C U R R E N CY

AN D

C R ED IT

LO N G MA
39

N S,

IAWT REY

G REEN

PATE RN O STER

RO

AN D

L ON D O N

N EW

9 179

CO

YO RK

P R E F AC E

To add yet

ther to the legi on o f boo k s wh ich ha v e

been wri tt en o n C u r re ncy i s an act wh i ch alm os t r equ i r es
an ap olog y
B ut e x tens i v e a n d co mplex as th e s ubj ec t
has always bee n e v er y y ear t hat pas s es b r i n g s ne w
d e v elo p m e n t s w hi ch ad d to i ts ex te nt and i ts c o m p lex
i ty
A s ubj ect w hi ch g ro ws i n th i s lue ia nt fas hi o n
op e ns u p a co r r es o nd i n
p
g v ar i e ty i n the m e tho d s o f
The p r es en t wo rk i s no t i n
theo r e t i cal approach
tend ed to s et u p o ne part i cu l ar m e t ho d to t he exc l u
s i o n o f al l o t h e r s
S t i l l les s d o es i t e xalt an y s i n g l e
practi ca l m eas u r e as a panacea o f cu r r e n cy d i s o r de r s
Its purpo se i s rather to pres en t a s y s t ema ti c a n alys i s o f
cu rre n cy an d c r edi t m o v e m e n t s a nd es peci ally t o a v o id

o t he r th i n s b e i ng eq ua l
b
i
i
s
w
h
i
c
h
t
that p h ras e
y
g
s o fatally eas y fo r th eo ry to s t ep s t raigh t fr o m p r em i s e s
an o

to co nclu s i o n

S ci en tic treat m e nt o f the s u bj ect of cu rr en cy is i m

T
w
o
i
s o m e form o f the qu an ti ty theo r y
h
o
i
b
l
e
t
u
t
o
s
s
w
p
form s o f this t heory b oth r igorous ly tr u e w ill be fo u nd
B ut the quant i ty the ory by
en u nci a ted i n C hap t e r 111
.

an d

i t se lf i s i nad equ at e ,
treat m e n t

i ncom e

b ased

and th

on

wha t I hav e

e co ns um ers o u

up

to t h e

m e tho d

of

called th e co ns u m er s

t lay that i s

to say, s i m ply

i nd i v i d ual i n com es a nd i ndi v i d ual e x

Thi s method has been emp loyed thro ughout

the agg rega t es o f

pendi tures

i t lead s

the succeedi ng

pages

P REFACE

vi

It w i ll b e fo u nd t hat p r e w ar i n s t i t u t i o ns a nd con
Th i s
d i ri o ns ar e o fte n r e fe rr ed t o in th e p r es e nt t e n s e
i s no m o r e u n re a l than t o s p eak o f t h em i n th e pas t ,
a s t h i n s o f th e
n o w th e w ar i s n o t t ech n i
t
v
n
as
E
e
p
g
-

'

i n th e p r e v a i l i n g o b s cu r i t y i t i s i m p oss i b le
to s ay w h a t ca n o r ca n n ot b e r eg a r d e d a s n o r m a l o r
a c tu a l
ca

ll y o v e r

a nd

C hap t e r s X V

to

X IX

ar e occ u i e d
p

w i t h i l l u s t ra t i v e

xam p le s d ra w n fr o m a v a r i e ty o f p e r i o d s an d co u n t r i e s
I am i n d eb t ed t o t h e e d i t o r s o f t h e
E con om i c J our nal
fo r b r i n g i ng o u t the g r ea t e r pa r t o f C hap t ers X V a n d
X V I i n t h e i s s u es o f the J o u r na l fo r S ep te m b er a nd
M ar ch 1 9 1 8
e

'

u n e,

9I 9

H AW T RE Y

C O N T E N TS

P AG E

M ET ALL I C M O N E Y
PAP E R M O N E Y A N D TH E QU A N T I T Y TH E O R Y
TH E F O R E I G N E X C H A N G E S
SY S T E M S O F N O T E I SS U E
I N T E R N A T I O N A L C U R RE N CY M OV EM E N T S
II TH E ME C H A N I S M O F F O R E I G N E X C H A N G E
X
V I I I A C o NTR A C T I O N O F C R E D I T
FI N A N C I AL C R I S E S
.

M O N EY
XII

AN D

C O I N AG E

TH E TH EO RY

WAR

OF

B AN KI N G

F I N AN C E

WAR I N FL A T IO N
T H E A SS I G N A T S

TH E B AN K R E S T R I CTI O N

XV I I

A C HAN G E

OF

THE GOLD S T AN D AR D
THE

C O N CL U S I O N

7 97

STA N D AR D

TII E G OL D S T A N D AR D
AF T E R

0?

WAR

2 99

C HAPTER I
C

R E D I T W IT H OU T M O NEY

M O N EY is o ne o f those concepts which like a teaspoon Or an

umbrella but unlike an earth q uake or a buttercup are d en
able primarily by the use or purpose which they serve The
use or purpose o f money is two fold : it provides a medium o f
exchange and a measure o f value
According to the classical doctrine o f money mankind in
order to avoid the intolerabl e in convenience o f the direct barter
o f one k ind o f commodity or service fo r another has learnt to
choose one standard commodity to be o ffered by every buyer
and accepted by every seller Whether this standard co m
m o d i ty is established by law or custom the seller willingly
accepts it in payment because he knows that it will be ac
The
cepte d in turn by those from whom he wants to buy
practice which makes the selected commodity the common
medium o f exchange almost inevita bly makes it also the
common measure o f value
A market which pri ced each
commodity separately in terms o f every other would be i m
possibly co mplicated ; th e u s e o f 0
standard commodity as
2%
money enables us to express all prrees in terms o f this o ne
commodity
If we approach the subject in this way we naturally as
sume that the use o f some selected commodity as money is
the only alternative to a state o f barter To Show what part
the u se o f money plays in society and how great a di fference
it m ak es w
e are invited to turn t o remote and benighted co m
muni ti es which have never learnt the u s e O f it or to conj ec
ture what must have been the economic condition o f mank ind
before money was originated at all Such comparisons may
well exaggerate the impo rtance o f money I n o rder to see it
,

"

m
a!

CURRE N CY AND CREDIT

in its true proportion we ought rather to take a completely

organised and civilised society w ith all the modern develop
ments o f commerce and industry and to examine to what
extent such a society might have existed j ust as it i s without
the use o f money o r which o f i ts characteristics would be
necessarily sacriced In other words we have to nd not the
historical but the logical origin o f money
Suppose then that society is civi lised and that money
does n o t exist Goods are brought to market and exchanged
But even though there is no med ium o f exchange it does not
follow that they must be bartered directly fo r o ne another
If a man sells a ton o f coals to another this will create a d ebt
But the buyer w ill have been
from the buyer to the sel ler
himsel f a seller to some o n e else and the seller will have been
himsel f also a buyer The dealers in the market can meet
together and set o ff their debts and credits B ut fo r this pur
pose the debts and credits which represent the purcha se and
sale o f a variety o f goods must be reduced to some common
measure In fact a u ni t fo r the measurement o f debts i s i n
dispensable Where a commodity is used as money it natur
ally s upplies the unit for the measurem ent o f debts Where
there is no money the unit m ust be something whol ly con
ve n t i o n al and arbitrary
This is what is technically called a

money o f account
Even when money is used it may o c
c a s i o n al ly happen that the unit fo r the calculation o f debts
d iverges in some degree from exact correspondence w i th the
money in circulation In that case the distinction between
money and money o f account immediately becomes a practical
Th e value o f the standard coin will be quoted in terms
o ne
o f the money o f account and varying amounts o f th e standard
coin will be needed to pay a given debt This is an app ro x i
mation to the state o f affairs which we are assuming
But however conventional and a rbitrary the unit may be
once i t Is establ i shed as the basis o f the debts and pri ces and
val ues o f a market it i s bound to assume a certain continuity
I f the bargains o f a day were completed w ithin the day a n
d
everyone could exactly balance h i s debts again st h i s credits
the next day s business might start with an entirely new uni t
,

'

CRED IT W IT H OUT M O N E Y

as arbitrary as th e other and having no relation to it B ut in

fact thi s balancing o f debts and credi ts is impossible ; each
'
day s transactions will leave a residue o f i ndebtedness to be
carried forward to the next The same unit will there fore
necessarily be used from day to day Each day s business
starts with the rec ord o f the previous day s closing prices cal
cu l ate d in the unit
E ach dealer in th e market calculates hi s
o w n command o f wealth in the same unit ; it a ffords the basis
fo r his val uation both o f what he wants to buy and o f what
he wants to sell and he looks fo r only such divergence fro m
the previous prices as variatio n s o f supply and demand will
j usti fy The total e ffective demand fo r commodities in the
market is limited to the number o f units o f the money o f a c
count that dealers are prepared to offer and the number that
they are prepared to o ffer over any period o f time is limited
according to the number that they hO p e to receive There
fore arbitrary as the unit is capricious variations in i t s pur
chasing power w ill not occu r
Inconvenience would un d o u b te d l y be caused by the absence
o f any generally recognised medium for the discharg e o f a n
;
outstanding balance o f indebtedness
As between dealers
balances can fo r the most part be carried forward from day to
day but immediate payment will sometimes be required and

in ca se of dispute there is n o recognised legal tender in

which a court o f law can order the debtor to pay H o w this
problem might best be solved by the dealers we need no t stop
to in q ui re Thi s question o f the payment o f debts i s a wider
o n e than that o f the settlement o f balances among dealers in a
market
In the processes o f production a service rendered creates a
debt from the person to whom the product belongs to the
person who renders the servi ce Most people deriv e their
incomes from services rendered either by their personal e x e r
tions o r by the use o f their property in production The
practi ce which we have attributed to the dealers o f setting o ff
one debt against another may be described as the use o f cr edi t
as the means o f pay ment A s H D M ac L eo d insisted Debt
and Credit are d i fferent names fo r the same thing That
.

'

C U RR E N C Y A N D CR EDIT

which to the debtor is a debt i s to the creditor a credit

Can
credit be used as the mean s o f p ayment not only between
dealers w h o are all men o f business but between employers
and employees ?
An umbrella maker might pay wages by creating a debt
from himsel f to hi s workmen but in order that h i s work men
m ay sp end their wages the liability must be trans ferred to
other shoulders than those o f the umbrell a maker fo r he can
sell them nothing but umb rellas
The solution o f this di fculty i s to be found in the inter
The umbrella maker
v e n ti o n o f some o ne who d ea l s i n d e ts
can sell to this dealer in debts the debts due to him fo r the

umbrellas which he h as sold and in return the dealer in

debts can take on himsel f the l iability fo r the um brel l a

maker s debts to h i s workmen If every creditor assigned his
rights as against his debtors to the dealers in debts the setting
o ff o f debts against one another would be enormously facili
.

tate d

dealer in debts or credit s is

The debts o f the

community can be settled by trans

in the banker s
books o r by the delivery o f documents such as bank notes
repre sentative o f the banker s obligations So long as the
bankers remain solvent their obligations supply a perfectly
adequate means fo r the discharge o f debts because a debt can
be j ust as well cancelled against another debt as extinguished
by a payment o f money O f course it i s still true that i f the
banker himsel f i s sued in a Court o f Law there i s no legal
tender in which he can be ordered to pay B ut i f he i s so l
vent he can obtain a credit from another banker I n fact
the natural test o f the solvency O f a private trader woul d be
h i s power o f O btaining su fc i ent bank cred its t o meet h i s lia
bi l i t i es and the test o f the solvency o f a banker would be the
ready convertibility o f his obligations into the O bl i gations o f
other bankers
But it may be asked is n o t this to give away o u r whole
hypothesis ? We postulated a state o f society without money
-

Th e

a n ti th e si s

quan ti ty , m eans th e

i s b et w ee n
s tu ff o f

d eb t

wh i c h d e bts

an d

(or

cr edi t.

c r ed i t s

are

C r ed i t ,

made

th e

no u n

of

WIT H O U T M O N E Y

C RED IT

Yet i f a man can go to his banker and cash a cheque in bank

notes is not this to admit the existence o f somethi n g which
is money in al l but name ? I t is true that we are accustomed
to think o f bank credits a s money B ut this is only because
fo r the practical p u rposes o f every day the distinction betw een
bank credits and money i s rarely o f any importance An d
fo r all that a bank credit i s m er ely a debt di ffering from other
debts only in the facilities allowed by the banker fo r trans fer
ring i t to another creditor No o ne imagines that a trade
debt i s money though it may be as good an asset as a bank
credit
H aving found in the bank credit the means o f making
payments h o w far have we provided fo r a standard o f value ?
The money o f account provides a unit fo r the measure
ment o f debts It must also pro vide a unit fo r the measure
ment o f prices F o r when a price o f any com modity i s quoted
in a market t h is cons titutes an o ffer the acceptance o f which
creates a debt from the purchaser o f the commodity to the
vendor The function o f the price i s to determine the magni
tude o f this debt
But the unit fo r the measurement o f prices i s inev itably
the unit fo r the measurement o f values The relative values
commodities ( in the econom ic sense o f values) are
o f all
measured by their relative prices And the price O f each
commodity measures i ts value relative to the unit What
then i s the value o f the unit ? So long as value means value
in exchange the value o f anything whether it be a com modity
o r the monetary unit o f account must always be a p r opor ti on
a value in term s o f something else Just as every commodity
h as a val ue in terms o f the unit so the unit h as a value in
terms o f each commodity I t may be the equivalent say o f
a pair o f trousers or o f a ton O f coals
N ow in some sense o r other the chief req uirement o f the
unit o f value is stabil ity But what d o we mean by stability ?
It i s al l very well to s ay that th e val ue o f theunit mu s t not
va y b ut the re is no S ingle interpretation o f the value o f the
r
unit Its value in coal s may be stable while its value in
trousers may rise or fall This problem i s no t peculiar to the
,

'

'

CU RR E N C Y AN D CR EDI T

conception o f a money o f account It arises e q ually where

the mon e tary unit i s dened a s the eq uivalent o f a prescribed
quantity o f a selected commod i ty such as gold We still
want to know whether the val ue o f gold in terms o f other
commodities varies
Th e s i gnica n ce and the measurement o f a rise or fall in
the unit o f value will engage o ur attention later Here it i s
enough to s ay that if we can point to a tenden cy fo r a l l prices
reckoned in the unit to rise together that
o f commod i ties
means that the value o f the unit is fall ing ; and a tendency
fo r all prices to fall means that the val ue O f the unit is rising
Will the continuity in the u s e o f the unit from day to day
be o f itsel f su fcient to prevent its value in commodities vary
ing in either d irection unduly even though it be unrestrained
by e q u i valence to any specied commodity ? If every o ne
who received a credit i mmediately spent it o n co mmoditie s
the function o f the banker would be reduced to that o f settl ing
up every one s books at the end o f the day H e would be a
humble accountant rem unerated by a moderate com mi ssion
o r in some other suitable m anner
Without doubt however
j ust as every o ne in the economic societies we kno w keeps
some ready money in hand s o in that which we are postul at
ing every o n e woul d keep some unexhausted credit in hand
t o meet the payments foreseen o r un foreseen which wil l have
to be made in the near future
These reserves o f unexhausted
credit in the hands o f the public are o f course the counterparts
o f undischarged debts due from the bankers
A s the reserves
always exist the bankers are perpetually indebted to that ex
tent to the public And a s the publ i c retain these reserves o f
cred i t o f their o w n accord and fo r their o wn conven ience the
bankers do no t have to pay interest upon them o r at any
rate do no t pay interest at the full rate
N o w the bankers are merely dealers in credit
They do
n o t take over liabilities except in consideration o f receiving
equal assets Th e umbrella maker w h o wishes to pay h i s em
p l o y ees in credits on a banker must purchase these cred its o ut
o f the proceeds o f his umbrellas
But a banker is no t willing
to deal in umbrellas and will not buy them him sel f
It is o f
.

'

CRED IT W IT H OUT M ON E Y

the essence o f the banker s position that he sells credits to all

sorts o f producers and dealers so that his credits may be ac
ce p te d in payment by all sorts
wil l nd it more co n
ve n i e n t as actual bankers d o to
his credits rather than
(
)
to buy
will consist mainly o f advances
made t
ers who wil l employ the credits
advanced in their respective businesses and will pay interest
upon them o ut o f the prots so made
The great credit machine wil l work very much as it does
in the actual world An order i s given by a merchant to a
manu facturer to supply a certain q uantity o f goods The
manu facturer borrows from his banker a sufcient credit to
meet the necessary expenses o f manu facture including the
cost o f raw material fo r the period which will intervene be fore
the goods can be del ivered and payment rec eived from the
merchant When the goods are del ivered the merchant in
turn borro ws their value fo r the peri od fo r which they are
l ikely to be o n hi s han ds The goods may pass from one
manu facturer to another and from o n e dealer to another
several times be fore they are nally disposed o f piecemeal by
the retail dealers to the consumers Each manu facturer or
dealer will probably be indebted fo r a part at any rate o f their
value s o long as he holds them A debt as it were i s attached
to the goods so long a s they are being d ea l t i n that i s to s ay
bought with a view to being sold This debt is only nally
paid o ff when the goods are sold no t to be dealt in but to be
con s u m ed
But each manu facturer o r dealer i s quit o f the debt
when he i s quit o f the goods H e borrows to meet the ex
pense o f making o r b uying the goods uses the proceeds o f hi s
borrowing to pay the people em ployed in manu facturing them
when he disposes o f
o r to de fray the purchase price ; then
them applie s the proceeds to pay o ff the s u m borrowed and
retains any balance as his o w n prot Thus n ew credits a s
distinguished from those created merely in replacement o f old
ones are created to pay the prots remuneration interest
etc o f those who contribute either by their pers on al services
or by the u se o f their property to production
The borrowing i s done by traders by those that is w ho

'

C U RR E N C Y A ND CR ED IT

ither produce or buy goods etc with a view to subsequent

sale The stocks o f goods in course o f production in transit
or awaiting sale are the property o f the traders and at any
moment there is a stream o f goods passing from trader to
trader through all the successive stages S imultaneously the
corresponding credit O perations are takin g place Any i n
dividual trader may be both m aking and receiving payments
H i s actual borrowing and re paying O perations may have no
denite relation to any individual buying and sell ing tran sac
tions but will only represent the net result a fter h i s receipts
and payments are s et o ff against o ne anotherthat is to say
when his outlay o n the production o r purchase o f goods ex
when it is less he repays H is
ceed s his sales he borrows
indebtedness rises and falls with h i s stock in trade
Consider what happens in a particular week P roduction
i s increasing the traders stock s ; sales to the consumer are
dim inishing them Those o f the traders wh o are engaged in
production are p aying out such part O f the expenses o f pro
duction as come in course o f payment in the week
The re
tailers are receiving the sum s that the consumers spend in the
week These consumers are to a great extent the same people
who receive payment from the producing section ( though o f
course there are some classes o f the co m munity such as land
lords and domestic servants whose incomes d o no t com e from
businesses that require to be nanced
Between the retailing and producing sections o f traders
stands the wholesale section the merchants
The wholesale merchants l l a very im portant place in the
trading system They j udge demand and regulate supply
The outlook o f the retailer is l ocal and limited ( except where
wholesale and retail dealing are combined and the di fferentia
tion o f function i s lost) and he cannot make a com prehen sive
survey o f the prospects o f demand I t devolves there fore on
the wholesale merchant to set the machinery o f production at
work by giving orders to the producers and incidentally to
start the mach inery o f credit This i s especially tru e o f man u
factures and the production o f raw materials
I n agricultural
production supply is a matter o f O pportunity and demand is
e

C R E D I T W IT H O U T M O NE Y

comparativel y steady and there con se quently the functions

o f th e merchant coun t for much less
The prod uction o f xed
capi tal is di fferent again The order is given n o t by a merchant
bu t by a promoter wh o makes it his busin ess to procure savings
to cover the cost
Money invested is o f course spent ; i t is
spent o n xed capita l The d emand fo r xed capital is made

up o f people s savings in j ust the same way as the demand fo r

consumable comm odities is made up o f their expenditure o n
their present needs I n this process the need for tem porary
borrowing comes i n at two points The contractor who e n
gages to construct the new xed capital may borrow to meet
the expe nses in a nticipation o f the payments he is to receive
fro m the promoter
And th e promoter himsel f may have to
borrow in antici pa tion of the savings he hopes to collect from
the investo r
When a banker lends we say that he grants or creates

credit o r a credit
This is a l oose way o f describing a
double transaction The banker assumes an immed iate o b
l igation to his custom er in exchange fo r the customer s o h
ligation to him at a future date The banker s obligation or

bank credit meets the c ustomer s need because it can be

'
assigned away as a m eans o f payment The customer s o h
l igation since it yields interest or discount fo r the period be fore
it becomes due, supplies the banke rs prot Thus two credits
o r debts are rea lly created though only o ne o f them is destined
to be used as a means o f payment
I n o u r sel ected week there will be determ inate market rates
o f wages salaries etc
and determinate market prices o f co m
m o d i ti e s
The merchant i n deciding at what price he will
order good s must be guided by the then prevailing market
prices th e manu facturer in deciding what price he will accept
m ust beg ui ded by the then existing costs o f production To
a g reat extent th e incomes which the consumers have to spend
an d which constitute the demand fo r commodities are the
component parts o f those same costs o f production it being
understood that the traders themselves are included among
the consumers and their pro ts among the costs o f pro
duc tion
,

'

C U R R E N C Y AND C R E D I T

IO

consumers purchasing power is there fore l argely sup

plied o ut o f the credits which the traders borrow from the
banks Credit originates i n production and is extinguished
in consumption The supply o f purchasing power i s thus
regulated by the transactions which require to be nanced I t
starts from the giving o f an order to the producer and the
quantity o f purchasing power brought into being when the
producer borrows to carry o u t the order depends upon the
price at which it is placed The capacity o f the productive
resources o f the community i s limited and at any rate when
this lim it i s approached continuity in prices implies continuity
in the supply o f purchasing power
Every bo rrower in fact h a s to take account o f condition s
tha t lim i t the amount which he borrows and this very l im ita
tion o f borrowing tend s to conne the income and consequently
the expenditure o f the consumer to their previous limits
Nevertheless it is obvious that thi s principl e o f continuity
i s incomplete
There i s room fo r variation in the vol ume o f
orders th e rapidity o f their execution the quantity o f credit
with which they are nanced If we are to prove that the
monetary unit will be a stable standard o f value we must show
that i f exposed to any disturbing cause the un it will tend to
r etu r n to i t s fo rmer value or at any rate that it will arrive at
a new and relatively stable value not di ffering much from th e
old
Suppose then that the rou tine o f the credit m achinery i s
interrupted This routine depends upon the new borrowing
be i ng o n the whole suf cient and no t more than sufcient to
replace the advances paid O ff The credit created must be
equal to the credit extinguished Granted this the stability
O f every other part o f the machine follows
First consider the case where there is a curtail ment o f new
borrowings It may be fo r instance that the merchants have
given fewer new orders to the m anu facturers or perhaps that
borrowers have been applying to the reduction o f their indebted
ness credits which they would otherwise have spent I n the
latter case expenditure being diminished sales will fall o ff and
the stock o f commodities in the hands o f the dealers will be

