be bought at a disadvantage.
No nation has ever had the courage to pursue this course except England, and she only entered upon it after two or three commerical revulsions had destroyed a large part of the paper, never immoderately redundant; she entered upon the effort under the guidance of a high order of statesmanship; she took advantage of the fall in prices and business stagnation following a crisis; and her resumption was not complete until after the withdrawal of the small notes in 1829. Other nations, like Austria and Russia, have gone on for generations, sinking deeper and deeper, crippled in their military and industrial strength by this inheritance, not knowing how to endure it or how to get rid of it, or, like France and our own colonies, have gone through bankruptcy and repudiation. These are the alternatives, and it has been well likened to the choice of a man in a house on fire who jumps out of the second story rather than wait to be driven up to the third or fourth or the roof.
If the withdrawal of the paper should be resolved upon, the best way to accomplish it is the one which is simplest and most straightforward; that is, to raise a surplus revenue and with it cancel the government issues, It is not consistent with the present purpose to criticise the various schemes which have been proposed. They all involve some kind of conversion of one sort of paper into another, and every such change complicates a system already far too intricate, and every such change involves chances of unforeseen events, or of unexpected effects, for they consist of experiments on totally untried ground. Some of these schemes involve no actual reduction of the outstanding paper, and can lead to nothing but expense and injury to the public credit. Others do involve a diminution of the paper and seek to accomplish it without the distress which it must occasion. It is certainly most desirable that any possible application of science to this end should be invented, but all such plans involve the danger of political events during the next five or six years, which cannot now be foreseen, and they assume also that the scheme will be faithfully carried out whenever it begins to press hard, as at some time it certainly must. Past experience leads us to doubt whether this latter assumption would be justified by the event. Our object here, however, is simply to establish by history and science, what are the indispensable conditions of resumption, and to place the problem in such light that it may be perceived how it must be attacked, if it is to be solved at all.
Ordered, by the House of Commons, to be printed, 8 June, 1810.
The Select Committee appointed to enquire into the cause of the High Price of Gold Bullion, and to take into consideration the state of the Circulating Medium, and of the Exchanges between Great Britain and Foreign Parts;—and to report the same, with their Observations thereupon, from time to time, to the House;—Have, pursuant to the Orders of the House, examined the matters to them referred; and have agreed to the following Report :
Your Committee proceeded, in the first instance, to ascertain what the price of gold bullion had been, as well as the rates of the foreign exchanges, for some time past; particularly during the last year.
Your Committee have found that the price of gold bullion, which, by the regulations of his Majesty's Mint, is 3 l . 17s. 10½d. per ounce of standard fineness, was, during the years 1806, 1807, and 1808, as high as 4 l . in the market. Towards the end of 1808 it began to advance very rapidly, and continued very high during the whole year 1809; the market price of standard gold in bars fluctuating from 4 l . 9s. to 4 i . 12s. per oz. The market price at 4 l . Ios. is about 15½ per cent, above the Mint price.
Your Committee have found, that during the three first months of the present year, the price of standard gold in bars remained nearly at the same price as during last year; viz., from 4 l . IOS, to 4 l . 12s. per oz. In the course of the months of March and April, the price of standard gold is quoted but once in Wetten-hall's tables; viz., on the 6th of April last, at 4 l . 6s. which is rather more than 10 per cent, above the Mint price. The last quotations of the price of gold, which have been given in those tables, are upon the 18th and 22d of May, when Portugal gold in coin is quoted at 4 l . II S . per oz. : Portugal gold coin is about the same fineness as our standard. It is stated in the same tables, that in the month of March last, the price of new doubloons rose from 4 l . 7s. to 4 l . 9s. per oz. Spanish gold is from 4½ to 4¾ grains better than standard, making about 4s. per oz. difference in value.