Th e

W IT H O U T M O N E Y

C R EDIT

It

le ss d rawn upon than usual and the dealers w ill give sm aller
orders to the manu facturers fo r the replenishment o f those
stock s Thus in either case a slackening in the creation o f
new credits means a diminution o f orders to the manu facturers
But the result o f this will be that the labour and plant o f the
community a re no longer fully employed and the total amount
o f wages and prots w ill be d iminished
Consequently the
expenditure o f the publ ic will begin to fall o ff But this will
rea ct on the sales o f the retailers and merchants They in
turn will further restrict their orders fo r fresh supplies o f goods
and so the original restriction o f cred it will tend to repeat and
rein force itsel f A co rrective tendency will however early be
at work
a restriction of the

bankers
bankers will n o t willingly acquiesce
in the co
age o f their prots and th ey will try
borrow They will in fact reduce
to tempt their customers
their charge for interest
I t should be obs
at quite apart from any deliberate
action by the bankers there i s in any case an important i n
As we have
u ence at work to lower the rat e o f interest
seen the curtailmen t o f credit occasions a agging o f the de
mand for commodities This flagging o f demand will produce
a fall o f prices The merchants w ill nd that their stock s o f
goods lose value while they hold them and this loss o f value
wil l dim inish the prot o ut o f which they pay interest o n the
loans with which these stocks are nanced Falling prices o f
themselves there fore make borrowing less attractive and re
duce the rate o f interest which borrowers are willing to pay
The bankers must reduce their charges o f interest accordingly
be fore they can even induce their customers to conti nue bo r
rowing on the diminished scale which their turnover o f goods
w i l l justi fy and i f these customers are to be tempted to i n
crease their borro wing the rate o f interes t m ust be reduced
even below this l o w level
If as is not impossible the bank e rs fail to e ncourage bo r
rowing i n thi s way the restriction o f credit and consequent
d epression o f trade will go on until disappointed merchants
are driven to borrow o n terms which they d o not hope will be
,

C U R R E N CY AN D C R E D I T

12

remunerative merely to keep their businesses al ive This will

preve nt credit operations from dwindling down to nothing
and the circulation o f the credits s o created will presently re
vive the o ld routine But in the meantime the volume o f
credits in circulation and the nom inal amount o f wages a n d
prices paid o ut o f them ( calculated in the conventional unit o f
value) may have been enormously reduced I n other words
the value o f that unit expressed in services o r com modities
may have been enormousl y increased
N or i s there any
tendency fo r it automatically to return to its former value
Indeed a new disturbance may be initiated in the form o f a
new curtailment o f credits and a fter a new period o f restricted
trade may end in yet a further appreciation O f the un it o f
value
The probability o f a contrary variation an expansion o f
credits and a depreciation o f the unit o f value is however at
all times much greater And this movement i s even more
unlimited in scope Sel f interest prompts both the e n terp ri s
ing trader ever to borrow more and the enterpri sing banker
ever to lend more fo r to each the increase in his credit opera
tions mea ns an increase in his business Suppos e some o f the
merchants in the hope o f extending their business give i n
creased orders to the manu facturers The manu facturers will
forthwith borrow more than usual from their bankers
They
will urge o n the business o f manu facture will pay more to
their employees and will receive greater prots in proportion
to their greater output They and their employees will have
more to spend ; the retailers will d ispose o f more goods and
will take over more from the merchants ; the merchants will
give yet further orders to the manu facturers The man u
fact u rers nding their productive capacity overstrained will
quote higher prices to the merchants ; the merchants being
unable to supply the retailers fast enough or to maintain their
stocks o f goods will raise prices to the retailers and the re
tailers wi ll raise prices to the public The general ri se o f
pr i ces will involve a propor tional increase o f borro wing to
nance a given output o f goods over and above the increase
necessitated by the increase o f output This increase o f bor
.

'

CREDIT W ITH OUT M O N E Y

rowin g meani n g an increase in the volume o f credit wil l

further stimulate trade
Where will this process end ? In
the case o f the curtailm e nt o f credits the sel f interest o f the
bankers and the distress o f the merchants combined to restore
the creation o f credits though not to its pre e xisting level
But in the case o f the expansion o f credi ts there is no s uch
corrective inuence at work
An ind e nite expansion o f
cr edit seems to be in the imm ediate interest o f merchants and
bankers alike
The continuous and progressive rise o f prices makes it
protable to hold goods in stock and the rate o f interest
which the merchant who holds such goods is prepared to pay
i s correspondingly high
Thus the merchant and the banker
Share between th e m a l arger rate o f prot on a larger turn
over The credit created fo r the pu rposes o f production be
comes purchasing power i n the hands o f the people engaged
in production ; the greater the a m ount o f credit created the
great er will be the amount O f purchasing power and the
better the m arket fo r the sale o f all k inds o f goods The
better the market the greater the de mand fo r credit Thus
an increase in the sup ply o f credit itsel f sti mulates the de
mand fo r cr edit j ust as a restriction in the supply o f credit
leads to a declin e in the demand fo r credit Either the ex
pan s i o n o r th e contraction o f Credit may therefore proceed
absol utely without l imit and the correspo nding fall o r rise
in th e value o f the monetary unit would there fore also p ro
I n each case all standard o f value will
c ee d without limit
be completely lost
But i t may be asked why invent this fantastic hypothesis
what was
o f a civilisation witho ut money merely to prove
O bvious from the beginn ing that prices released from any
physical standard o f value would vary without lim it ? Paren
thetically it S hould be remarked that the hypothesis is no t so
entirely fantastic ; during the rst fteen years o f the Bank
Restr i ction Act I 7 9 7 to 1 8 1 2 the universal mean s o f pay
ment in England w as the Bank o f England note which w a s
not legal tender and w as m erely the evidence o f a debt due
from the B ank but a debt not payable in gold o r any other
,

C U RR E N C Y AND C REDI T

I4

medium But without pursuing that subject further here we

may s ay that the j ustic ation fo r the hypothe sis i s that it pro
vides us wi th an analysis o f the functions o f credit which
would othe rwise be i nex tri cably interwoven with the functi ons
o f money
In the rst place we can dene the money o f acco unt a s
the unit fo r the me asurement o f debts ; we can s e e that the
unit fo r the measurement o f debts is necessarily also the unit
fo r the measurement o f prices and that the existence o f
market prices xes a relation between the uni t o n the o ne
hand and every form o f wealth o n the other
Next we can show that the business o f the deal er in debts
o r banker intervenes to provide a universal means o f payment
di ffering in no essential respect from the bank credits with
which we are familiar save only th at o f convertibil ity into
money
We then nd that this apparently articial system contains
w ith i n itsel f a principle o f continuity by which it might b e
maintained in e q uilibri um As every one s wealth i s measured
at any time in the monetary unit upon which transaction s
have till then been based the sum s which purchasers are pre
pared to o ffer are regulated by the value o f this un it The
level o f prices cannot be capriciously o r discontinuously
changed
But nally it turns o ut that this equil ibrium i s u ns ta bl e
Every displacement from the eq uilibrium position tend s to
magni fy itsel f
Further our hypothesis may serve to show that there is a
distinction between a debt and a promise to pay
A debt i s
fundamentally an O bligation to give n o t money but w ea l th
Legally the u s e o f money enables the de b tor to clos e the
transaction
From the economic standpoint however the
credi tor s claims are no t fully satised till he has sp en t the
money H e must go into the market and draw from it so
much wealth a s i s represented by the purchasing power he has
received If instead o f receiving money from the debtor he
a ssigns away his right in the debt to some o ne else in exchange
,

S e e ch ap

xvi

C RE D IT W IT H O U T M ON E Y
fo r th e

appropriate amount o f wealth he has taken a short cut

to the same end
But in the absence o f money there is a
certain dif culty i n closing transactions The value o f a debt
depends upon the solvency o f the debtor The credit o f the
ordinary debtor is not good enough or at any rate n o t well
enough known fo r his debt unsupported by security or
guarantee to be a suitable means o f payment The use o f
bank credits would be necessary fo r this reason alone But
even banks are not always o f unquestionable s o lvency and in
the exchange o f a credit on o n e bank fo r a credit o n another
there is n o nality
The need fo r a medium o f payment
which cannot legally be disputed is obvio us
We now s e e the part that money has to play First o f
all it h as to provide the means fo r th e legal d ischarge o f a
debt ; secondly by
a standard o f m i ne it has to
correct the instability o f credit We started by saying that
money is a medium o f exchange This is true enough ; i f
goods are sold fo r money and the money i s laid out o n the
purchase o f goods the former goods are indirectly exchanged
fo r the latter with money as the m edi u m o f exchange
B gt
legally money is the means o f discharging a debt and this is
It is us ed as a medium
r33
7 1? the more general conception
cause a purchase creates a debt and money
o f exchange b e
provides the means o f paying the debt When payment i s
made in ready money this merely means that the debt is i m
A purchase for money can always be
m ed z a tely discharged
analysed into the creation and discharge o f a debt The d i s
charge o f a debt in money cannot always be identied as the
completion o f a purchase o r exchange
C redit and money are both equally media o f exchange
Credit is o ften said to be a substitute fo r money It woul d
be j ust as accurate to say that money i s a substitute fo r credit
that the legal means o f discharging a debt is a substitute s o
far as the creditor is C o ncerned fo r the debt itsel f
The second function o f money that o f prov i ding a standard
aris es naturally out o f the rst The value O f a
o f val ue
debt immediately due i s necessarily equal to the value o f the
means by which it can be leg ally paid Thus the problem o f
,

'

'

16

C URR EN CY

A ND CR EDIT

S tabilising credit i s trans formed into the problem o f stabil

ising the val ue o f money
Shall
that the expansive
tendencies o f credit are in
conict with the main
te na n ce o f a xed standard o f val ue and a great part o f o u r
subject is taken up with the problem o f how best to rec oncile
thi s conict
.

C HA P TER I I

M E TA LL I C M O NEY

WE have now arrived then at a revised denition O f money

It is the means established by law ( or custom ) fo r the payment
o f debts
Consequential upon this characteristic are both the
functions by which we sought to dene it at the outset that
o f a medium o f exchange and that o f a standard o f val ue
Accord ing to the classical theo ry o f money as we saw
money is a se lected com modi ty
Law o r custo m decrees that
debts may be paid in gol d o r in silver o r perhaps indi fferently
i n either Gold and silver are the raw materials o f certain
industries and have a value as such and in virtue o f this value
they supply an ind ependent standard for the measurement o f
debts A banker s obligation whether it take the form o f a
bank cre d it o r a bank note becomes an obligation to pay
money Such an obligation may be used as a medium o f
payment ; a debtor wh o has a bank credit may pay his debt
by assigning thi s bank credit to his creditor B ut a bank
credit n o t being the l eg a l means o f discharging a debt must
be read i ly transfo rmable i nto money i f required
The
banke rs o bligation must be to pay money
If gold is to be the legal medium o f payment it must be
put o n the market in a form i n which its quantity can be
easily and quickly and certainly estimated This is done by
coining The ostensible purpose o f coining i s to divide the
gold up into smal l port ions convenient for handl ing and to
certi fy by a stam ped inscription that each such portion i s o f
th e prescri be d weigh t and neness
Under a system o f free
coinage anyone with gold to dispose o f can bring it to the
Governmen t to be so d ivided up and certied and this wil l be
don e either free o f charge or at a charge nearly negligible in
If th is system is
comparison with the value o f the gold
.

17

CURR ENCY AN D CRED IT

18

W ear
effectively carri ed out i f all coin that is reduced
appreciably below the current weight is promptly withdrawn
i f there is no obstacle t o melting down coin fo r use other
wise than as currency then the value o i coin and the value
o f bullion can never diverge far fo r either can be transformed
into the other at a triing expense Gold as a commodity
will then be really the standa rd o f valu e A ny departure
from this system i s regarded under the cl assical theory as a
perversion The nature extent and causes o f such d epartures
we shall have to consider later In the present chapter we
shall assume that a system o f free coinage is faith fully and
e fciently maintained In the next chapter we shal l turn t o
the consideration o f systems in which the orthodox theory o f
free coinage is avowedly thrown asid
The most i mportant characteristics o f the classical theory
are that the value o f the monetary unit is determ ined by the
1
val ue o f the metal fo r purposes other than coinage and that
the supply o f money being de pendent upon the supply o f th e
metal cannot be arbitrarily incre a sed
If a gold coinage i s to be combined with a cre d it system
we have next to consider where the o ne will begin and the
other end A payment in coin being a l egal discharge O f a
debt while a payment in credit is n o t coin w ill always be
used in pre ference to credit unless there is some superiority
o f convenience o r other ad vantage in the use o f credit
Fo r
large payments the superior convenience o f credit is obvious
since it avoids the trouble o f counting han d ling and scrutin
ising the coin and the cost and risk o f transport and storage
Moreover the privileges o f a banker s custo mer are valuable
to the well to d o man and especially so to the t rader O f
course all these advantages presuppo se the solvency o f the
banker but we may assume that the risk o f failure o f a l arge
and well establi shed bank i f no t absol utely negligible is at
any rate small compared with the risk o f losing money which
instead o f being deposited at a bank is kept at a trader s
premises where the risk o f loss by theft falls o n him
Fo r smal l payments the advantages o f credit are not s o
,

Thi s i s

o nl y

true

sub ect

to

reserv ati ons

(see chap

M ETALL IC M ON E Y

19

considerable Payments by cheque tho ugh they save trouble

fo r large sum s give additional trouble fo r small sums
If
sm all payments are to be made in credit at all they must be
made with bank notes But bank notes have very l ittle ad
vantage over coin Like coin they may be lost ; like coin
they need to be counted and change must sometimes be
asked fo r them And while th e sm all bank note seems to
have no advantage over coin to set against its legal in feriority
in discharging a debt it i s subject to a special d isadvantage
in that it may c i rculate in the hands o f unin formed people
w h o have no means o f j udging o f the credit o f the bank
which issued it and w h o m ay be seized with an unreasonabl e
yet widespread distrust The mere fact that there are people
who are unwilling to accept the notes o f a particular ban k
will be quite a s u i ci ent reason fo r every o n e to demand coin
in exchange fo r the notes Even those who themselves think
the bank perfectly solvent d o n o t want to hold their pur
chasing power i n a form which would not be accepted by
every one Sm all bank notes (i e fo r amounts smaller than
the prevalent weekly wage o f the working class) are likely to
be an embarrassment rather than a source o f prot to the
issuing bank and accordingly they tend to fall out o f use
except where there is some special reason to favour them 1
Consequently the d ividing line between coin and credit is
likely to separate large from small transactions The weekly
Wages o f the worki n g m an o r lo w paid empl oyee will be paid
wholly in coin The relatively highly paid empl oyee will be
paid in credit The large transactions between men of busi
ness wil l o f course all be carried thro ugh with credit and
their prots will accumulate in the form o f credit But even
the man who receives his income in the form o f cred i t will
It is
u s e coin fo r smal l retail payments railway fares etc
therefore easy to s ee what modications ought to be intro
d u ced into the picture given i n the preceding chapter o f the
trans ac ti o n o f a week s business o n a credit basis in or d er to
allow fo r the introduction o f money
.

ch ap.

Th i s d oes

n ot appl y

to l egal tend er n otes w h i ch are th em s el ves

m o ney

iii
2

(s ee

C U RR E N C Y A N D CREDIT

20

The manufacturer who has obtained a credit from his

banker to enable him to execute th e o rd e r given hi m by a
dealer will draw out week by week a certain amount o f cash
against that credit fo r the payment o f wages The recipients
o f this cash will spend it in the course o f the week on their
day to day expenses and so it will come into the hands o f
the retai lers rent collecto rs tramway companies etc who
will pay it all back into the banks At the sam e time the
manu facturers merchants salaried employees and other people
with large enough incomes to have banking accounts will all
need to keep part o f their avai lable purchasing power in thei r
pockets in coin The s u m s o retained being destined only
fo r petty expenses will be small in comparison with their
i ncomes but they will spend a certain amount out o f it in the
course o f the week and draw sums out o f the bank s equal on
an average to what they have spent The dealers who inter
vene between the retailer and the manu facturer are concerned
in large transaction s fo r which credit is appropriate
The u se O f money does n o t disestablish the normal p ro
cess o f creating credit Money it i s true is always being
paid into the bank s by the retailers and others who receive it
in the co urse o f business an d they o f course receive ban k
credits in return fo r the money thus deposited B ut fo r the
m anu facturers and others who have to pay money o ut credits
are still created by the excha nge o f obligatio ns the banker s
immediate obligation being given to his customer in exchange

for the customer s obligation to repay at a future date

We
shall still describe this dual operation as the creation o f credit
By i ts means the banker creates the means o f payment o ut o f
nothing whereas when he receives a bag o f money from his
customer one means o f payment a bank cr edit is merely
substituted fo r another an equal amount o f cash
Now let us examine again the e ffects of a disturbance o f
the credit machine with the modications introduced by the
use o f money Consider the e ffects o f an increase in the
cred i t given Suppose that in a particular week somewhat
larger orders than usual are given to the m anu facturers and
that the manu facturers obtain correspondingly larger credits
'

METALLI C M ONEY
from

the banks These larger credits are required fo r the

increased output o f g oods and are drawn upon fo r increased
payments o f wages more hands being employed and overtime
pe rhaps being worked A greater amount o f cash is drawn
o u t o f the bank s than is usual and is added to the stock o f
cash i n th e han d s o f the working men A part but probably
n o t the whole
o f these increased rece ipts o f cash will be
spent and will so com e back to the bank s through the re
tailers There will thus be an increase in the volume o f pur
chases by the working classes w hi c h will lead to further
orders yet being given to the manu facturers The accelerated
sales wil l mean increased prots to the retailers and merchants
and the increased output w ill mean increased prots to the
manu facturers ; as soon as these increased prots come to be
drawn upon there will be increased purchases by the credit
using classes These increased purchases like those o f the
wage earners will be quickly reected in further orders to re
plenish the stocks o f com mod ities
The important question to consider is wh at will be the
e ffect o f these movements on the d istribution o f coin fo r
the use o f coin is the new factor in the problem Th e stock
o f coin i s made up o f that in the hands o f the bankers and that
in th e hands o f th e public The coin in the hands o f the
public is made up o f that in the hands o f the wage earners
and others who have no t banking accounts and the pocket
money o f th ose who have The pock et money even o f a very
rich m an may be quite a small s u m The number o f ind i vidual s
with banking accounts is small compared with the number o f
those w h o have none The total amount o f coin which the
former class taken i n the aggregate uses as pocket money i s
prob ably not large compared with the cash which represents
the entire liquid resources o f the much more numerous
working class Further the pocket money o f the well to d o
man probably varies little ; it is hardly i f at all greater in a
time o f prosperity than in a time o f adversity The working
man o n the other hand i s driven from time to time to draw
on hi s reserve o f cash in hard times and nds it di fcul t to
make good the gaps in it But when good ti mes come, a nd
.

CURRENCY A ND CR EDIT

22

he gets regular employment with overtime earn ings and

presently an increase in the rate o f wages as we l l he can
restore his reserve to the amount which prudence re q uires
No doubt the thri fty m an wi ll put his savings into a savings
bank or some other agency that will keep them sa fe and pay
i n terest on them But he must rst see to it that he has a
l ittle money in the house and even when he has enough and
all his further savings are going into the savings bank h e will
not pay in every hal f crown a s he earns it ; so long as he i s
saving he will usually have some money destin ed fo r the
savings bank waiting in the house Consequently when em
ployment is good and wages high a certain amount o f the
money paid o ut each week to the workmen fails to come back
to the banks in the following week and there i s in fac t what

is called a withdrawal o f money fo r internal circul ation

The fact that this drain o f coin occurs is o f great importance
in the theory o f currency The stock o f co i n i n the hands o f
the bankers is l imited Once i t i s exhausted they wil l fail to
discharge their obligation to provide money on demand ho w
ever solvent they may be If th ey are to avoid this calamity
they must take steps to check the drain o f coin
Th e drain o f coin i s o n ly o n e among several e ffects o f the
expansion o f credit O f th e net amount o f new cred it created
in a week
that is to s ay o f the excess o f new credits created
over existing credits paid o ff a part goes into the hands o f
the well to d o consumer and i s spent by him in the form o f
credit without being transformed at any stage into coin It
i s only a part which is paid o u t in coin to the wage earners
and the greater part o f this part comes back to the retailers
in return fo r goods purchased At the beginning there fore
the drain o f coin into circulation i s hardly perceptible The
i m portant e ffect o f the expanding credits at that stage is the
additional purchas ing fo r consumption by both credit using
and coin using classes It is only when this sti m ulus to the
sales o f goods h as reacted to a considerable degree upon
output and prices that a really marked e ffect will be felt o n
working class earnings and conseq ue ntly o n the power o f the
workin g classes to absorb coin Thou gh re gularity o f em
,

'

'

M E TA LL I C M ON E Y

23

pl oyment

and a resort to overtime increase ea r ni ng s to a

material extent it is only a fter a considerable interval that
the prosperity o f the manu facturer is reected in an increase
o f w ag es
C onsequently it is only very gradually that the
bankers can become aware that the growth o f credits i s
threatening their reserves o f coin By the time the drain o f
coin becomes perceptible credits will already have been i n
creased to such a point that there woul d be a heavy additional
d rain eve n i f there were no further expansion o f credits Not
only are wages still below the level which the existing rates
o f pro ts would j usti fy but the wage earners are still in process
o f adding their weekly surplus receipts to thei r l ittle hoards
and the cash in thei r hands i s short o f the total which it will
reach even without any increase o f wages Yet unless the
bankers are gi fted w ith a degree o f foresight that practical
men do no t always po ss ess it will only be at this stage th at
they will take any measures to sa feguard their po sition
The danger arises from the undue increase o f cred its ; the
remedy is to be found only in a curtail ment o f credits Th e
grant o f a cre d it rests i n a banker s absolute discretion H e
is under no legal obligation to accommodate a borrower B ut
a at re fusal to lend to traders who ge nuinely need advances
fo r the purposes o f their legitimate business may have disastrous
consequences If a few bankers take this action the result i s
merely to increase the pressure o n the rest
If there is a
general re fusal to lend there will be a general disorganis ation
Dealers who have undertaken to buy cannot
o f business
Those who expecte d to sell t o them
full their contracts
nd themselves without the funds they had counted o n and
yet cannot tide o ver their d i fculty by borrowing The result
must be that perfectly solvent traders fail to meet their e n
,

gage m e n ts

Short o f an absolute re fusal to lend there i s much that

bankers can do to restrict cred i t They can apply a more
sever e standard to the security o ffered ; they can reduce the
maximum period fo r w hich they are will ing to lend ; they
can discriminate as to the purpose for which the borrower
A bank er knows much o f the affair s o f his
wants the loan
,

C U RR E N C Y A N D CRED IT

24

o r nu

customers and can o ften practically veto hazardous

necessary enterprises or can at any rate exercise much I nu ence
in advising caution
But it has come to be recognised that the banker s pri nc i pal
instrument fo r the regulation o f credit is the rate o f i nte rest
When there is a scarcity o f a commodity the price is raised
and the diminished supply goes to those wh o bid highest fo r
it The price charged fo r a loan i s the interest u pon it If
the demand fo r loans is outstripping the supply the market
can be brought into equilibrium by an increase in the rate o f
interest
I t is sometimes urged as an O bjection to this course that
the interest on advances i s s o unimport ant an item in the
prot and loss account o f a trader th at a rise in the rate woul d
only have a very gradual e ffect and that something much
more drastic is needed especially at a time o f high prots
N ow the high prots must o f course be take n i nto account in
deciding j ust what increase in the rate o f interest i s needed
The reason why they are high i s that prices are rising and
the value o f any stock o f goods grows even while it is in the
dealer s hands
But i f the rate o f interest is raised high
enough to O ffset the extra prot anticipated from this cause
there is no reason why it shoul d not react rapidly al most
immed iately o n the demand fo r new credits It may be con
ceded that the manu facturer though he is no t quite ind i fferent
to the rate o f interest can afford t o treat it as o f small account
in comparison with h i s other expenses H e is specially con
cerned to keep h i s pl ant and workmen fully employed H e
gets his order from the wholesale dealer and he is not going
to re fuse to accept it because to execute it he will have to
pay 7 per cent per annum fo r th e money borrowed (fo r a few
weeks only perhaps) instead o f 4 But it is the wholesale
dealer himsel f w h o i s frightened by high interest
He
borrows money to hold stocks o f goods in the course o f their
passage from the manu facturer to the retailer H e makes his
prot out o f the d i fference between the price at which he buys
and the price at which he sells and the set o ff against his
gross prot fo r insurance rent wages etc is quite sm all
,

M ETALL IC MONEY

25

compare d to the whole value o f the goo d s The set o ff o n

account of interest is there for e by no means unimportant
In th e case o f the manufacturer the value of the nished
product may be fo r ex ample three times that o f the raw
material
The actual expenses o f manu facturing may be
perhaps three fou rths of the two thirds by which the value o f
the product is increased i n course o f manu facture i e hal f the
nal value
The a d dition o f I or 2 per cent to this hal f
is almost negligible The merchant o n the other hand buys
and sel ls enormously more goods in proportion to his capital
but ad d s to what he buys n ot th e l arge additional value re
presented by manu facture but the relatively small additional
val ue represented by the dealer s prot This prot may be
perhaps 1 0 per cent on goods which are held in stock fo r say
six month s o r mo re Such part of the goods as are held with
borrowed money will have to pay interest in addition to other
ex penses and a sudden j ump in a hal f year s interest from 2
to 3 } per cent may well make a merchant hesitate to order a
fresh consignment
B ut i t i s the merchant as we have seen
who takes the initiative in p ro d IIcti o n If he can be i n d IIced
to delay giving fresh orders th o ugh his o w n demand fo r loans
will be una ffected till the time at which those orders would
have been com pleted i f he had given them the manufacturer s
demand for loans is dim inished im mediately The merchant
can stand a very consid erable d iminution o f his normal stock s
o f goods without su ffering any serious inconvenience and any
diminutio n in the value o f his stocks d iminishes by an equal
amount his indebted ness to his banker The period fo r which
the merchant keeps his goods on hand unsold is inversely
pro portional to the quantity o f goods so kept ; the interest
charge i s proportional to this period ; but (apart from varia
tions o f market price) the prot on the turn over o f the goods
is indepen d ent o f the period o f storage A rise in the rate o f
i nterest is th us a direct incentive to the merchant to keep
down hi s stocks and delay g iving fresh orders And as he is
so se nsitive to the rate o f interest the whole machinery o f
credit in which he plays such an important part will be
e qually sensi tiv e But as h as already been m ention ed , the
-

26

CURRE NCY A ND CR ED IT

rise in the rate o f interest must be s u i ci ent to o ffset the

e ffect o f rising prices If prices rise while the merchant holds
his stocks o f goods the amount O f the rise h as to be added
to his prot o n the turn over If with prices unchanged h i s
prot would be 1 0 per cen t then with a 5 per cent rise of
prices h i s prot would be raised to 1 5 per cent When dealers
expect prices to rise they try to increase thei r stocks in orde r
to gain the advantage o f this prot by doing s o they increase
the immediate demand and tend to bring about the anticipated
rise o f price at an earlier date ; and the tenden cy to increase
stocks ceases when this rise o f the present price h as gone far
enough to wipe o ut the prospect o f exceptional prot
In
calculating whether it is worth while to go o n add ing to hi s
stock o n e o f the factors o f which the merchant has to take
account i s the p ayment o f interest on the additional money to
be borrowed fo r the period fo r which he m ust hold the stock
A rise in the rate o f interest will a ffect h i s calculation s ve ry
materially Whe n he is buying in the hope o f a rise o f prices
n o t only must he hold his stocks fo r a longe r period than
usual and there fore pay more in interest at a given rate but
while the gain in price is more or less speculative the extra
charge fo r interest is certain
Th e d ealer in securities responds to a rise in the rate O f
interest in much the same way as the dealer in commodities
I ndeed he i s even more sensitive to it H e buys securities to
sell them with a narrow and uncertain margin his calculations
are in small and varying percentages among which the dead
weight o f an app arently triing additional in terest charge may
be q uite a serious factor
When the banke rs perturbed by the drain o f cash into
c irculation put up the rate o f interest it i s their aim to raise
it to the critical point at which it i s j ust su fcient to curb the
enterprise o f the dealers in securities and the d ealers in co m
m o d i ti es
If they can attain this point the stream o f fresh
orders both fo r xed capital and fo r consu mable goods will be
stemmed And in proportion a s production ags th e incomes
der i ved from production will ag to o That intim ate con
nec ti on between the volu me of fresh cred i t cr ea ted and the d c
.

M ETALLIC MO N EY

27

mand fo r go o d s whi ch is the cause O f the i nstability o f credit

will be brought into play B ut in practice it is exceedingly
di ffi cult fo r the bankers either to judge accurately when to
take action or to tell when they have taken it whether it is
,,

e ec ti ve

The expedient to which banks almost invariably have re

course is to ai m at preserving a certain xed proportion be
tween t hei r reserve o i cash and their liabil ities If to o much
credit is gi ven the reserves o f some o r all o f the banks will
fall below this xed proportion ( which need not o f course be
the same fo r all the banks concerned) Each o f the banks to
which this happens wi ll immediately tak e steps to diminish its
credits and to restore its reserves to the conventional propor
tion by charging a higher rate o f interest and the market rate
o f interest will thus be raised
If the rise in the rate is i n
s u f ci e n t warning wil l be given by a re newed fall in the cash
reserves At rst sight it would seem that this met hod o f
proceeding would absolutely secure the banking community
against the danger o f excessive credits It may be conceded
that it goes a long way towar ds doing so and perhaps that no
better me thod has yet been found But fo r all that there are
sources o f weakness in the m e thOd The true cause o f an ex
c es s i ve demand fo r credits i s to be found in the depletion o f
the merchants stocks the prosperity which enables the co n
sumer to deplete those stocks by his purchases being due to
the fresh orders given fo r their replenishment But the p ro
d ucti v e powers o f the com munity are limited and as its o u t
put approaches the maximum further orders will only produce
The manu facturer s
further and further delay in del iveries
borrowings are proportional not to the orders awaiting ex ecu
tion but to the work actually in hand and there may thus be
a great l a tent demand fo r credits o f which the bankers know
nothing The bankers balance S heets will only S how the
actual credits outstanding and as the indebtedness o f the
merch ants i s proportional to their stocks which have been de
o f the
and
cannot
be
uickly
replenished
while
that
e
t
e
d
l
q
p
manu facturers is calculated only fo r the work actually i n hand
the pro portion o f li abili tie s to Cash m ay not b e at al l excessive,
.

"

CURRENCY A N D CRED IT

28

though o f course the credits will be swollen in both cases by

high prices
Th e greater the accumulation o f orders on the m anu fac
tu rer s hands the greater will be th e earnings o f their work
men and the greater mo re particularly the demand fo r higher
wages Consequently while the accumulation o f orders is
being worked o ff the drain o f cash will continue and it will
be just as formidable to the bankers reserves notwithstandi n g
that the total o f outstanding credits does n o t appear to be
great This situation is dangerous in tw o ways ; rst that
owing to the apparently moderate amount o f outstanding
credit s the bankers may believe themselves secure at a time
when they ought to be tak i ng prompt action ; and secondly
that even i f they d o take action the e ffect will not be s o rapid
They may really have checked the funda
as they expect
mental danger o f the position in that they have e ffectively
sto pped the stream o f n e w orders from the merchants to the
m anu facturers and yet the demand fo r fresh cred its and the
drain o f cash into circulation may gO o n undim inished The
conseq uence may be a state o f panic among the bankers wh o
unaware o f the cause o f the apparent ine ffectiveness o f the
measures they have taken despair o f saving themselves from
failure re fuse credits recklessly call in existing loans regard
less o f the embarrassment o f the debtors and precipitate a
series o f bankruptcies among their customers and themselves
The fact is that there i s no golden rule fo r keep i ng the ex
tension o f credits within bounds If the bankers keep large
reserves and take early steps to sa feguard them n o t merely
when the proportion o f reserve to liabilities falls below their
conventional limit but a s soon a s trade begins to become sus
p i c i o us l y protable and i f they have the courage to avoid
panic measures even when their reserves seem to be melting
away to nothing they are likely to keep control o f the situa
tion But bankers are human and absolute security appears
to be unobtainable s o lo n g as the legal medium o f payment
is something o f which the supply i s limited o r nearly l imited
and cannot be increased at will under the stress o f a cri sis
The i ntrodu ctio n i nto a credit syste m o f a stable s tanda rd
,

'

M E T A LL I C M O N E Y

29

of

value i s a very equivocal im provement i f it means that an

ination o f credit is going to produce a pa n ic and a long list
O f failures instead o f a depreciation o f the unit o f value
It may be retorted that the danger o f a crisis arises only
from the assumed absolute limitation o f the supply o f gold
and that though the fresh supply to be obtained from the
mines at short notice is negligible in proportion to th e stock
already in existence there may be l arge stock s available in
forei gn countries
The extent to which foreign stock s can be
d rawn upon i s a matter o f importance which we shall have to
investigate presently But be fore we can use fully consider it
we m ust turn to another expedient by which it i s possible to
m ake good a shortage in the supply o f money
,

CHAPTER I I I
PAP E R M O NEY

AN D TH E

QUAN T I TY

H E O RY

I N Chapter I it was sh own t hat credit in the form o f a

banker s obligation would supply society with a mediu m o f
payment but not with a stable standard o f value In Chapter
I I we have just Shown that the u s e o f a com modity gold as
a standard o f valu e gives rise to a new s et o f problem s The
na tural practice o f the banker i s to grant credits to h i s cus
to m er s wi thout demur at the highest rate o f i nterest he can
get s hort o f deterring them from bo rrowing But so long as
the rate o f interest i s n o t deterrents o long that i s a s it does
n o t exceed the rate o f prot l ikely to be made from th eu s e of
the sum s borrowed there i s an inherent tendency o n the part
o f traders to borrow more and mo re and o f bankers t o lend
more and more This tendency works j ust a s freely as i f the
stabilising inuence o f the gold standard were no t present
u n ti l the demand fo r cash fo r circulation occasion s an actual
Shdffage in the banks gold reserves And even when this
happen s the gold standard does n o t remedy the situation
automatically ; it can only act as a warning to the bankers
that they must take some positi ve action to restrict credit If
they fail to d o s o or i f the action they take i s not e ffective
they may be brought up short by nding their vaults co m
p l et ely denuded o f cash
In such an event what i s then the remedy ? What is
wanted i s some medium the supply o f which can be increased
i f need be a t w i ll
This medium i s found in paper money
It is enacted by law that a paper document designed like a
bank note to de fy the ingenuity o f the forger shal l be legal
tender for the discharge O f a debt
Paper money resembles bank no tes in appearance and in
being a medium o f payment o f no in trinsi c value which passes
,

30

P APER M O NEY A ND QUA NT ITY TH EO RY

from

31

hand t o hand without any other formality than delivery

The two must however be care fully d istinguished In prin
ci pl e the di fference between them is cle a
r A bank note is
evid ence o f a cred it with a banker
Its value arises solely from
the banker s obl igation o f which it is as it were the title deed
If the banker fail s the note ceases to be worth its face value ;
unles s s pe cially secured it will only entitle the holder to sha re

in the banker s assets along with the other cred itors P aper
money o n the other hand derives its value from being legal
ten d er Th e debtor has the right to pay it and the creditor
i s b ound to accept it
Unless ( as occasionally happens) the
law is allowed to become inoperative the paper money cannot
fail to circulate at par
But this means at par with the money
o
f account no t w ith any physical standard o f value s uch as gold
or silver
Thus a bank note rep res ents credit ; a legal tender note is
i ts elf money
In its application nevertheless the d istinction
between them becomes uncertain While there are plenty o f
instances ( l ike the present British currency notes) o f i nd i s p ut
able paper money there a re many others where notes which have
been issued as evidence o f bank cred its have been made legal
tender I s i t in that case the document or the credit which it
represents that is really the legal means o f payment ? The
credit and th e d ocument are so in s eparably connected that it
is o ften i mpossible to say The Bank o f Engl and note is legal
ten d er in all payments above 16 5 but only so long as the bank
m aintains specie payments Here it seems clear that it is th e
bank s obligation to p ay that i s legal tender Yet the same
obl igati on i f represented no t by a promisso ry note but by a
d epo sit i s no t l egal tender
And i f a ban k with the privilege O f issuing legal tend er
no tes is allowed to suspe nd payments in cash is it still the

bank s obligation that is legal tender or i s it the paper ?

For practical purposes it is not necessa ry to settle these
The
d i f culties which are l argely matters o f legal denition
important distinction is between notes which are legal tender
and notes which are not I f t h e delivery of the document
secures the nal discharge o f a debt the question whether it
.

C U RR E N C Y A N D CRED IT

32

is the document itsel f or the credit that it represents to which

1
this virtue belongs can be le ft unanswered
Paper money i s usually used to supplement a metallic
standard Either it i s convertible on demand into specie or
it circulates alongside gold or silver money and a s both paper
and coin can be used at the debtor s choice to discharge a
debt both paper and coin have the same value in terms o f the
money o f account
But it sometimes happens that there is s o m uch paper
money in circulation that no debtor ever need u s e coin to pay
a debt I n that case anyone who wants coin can no longer
rely o n getting it by selling com modities or securities or by
calling up debts These expedients will only produce paper
and i f he wants coin he must buy it as a commodity and per
haps pay extra fo r it
If the val ues O f paper and coin are thus divorced what de
termines the value or purchasing power O f paper ? Where a
commodity s uCh as gold i s adopted as a standard it i s easy to
see that the val ue o f the monetary unit must be equal to the
value o f gold as a commodity But where the only money is
paper inconvertible into anything o f intrinsic val ue there is
no such simple answer to the question
It i s sometimes maintained that no paper money can have
any value except in virtue o f some ex p ectation o f its ultim ate
convertibility into coin Indeed inconvertible paper is O ften
a rel i c o f a pre
existing convertible issue the issuing Govern
ment having failed to maintain the convertibility o f the notes
If they are at a disco unt , as compared with their nominal
value in coin this discount it is contended measures the d i s
trust o f the credit o f the Government which has in any case
broken i ts engagements in m aking the notes inconvertible
According to this view their i m mediate convertibility on de
mand has been replaced as in the c ase o f a bank which has
suspended payme nt by a contingent and re mote convertibil ity
at some future date when the publ ic nances perm it and
.

It

ev en

con ti n ue t o
are

h ap pen s

be

s om eti m es th a t n o te s

u s ed as a

pract i cal l y paper

wh i c h h av e

ce as e d to

be

c o n ve rt i bl e

p aymen t w i th ou t b ei ng l egal tender

m o ney , th o u gh o nl y a
custo mary tend er

m ean s

of

They

PA P E R M ON E Y AN D QUA NTITY TH EORY

33

peop le accept the notes in discharge o f debts on the strength

o f this conti ngent and remote convertibility but only at a
value which allows fo r the inde nite postponement o f i ts a c
co m l i s h m e nt
I t may be admitted at once that future co n
p
vertibility into coin i s sometimes an important factor i n
determining the value o f paper money which is fo r the time
being inconvertible But that does not mean that this is an
explanation o f unive rsal or even o f general application N o t
only are there many cases where there i s p racti c al ly no ex
p ectati o n o f fu ture convertibility but even w here th i s expecta
tion does exist it probably pl ays a much less i mportant part
in xing the val ue o f the paper money than the fundam e ntal
qual ity o f being legal tender In fact there is a d emand fo r
the m ean 8 o f payment a s s u e/z and th i s d emand gives a value
to whatever i s established by law or custo m as th e mean s o f
payment q uite apart from any value it may possess fo r any
other purpose Go ld itsel f derives part o f its value from the
demand fo r it as a means o f payment
If an issue o f paper money derives a value in the market
from the prospect Of its ultimately becoming convertible into
coin and i f this value i s g r ea ter than its value as the means
O f payment it will be acq uired and held by speculators who
wish to prot by i t s convertibility when the time comes But
this i s an exceptional case o f q uite subsidiary importance in
comparison with the general question o f the determination o f
the val ue o f the legal means o f payment
To answer this
question we must discover in what manner the value o f a legal
tende r currency without intrinsic value and unsupported by
convertibil ity into anything Of intrinsic value i s determined
The same problem really ari ses in the case o f the hypo
thetical country assumed in Chapter I which h ad n o money
and used credit as the sole medium o f exchange There the
unit o f value w as something entirely arbitrary a mere arith
metical abstraction
In all the transactions into which the
unit o f value enters what requires to be measured i s the p r o
r ti on which the value o f some commodity serv i ce right o r
o
p
debt bears to so m e other To measure that proportion it
is convenient to expre ss each value as a number but the
,

CURRENCY AND CREDIT

34

choice o f a unit as the basis o f these num bers is as non

essential as the choice O f a language in which the bargains
are to be concluded In the economic li fe o f the community
the proportions to be measured are o f th e substance while
the unit in which they are measured is o f the form only
This being s o i f the whole o f the econo m ic fabric o f society
and all the transactions be supposed given to x the nu m eri
cal measure O f one value i s to determine the unit and there
fore to x the numeri cal measures o f all
N o w o ne o f the q uantities which are measurable in terms
o f the unit o f value is the aggregate o f all th e bank credits
outstanding
This aggregate which under o u r hypothesis
that no mon ey i s used i s o f cour se the same as the aggregate
may conven i e ntly
o f unspent purchasing power in circulation

be called the unspent margin

It can be arrived at either
by adding up the liabil i ties o f all the bank s o r by adding up
the cred i ts held by all their cus tomers whether depositors o r
note
holders F o r to ascertain the total o f a number o f debts
we can obtain the particul a rs eit her from the accounts o f the
debtors o r from those o f the creditors Let the unit o f value
h e settled and the numerical measure o f the unspent margin
is determ i ned Conversely i f the number o f units o f value
in the unspent margin is settled the unit o f value i s thereby
determined and the determination o f the unit o f value deter
mines all the other q uantities such as the prices o f co m
m o d i ti es and services which are measured by it
Thus we
s ee that giv e n all the economic conditions the prices o f c o m
m o d i t i e s are directly proportional to the number o f units o f
value contained in the unspent margin o f purchasing po wer
But we must beware o f reading more into this conclusion
than it really says It does not say that i f the number o f
u nits o f val ue in circulation ck a n es the prices o f com modities
g
will chan ge in exact proporti on A change in the unit o f
value i s likely to cause a number o f other chang es ( sOm e O f
which we e xamined in Chapter I ) s o that the economic co n
d i ti o n s a re no longer all given
Nor can we assume that
pri c es at two di fferent times will be exactly proportional to
the quantities o f purchasing power i n ci rcul ati on (though i f
.

'

"

H
L

"

'

economic con d itions at the t wo epo chs are very nearly i denti
cal this wi ll be nearly true
) All that we have establ ished is
th a t i f every thi ng in the economic picture be painted in save
only the numbers to be expressed in term s o f the unit o f
va lue the n since the mutual proportions o f the s e numbers
are a lready determ in ed by the economic conditions the
number o f un its in any o ne will be directly proportiona l to
the nu mber in any other and in particular the prices o f com
m o d i t i es will be proportional t o th e number o f units o f value
contained in th e aggr egate o f bank cred its o r unspent margin
S uppose now th at money i s used
Money will be subs ti
tuted fo r cred it in a certain proportion o f the transactions
A certain propo rti on o f the purchasing power in bein gthat
i s to say o f what we have called the unspent margin will be
in the form o f money instead o f bank credits The extent to
which money i s held rather than credit will be wholly deter
mine d by the convenience o f th e people and their habits and
pre fe ren ces The un spent margi n i s n ow made up o f two
parts the money in circulation and the bank cred its outstand
ing Each is ex pres sible in terms o f the unit o f value and
the proportion o f one to t he other i s determined like al l the
other proportions by the economic conditions Provided
t here fore that all the economic co nditions are give n inclu d ing
the proportion o f ba nk credits to money we in fer that all
money val ues and in particular th e prices o f com modities
are d i rectly proportional to the quantity o f money i n circula
I n the case o f a free gold currency or a paper currency
t ion
m ainta ined at a xed gold value o n e o f the given econom ic
conditions must be that the value o f gold as currency i s equal
t o its value as a com modity and this i s su f cient to determine
In the case o f a paper currency wi th no
al l the other values
xed v al ue in t erms o f gold o r any other commodity the
p rinci ple at which we have arrived show s how i ts value i s
determ ined The val ue o f the unit is i nversel y proportional
H ere we have in its simplest
to the quantity i n circulation
for m what i s call e d the Quantity Theory o f money
B ut s o l ong as this principl e is subj ect to the limitation
th at a ll other e conomic cond i tions must be given i t is
,

'

0
.

CURREN CY A ND CRED IT

36

neces sarily sterile Be fore we can make practical use o f it we

must see which o f the economic conditions are really relevant
to the determination o f the value o f the unit
The rst question to answer i s th i s how do members o f
the community settle what margin o f unspent purchasing
power they shall keep whe ther in the form o f cash or in the
form o f credit ? From the point o f view o f the individual
there are three principal purpose s fo r which reserves o f pur
chasing power have to be kept
First income and expenditure d o no t exactly k eep pace
I n the case of the we ekly wage earner they very nearly d o
keep pace ; but even he gets occasional wind falls in the shape
o f o vertime earnings or other exceptional receipts and su ffers
occasional interruptions o f earn ing power fro m illness and unem
ploym ent ; and from time to time he incurs extra expenditu re
o n furniture clothes
holidays etc The wel l to do man t e
ce i ves his i ncome at longer and someti mes at more irregular i n
te rvals he may have a xed sal ary o r dividends paid quarterly
or he may be earning pro fessi onal fees in variable amounts and
at variable times Every o ne tends to have a good deal o f
money in hand just be fore a large item o f expen d iture be
comes due or j ust a fter receiving a large item of inco m e
Secondly every one endeavours to keep a supply o f money
in hand to meet an un foreseen emergency I t i s impossible
to anticipate all the di fferent occasions for expendit ure that
may arise and there fore the prudent man s o regul ates hi s
balances o f cash o r credit that at those times ( imm ed iately
a fter large disbursements or be fore large receipts) when the
balances are lowest he stil l h as something i n hand
Thirdl y the man w h o i s saving cannot be p erpetually i n
vesting hi s savings in driblets H e lets his bal an ces accumul ate
until he can spare some considerable s u m he then inve sts all
he can without unduly depleting his balances an d starts saving
agai n The procedure is the same in the case o f the work ing
man w ho periodically puts two or three pound s in the savings
bank in the case o f the pro fessional man wh o every no w and
then invests a hund red or two ; o r in th e case o f the ri ch man
whose savings are reckoned in thousands
,

P A P E R M O N E Y AND QU A N TIT Y T H EO R Y

37

The problem of regula ting balances is somewhat di fferent

fo r a trader s business
It is a normal practice in the case o f
such a b usiness to borrow fo r short peri od s and this makes
po ssible a much nicer calculation o f b alances than in the case
o f an individual
A balance o f cash or credit is in itsel f a
o urce o f loss, since except in the case o f a deposit subj ect
to
s
notice it is earning no intere st and even a deposit subject to
n otice earns interest at less than the full rate By borrowi ng
to meet large disbursements and applying large receipts in
repayment o f borrowings a business concern can reduce this
loss o f interest to a m inimum Its power o f borrowing also
enables it to be ready fo r an un fo reseen emergency without
perpetually keeping a stock o f money o n hand fo r the purpose
As to the distribution o f the uns pent m argin o f purchasing
power betwee n cash and cre dit we have already seen that the
man rich enough to have a banking account will keep the
bulk o f h i s reserve balance in credit and only an unimportant
sum o f pocket money in cash The poor man keeps all his
reserve balance in cash except in so far as he puts it in the
savings bank and a deposit in a savings bank is rathe r an
investment than a part o f the unspent margin F o r a business
balances are kept in the form o f credit but the manu facturer has
constantly to draw o ut large sums o f cash to pay wages and
the retai ler the railway tram o r omn ibus company the collector
o f wo rking cl ass rents the theatre manager and oth ers whose r e
c e i p ts are m ainly in cash are continually paying cash into th e
banks The banks themselves keep reserves o f cash su ffi cient in
proportion to their liabilities to meet their customers demands
F o r each private individual the appropriate balance o f credit
and the appropriate balance o f cash will bear a dete rminate
proportion to his income ( no t o f course the same prop ortion
fo r different in d ividual s o r fo r the same individual at di ff erent
ti me s) F o r each business the appropriate bal an ces will l ike
wise be determ ined by conven ience but wi ll be proportional
rather to th e g ross transacti on s o r turnover than to the net
income o f the business Traders howeve r can regulate their
balances more closely Consequently their balances bear a
far smaller propo r tion to their turnover th an those o f private
.

CU RR ENC Y A N D CR EDIT

38

i ndividuals to their incomes In all cases alike the balance s

o f pu rchasing power kept in reserve are settl e d w ith a view to
the transactions to be nanced
The requirements o f the community fo r reserves o f purchas
ing power may be regarded as constituting the demand fo r
credit and money The su pply o f credit emanates from the
banks The supply o f money i s d et ermined by the legal and
administrative arrangem
ents fo r regulating the co inage and the
issue o f legal tender paper But here again the b ank s inter
vene for it i s only such part o f the avail able stock o f money
as i s i n the hands o f the public that forms part o f the unspent
margin o f purchasing power The money which fo rm s the
reserves o f the banks is excluded from the unspent margin
though o f course it is part o f the assets hel d by the banks
against the credits which compose their liabil ities and these
credits are part o f the unspent margin The unspent margin
in fact is equal to th e money in circulatio n p l u s the obl igations
o f the bank s
These obligations are equal to the assets o f the
banks l ess their capital The amo unt o f credit rises and falls
with the assets o f the banks and these assets are co mposed o f
two pa rts interest bearing assets such as loan s discounts and
investments and cash reserves If the cash rese rves are i n
creased by a return o f money from circ ulation into the banks
or i f they are diminished by the withd rawal o f money from
the banks into circulation the unspent margin is una ffected ;
all that happens i s that so much cash i s turned into credit o r
so much credit i nto cash But i f the banks increase o r d e
creas e their loans o r advances the unspent margin is increase d
or decreased by the same amount N o w the bank s undertake
to trans form cash into credit and credit into cash at the cho i ce
o f their customers
they them selves clai m no say in the matter
The choice o f their customers as between cash and credit p ro
cee d s as we have seen from the economic conditions being
determined entirely by the convenience o f the individual The
public cannot be compelled arbitrarily to increase or decrease
their hold ings o f cash they can only be induced to do s o by
modi fying the economic conditions I f the quantity o f money
i s increased or diminished the result in the fi rst instance is
.

PA P E R M ON E Y A N D Q U A N T ITY T H EO RY

39

merely to increase or diminish the cash reserves o f the banks

and it rests with the banks to deci e whether they shall make
d
an
y change in their other assets o r in their deman d liabilities
Cha ng es there fore in the unspent margin depend upon the
action o f the bank s in creating more or less credit Such
c hanges are n o t really within the purview o f the quantity
theory which deals strictly speaking with static conditions
The quantity theory in the form in which we have enunciated
it merely equates the unspent margin o f purchasi ng power
which i s a total o f monetary units to the command over wealth
which the people hold in reserve It equates in fact a total
1
o f monetar
t
units
o
a
total
f
wealth
and s o determines the
o
y
value o f the m onetary unit in terms o f wealth But i f the
theory i s to be o f any practical value its relation to changes
in economic conditions must be discovered
We have al ready examined two particular cases o f this
general question We have seen in Chapter 1 h o w the value
o f the moneta ry unit might vary wi thout limit i f credit were
the sole medium o f payment and money d id not exist With
a gold currency lim i ted i n amount we have seen in Chapter I I
ho w an expansion o f credit might exhaust the available stocks
o f cash and precipitate a crisis
N o w that we have introduced
paper money into the problem we are in a po sition to attack
the general questi on
We have j ust shown that it rests with the banks to increase
The
o r decrease the unspent margin o f purchasing power
unspent m argin is eq ual to the ca sh in circulation p l us the
assets o f the banks l ess thei r capital The assets o f the banks
are equal to thei r cash reserves p l us the amount o f their other
assets such as loans and investments Consequently the un
spent margin is equal to all the cash whether i n circulation o r
2
i n the banks p l us th e net interest bearing assets o f the bank s
Assume fo r the present that the cash rem ains unaltered
In that case the unspent margin can only be increased or
,

It d epend s
f
h
e p u rch as i ng po w er of th e i r b al an c es , but th ei r
t
i
n
s
o
t
o
e
c
t
a
p
h l ti mate l y gover n ed by th e p r i ces wh i ch r ul e i n t h e m ar et
9 Th
e as s ets h el d agai n s t th eir cap i tal bei n g e xcl ud ed
1

A poten ti a l ,

n o t an act u al ,

to ta l of wealth

on

p eopl e

ex

expec t ati o ns are

C U R R E N C Y A N D CRED I T

4o

decreased by an increase o r decrease in the net interest bearin g

assets o f the banks In other words there must be an accelera
tion or retardation o f that process which we have called the
creation o f credit the exchan g e o f immediate obligations from
the banks to the traders fo r obligations at future dates from
the traders to the banks
L e t such an acceleration or retardation o f the creat i on o f
credit occur What will be i ts e ffects ? Th e rst thing that
requires to be said about it i s that no one borrows money in
order to k eep i t idle The borrowing is done by people in
business who have del i berately rel ied o n borrowing in order
at other times to avoid keepi n g large idle balances It follows
that practically all the sums borrowed will be qui ckly paid
away So me may be paid a w ay from o ne trader to a n other
in exchange fo r goods and the vendor may apply the money
which he receives to paying o ff an existing debt B ut this is
not really the creation o f new credit at all ; it i s s i mply the
substitution o f one trader s debt for another among the b an ks
assets Apart from this shuf ing o f debts all the credit
created is created fo r the purpose o f bei ng paid away in the
form o f prots wages salaries interest rents i n fact to pro
vide the incomes o f all w ho contribute by their services o r
their property to the process o f producti on production being
taken in the widest sense to include whatever produces value
It i s fo r the expenses o f production in this wide sense that
people borro w and it is o f these payments that the expenses
o f production consist
So we reach the conclusion that an ac
1
c el er at i o n o r retardation o f the creation o f credit
means an
equal inc rease o r decrease in people s incomes
An increase or decrease in people s incomes will lead to an
increase or decrease in th eir expenditures The income and
exp enditure now in question are o f course m oney income and
m oney expenditure that is to say the number o f monetary
units ( whether in credit or in money) rece ived o r spent With
r ea l income o r actual command over wealth per unit o f time
w e are not directly concerned
-

We

ti me

ki

are spea

ng

h e re ,

o f cou rs e , of

th e am o un t o f cre d i t cr eat ed

per

u ni

P A P E R M O N E Y AND QUA N TIT Y T H EOR Y 4:

Only true income and nal expenditure are to be counted ;
expenditure o n the production or purchase of goods fo r s u bse
quent sale is to be excluded The income is to be what
a
/
man has available to spend on his own need s ; the expenditure
i s to be what he so spends
They may co nveni ently b e called

the consumers i ncome and the c onsumers outlay though

it must be understood that consumer includes investor

fo r investment is o n e o f the purp oses o n which income may
be spent
The receipts and disbursements o f the trader w h o buys o r
produces with a view to sale may be called the tr aders turn

over to distinguish them fro m the consumers income and

the consumers outlay The trader o f course gets his true
income out o f the prots o f his business and this gures in
the total o f the consumers income
If then the creation o f credit is accelerated or retarded the
consumers income i s increased o r d iminished The c on
sumers outlay will also be increased o r di minished but no t
necessarily by an equal amount The di fference between the

consumers income and the consumers outlay will represent a

c h ange in the unspent m argi n If a man spends less than he
receives h is balance o f c redit or m oney will be increased by
just that amount The unspent ma rgin consists o f two por

tions the traders balances and the co nsumers balances The

traders balances being clo sely regulated will no t be gre atly
a ffected by a change in the rate o f fabric ation o f new credit
fo r a s u m which i s perceptible in proportion to the consumers

income may be negligible in comparison with the traders

turnover The e xtent to wh i ch the consumers balances are
affected wil l depend o n the action o f the ind i viduals concern ed
A man whose income is altered over a period o f time might
make an exactly equal alteration in his expenditure o r might
make no alteration at all I n the former alternative no change
would be m ade i n h is balances in the latter the whole change
In practice his
o f his incom e would be absorbed in them
course o f condu ct will lie som ewhere between these two ex
tremes A temporary accession o f inc ome will be aecom
by
some
increase
o f expenditure ( wh ich it must be
i
e
d
a
n
p
.

'

'

C U RR EN C Y A N D C R ED I T

42

remembered includes investment ) A temporary shrinkage

o f income will be acco m panied by some reduction o f e x p e nd i
ture Balan ces will be in the rst ca se somewhat increased
in the second somewhat diminished
The presumption is however that th e change in balances
will be relatively small Where there i s an accession o f i n
come the thri fty man will tend to invest his wind fall the u n
thri fty to spe nd it
In the rst instance an apparently
temporary inc rease in earnings does not require a reconsidera
tion o f the balance to be kept in cash o r at the ba n k and such
increase as occurs is largely casual Where there is a reduction
o f income the prudent man at any rate will try to make an
equal reduction o f expenditure as soon as he can though it is
probably true that adversity reduces balances more quickly
than prosperity increases them
Speaking fo r the sake o f simplicity o f an acceleration o f
credit creation only we see then that the extra credit created
in any period l ess a negligible amount added to traders
balances is paid away as an addition to the consumers i n
come fo r that period This addition to income is appl ied to
a small extent to in creasing the consu mers balances and to
a much larger extent to swelling the consumers outlay fo r the

period But the consumers outlay repre sents the demand fo r

goods If it i s increa s ed that means that more goods are
s o ld a nd that the receipts o f the retailers and o thers who sel l
to the consumer are swollen and their stock s are encroached
upon Like other traders they are unwill ing to hold idle
balances and their additional receipts are applied either to
payi ng o ff indebtedness or to buying fresh stocks o f goo d s
In the latter altern ative the dealers from whom they buy will
probably pay o ff loans so that i t may be taken as broadly
true that the consumers outlay is applie d to paying o ff i n
d eb te d n es s
There fore the e ffect o f a n acceleration o f cred it
c reation is likely to be very largely offset by the consequent

increase i n the consumers outlay and the di sch arge o f i n

d e b te d nes s by the dealers from whom the consumers buy
But at a given level o f prices the increase in the consum ers
outlay means an increase in the consumption o f goods H o w
.

PA PE R

M O N E Y AN D QU A N T ITY T H E ORY

43

is this increased consumption to be provided for ? Up to now

we have supposed the creation o f credit to be accelerated
without inqu iring why or how The creation o f credit is in
the han d s o f the banks and i f they want traders to borrow
more they must encourage them to d o s o Trade rs borrow
to pu rchase and hold stocks o f goods o r securities and bankers
e ncourage them to increase these stocks
and so to increase
their borrowing by lowering the rate o f interest But in so
far as the e ffect o f the increased borrowing is to swell the

consumers outlay the stocks o f goods and sec urities in the

dea lers hands are depleted and further orders have to be

given to the producers to replenish them These further
orders need further loans to nance them as output expands
cred it expands and with it the consumers income and the

consumers outlay Now output cannot be increased wi thout

li m it and as the dem and fo r fresh goods presses against the
productive resources o f the community prices rise Retail
pri ces rise because stocks are being depleted and cannot be
quickly repl enished ; wholesale prices rise because producers
are besieged with orders that they cannot full As prices
rise the quantity o f credit needed to n ance a given con s ign
ment o f goods increases in pro portion and the creation o f
cred it is still further accelerated
Now the greater the proportion o f the additional credit
that goes to swell the consum ers outlay and the les s the p ro

portion that is added to the con sumers b alances the greater

will al l these effects be A superci al interpretation o f the
quantity theory wou l d lead u s to lay all the stress on balances
and to say that prices ought to increase in propor tion to the
unspent margi r i i e to the quantity o f credit and money in
B u t now we see that the more
the han d s o f
of
sl ow ly th i s quanti ty increases the greater will be the rise
s
l
ng
as the acceleration o f the creation o f credit
o
o
r
i
c
e
s
p
ed when the banks
When
the
process
i
s
complet
e
s
e
t
n
u
.
g n i
n o longer seek to encourage borrowers an d the credit created
no longer exceeds the credi t extingu i shed then the unspent
margin wi ll again become the measure o f p rices If eq u i l i
bri u m supervenes and the economic condition s that existed
,

'

"

C U R R E NC Y AN D C R E D I T

44

be fore the d isturbance are approximately repro d uce d it will

then be approximately true that prices and all mo ney val ues
will have changed in proportion to the quantity o f purchasing
power ( though this i s in any case subject to the qualication
that some money values are absolutely xed either fo r a period
such as debenture intere st rents etc and
o r in perpetuity
others are xed by custom )
In the same way when the creation o f credit is retard ed
the more slowly the unspent margin con tracts the greater will
be the fall o f prices To make this rather intricate part o f the
subject clear it will be well to sum up the resul ts at w hich we
have j ust arrived 1 The consumers income rises and fall s
with the amount o f new credit created the consumers outlay
with the consumers income ; the credit extinguished with the
consumers outlay But the changes in these several quantities
do not exactly keep pace The difference be tween any two o f
them represents a change in balances The change in the
trad ers balances due to a discrepancy between the changes in
the new credit created and the consumers income or between
the changes in the consumers outlay and the credit extinguished

is likel y to be small The change in the consu mers balances

may be relatively considerable since they have not the same
facilities as traders fo r econom ising balances
M oney is borrowed fo r production and a change in the rate
o f creation o f new credit is in the rs t instance a sign o f a corre
s p o nd i ng change in the rate o f production o f wealth
But o ut
put cannot be increa sed and will not be decrea sed indenitely
An increas e o r decrease in the orders to producers is quickly
reected in an increase or decrease o f wholesale prices
The consumers outlay in being applied to the extinction

o f traders indebtedness prod u ces a d epletio n o f t rad e r sxtgc k s

The volume o f new orders to the producers rises and fall s with
the rate o f depletion o f these stocks and the amount o f new
credit created rises and falls with the volume of new or d ers
a nd the general level o f prices
Th us is the cycle completed
The banks take measures to expand or contract credit as the
,

'

sult s

S ee
in

al s o th e note at th e end o f t h i s

al gebrai c notati o n .

Chapt er for

a s tatem ent of th es e re

P A PE R M ON E Y AN D QU AN T IT Y T H E ORY

45

case m ay be F rom the point o f view o f the tra der borrowing

is an incident o f the process o f holding stocks o f goods
whether in course o f manu facture o r in transit or awaitin g
sale I f he i s induced to borrow either more o r less this
really means th at he is induce d to hold greater or smaller
stocks But when he takes steps to adjust his stocks and his
indebte d ness by giving greater o r smaller orders the cycle o f
changes is started and the e ffect o n stocks and indebtedness
o n the whole is limited to the d z erenee between the change

e ffected in the amount o f credit created at one end and the

change in th e amount o f cred it extinguished at the other
a fter this credit has circulated through the various stages
which we have seen This d i fference is the comparatively
small a mount which i s wayla i d and le ft behind in balances
The bank er sees the whole p rocess from the point o f view o f
his balance sheet H e sees the credit expansion or co ntrac
tion begin in th e appl ications fo r loans ; a fter a short interval
he sees it to a great extent o ffset by a simil ar change in the
repayment o f loans The change in the bank credits which
make up his liabilities is equal to the change in the loans
which m ake up his assets The choice as to h o w much o f the
new credit create d shall be kept in balances ( whether as mon ey
or as credit) and how m uch spent res ts entirely w ith the con
sumers themselves
Upholders o f the quantity theory o f money have some
times been led to argue that prices ought to rise and fall reg
The
ula rly with the quantity o f money and credit in being
theo ry has been as o ften attacked on the ground that ex p eri
ence shows us ma ny examples o f price s rising when the
quantity o f credit and money fall s and v i ce vers a The argu
ments o n both sides betray a misc o nception o f the theory It
is indee d so metimes the case that when prices show a marked
rise there i s not at any rate a proportionate increase in the
bankers liabilities whether deposits o r note issues That oc
curs at one o f these transition periods when credit is expand
ing F l uc tuati n g i ncomes whether derived from wages or
prots dividend s o r fees are swollen by the ood o f new
cred it b ut the bal ances retained in hand by the reci pi ents o f
.

'

'

C URRE N CY AN D CRED IT

46

these incomes are not immediately increased up to the propor

tion to which they would approxi mate with the same in comes
in a state o f equilibrium Thus i L is qnly at
bri gg when the q uantity o f credit and money in circulation I s
neither increasing nor d ec reasing that the relation o f
an e mones! values to that q uan ti tx o f s r s si t and mo u r n Ed s
term i ned by the i II d i vi d u a l s considered choice o f the bala nce
o f purchasing power a ppropriate to his income
At all other
time s one o f the mo st important o f the economic con d itions
which the quantity theory takes to be given will be an ac
i ce l e rati on or retardation in the creation o f credit
I n practice
it seldom perhap s never happen s that a state o f equil ibrium
is actually reached A period o f expanding or contracting
credit when it comes to an end leaves behind i t a legacy o f
adjustmen ts and be fore these are hal f completed a new move
ment h as probably already set in There fore when d rawing
guidance from the quantity theory in the examination o f actual
conditions we m ust beware o f as suming too easi ly that in a
country where e conomic organisation has rem ained s ub stanti
ally unchanged prices will go up and down in strict pro
portion to the quantity of purchasi ng power in circulation
Be fore mak ing any such assumption we must rst ascertain
whether credit is expanding or contracting
In o n e respect however this tell s rather fo r than agains t
su ch practical applications o f the quantity theory ; fo r at any
rate we may be sure that when the quantity o f purchasing
power in circulation increases o r diminishes the corresponding
changes in prices and other money val ues d o not lag behind
It must be clearly understood that such applications o f
the quantity theory do not come wi thin th e four corners o f
the theory itsel f That theory is not in strictness conc erned
with vary ing conditions at all but merely with the d eter mi na
tion o f the value of the monetary unit when a ll o ther w
d i t i o n s are xed
B u t there i s a form o f the quantity theory
which i s s o devised as to take account o f changing con d i tions
According to this the quantity o f purchasing power in cir
culation is only o ne among several facto rs the others being
the average rapidity o f circulation o f money and cred it and
.

"

"

P A P E R M ON E Y A N D QUANT ITY TH EO RY

47

the volume o f tran sactions ; Over any period o f t ime the total
quantity o f credit and money multiplied by the average
number o f times every unit o f credit o r money has changed
hands in the course o f business must necessarily be equal to
the total value o f all the transactions in which credit o r money
has passed
H ere we have a formula which is applicable
without reservation to varying conditions
It is subject
however to the disadvantage that some o f the quantities it
employs are not themselves o f any separate importance in
economics
Among the transactions i n which money has
passed are many into which the use o f money o r bank credits
enters quite capriciously It is a matter o f chance whether a
particular purchase o f goods or securities i s paid fo r by cheq ue
o r by way o f a book credit and i f it is paid fo r by the latter
method the debtor may fo r the moment actually keep a larger
balance at his bank by reason o f the undischarged liability
than would otherwise be needed In the aggregate o f trans
actions the gross total o f business transactions where goods
or sec urities are bought in order to be sold again will count
fo r enormously more than the expenditure o f the private i n
dividual
The disbursements o f the private individual are
made o u t o f his income The turn over o f the trad er m ay be
many times greater than his income and hi s bank bal ance i s
far smaller in proportion to hi s turn over
Thus the total o f
transactions fo r th e purpose o f this version o f the q uantity
theory is arrived at by adding together tw o quantities the
Consumers income and the traders turn over which fo r other
purposes are to tally unl ike The traders turn over counts fo r
far more in the total than its actual share in determining the
quantity o f purchasing power in circulation would j usti fy and
1
f
n
d
its amount is a ffected by capricious a uncertain actors
And the rapid ity o f circulation o f money o r c redit i s n o t
a phenomenon which enters directly into anyone s experience
The b es t way to estimate the rapidity o f circulation o f a man s
,

quan ti ty th eory i n th i s form , Prof Ke mm erer n ds th at

o n ey
w ages repr es en t o nly 3 per c e nt o f th e t otal o f m oney tr an s a ct i o ns (

r
a
l
r
i
c
en e
P es , p 1 3 6
Pr o f
n s tru m e nts i n th ei r R el ati o n to
and C re di t
1

In

appl yi n g

th e

Irvi n g F i sh

Wages

er acc e p ts th e s am e es t i m at e

w ould pr o babl y be

near ly

hal f th e

P urch as i ng P ow er of M on ey

c o ns u m ers

i ncome

p,

CURREN CY AN D

48

C R ED IT

money is to calcul ate the proport ion o f his total payments in

any period o f time to the average balance held by him during
that period H is balance is a matter o f practical moment to
him ; he has to devote some care and thought to regulating
it ; consequently we can tell what circumstances and what
motives are likely to a ffect it and how ; whereas i f any cir
cu m s t ances affect the rapidity o f circulation o f money it can
only be indirectly by affecting balances
There fore l ittle is gained by introducing these two factors
the total money transactions and the rapidity o f circulation
into the quantity theory I t is better to l imit the rigorous
theory to the bare arithmetical relation between the unit o f
value and the quantities measured by it and to approach the
more complex problem presented by the variation o f the
economic condition s from th e stand point o f the inuences
which may a ffect balances o f cash o r credit
We have been assuming that cash and credit may be
tre ated merely as di fferent but interchangeable forms o f pur
chasing power P ractically all the purchasing power comes
into existence in the form o f credit and though it may be
transmuted into cash in its passage through the hands either
o f poor men who have no banking account or o f rich men
who require pocket money it resumes the form o f credit to be
extinguished Nevertheless whi le the circulation o f money i s
thu s dependent on the circulation of credit there i s a sense in
which it i s the circulation o f credit which is determined by
the circulation o f money
Credit implies the liability o f
banks to pay money o n demand and the banks must maintain
reserves o f cash to ensure that they shall always be able to
discharge this liability As has already been mentioned it is
the general practice o f banks to aim at maintaining their cash
reserves in a xed proportion to their demand liabili ti es and
this practice o perates to limit the amount o f dred i t created to
that for which the cash in circulation will be suffi cient to
If the bank s create credit in
provide the proper reserves
excess o f th i s limit not only do their existing reserves cease
to bear the usual proportion to their d emand liabilities b ut as
the extra credit passes into circulation stimulating trade and
.

,
,

PA PE R M ON E Y A N D Q U A NTITY T H E O RY

49

d riving up prices more cash passes into circulation too and the
reserves are not only relatively but absolutely diminished And
at a time when the reserves are in the requisite proportion i f the
supply o f cash is d iminished fo r example by the withdrawal and
cancellation o f a cer tain amount o f legal tender paper the p ro
portion will be disturbed and the banks i f they are to restore
it must restrict the creation o f credit Such a withdrawal o f
currency will in the rst instance a ffect only the bank reserves
si nc e the customers o f the banks have the right to d raw out as
much cash as they please wi thin the li mits o f their credits and
the requirements o f the public for cash only change gradually
The note issu in g authority which regulates the supply o f
legal tender paper m oney i s really dependent upon the control
o f cre d it fo r passing the notes into circulation
I t may i n
crease o r di m inish the supply o f paper money but the quantity
in the hands o f the public and the value o f the moneta ry uni t
will be l ittle aff ected unless the banks proceed to increase o r
d i m inish the supply o f credit O f course s o long as the bank s
adhere to the recognised practice of preserving a xed p ro
portion between their cash reserves and thei r liabilities th ey
wi ll alway s tend to take the appropri ate action But they
may no t choose in all circumstances to observe this practice
o r t hey may fail to carr
Th e note issuing
y it o u t eff ectively
authority can d o l ittle more than give them the signal to ex
pan d o r contract credit and must rely o n them to take the
3 i ssue
1 h? 9 12
necessary measures
It i s
which d irectly affects th e va lue o f t he mone tary unit
The note issuin g authority may o f course be a Government
d irectly de fraying its own l iabilities with notes fresh from the
printing press When rst issued they swell the consumers
i ncome exactly like s o much credit created by the banks fo r
the nee ds o f commerce A nd i t may be that the banking
system i s so little developed that the notes d o no t come back
to the banks as they are spent I f the traders who sell to the
note holders keep their cash in the fo rm o f notes in their
strong boxes rather than in the form o f bank credits the notes
accumulate i n the s e strong boxes The traders spend them
d away agai n
o n replenish ing their stocks and s o they get pai
,

C U RR E N C Y AN D C R E D I T

50

to those engaged in production w ithout ever passi ng through

the banks The paper money once issued circul ates and cir
cu l ates with su fcient rapidity to maintain the appropriate
increase o f prices Under such a system there i s no provision
fo r withdrawing notes unless the Government sets to work t o
raise the necessary sums from the public by taxe s or loans
F o r this reason it has usually been found convenient to combine
the control o f a paper currency with some national control
The best organ o f Government fo r
lover the supply o f credit
this purpose is a State Bank o r else a central bank which
while n o t itsel f a part o f the Executive Govern ment is willing
regularly to co operate with it Such a bank can regulate the
paper currency o n bank i ng pr i ncip l es It will have a balance
bank i ts l iab ilities including
sheet like that o f
( along with ordina ry deposits) the legal tender notes issued
while its assets apart from its gold reserves wil l consist
chiey o f short perio d loans Day by day notes will be issued
(just as credits are created ) by way o f advances to traders and
others and day by day notes will be returned from circulation
in payment o f past advances By encouraging or d iscouraging
borrowers and especially by varying the rate o f interest the
central bank can expand o r contract the stream o f fresh notes
I f it increases i ts advances so that both sides o f its balance
sheet are increased the additional notes issued in so far as
they are no t immediately needed for ci rculation go to swell
the cash reserves o f the other banks If it contracts its ad
vances the additional notes withdrawn in s o far as they are
n o t extracted from ci rculation
are taken out o f the other
bank s cash reserves The fact that bank s mu st maintain
adeq uate reserves o f legal tender money to ensure th at they
can meet their demand liabil i ti es while legal tender money
can in the last resort be obtained only by borrowing from the
central bank gives the central bank great power o f control
over credit The market rate o f interest will always tend to
approximate to the rate charged by the central bank the

bank rate as it i s called The market rate can never be

appreciably higher than the bank rate fo r a borrower o f given
standing fo r otherwise borrowers woul d all have recou rse to
,

'

P A P E R MO N E Y A ND QUA NTITY TH EO RY

51

the central ba nk which can give them legal tender money

while the other banks will only give them credit based o n the
same l eg al tender money
The bank rate may no doubt be appreciably higher than
the market rate for a time i f i t happens that there is more
legal tender money in circulation than the circumstance s re
quire In that case the banks would nd themselves with
l arger cash reserves than they think necessary to suppo rt their
demand liabilities and woul d tend to o ffer loans at low rates
B ut even so there would be little o r no borrowing fro mthe
central bank and there would be a steady diminution in the
legal tender notes in circul ation as loans and bills matured
till at last the other banks would nd their reserves falling
short and would be driven to borro w from the central bank
t o replenish them
When the cash reserves o n which the
'
ba nks credit operations are built up are all borrowed at bank
rate from the central bank the market rate will not be far
below the bank rate If the central bank wishes to force up
the market rate ( in order perhaps to restrict a tendency to
create excessive cred its) it can come itsel f into the market as
a borrower By b orrowing at the market rate it can withdraw
as much legal tender money as it pleases from the other banks
and they m ust either raise the market rate at least to a level with
the bank rate or else run the risk o f having to borrow back
at the bank rate what t hey have lent at a lower rate In
practice under this system the lending operations o f the
central bank take the form chiey o f loans to the other banks
indeed the regulations under which the central banks o f some
countries lend requiring the endorsement o f a banker o r sub
practically l imit
s t an ti al nancial house as a s i n e qu a n on
them to this
I t is o b vi gus that a central bank which
advances to the other banks at what rate o f interest it
pleases the cash necessary to provide their reserves holds a
very commanding position Especially is thi s s o in a count ry
where deposit banking is n o t developed to its fullest extent
and where as in most countrie s o n the continent o f Europe
Cheques are l ittle used except fo r large payments between
bu s iness men In such conditions many o f the traders wh o
,

,
,

C U RR E N C Y

52

AND

C R ED I T

borrow from the ordinary banks want legal tender notes and
fo r them the ban ks will act practically as intermed iaries fo r the
purpose o f obtaining advances from the central bank Thus
the credit operations o f the c entral bank form a very sub
s tan t i al part o f those o f the whole country
We can no w s ee what are the essential factors in the
regulation o f a paper currency Its value dep ends o n the
quantity issued Th e greater the number o f monetary units
in circulation the less other things being equal wil l be the
value o r purchasing power o f the u nit An increase or de
crease i n the amount in circulation has as we have seen
many complex reactions besides the tendency to produce an
inversely proportional change in the value o f the unit but
whatever allowance h as to be made fo r these reactions we
can still s ay that except s o fa r as the issue o f paper money
i s regulated and limited the val ue o f the m onetary unit is
j ust as liable to be indenitely depreciated as under a rgime
o f pure credit unsupported by money
The only e ffective method o f controlling the i ssues o f
paper money is to control the creation o f credit fo r the de
mand fo r legal tender money fo r circulation is consequential
upon the supply o f credit H ence the need fo r a central bank
I nevitably a central bank with a monopoly o f a
o f i ssue
legal tender note issu emust be subject to care fully devised
legal o r at any rate administrative restraints Indeed it goes
without saying that the sole right o f manu facturing the
mediu m in which debts may be law fully discharged cannot
be lig htly handed over to a private institution or even to a
State Bank The actual l imitations i mposed on this right
must be s o devised as to guard the community against the
various disorders which may arise from an imperfect standard
o f value o r medium o f payme n
t At the present stage how
ever we are hardly ready to consider in detail the di fferent
k inds o f lim itation s to which the right o f issuing legal tender
notes may be subject Be fore we can do s o we must deal
with the foreign exchanges a subject o f the utmost impor
tance in the theory o f credit and currency
,

C H A P TE R

N O TE TO

III

Th e

rel ation s b etween the rate of creation o f cred i t th e co n

sumers inco m e an d o utlay an d the u nspent margin are so intricate

that so m e read ers will nd the m eas i er to und erstan d i f algeb raic
s ymbols are u se d
S uppose a state o f monetary e quilibriu m in which cre d it i s b eing
created and extin gui she d at e xactly equal rates and th e c ons um ers
inco m e and cons u m e rs outlay are al so e qual L e t A b e th e am o unt
eated per unit o f ti m e an d B th e cons ti mers Inco m e
o f cre d it cr
L et M be th e un s pent margin an d l e t T an d C b e th e p ortio ns
o f it in the han d s o f trad ers and con s u m ers resp e ctivel y so th at
,

a an d l et th e c onsu m ers i n
increased to A
c o m e b e co me B
b, the con s u m e rs outl ay (h itherto eq ual to B )
a
B
an d th e c re d i t extingui s hed (hith e rto eq u al to A) A
If al l th e add iti on al cred it it were paid away th e c on s u mers
i n c om e would be B
a
Th e d i fferen ce between a and b i s ao
c oun ted fo r by the su m wh ich trad ers borro w but d o n o t pay a way
After a n i n te rva l
and which is there fore add ed to the ir b al an c es
Th e co n su mers
at
o f ti m e t the credit cre ated wi ll h ave b een A t
re ceipts will have b een B ! M Trad ers bal ances w ill have b een
b
rai sed fro m T to T a t t Th e co ns um ers o utl ay i s B
an d the ir balanc e s will have
i n ti m e r they wi l l have sp en t B !
been inc reas ed b y 5 ! l and will s tan d at C + (bt b t ) The
traders wi ll have rece ived B t
fro m th e c on s u m ers an d w i ll
'
a t
Th ei r
ss to the am o unt o f A l
have di scharged indebted n e
an d
will
of f
balan ces will have been further increased by
s tand at

N ext l et A be

'

T +
Th e

consu m ers

balanCes

'

bl

a re

C 4 t

Conse quently the un spent

these two is

m argin

as

who l e,

C
or

at

at

53

d
'
d

'

l,

b eing

th e

su m

of

CURRENCY AND C REDIT

54

In fact as must obviously be the case the unspent m argin is i n

creased by the excess of credit created over cred it exti ngui she d
N ext we pass to th e co n se q uential changes in prod uction and
c on s u mpti on We take the prod uction an d consumption o f wea lth
each to be e qual in th e rs t i nsta nce to X
Th i s i s a q ua n ti ty of
wealth p er unit o f ti me (rather an arti cial conception inasm uch as
there i s no o ne unit of quantity applicable to all form s o f wealth)
N ow
I f P be the average o f pri ces P X is the m on ey value o f X
PX
B since all incom es may be assu med to ari s e from prod uc
tion whether they are th e reward o f services or fees pai d by way of
i nterest or rent for th e u se o f pro perty and all c o sts o f prod uction

are s o meo ne s inc ome

It may be supposed that th e increase in credit created fro m A
to A
a i s for th e purpos e o f i n creasin
g sto cks of good s
L et productio n be incre ased fro m X to X
x
Then i f pri ces
have no t yet risen we have
b
P (X
x)
B
,

an d
'

'

consu mers outl ay B

th en X x
b
P (X
represents the quantity o f wealth co n su med in unit ti m e In ti m e t
'
the s to ck s of go od s will have b een increased by (x
x t
If S be
)
th e o riginal stock s this will have be en raised to S
xt
x l
Th e
value of the stocks will have been rai sed from P S to P S
t
Px t
I f th e

or

PS

5!

Trad e rs

'

ind ebted ness has increased by a t a t while the value

o f the ir sto ck s has increa sed b
a t
bt
The d ie ren ce (a t
y at
)
i s the am ount by which traders bal a nces have increas ed ;
(t
it i s in fact th e extra amount which they have borrowed but have not
s p ent
I t i s probably s mal l an d m ight be ni l s ince p eo pl e d o n ot
borr ow m oney to keep it i d l e
B u t p resu mabl y pro d uction cann ot be raised from X to X
x
w itho ut o eri ng som e ind ucem ent in th e shape o f increased p r ices
t o th e pro duc ers
If price s ri s e to P
p then
,

'

B + b =

(P

[X

5 = pX
6

'

b =

(P

1) ) x

+
+

p)

(x

Trad e rs

increase their b orrowing from A to A a in ord er to

increase their stock s The actual effect on their stocks i s d i minished
because ( I ) when they spend an add itional amount 6, on prod uction ,
.

N OTE TO C H APTE R 111

55

expendi ture of the peopl e wh o re ceive this sum is increased b y

b an d the net i ncrea se in sto cks is onl y to th e value o f b
b an d
( 2 ) the pressure of t he ad d iti o nal ord ers upon the productive re
so urces o i th e country tak e s eff e ct onl
y partiall y in an increase o f
output fro m X to X x and fo r the rest spen d s itsel f in an i ncrease
of prices from P to P
Th e actual increase i n stocks i n ti m e t
p
th e

is

h r o e only

t e ef r
an d

If

thi s

i s sm all , i f 6

is not

m uch

l ess than

'

if p

is considerable the d esire o f traders to i ncrease the ir

sto cks is proporti on ately unsatis ed an d th e o w of new ord ers i s
propo rtionatel y m ai ntain ed
B u t n o w that pri ces h ave been ra ise d to P
p it i s necessary t o
borrow m ore m erely to m aintai n the o l d rate of output X In ord er to
ma in ta i n th e n ew rate o f output X x the rate of creation of n e w cred i t
m us t be suf cient to provid e expense s o f pro d uction to the amo unt o f
(P p ) (X
Th e increase of prices i s i m m e d iatel y d ue to the pressure o f the
deal ers d emands on the prod ucers a p ress ure which will continu e so
l o ng as the d esire o f th e deal ers to obtain a dd iti onal stock s rem ai n s
unsati s ed This desi re it i s hard ly possibl e to measure by any p re
A fall i n th e rate of inte rest o r a
cis e mathematical formula
prosp ect of ri sing prices ind uces trad ers to add to their sto ck s ; a
rise in the rate of interest o r a pro spect of falling prices i n d uces
them to let th eir stocks ru n d own In so far as th e augmentati on
o f cred it spends its el f in an incr ease o f prices inste ad o f an i n creas e
o f pro ducti on and in so far as con s u mption k eeps pac e with pro d uc
tion the in d ucement to go on mak i ng de mand s on the pro d ucers
co ntinues unabated and m ay even be sti m ulated
Th e check to this pr o cess o f exp ansion of course co m es from
Th e assets o f the bank s are co mpo sed of l oan s bills an d
the bank s
investments L and cash R If their li abiliti es be D then
their capital which we may suppose xed
D
L
R
Th e effe ct o f th e increased creation o f credit i s to rai se b oth 1
'
I f P b e th e am o unt of l egal ten der mo n ey i n
d x
an d D b y at
the country o f which F R i s i n circulati on th e unspent m argi n

a t
f

a
F
R
t
o
D
hi
i
se
d
+
ra
+
=
T
s
i
s
R
M
D + F
B u t as the un spent margin incre as e s th e p orti on o f it h eld in th e
Suppose that it increas es
form of money will tend al s o to i n cre ase

at
a t
It and thei r
by h
Then th e banks liabilitie s are D
reserves o f cash are R It H e re I: is of course l ess than a t a t
es
up
o rted b
s
ll
r
r
serv
e
m
a
e
e
s
r
a
a
s
ther
ore
l
r
er
li
b
liti
a
i
e
y
and
ef
p
g

5,

C HAPTER IV
T H E FO R

E I G N E XCH A N G E S

WE have seen that the medium

payment used i n the larger

transactions o f trade is no t money but credit C redit only
requires to be trans form e d into legal tender money fo r the
paym ent o f wages or fo r making small retail p urchases pay
ing railway fares etc Though in law a debt i s payable in
mon ey, in pract i ce all debts o f any i mportance gravitate to
the bankers books where instead o f being paid in money
the y are fo r the most part set o ff against one another The
process is a simple one where debtors and credito rs are cus
it is a simple one still w
here debtors
to m ers o f the same bank
and creditors deal with di fferent banks which settle through
But where debtors and c reditors
th e same clearing house
deal with ba nks in di fferent countries having di fferent cur
re n c i es
the me chanism o f settlement becomes exceedingly
complicated
Ra w material s may be produced in o ne cou n try sent fo r
the rst stages o f m anu facture to a second completed in a
third carried in the ships o f a fourth to a wholesale dealer i n
a fth and perhaps passed o n by him to yet another be fore
the nal pro duct reaches the consumer All the people who
have handled the goods worked upon the m carried them
bought them and sold them must receive thei r remuneration
o r their prot
Their rem uneration and their prot must
somehow o r other be provided fro m the payments received
from the consumer
But everyone concerned wants to receive
the sum due to him in h i s own country where his li abil ities
are due ; it is no use to anyone to be given a credit in the
country where the goods were ultimately sold i f he does n o t
live there ; be fore such a credit can meet his needs it mu st be
exchan ged fo r a cred it in his own country

of

T H E F O RE I G N E XC H AN GES

57

The trader whose b usiness i s carrie d o n entirely in h i s

o wn country n ds th a t he is the d ebtor
o f some o f his fellow
countrymen and the creditor o f others If he dra ws cheques
in favour o f the former and receives cheques drawn in his
favour by the l atter all h i s debts and cred its becom e an a ffair
between himsel f and hi s banker and they are reduce d down
in to a ne t credit o r d ebit balance Fo r this simpli cation it
i s essential that the d eb ts and cred its should be ho m og eneous
they mu s t be reckone d in the same unit A debt for forty
s hillings can be set o ff against a debt fo r
2 because a sh illing
merely mean s o ne twentieth o f 1 A n undertak ing to de
liver 1 00 k ilogrammes o f gold can be set o ff against an under
taking to deliver 3 2 1 5 02 3 Troy because th ese are equal
weights o f th e same com modity B ut an undertaking to
d elive r ,6
i n Exchequer Bon d s cann ot be set o ff against
a d ebt o f
u ntil the value o f a bond in cash has been
s ettle d by a bargain between the parties N o r can 1 000 0 2 5
o f gol d at Capetown be set o ff agai nst 1 000 o z s o f g o ld in
Lon d on except by such a bargain Gol d at Capetown is not
the same thing as gol d in London any more than cotton at
New O rleans i s the same thing as cotton at Liverpool
Debts in di fferent countries are as heterogeneous as co m
in Cap etown is
mod i ti es in di fferent countries ;
so me thing quite d i fferent from 6 I
in London The fact
t hat each is tran s formable into precisely the same quantity o f
g ol d and that the gold can be sent at moderate expense
fro m either place to the other does not alter this though it
kee ps the variatio ns o f the val ue o f either debt in terms o f
A credit in Capetown is the
the o ther within narro w limits
means o f m aking payments in South A frica ; a credit in
London is the means o f mak ing payments in England Each
c redit there fore gives a command over wealth in the region
where it is d ue This is the real basis o f its value ; converti
bi li ty in to gol d i s merely a device a d opted to steady the pur
cha s ing power o f the monetary uni t
To provi d e the facilities nee ded for e ffecting settlements
amon g t raders w ho hav e become posses sed o f credits in
f
d
al
ers i n wha t i s
cla
s
o
s
i
r
o
n
ries
h
r
e
is
s
ff
t
e
e
n
x
t
t
e
a
t
d ee cu
,
.

CURRENCY A N D CRED I T

58

called foreign exchange

I n th e foreign exchange mark et
are settled the term s 0n which credits in o ne country are to
be exchanged for credits in another The dealers must have
establishments in each o f the centres at whi ch they deal A
dealer who i s not himsel f a banker will keep a credit balance
at some bank at each centre People who want to rem it
money that i s to say to obtain a credit in one o f these places
in exchange fo r a credit i n another will pay over the credit
into h i s account at the latter p lace and he will pay o u t the
stipulated equivalent from his account at the former At
each centre his balance will be increased o r di m inished ac
cording as the remittances from it are greater or less than the
rem ittances to it If the exchange dealer is him sel f a banker
he can cr ea te credits i n favour o f those who wis h to remi t to
any centre and his demand liabilities wil l be increased or
diminished according a s the remittances to the centre are
greater o r less than the remittances f r om it
Wh ether he is a banker o r no t he wil l be unwil ling to
let an inequality of remittances continue indenitely If he
is a banker he will no t want his demand l iabilities in any place
to grow out o f proportion to his assets real isable in the same
pl ace If he i s n o t he wil l not want his credit balances at
any o f his places o f business to be either i nco nveni ently d e
p l eted o r inconven iently swollen
Now between any two centres the dema nd fo r remittances
in o ne direction constitutes the s upp ly o f the means o f rem it
ting i n the o ther A disparity between them is simply a sign
that supply and demand no longer balance I n this as in all
other trades a failure o f eq uilibrium between supply an d de
mand is corrected by an adjustment o f price If the exchange
dealers are receiving greater sums than they pay at any centre
they o ffer less in other centres i n exchange for a credit there ;
i f they are paying greater sum s than they receive th ey o ffe r
more In other words in the former case having too m uch
credit in the centre in question they make it cheaper in terms
o f forei gn currencies
; in the latter having too little they
make it dearer When the val ue o f the monetary unit i n
forei gn curren cies falls, th e e xchanges are s ai d to b eco me
~

TH E FO RE I GN EXC H AN GES

f
un avou ra bl e ;

favou rable

59

when it ri ses they are said to become

,

I t would seem to follow and in a sense it i s true that the

foreign exchanges are determined by the demand and supply
fo r rem ittances
If as the result o f th e economic relations
between two countries there is an uncovered balance o f i a
debtedness d ue from o n e to the other there will be a demand
fo r remittances from the debtor nation to the other in excess
o f the demand fo r remittances in the opposite di rection and
the exch an
ge will become un favourable to it The whole
theory o f the foreign exchanges i s commonly explained by
re ference to this fact I n reality however it is not an alto
gether sat i s factory account o f the matter In any kind o f
market movements o f price are determined by the state o f
s upply and demand
If prices rise that is because the supply
falls short o f the demand ; i f they fall that is because the
dem and fal l s sho rt o f the supply Th e level towards which
pri ces al ways gravitate is that at whic h supply and demand
are equal But when we come to examine any particular
market this general la w tells us very little about h o w the
eq uilibrium price is determined The excess or deciency o f
the supply as co mpared with the demand is merely a sy mp tom
o f a maladj ustment o f price ; it is no more than evidence that
the price is to o high or to o l o w And this is true o f the
foreign exchange market
If there is an excess o f remittances
in o n e direction over rem ittances in the other that is a sign
that the rate o f exchange i s no t at the equilibrium point but
this does no t throw any light o n the conditio n s which deter
mine where the eq uilibrium po int is
far as readily transportable commodities are concerned
,S o
all the di fferent countries o f the world form a single market
The buying capacity o f each country consi sts o f its consumers
outlay But each country o f course reckons its co n sumers
outlay i n its own currency and in order to measure the
country s purchasing power in the world s markets its cur
The
re n cy m ust be expressed in ter ms o f foreign currencies
purchas i ng power o f a given consumers o utlay in the world s
o the forei n e x chan es.
directl
ro
ortio
al
t
n
ar
et
w
ll
i
b
k
e
s
m
g
g
yp p
,

'

60

CURREN CY AN D CREDIT

The more favourable the exchanges the greater wil l be the

share o f wealth acquired by a given consumers outlay Or
to put the same thing in another way the greater the value
o f the consumers
outlay in terms o f foreign currencies the
more attractive will be the market o ffered by the country to
foreign goods
But the share to which the country is enti tl ed in the
world s markets i s measured by th e products which it co n
tributes The value o f those products in foreign currencies
will be determined by world prices and their value in the
home currency will be i nver s ely proportion al to the foreign
exchanges The more favourable the exchanges the l es s wil l
1
be the value o f the country s products in its o w n currency
It i s easy to see there fore that i f the exchanges are m ore
favourable than the circumstances justi fy a disparity will be
caused between the co untry s purchases and sal es i n foreign
m a r k e t s and there will be a balance o f indebtedness to be
d i scharged And in the same way i f the exchanges are um
du ly un favourable there wil l be a b al ance o f indebtedness
from abroad
The rate o f exchange which wil l j ust ma i ntain
equilibrium is that multiplier which will make the purchasing
power o f the consumers outlay precisely e qual to the world
val ue o f the country s products I t follows that any change
in the consumers outlay should ( other things being equal )
produce an inversely p roportional change in the exchanges
I t also follows that any change in the country s productive
ness o r in the world value o f its products sh ould produce a
corresponding change ezz/zer in the consumers outlay or in
the exchanges
The foregoing exposition is subject to an im portant co r
rection
It is n o t only the liabilities in respect o f the export
and import o f physical products that have to be settled
through the foreign exchanges The equilibrium required is
in respect o f al l liabilities from whatever transactions they
may arise They may arise from services rendered brokers
or agents may be employed in one country o n the business o f
Thi s i o nl y t e o f p o d uct s w h i ch h ave an i n te nati on al mar k e t i a th o e
,

'

whi ch

are read il

ru

trans

por tabl e

TH E

FO RE I GN EX CH ANGES

61

another ; the ship s o f o ne count ry may carry goods fo r the

m erchants o f another Liabilities may arise from past invest
ments ; the capitalists o f o ne count ry may possess property o r
secur ities in another and may be entitled to draw interest
rents prots dividends etc there from And new invest
ments create liabilities from the lenders to the borrowers ; he
w h o invests i n a foreign country takes upon himsel f the lia
b i l i t i e s to send th ither the capital s u m invested ; in other
words foreign securities have to be paid fo r as much as fo re i gn
goods
Consequently the purchasing power properly ass i gnable to
a count ry in the world s markets is not correctly measured by
the value o f the products it sells but by the net amount o f all
the payments due to it Equilibrium does not require an
equality o f exports and imports ; it requires an excess o f ex
ports o r an excess o f imports j ust su f cient to cover the
balance o f other payments due to or from othe r countries as
the case may be A co untry which is receiving
a year in i nterest o n foreig n securities and 6
fo r
shipping freights and services rendered and is investing
a year abroad would receive an excess o f i m
,6 I
ports over exports amounting to I
a year To
maintain equilibriu m its market must be j ust s o attractive as
to bring in this excess o f imports and no more In other
words the rates o f exchange must be xed at the point at
which the consumers outlay h as precisel y this amount o f pur
chasing power in excess o f the world value o f the country s
products When a ny o f the conditions change whether it be
the country s output the balance o f other payments or the
consumers outlay the foreign exchanges must be adjusted
For example suppose that there is a decl ine in the output
such as might be due to a fail ure o f the
o f commodities
harvest in a grain exporting country In that case the e ffect
o n the foreign exchanges appears to be as simple and direct
as possible O n e l arge item being dropped o ut o f the total
the eq uil ibr ium is destroyed
o f payments d ue from abroad
and the exchanges must become un favourable But a closer
scrutiny w ill sho w that the matter i s not so simple as this
.

'

CURRE NCY A ND CRED I T

62

'

For th e i mmediate e ffect o f the failure o f the harvest is t o

d iminish the income o f the agricultural population I f the re
mai nd er o f the population receive the same income as be fore
the consumers income will be diminished by an amount equi
valent in value to the shortage o f the h arvest It would seem
t o follow that even i f there be n o change in the foreign
exchan ges the purchasing power o f the country will be j ust
so far diminished as to kee p the equil ibrium undisturbed To
the extent that the decl ine in purchasing po wer is not felt in
the demand for imported g oods it will a ect the market for
home products and they will tend to be diverted to export
Or alternatively i f the home producers can not nd rel ief in an
increased export trade they in turn will su ffer a diminution o f
income
Why then does a fail ure o f the harvest lead as it usually
does to an adverse movement o f the exchanges
The answer
is to be found in the fact that a di min ution o f the consumers
income does not immediately cause an eq ual diminution o f the

consumers outlay In s o far as the farmers labourers land

lords and others who su ffer by the failure o f the harvest
spend their balances o f ready money their outlay exceeds
their income To this exten t the equilibrium will be upset
and s o long as bal ances are being drawn u pon the exchanges
will be un favourable The consumers income being reduced
the unspent margin will be excessive until it i s reduced in
proportio n The ulterior effects depend very m uch o n the
currency system in u s e If a paper currency is u sed w ith no
meta llic basis the foreign exchanges are free to move upwards
or downwards without li mit
In that case the effect o f the
reduction o f the amount o f money and credit in the hands of
the agricul tural population will be to increase the cash in hand
and to diminish the dem and liabil ities o f the bank s The cash
cannot be exported and must remain in th e bank s till they
can induce a renewed demand fo r it fo r internal circulation
The banks will naturally take steps to stimulate the creation
o f credit unti l the normal proportion i s restored between their
cash holdings and their liabilities In so doing they will i n
crease th e consumers income and will intensi fy and prolong
.

'

TH E FO RE I GN EX C H AN GES

63

the un favourable condition o f the exc hanges till a good harvest

com es round and resto res the country s productiveness
On the other hand i f the country is o n e o f a group all
using a gold standard the foreign exchanges within the group
can only vary within narrow limits I f in any tw o countries
cred its can a t al l times be obtained in exchange fo r go ld and
gold fo r cr edits at a prescribed price a credit in o ne country
can be trans formed into an equivalent credit in the other at
no more than th e cost o f send ing the val ue o f the credit in gold
from o n e to the other
I f to o high a price is asked in the ex
change market fo r credits in o n e country in terms o f credits in
the O ther traders w ill re sort to this alternative method o f
rem ittance by sending gold
Thus the rate o f exchange
oscillates between an upper and a lower limit The l imi t at
which it b ec omes more protabl e to export gold than to buy

foreign cred its is called the export specie point ; the limit
at which it becomes more protable to import gold than to sell

foreign credits is called the

import specie point
The
intervening point at which the rate o f exchange just represents
the relative amount o f gold in the tw o monetary units is called
the par o f exchange
The co st o f sending any considerable
sum o f gold incl uding freight insurance and interest fo r the
period o f the voyage is smal l in proportion to the value o f the
gold
In time o f peace it would s carce l y e x cee d o n e per cent
fo r the longest voyage and i n most cases would be one hal f
per cent o r less though in ti me o f war the insurance against
war ri sks and the various restrictions on i nternational inter
course may make i t much higher The result i s that in time
of peace at any rate the causes which tend to make the foreign
exchanges favo urabl e o r un favourable display their chie f
effects in i mports and exports o f gold In the case o f a
failure o f the harvest i f the consumers income shrinks exactly
in proportion to the country s productiveness the uncovered
excess o f im ports to be paid fo r is just equal to the sums
drawn by the agricultural population from balances A p o r
tion o f these sums will be cash returning from circulation to
the banks a portion will be credit The cash portion is avail
able fo r export as fast as it accumulates without di s turbing
.

'

l.

CURREN CY A N D CREDIT

64

the position o f the banks

The credit por tion being paid
to the d istressed
o f course t o dealers who sell commo dities etc
farmers will be appl ied in red uction o f the indebtedness o f
these dealers There will also be a further redu ction in the
volume o f credit fo r the dealers in grain nding less to buy
will borrow less Credit will there fore contract o f itsel f and
the banks will be enabled to release a corresponding amount
I n this case there fore there i s no ind uce
o f gold fo r export
ment to the banks to stimulate the creation o f credit The
dim inished output o f the country requires a smaller consumers
inco me and a smaller basis o f gold and credit The re
d u n d ant credit i s extinguished the redundant gold is exported
and e q uil ibrium is quickly regained
To pass to another illustration suppose that the equilibrium
o f international payments i s disturbed by a borrowing opera
tion or a capital i ssue in o ne country to provide fund s fo r an
enterprise in another Credits are brought together in the
former from the subscribers o f the l oan and are placed at the
di sposal o f the borrowers who must exchange them fo r credits
in their own count ry be fore they can use them
H ere again o ne is tempted to say that the effect on the
foreign exchanges is so obvious and direct that no further ex
planation i s wanted There is a new demand fo r rem ittances
one way and there are no corresponding remittan ces the other

way to supply it ; the exchange must become favourable to

the borrowi n g country The ultimate result must be a re
s to ra t i o n o f equ i librium
But where will the n e w point o f
eq uilibrium be ?
The essence o f the lendi ng operation is that the purchasing
power represen ted by the s u m lent is as it were transplanted
from the lending to the borrowing country
The consumers
'
o
f
income the former i s d iminished and the consumers income
o f the latter is increased
by this amount The borrowing
country thereby becomes entitled to a greater share in the
world s products and in order actually t o obtain this greater
share it must be made a more attractive market Accordi ngly
the rate o f exchange moves in its favour If i t has a paper
currency with no metal lic b asis the favourable tendency o f
,

'

T H E FO RE I GN EXCH AN GES

65

th e

exchange will continue up to the point at which the value

o f the consumers outlay in the world s markets is su cient
f
to
sec ure an excess o f imports equivalent in value to the s u m

receipt o f which sets free the productive resources o f the

borrowing country fo r capital ente rprises instead o f the supply
o f consumable goods
B ut o f course this favourable movement o f the exchanges
is only necessary i f the consumers outlay remains unchanged
The increase in the country s com mand over wealth C ould be
e ff ected j ust as well by expanding the consumers outlay and
ke eping the exchanges at par
For example the promoters
o f the capital enterprise or the contractors empl o ed by them
y
might be nanced by bank advances in their own country in
anticipation o f the proceeds o f the loan The bank credits so
created being paid away in the expenses of production
would swell the consumers income
If t he only legal tender money i s paper and the supply o f
this medium is lim ited the banks can not a fford to let credit
expand unduly If o n the other hand the borrowing opera
tion takes place in a gold using group then i f in the rst i n
stance the banks are t oo cautious to let credit expa nd gold
wil l be i mported The supply o f legal t ender money being
thereby augmented credit can safely be extended and when
the sti mulation o f Credit has raised the consumers income and
the consumers outlay to the requisite level the exchanges will
drop to par a nd the im portation o f gold will stop When
extra impo rt s to the total o f the loan have been obtained the
consumers outlay must return to its former level The surplus
gold wi ll then be exported again
This i mportation o f go ld by the borrowing coun try i s a
well recognised phenomenon It would be wrong to interpret
it as a payment o f the loan o r o f part o f the loan in gold
The true fun ction o f the gold i s to en a ble the banks to su ffer
an expansion o f credit which woul d otherw ise upset the p ro
portion o f their cash reserves to the ir demand l iabilities If
the banks were will ing to acquiesce in the reduction o f this
.

66

CURRENCY AN D C RED IT

proportion the gold need no t be imported at al l And in

any case when the movement o f capital is com pleted the
gold is returned s o that o n balance the borrower receives no
gold and all the proceed s o f the loan are received in goods o r
services
Yet a third example o f a disturbance o f the equi librium of
th e exchang es i s t o be found in an expansion o f credit
An
e x pansion o f credit as we s a w in the last chapter increases
I t is also
th e consu mers income and the consumers outlay
accompanied by some increase in the production o f com
m o d i ti e s
But the consumers outlay q uickly outstrips p ro
duction and there follows pressure o n the country s productive
capacity which causes a rise o f prices Thi s disproportionate
increase in the consumers outlay makes the country a more
favourable market fo r the sale o f fo reign goods so long as the
foreign exch anges remain as they were
Imports are i n
creased exports diminished The exchanges have there fore
to be so adj usted as to reduce the purchasin g power o f the
consumers outl ay to the point at which the eq uilibrium o f
paym ents is resto red If the country and its neighbours have
gold currencies the exchanges are stopped at the export
specie point and gold i s exported So long as there is gold
to be exported the disparity o f exports and imports can con
ti nue
If the export proceeds til l the country s stock o f gold
is exhausted the gold standard can no longer be maintained
and then either credit must be contracted or the proportional
adjustment o f the exchanges must at last pa s s beyond the
specie point
These three examples a failure o f the harvest a fore i gn
loan an e xpansion o f credit show the variety o f in uences to
which the foreign exchange m arket i s susceptible But with
al l this variety there is a fundamental uni formity In each
case the due proportion bet ween the consumers outlay an d
the co untry s pro per share in the world s w ealth is di sturbed
and the value o f the consumers outlay in wealth at world
prices has to be corrected
Credits in any country are sought a fter because they are
the means o f purchasing its prod ucts The rat e o f excha nge
.

T H E F O RE I GN E XC H AN G ES

67

between any two countries substantially expresses the relative

purchasing power o r the relative value in terms o f co m m o d i
ties o f their respective monetary units o f account If al l
goods could be freely transported from one pl ace to another
without cost this would be ex actly true B ut in the actual
circumstances o f the world any commodity may have di fferent
values i n d i ere nt p laces the di fference between two places
being any amount no t exceeding the cost o f transporti n g it
from o ne to the other
F o r some commod iti es the cost of
transportation is prohibiti ve ; fo r s ervi ces there is o ften n o
question o f transportation at all As between two places in
w h ich al l com modities have no t the same rel ative val ues
there is i n strictness no such thing as the relative value o f
their respective monetary units To compare the values o f
the m o netary units in shoes o r in ships in sealin g wax o r in
cabbages would be intell igible but each o f these comparisons
might give a di fferent result Or a composite commodity
m ight be made up o f appropriate quantities o f a number o f
di fferent com modities This composite commodity would
have a determinate value in term s o f each o f the tw o mone
tary un its to be compared and would thus express thei r
relative purchasing power so far a s the selected commodities
The p rice o f a composite com modity o f this
a re concerned

k ind provides what is called an index nu mber o f prices

If a schedule o f commod ities be chosen which includes all
the most repres entative articles o f general consumpti on the
index number comes near to measuring something tha t can
be called the value or purchasing power o f the monetary unit
But this i s still only a manner o f speaking ; the val u e remains
relative to the commodities ; only the comprehensiveness o f
the sele ction gi ves th e comparison greater generality And
however comprehensive the selection the generality can never
be com plete The same schedule o f commodities would n o t
usually be appropriate to tw o d i fferent places Fo r exam ple
each might co ns u m e a specially large proportion o f i ts own
products which would be cheap and a specially small pro
portion o f the products o f th e other which would be d e ar
If a s chedule appro priate to one were chosen and special

'

'

'

C URR ENCY A N D CR ED IT

68

prominence given to the products which were cheap and

plenti ful there its monetary unit wo ul d be credited wi th a
much higher relative purchasing power tha n with a schedule
appropriate to the other
We can it is true escape from all re ference to a schedule
o f commodities i f we content ourselves with saying that any
cause which a ffects the value o f o ne o f the monetary units in
terms o f al l commodities alike affects i t s value in terms o f
But this would be a
foreign currencies in the same degree
law o f very l imited appli cation for in practice hardly any
such cause can be instanced f wh ich might not a ffect the rela
tive val ues o f commodities i nter s e
And as a matter o f fact there is a schedule o f commodities
the prices o f which in the two monetary units very nearly
determine their relative values fo r the purposes o f the foreign
exchanges This is the set o f commodities whi ch are i m
ported or exported o r i f not actually i m ported o r ex ported
compete in the imp t and export ma rkets These may be
conveniently termed he foreig n trade commod ities A p art
o f the consumers i n c me in ea ch country will be derived fr o m
p
the production o f goods and services which compete neither
with exports nor w i th imports and a corresponding part o f
the consumers outlaywill be applied to the purchase o f these
goods and s ervi ces l This part o f the consumers outlay does
not affect the foreign exchanges B ut the remainder o f the
co nsumers outlay i n each country is applied to the foreign
trade commodities and the share wh ich each country gets o f
these commodities depends o n the purchasing power o f this
portion o f the consu ers outlay in term s o f those co mm o d i
ties A credit expansion i n o n e o f the countries involvin g
an increase in the con sumers outlay will raise prices but the
prices o f di fferent com m odities may rise in very unequal
d egrees If the portion 3f the consume rs outlay applied to
foreign trade commoditi es i ncreases by say 5 per cent then
the prices o f those comm odities will ri se o n an average by
5 per cent and to m ai n tai h equilibri u m an adve rse move
ment o f the foreign ex cha ngesqn us t oc cur in th e sa me p ro
portion But meanwhile the other c ommodities may ha ve
,

THE FO R EI GN EXCH AN G ES

69

ri sen t o per cent o r 5 0 per cent or no t at all ; price changes

among them do n o t affect the exchanges except o f course in
the sense that with a g i ven consumers outlay the greater
the portion used u p o n them the less the balance le ft fo r the
foreign trade commodities
But tho ugh the rate o f exchange expresses the ratio be
tween the values o f the two monetary units relatively to the
foreign trade commodities this ratio may be very far from
measuring their values relatively to such a set o f commodities
as m ight be take n to re present the cost o f l iving generally
A country may fo r example be very rich in certain
natural products so that its available capital and labour are
almost excl usively devoted to acquiring and exporting them
Nearly all the co m modities which can be conveniently i m
ported wil l be obtained from abroad in exchange fo r these
products The productiveness o f the country will be reected
in the high rate o f wages high enough to make u n re m u ne ra
tive the production o f any commod ities wh i ch c an be imported
at a moderate cost But there will be a resid ue o f co m m o d i
ties services etc which cannot be imported and can only be
produced at home at a high c ost in consequence o f the high
rate o f wages prevailing such fo r example as some building
materials which are too bulky in proportion to their value to
bear a long transit Retailers prots and som e items in the
household budget such as house rent and servants wages
will follow the same rule I n such a case the foreign ex
changes measu ring the purchasing power o f the monetary
unit with re ference to the goods imported and exported will
gi ve an al tgg ether misl eading view o f what is ordinarily meant
by its purchasing power
F o r the purpose o f comparing the purchasing power o f
tw o monetary uni ts the valu e o f each o f the foreign trade
com modities must be taken in the country from which it i s
exported
I t is there that the choice is made in which
market the goods are to be sold it i s there that the compari
son is made b etween their value at home and their value
abroad The value abroad in this comparison is the value
o f freight insurance
that
is
to
say
the
value
excl
usive
fo b
.

'

CUR R EN CY AN D CR ED I T

7o

and customs duties Freight must be regarded as a separate

commod ity fo r either country may provide shipping for some
The services
o f the other s products as well as fo r i t s own
o f shipping so provided are as much exports as the same
value in goods If o ne o f the countries h as a high protective
tari ff the exclusion o f that part o f the price o f goods exported
to it which represents the customs d uties may result in a wide
divergence in the purchasing power o f sums which accord ing
to the exchange market are e q uivalent
It might perhaps be supposed that this equal ity o f pur
chasing power i n terms o f foreign trade commodities only
holds good when there i s no net balance o f other payments
For i f there i s such a bal ance or i f there i s a gold movement
o n e way o r the o ther o n e o f the countries must be made a
more attractive market than the other so as to secure an
excess o f im ports B ut this does not mean that there is any
inequality o f prices Any such inequal ity would soon be re
moved under the inuence o f competition The market fo r
imports i s made more attractive not by an actual rise o f price

but by a g reater volume o f purchases If the consumers

outlay in the importing cou ntry did no t expand there wou ld
be an actual fal l in the prices o f foreign trade commodities
there since a given sum o f its currency would with a favour
able exchange command a greater quantity o f those commo
d i t i es at the prices o f the world markets
The transactions o f international trade are wholesale
transactions and the pri ces are wholesale prices
C o n se
quently the action o f the consu mers outlay o n markets is no t
direct The merchant indeed regulates h i s purchases accord
ing to the demand which he nds But o f course he has also
to take account o f the state o f the money market and the state
o f hi s s to ck ~
i n trade
This aspect o f the foreign ex changes
we must leave to be developed in the ensuing chapters
Payments do no t a ffect the exch anges till they are actually
made The individual w h o makes the payment m ust have
the means o f payment re ady to hand I f he does not al rea dy
possess a suf cient credit he must borrow If he neither
possesses no r can rai se the funds the payment cannot be
.

TH E

F O RE I GN

E XC HAN GE S

m ade and the foreign exchanges are n o more affected than i f

it were not due When credit i s in a
ted people are enabled
to make more payments than the econom ic position really
j usties If the exchanges remained unaffected they woul d
be gaining real we alth in exchange fo r ctitious money The
act u al e ff c t upon the excha n ges arises from the endeavours
o f those w ho are paid in this ctitious money to convert it
into wealth either by drawing out gold fo r their credits o r by
selling them in the foreign exchan ge m arket The supply o f
gold in the hands o f the banks and the supply o f foreign
credit s in th ehands o f the exchange dealers are both depl eted
the banks respond by contracting credit and the exchange
dealers by an adverse adj ustment o f the rates o f exchange
,

C H AP TER V
SYS T

EM S

N O TE I S S U E

OF

N O W that we have dealt with the principles o f the foreig n

exchan ges we can return to the consideratio n o f the control
o f credit and currency at the point at which we le ft it
The great practical c urrency questions o f the present day
are neither those o f a simple gold system n o r those o f an u n
supported paper money I n 1 9 1 4 be fore the war broke out
all the principal nations o f the world ( except China) employed
gold as their standard o f value To a greater o r less extent
they used legal tender paper money as the actual medium o f
exchange but in theory at any rate the paper was either con
vertible into gold o r maintained at a xed gold value In
some countries the position w as Complicated by the e x istence
o f silver coins o f unli mited legal tender which were kept at a
xed gold value above the market val ue o f the silver they
contained
In the present chapter we shall h a te to examine the
di ff erent relations that may be established by law o r practice
between the supply o f gold on the o ne hand and the quantity
other S ince the bankers
o f paper m o ney issued
o n the
regulate cred it according to their sup ply o f legal tender
money it w ill be these relations that ultimately determine
the effect o f a gold movement in expanding o r contracting
credi t It must be remembered that the bulk o f the demand
fo r legal tender money i s fo r the payment o f wages
Money
whether gold silver o r paper, which i s in to o large denom ina
tions fo r this purpose will not satis fy the demand
In the
Middle Ages when a foreman got 4 d a day a skilled mason
3 d and a labourer I l d o r I d the only English co in w as fo r
a long ti me the silver penny which w as about the si ze o f o u r
present threepenny piece In the fourteenth century a certain
,

72

S YS T EMS O F N O T E I S S UE

73

standard co i n w as very small

In India at the present day
gold and paper are co nve n ient to the merchant and the rich
man but even though the standard o f value is gold the
smal lest gold coin is to o bi g fo r the payment o f wages and
the bulk o f the circulation consists o f silver rupees In Eng
land be fo re the war the smallest denomination o f legal
tender paper money w as the 5 Bank o f England note and
wages were paid in gold and subsidiary silver In France
be fore the war the smallest notes were fo r 5 0 francs These
being the equivalent o f about 2 were more adapted to retail
transactions and to wage payments than the English ve
pound notes but none the less a co nsiderable ci rculation o f
10
and 2 0 franc gol d pieces was re q ui red fo r S ilver 5 franc
pieces though unlim ited legal tender are too bulky to be
convenient fo r large payments The United States o n the
other hand h a s al ways been a paper using country notes down
to o ne dollar being in ordinary us e Thus the di fference b e
t ween the country with a sim ple gold currency and that with
a paper currency convertible into gold i s o ne o f degree rather
than one o f k ind
Gold m ay be needed fo r any o r all o f three distinct pur
poses It may be needed fo r circulation as coin o r to form a
reserve against the circulation o f paper o r fo r export to a
foreign country
The two former sources o f demand depend
upon the law governing the currency If the law al lows no
paper money belo w a certain denom ination and i f that de
no mination i s to o high fo r some considerable class o f pay
ments above those fo r which subsidi ary silver is suitable then
gold coi n will circulate and a demand fo r legal tender money
will m aterialise in part at any rate as a demand fo r gold coin
In s o far as the demand can be met by the issue o f paper money
an addition to the supply o f gold may still be necessary i f as
is usual ly the ca se the law prescribes a relation between the
amount o f paper mo ney issued and the amount o f gold held in
reser v e against it But it is important always to bear in mind
that these require ments are imposed by law and can be altered
.

CUR R EN C Y A ND CR ED I T

74

by law If no notes are allowed below 5 or 5 0 francs the

legislature can alter this at any moment and authorise the
issue of notes down to 1 05 or 5 francs If the note issue is
l imited by some relation to the go ld reserve the legislature
can suspend the l imit In the last resort it is only the de
mand fo r export which cannot be regul ated by a change in
the law Th e demand fo r export arises when the exchange
o n a foreign country reaches the export specie point
There
upon it becomes protable fo r anyone who possesses or can
obtain any considerable sum in gold to send it to the foreign
country and in practice bullion dealers and exchange dealers
will take advantage o f this p r ovi d ed that the market price o f
gold does no t exceed its coinage price The coinage
gold i s the value i n money o f the coin into which
amo unt o f gold can be trans formed F o r example in
a kilogram me o f gold nine tenths ne i s coined into 3 1 00
francs s o that the coinage price i s 3 1 00 francs th e kilogram me
This equation determines the value o f the money o f account
in gold ; so long as it i s exactly maintained the gold standard
i s preserved ; whenever the market price o f gold deviates in
any degree from the coinage price the gold stand ard is to
that extent departed from So long as the paper money is
genuinely convert i ble on demand into gold and bank credits
into paper money the market pri ce o f gold i s e ffe ctively kept
down to the coinage price fo r there is always a seller at that
price If credits cannot be thus transmuted into gold on de
mand then the price o f gold may at any time ri se above the
coinage price The management o f a currency based on a
gold standard under modern conditions has two principal
branches rst the accumulation and maintenance o f a sufh
cient gold reserve to s ecure the invariable convertibil ity o f
bank credits and paper mo ney into gold ; and secondly the
regulation o f the value o f the monetary unit by inducing an
expansion o r contraction o f credit as the circumstances may
require The second i s the more fundamental The export
o f gold is a S ign th at the value o f the monetary unit has
fallen below the point at which eq u i li bri u m is maintained in
the foreign exc hanges whether this fal l be due to an exce ssive
,

SYS T EM S O F N OTE I S SUE

75

xpansion o f cred it o r to some other cause such as a shortage

o f expor table commodities
The remedy fo r the depreciation
of
the monetary un it is a contraction o f credit If this remedy
15 n o t appl ied gold may
go o n being exported and yet the
exchanges may remain adverse fo r s o long as the q uant i ty o f
purchasing power in circulation is excessive the val ue o f the
monetary un it as determined by the
ti ty theory wil l be
a
depressed
In such a case no gold resrve will be great
enough to secure convertibility On the other hand i f credit
i s adequately controlled the drain o f gold can be stopped and
it i s only t e s s ary to have such a stock o f gold available in
ng
the country as will j ust meet the maxim um possible demand
fo r export in the inter val between the rst com mencement o f
the drain and the time when the steps taken fo r the co ntrac
tion o f credit become e ff ective To this aspect o f the question
we shall return later Here we shall consider the d i fferent
systems that have been devised fo r accumulating and r eg u l at
ing gold reserves
We saw at the end o f Ch apter I I I that in order to regu
l ate a paper currency it i s desirable to entrust the issue o f the
legal tender notes to a central bank more or less closely
associated with the Government or even subordinated to it
There are however some systems o f note issue which do
not require any regulation at all being absolutely automatic
in their operation I n the United States the public pre fer
paper to gold The gold available fo r circulation does not
pass from han d to hand but i s deposited with the Treasu ry
in exchange fo r gold certicates
The Treasury i s not
cal led upon to exercise any discretion in the matter ; it re
ce i ves and keeps the gold and the gold certicate s in circula
tion are exactly equal to the gold kept So long as what is
needed i s money for internal payments the certicates pass
A s soon as gold
from hand to hand and remain outstanding
is needed fo r export the certicates are presented and the
go ld withdrawn But however many certicates are presented
the gold o f course is always forthcom ing It might be s u p
posed that this system o f gold certicates is indi stinguishable
from that o f a gold coin ci rculation except merely fo r the
e

76

CURRE N C Y AN D C R ED I T

grea ter o r less convenience o f handling paper instead o f co i n

But there is just this di fference that in an emergency the notes
may cease to be mere gold certicates ; some o f the gol d by
which they are secured may be diverted to other purposes
o r new notes may be put into circulatio n without their e q u i va
lent i n gold being added to the reserve This m ay not be in
accordance wi th the law but the law may be amended o r in
extreme emergency broken Such a measure may be de
n o u n ce d as a breach o f faith and whether it i s s o o r not can
only be determined by re ference to the understanding o n
which the gold w as originally deposited But even i f it is a
breach of faith it is arguable that the other party to the con
tract h as su ffered no detriment s o long a s gold i s fo rthcoming
when he asks fo r it If the emergency is really extreme i f
fo r example such a shortage o f legal tender money has
occurred as we found in Chapter II to threaten a universal
suspension o f the banks a Government may be right deliber
ately to break its understanding with the certicate holders ;
it may save the whole nancial fabric o f society at the cost
of a
farthing damages to them
O f course a gold coin circulation may be supplemented
in time o f crisis with a new issue o f notes provided that the
notes can be prepared and printed in time and that people
can be induced to accept them A gold coin circulation p ro
vides an indirect gold reserve which can be drawn o n as fast
as paper can be issued to take its place
But the displace
ment o f gold by paper may take a consider able time The
banks may agree to pay o ut nothing but paper and to place
all the gold which they rec eive in the course o f business in a
cent ral reserve in exchange fo r the pape r they d raw o ut But
they probably cannot be com pel led to d o this i f they think
it is better business to keep the gold in the hope o f i ts earn
ing a premi um later o n and even i f they agree m uch o f th e
gold coin i n the country may not pass through their hand s
The man who is too poor to have a banking ac count and
keeps his cash balance in the house will probably leave the
same little accum ulation o f gold coins almost untouched week
a fter week month a fter month perhaps even y ear a fter yea r
.

'

SYSTE M S OF NOTE I S SUE

77

It i s only when the emergency arises fo r which the reserve

provides that he actually draws it out If he nd s that his
em ployer begins o n e day to pay hi s Wages in paper instead
f gol d he will spend the paper money as he receives it but
o
h i s little hoard o f gold will still remain untouched
U nder
a gold certi cate system thi s problem o f displacing gold from

n
o
t
circulation does
arise The cash actually in people s
hands is already in the form o f paper ; the gold i s already
assembled in o n e central stock N othing is needed but the
suspen s ion o f the law to make the gold available as wel l as
the paper
Another system o f paper money which req uires no dis
creti on in its management is that o f an absolutely xed issue
p r ovi d ed that the amount xed i s distinc tly less than the
minimum a m ount o f legal tender currency eve r needed fo r
internal circul ation This proviso is very important fo r i f
the xed note issue i s ever in excess o f the amount o f legal
tender currency nee ded the limit becomes inoperative and
the currency re q uires a s much management as i f there were
Th e demand o f a community fo r currency
no limit at all
cannot be absol utely xed and i f the xed issue is below the
minimum demand the paper must always be supplemented
by some other form o f money the amount o f which will vary
according to the need fo r it So long as gold and paper cir
cul ate side by S ide subject to a legal tender law the paper
will pass at its no minal value The supply o f paper bei n g
ex hyp oth es z insu fcient to meet the whole demand fo r currency
debtors will be compelled som e times to pay in gold ; when
they do so they have no legal right to pay less than they
would pay in paper ; consequently gold and paper must cir
culate at par
I n time o f crisis the xed issue syst e m h as both a d va n
tages and disadvantages On the o n e hand people are a lready
used to paper mo ney and the means o f producing it are
already in operation If the xed issue i s to be exceeded
it can be done with smoothnes s/ and celerity On the other
is less than it
hand the actual s to
of
em
that
o
r
h
e
e
i
t
would be und r
.

78

CURRE NCY AN D CR ED IT

a gold coin circulation B ut o f course provided the gol d stock

is suf cient to meet the demands o f a crisis any further supply
It would be universally rec o gn i se d a s
o f gold i s sheer waste
sa fe fo r a country to have s om e uncovered paper money in
circulation and that being once admitted the xed issue
system may be classed as a very cautious and conservative
I n practice the xed issue system is
form o f currency law
usually united w ith the gold certicate system N otes are
issued to an amount equal to the gold reserve held and to a
xed amount in addition N o distinction need be made b e
tween the notes which are covered by gold and those which
are n o t ; that is to s ay none o f the notes are expressly issued
as gold certicates Consequently in the event o f the law
being broken o r suspended there is no room fo r the accusation
o f a breach o f faith
This system originated in the famous Bank Charter Act
o f 1 8 44 which regulated the note issue o f the Bank o f E ngland
and has since been widely copied with o r without mod ications
Be fore that Act the note issue o f the bank w as in the ab So l u te
d iscretion o f the Directors without even a pure ly nom inal
maximum limit such as that to which the note issue o f the
Bank o f France is subject The Act o f 1 8 44 divided the bank
into tw o Depart m entsthe Issue Departm ent which had the
sole responsibility fo r issuing and paying notes ; and the
Banking Department which retained the business o f discount
ing and lending and creating and trans ferring bank credits
The Issue Department holds a xed amount o f securities
equal to the xed duciary i ssue ( at present
and as this xed issue i s far below the lo west amount o f notes
ever in circulation the business o f the Departmen t consists
merely in paying out notes for gold and gold fo r notes The
whole business o f regulating credit which belonged to the
undivided Bank o f England as the central bank o f issue b e
fore 1 8 44 now attaches to the Banking Department
In fact experience has shown tha t even with an auto m ati
cally regulated paper currency which does n o t need to be
managed o n banking principles a central bank for the con trol
o f credit is almost indispensable
Fo r a long time the United
.

SY ST EM S O F N OTE ISSUE

79

States w as an example or rather a warning o f the contrary

system But even there the Associated Banks o f the New
York Clearing H ouse had already created an organisation
w hich discharged some o f the functions o f a central bank
before the Federal Reserve Ac t o f 1 9 1 3 established the
system F o r although that Act established n o t a sin g le

central bank but a n umber o f Federal Reserve Banks each

is alone in i ts own district and all are subject to some central
control
The e ffect o f the introduction o f the rigid limitation o f
the Bank o f England note issue embodied in the Bank Act o f
1 8 4 4 was to leave available a s the cash reserve o f the Banking
Departme nt so much o f the gold reserve as w a s n o t req uired
to support the notes in circulation in the ha nds O f the public
Fo r accounting purpo ses it is the practice t o leave this gold
exce
so
m
u
h
as
i
s needed from day to day to u se at the
c
t
p
(
Bank s counters) in the vaults o f the Issue Department and to
issue an equivalent amount o f notes from the I ssue Depart
ment to the Banking D epartment Thus the reserve o f the
Banking Department is principally composed o f that portion
o f the Bank s power o f issue which is not fo r the time being
o f gold t hat en titles
exercised If the Bank h as 25
If it has in fact i ssued only
it to issue
o f notes
000 to the public there remains a sum o f
in the reserve o f the Banking Department Thus the reserv e
i s a purely legal concept ; it may be either greater o r less than
the amount o f gold held ; i ts exhaustion i s the signal n o t fo r
the suspension o f the Bank but fo r the temporary removal o f
The whole system depends upon
th e legal limit o f note issue
this legal l imit being respected The Bank h as to conduct i ts
a ffairs in such a manner that it can always pay i ts depositors
whatever sums they may demand either in notes and gold fo r
internal circulatio n o r in gold fo r export without break ing
the l aw It must there fore take steps to restrict credit when
ever i ts reserve shows signs o f depletio n In the last resort it
may be necessary to break or suspend the law Four times in
o f the day
act
the
Bank
has
had
to
approach
the
Government
f
to ask fo r legislation fo r this purpose On three occasions
,

CURREN CY A ND CRED IT

80

that is to say in the three crises o f 1 8 4 7 1 8 5 7 1 8 6 6

the Government took the responsibility o f authorising the
breach o f the law and promised to obtain the covering
authority O f Parliament i f necessary in the form o f retro
legislation
On the fourth the crisis that w as
s p e c t i ve
precipitated by the im minence o f war in j uly 1 9 1 4 an Act
was passed empowering the Bank to exceed the limit with
the permission o f the Chancellor o f the E xcheq uer I n only
w a s it found necessa ry
o n e case tha t o f the crisis o f 1 8 5 7
actually to exceed the l imit at any rate s o far as the published
accounts o f the Bank show Th e necessity o f appeal ing to
the legislature i s a very real sa feguard The Bank Directors
would n o t l ike to face either the C hancellor o f the Exchequer
or Parliament with a request fo r extraordinary legislation
unless they could show that they had taken every measure
which prudence might dictate to avoid such a step If they
lightly took the consent o f the legislature fo r granted i f they
treated the suspension o f the statutory l imit o f note issue as
anything but a last resort publ ic opinion would condemn
them and the uni q ue position which the Bank h as gained fo r
itsel f might be threatened Thus we are led to the paradox
which has been generally recognised as the real de fence o f the
Act o f 1 8 44 The benets o f that Act are only felt when it
This paradox is really only o ne ap
i s broken o r suspended
plication o f the truism that gold reserves exist to be us ed
I t i s futile to establish a rule to secure the accumulation o f a
gold reserve in support o f the legal tender note issue unless
when urgent need arises the gold can in the last resort be
released It is true that the intention o f Peel and o f those
who assisted him in framing the Act o f 1 8 4 4 was rather to
prevent the u se o f an unl i mited note issue to stimulate a
credit expansio n but Peel h i msel f admitted a fter the cri sis o f
1 8 4 7 that i ts real merit was to be found in the accumulation
and preservation o f a large stock o f gold which could be m ade
available by a suspension o f the Act
And wherever an automatic system o f note issue is
established such as that with a xed duc iary issue the
u nexercised legal power o f i s sue provides the normal reserve
,

SYSTE MS O F NOTE ISSUE

of

81

the central ba n k while the gold reserve held against the

notes actually issued provides a second l ine reserve only to be
used as a last resort
The separation o f the banking business proper o f the
central bank that is to say that o f discounting lending and
creating and transferring credits from that o f note issue
makes the part played by it sl ightly di fferent from tha t
described at the end o f C hapter I I I I n England the reserves
o f the other bank s are held in the form not so much o f bank
notes as o f credits at the B ank o f England A certain amount
o f coin and notes they require fo r their daily dealings with
their customers but any reserve beyond that they leave on
current account at the Bank Thus all the legal tender money
in t hei r hand s may be regarded as i n us e ; they cannot spare
any and i f so me we re withdrawn from them they would have
to replace it by drawing an equal amount o u t from the Bank
o f England
An absorption o f cash fo r internal circulation i s
thus promptly felt by the Bank o f England and the Bank o f
England a l s o h as to nd whatever gold i s needed fo r export
As the holder o f the only surplus stock o f gold in the co untry
th e Bank o f England has the same power o f governing the
rate o f interest as a central bank in control o f an elastic note
issue As the central bank o f issue provides legal tender
money to form the reserves o f the other banks s o the Bank o f
England prov ides credits to form these reserves In either
case the rate o f interest asked must ultimately determine the
rate prevailing in the money market
The great c o ntinental banks o f i ssue d i ffer fro m the Bank
o f England in that they mana ge their n o te issues o n banking
principles Even where the princi ple o f the Act o f 1 844 h as
ostensibly been imitated with apparently S light modications
in practice the note i ssue is n o t rigid but almost completely
elastic When in 1 8 7 3 the o l d Bank o f Prussia was wound
up and merged in the new German Reichsbank a symbo l o f
the newly won unity o f Germany the principle o f a xed
duciary note issue supplemented with an unli m ited issue
against c as h w as adopted But to avo id the illogical English
plan o f a law which is only use ful when it is broken the Bank
,

CURRENCY AN D CRED IT

82

was to be allowed to exceed the limit subject to the payment

o f a tax at the rate o f 5 per cent per annum on the excess
The tax was intended to mark out the exceeding o f the limit
as something exceptional and fo r the rst twenty years o f the
Bank s existence the limit was indeed very rarely exceeded
B ut in spite o f successive increases o f the xed limit itsel f the
occasions o n which it is exceeded have be come more and
more fre q uent and be fore the outbreak o f war had ceased
altogether to be exceptional Especially at the end o f each
quarter when there i s a general settlement o f acco unts which
requires the temporary circulation o f a larger amount o f cur
r e nc
y than at other times there was al most invariably an
excess o n the limit notwithstanding that in order to meet the
special conditions an amendment o f the l aw has xed a higher
l im it at and near those dates If the unexe rc ised right o f
issue beyond the xed l imit is to be regarded as the reserve
o f the Reichsbank then this reserve i s as o ften a n egative as
a positive quantity I n practice the Reichsbank issues n otes
in the discount o f bill s or in advances to traders with almost
as free a discretion as the Bank o f France which is subject to
no legal restriction o n the amount o f its note issue except a
maximum limit which i s regularly raised by fresh legislation
as soon as it is approached
In avoiding the anomaly o f the English suspensions o f the
Bank Act the Germans have lost the S pecial advantages o f
the system embodied in that Act in that the transgression o f
the limit has ceased to be exceptional But it would probably
have been vain in any case to try to acclimatise the English
system in Germany It is not adapted to a country where
payments are made and consequently balan ces held to so great
an extent in legal tender paper as compared w ith bank credit/s
This predo m inance o f legal tender paper is less marked in
Germany than elsewhere o n the Continent but neverthele ss it
is considerable enough to make/ the co ntro l o f legal tender
o n a banking system an a l m o s t necessary element in
aper
p
the control o f credit The e l ati c i ty which
England and
Am erica i s so essential to bank credits, i s al most equally
essential on the cont i nent o f Europe to paper money
A
.

'

S YSTE MS OF N OTE ISSUE

83

bank credits and leaves the paper money rigidly conned in

the regulations o f an I ssue Department would not work under
continental conditions
The demands which in England are
easily met by an extension o f other deposits 1 would re
quire an extension o f the active circulation or notes in the
hand s o f the public
The continental bank s o f issue when
they red iscount bills fo r other banks are O ften practically ad
vanc i n g money not to t h e ban ks but to the traders w h o
originally drew the bills the bankers intervening as guarantors
o f their customers credit
It is because they nance trade in
this way as well as supply legal tend e r reserves t o support
the other banks credit operations that the banks o f iss ue have
such large balance sheets as compared with the Bank O f Eng
land regard being had to the scale O f the nancial operations
o f which they are the centres
C onsequently the ebb and
ow o f the note issue o f one o f these banks is great even in
comparison with the ebb and o w o f the deposits at the Bank
o f England
A system which rigidl y limited this ebb and
flow could n o t work
Another plan fo r regulating paper money though o ne no t
so prevalent as the various modications and adaptations o f the
English system is that which requires a xed propo rtion o f
the note issue to be covered by gold Under the xed issue
system any receipt or withdrawal o f gold makes an exactly
equal increase or decrease in the po ssi b le note issue Apart
there fore from the occasions when with o r without legal
authority the l imit o f uncovered notes is exceeded the note
issue behaves j ust l ike a currency O f gold certicates o r gold
coin With a xed proportion the case is di fferent If the
note issue i s limited to say three times the gold reserve the
receipt or withdrawal o f gold increases or decreases the pos
sible note issue by three ti mes as much If the foreign ex
changes are favourabl e the need ful expansion o f the note issue
can be e ff ected with one third o f the amount o f additional
gold that w ould be necessary on the xed issue principle But
when the foreign exchanges are un favourable there will be a
.

'

e. ,

depo s i ts

o th er th an

thos e of th e

Gove nm e
r

n t.

CURRE NCY A N D CRED IT

84

demand fo r gol d fo r export ; every note presented fo r payment

will d iminish the reserve n o t by o ne third but by the whole o f
its value The proportion o f reserv e to l iabilities being thus
continually diminished it may be necessary either to break
the law as to the proportion o r to make the notes i nco n vert
ible But whereas under the xed i ss ue system the breakdown
o n ly occurs when there is a to o insistent demand from the
banks either fo r legal tender currency fo r internal circulation
under the x ed p r op or ti on system the
o r for gold fo r export
break down arises from the inherent vice o f the system I n
fact there is n o room for any contraction however small o f a
note issue regulated o n the xed proport ion system unless
there i s a reserve o f gold i n a dd z tzoyz t o that required by law
But though i t may be granted that an autom atic re gula
tion o f a note issue o n this principle i s im possible that does
not dispose o f the question whether the limitation o f the note
issue to a xed proportion o f the reserve may not be a wise
system to pursue supposing it is ado pted merely as an
adm inistrative rule no t as a cast iron statutory restriction
At rst sight it i s attractive A x e d p ro p o rti o n agrees well
with the practice o f banks o f deposit The system is elasti c
inasmuch as a smal l movement o f gold makes possible a much
larger movement o f paper money If the proportion i s fairly
highsay not less than one third there can never be any
serious doubt about the central bank having enough gold to
cash any notes that may be presented ( provided that it is ready
to reduce the reserve temporarily below the proper proportion
fo r this purpose an d that it takes prompt steps to restore it
when so reduced )
But none the less the xed proportion plan does n
o t com
pare favourably with the xed issue plan The elasticity w hich
seems to be so advantageous i s really a danger C red it su ffers
in any event from the de fect o f being too elastic and i f the
substratum o f legal tender money i s also made elastic this
de fect i s aggravated If treble the amount of legal tender
money and there fore treble the amount o f credit can be created
with a given amount o f gold the danger o f a given gol d move
ment lead i ng to a state o f excessive in ation is increased If
-

'

'

S Y ST E M S

N O TE ISSUE

OF

85

all the gol d using coun tries managed their currencies on this
plan the periodical expansions o f credit which take place
would be greater than they a l read y are and the nancial crises
in which they so o ften end would be correspon d ingly more
severe
The xed proportion plan has been adopted in the United
States fo r regulating th e note issue o f the new Federal Reserve
Banks The cash reserves held by these banks against their
note issues are to be 40 per cent o f the amount o f notes out
standing and i f the reserves fall below this proportion the
banks have to pay a graduated tax on the deciency The
tax i s I per cent so long as the proportion does not fal l below
32 % per cent but a fter that point the tax is to be 1 } per cent
This i s an i n
o r more o n each 2 } per cent o f the deciency
geni ous attempt to substitute an automatic rule fo r discretion
but it is to be observed that a very wide discretion is none
the less reserved to the Federal Reserve Board in charging
interest o n the issues o f the Federal Reserve Banks as well as
in controlling credit generally The Federal Reserve Act i s
still to o recent and circumstances since it came into opera
tion have been to o exceptional fo r experience to have thrown
light o n its practical working
-

C H APTER VI

I N TE R NATIO NA L C U RR EN C Y M OVE M EN TS

the root o f nearly all currency problems is to be found

that inherent instabil ity of credit which we analysed in
Chapter I In Chapter I I we showed that i f an excessive
expansion o f credit occurred in a country which depended o n
gold fo r i ts supply o f money the whole structure o f credit
might collapse from the exhaustion o f all surplus supplies o f
legal tender The grounds fo r this conclusion were two fold
First though the consumers income i s increased the part
composed o f wages i s not i mmediately increased in proportio n
and even when wages do rise the amount o f cash continu i ng
in circulation the cash portion o f the unspent marg i n only
grows gradually There i s thus a long interval between an
increase in the q uantity o f credit and the corresponding i n
crease i n the circulation o f money Secondly the increase
in the consumers outlay tends to deplete stocks o f goods
orders are given fo r the replenishment o f stocks there super
venes an over pressure upon the productive powers o f the
country and an accumulation o f orders awaitin g execution
and this accumulation o f arrears o f orders constitutes a latent
demand fo r credit which wil l only materialise when the
arrears begin to be overtaken The result is that when trade
i s stimulated in this way the proporti on o f cash reserves to
'
liabil ities shown in the bankers balance sheets becomes mis
leading Apart from any fresh stimulation o f trade commit
ments already exist which are destined to produce a drain o f
cash and an insistent demand fo r new credit
H o w is this danger a ffected by the foreign exchanges ?
At rst sight it appears to be accentuated The depletion o f
stocks and the rise o f prices make the country a good market
I m po rts are increased
to sell i n and a bad o ne to buy in
AT

56

IN TE R N AT IO N AL CURRENCY M OVEMENTS

87

exports diminished a balance becomes due to foreign traders

the exchanges become un favourable gold is withdrawn for
export Thus to the drain o f gold fo r internal circulation is
added a drain o f g old fo r export But far from increasing
the danger o f a banking collapse this foreign demand fo r gold
greatly facil itates the task o f the bankers for it gives them
an earlier warning We saw in Chapter I I I that a stimula
tion o f sales and a rise o f prices are among the rst results
They are signs o f an increase in the
o f a credit expan sion
consumers outlay and this in turn is directly and immediately
caused by the acceleration o f the creation o f credit The
acceleration may be considerable at the very outset o f the
credit expansion and the attraction o f imports and the curtail
ment o f ex ports will begin at once There is a rise in the
aggregate demand fo r goods and services as measured in the
monetary unit and this increased demand produces a general
rise in the prices o f goods and services and in particular
in the prices o f foreign credits which give a command over
But when all the countries concerned
foreign commoditie s
have an e ffec tive go ld s tarrgi ard gold i s l h e &ne commodity
the pri ce o f which can not vary The general rise o f prices
o f all other com modities dimin is hes the purchasi ng power o f
gold at home it i s there fore sent abroad to countries to which
the rise o f prices has no t extended and where its purchasing
power i s accord ingly undiminished The country which ex
ports the gold nds its surplus reserves thereby reduced that
Both
which receives the gold nds its reserves increased
will turn round and look at the wo rk ing o f their currency
The one wil l be led to contract credit fo r
a rrangements
fear o f its gold reserves being altogether denuded ; the other
will be led to expand credit to avoid accumulating a plethora
there fore useless gold If this contraction and
o f idle and
this expansion o f credit did no t occur the d isg ar i ty between
the m on etarl uni ts o f the tw o cou n tries would remain and
the o w mf g old resulting from this di sp arity would persist
unabated The depletion o f the reserves in one country and
the increase o f those in the other would continue p rogressively
the
f
c
o
act
lon
er
the
ad
ustment
redit
is
ost
oned
h
f
e
p
p
t
In
j
g
,

88

CURRENCY A ND CRED I T

more urgent it becomes I n practice early action is the rule

The banking community in any highly developed country is
a fraid o f a loss o f gold and any seriously un favourable move
ment o f the exchanges (unless it be explicable by some cause
which is known to be temporary and limited in i t s operation )
is the signal for a prompt contraction o f credit The co n trary
e vent o f a gain o f gold presents an opportunity fo r that ex
p an s i o n which i s the natural tendency o f credit in s o far as it
i s n o t restrained by being harnessed to a metall ic standard
Any country which indulges in an expansion o f credit in
which its neighbours d o not participate tends to lose gold
but this leads it t o curb the expansion and the gold which it
exports forms the basis o f an expansion in other countries
I n the same way a country which is the scene o f a credit
contraction tends to gain gold and the countries from which
this gol d comes have themselves to contract credit
To suspend the payment o f paper money in gold is to
remove gold from the exceptional position which it holds as
having a xed price in terms o f the
account There
is no l o nge a y reason why the price o f gold should no t rise
along with the pri ces o f other commodities except perhaps
that there may b e go ld coin in circulation wh i ch can be
coll ected and exported and which will still provide a source
o f supply at the coinage price fo r a time
Even when gold
payments have been suspended the pri ce o f gold may still
no t exceed the coinage price provided that the supply o f
credit and paper money i s s o restricted that the value o f the
monetary unit as determined by the quantity theory does
n o t fall
In other words the price o f gold need not rise i f
the prices o f other commodities do not rise But the a u to
m a ti c regulation o f the value o f the unit no longer works and
its value can only be maintained by a proper control o f c redit
I t is by this contro l o f credit that the gold movements them
selves are regulated when credits are freely converti ble into
gold and it is the universal ai m in regul ating currency to
avoid the suspension o f gold payments by means o f a timely
contraction o f cred it when ever a serio us loss o f gold i s
threatened

"

I N TE R N AT I O NAL CURRENCY MOVEM ENTS

89

It might be i n ferred that this regulation o f credit so as to

avoid the with d rawal o f gold would be the solution o f all
di fculties that the foreign exchanges would invariably give
early warning o f an und ue tendency to credit expansion and
that the expansion coul d thereupon always be checked B ut
this sol ution o f the problem is inade q uate because it leaves
o ut o f account the case o f a u n i ver s a l expansion o f credit
co mm
o n to th e entire gold using world
However great the
expansion o f cred it and the rise o f prices may be in o ne
country there will be no loss o f gold i f there be an ap p ro x i
mately equal ex pansion o f credit and rise o f prices everywhere
else The general employment o f the gold standard com
bi ned with the systematic reg ulation o f cred it does not prevent
expansions and contractions o f credit but merely secures that
they shall b e approximately eq ual and simultaneous every
where A movement o f gold from one country to another is
simply a S ign that they are n o t exactly keepi ng pace One
lets credit expand a little faster than the others and loses
gold ; another l ag s behind and receives gold
But i f the whole gold using worl d be regarded as a single
econom ic unit it su ffers from just the same dangers as we
have already traced in a single country I t is threatened by
the inherent instability o f credit and when a credit expansion
occu r s th e dangerous latent dem ands fo r cash and credit come
into being in a greater or l ess degree in every country which
When the latent demand fo r
p articipates in the movement
The banks
cash bw
s actual the t u rni ng pg i n t is reached
become s e ns i bl? o f a growing drain o f legal tender money
in to circulation which is in real ity the consequence o f their
They endeavour to
to o lavish creation o f credit long be fore
contract cre d it but are con fronted with the apparently i n
satiable d emands o f m anu facturers and merchants who are
commi tte d by contract s already concluded to produce o r buy
good s and wh o cannot full their engagements unless they
borrow In cop i ng with this situation no country can expect
help from any other since all are in di fculties
Nevertheless di fferent countries may be a ffected in widely
d i fferent d egrees
The credit e x p ans ion i s s pread abroad
,

'

CURREN CY AND C RED IT

90

through the channel of the foreign exchanges and any cause

which happens to affect the foreign exchanges in any particular
country will affect its susceptib ility to the m o vement The
principal causes o f whi ch account has to be taken are rs t
changes in the prod uction o f foreign trade commodities whi ch
alter the balance between exports and imports ; and se condly
capital movements Examples o f both were given in Cha pter
IV A failure o f the harvest o r any similar fal ling o ff o f p ro
duction will tend to make the foreign exchanges un favourable
and i f credit conditions abroad were stable would occasion an
export o f gold and a contraction o f credit But as credit is
expanding in foreign countries these e ffects may be wholly or
partly counteracted The disparity o f exports and imports
that would otherwise be ca used by the shortage o f production
i s simply corrected by the increased demand in foreign
markets which import more and export less On the other
hand a country which h as an ex ceptionally good ha rvest or
is fo r any other reason producing more than usual will tend to
go ahead o f th e general expansive m ovement It may either
import gold or may expand credit up to a higher relative level
than i ts neighbours
If these conditions o f production are transitory and come
to an end be fore the process o f expansion in other countries
has ceased the co untries which ex perience th em must there
upon take meas ures to get into step with their neighbours
That in which production has been short wil l expan d credit
when production is restored That in which productio n has
been bounti ful must contract credit when production falls o ff
again But o f course the world expansion o f credit must
sooner or l ater come to an end and at that particular moment
there are l ikely to be some countries which happen to be
pro d uci ng either more or less tha n usual Their position will
be very mate rially a ected by this circumstance but in the
present chapte r we shall not consider the conditions attending
a world wide contraction o f c redit
There is o ne class o f cases where production is itsel f
affect ed by the existence o f a credit expansion When credit
f
and money are
lent
ul , and prices risin g and the w hol e
i
p
,

I NTER NAT IO NAL CUR RENCY M OVEMENTS

91

world feels itsel f p rosperous the effect o n the demand fo r

d i ff erent k inds o f commodities may be very unequal
demand fo r luxuries is sti mulated more than that fo r
s ar i es the demand fo r manu factured goods more than t
food
A country which special ises in the production o f
the demand fo r which is stimulated more than the average
will be i n the same position as i f it were enabled to produce
more fo r even apart from the probable increase o f the output
o f these goods the money value o f a given output will be i n
creased This is true not only o f manu facturing countries
b ut o f countries which produce the raw materials o f manu
facture
I ndia fo r exam ple was very greatly a ffected by the
trade expansion o f I 9 06 and 1 9 07 largely o n account o f the
exceptional demand fo r j ute The manu facturing activity o f
the world w as accompanied by a great demand fo r sacks etc
the raw material fo r which could not be inden i tely increased
at a moment s notice India as the great j ute producer reaped
the benet but paid th e penalty when the crisis supervened
in a very severe strain upon her currency system
B ut the most important class o f production which ebbs
and ows with the contractions and expansions o f credit i s
the production o f xed capital
This opens up the whole question o f capital movements
to which up to now we have only given passing notice We
have shown indeed that investment is expenditure and that
the initiative in this expenditure rests no t as in the case o f
goods wi th a m erchant but with the promoter w h o plans the
use o f the xed capital or other product which will be the out
come o f the expenditure The nancing o f capital expenditure
is much more complex than the nancing o f trade Traders
may o f course apply t heir o w n sa vings to extensions o f their
capital or may borrow by private arrangement from people
But under modern conditions
w h o have capital to spare
far the greater part o f the investible savings o f the pe ople
ow into the investmen t m arket the Stock Exchange or
Bourse as it is cal led It is the business of the dealers in i n
vestments who compose this market to supply stocks and
s hare s to the i nvestin g public and j ust as the d ealer in good s
,

CURRENCY AND CRED I T

92

always has on hand stocks o f goods so the dealer in invest

ments has o n hand stocks o f investments And the latter dealer
like the former holds a part o f these investments with borrowed
money Th e dealer in investments makes his prot partly
out o f a comm ission on the purchase and sale o f securities
fo r hi s client partly by using hi s special knowledge o f
securities to buy them cheap and sell them dear on his own
account
The stock o f securities which i s being perpetually absorbed
by the investors must be replenished It is replen ished by
new issues and it is in bringing o ut new issues that capital
expenditure i s really initiated Th e promoter o f capital ex
r e sees the transaction from the point o f view o f the
e
n
di
u
t
p
borrower He may be himsel f a trader extending hi s busi
ness o r he may be oating a new company o r he may be
acting o n behal f o f a Government o r municipal ity H i s
motive is to be found in the existence o f an opening fo r i n
vestment ; he approaches the i nvestment m arket with an o ffer
This
o f a future income in return fo r a present expend iture
future income may be derived either from the prots o f the
venture o r from the proceeds o f taxes pledged by a borrowing
Government N o w there i s no necessary equal ity o r even
approach to eq uality between the demands o f promoters and
the q uantity o f money available fo r investment and it i s o ne
o f the most important functions o f the investment market to
equalise the tw o The investment market receives money in
return fo r securities from the investors and pays money in
return fo r new issues to the promoters If the former trans
actions exceed the latter its stock o f securities i s diminished
and i ts indebtedness to the bankers is correspondingly
lightened in the contrary ca se i ts stock o f securities and its
indebtedness are both increased The market guards itsel f
against the one contingency by raising and against the other
by lowering the prices o f securities But quite apart from
this it has a hold over the promoter in another way The
promoter not being in direct contact with the investor has
to rely on an intermediary to get his capital subscribed This
in termediary w ho i s called an un de rwri ter , und ertak es to d i s
,

I NTERN AT I ONAL CURREN CY MOVEM EN TS

93

pose o f the whole whatever portion o f the issue i s not applied

fo r by the public he wil l himsel f accept and pay fo r receiving
a commission o f s o much per cent on the whole issue fo r
assu ming this liability If the supply o f new i ssues outstri ps
the supply o f savings the result i s that underwriters nd that
they cannot dispo se o f the securities fo r which they have made
themselves responsible Being loaded up with securities
which are at any rate fo r the time being unsaleable they are
reluctant to d o any more underwriting business and this
reluctance takes the form o f charging more onerous terms
Promoters have to pay a higher comm ission and to oat their
new issues at lower prices When cred it is expanding and
trade i s active the trade o f the investment market i s more
active than any other Th e consumers income being e n
l arged the surplus avail able fo r investment is enlarged more
than proportionately and the receipts o f the investment market
are swo llen At the same time trade bein g protable and pro
d ucers everywhere endeavouring to increase their output all
the openings fo r new investmen t become mo re attractive than
be fore This i s the promp ter s opportunity j ust when he
can use the investors money there i s plenty o f it to be had
When cred it contracts again the supply o f savings will fall o ff
and the openings fo r investment will become less protable
It may be objected that experience does not altogether co n
rm this and that a time o f trade activity i s o ften found to be
specially un favourabl e to the underwriter s business But
( except when the expansion o f credit h as in reality already
begun to give place to a contraction ) the underwriter s d i f
cu l t i es are conned to the oating o f securities bearing a xed
rate o f interest Both the borrowers and the underwriters are
slow to realise that when trade i s active they have t o meet
a very formi dable competition from commercial and industrial
shares which se t an altogether higher standard in the investors
expectations o f yield A Government o r municipality which
has borrowed at
per cent at a time o f quiet trade i s
surprised that the underwriters cannot even dispose o f an
issue o f 4 per cents at a time o f active trade The in ference
i s hastily drawn that there is a scarcity o f money whereas the
,

CURRENCY AND C RED IT

94

i s simp l y that prots are high and 4 per cent has become
unattractive The real troubles o f the investment market
come w hen the time of active trade stops and prots become
The gilt edged securities will then be rel ieved o f
l o w again
the embarr assing competition from which they have su ffered

though
even
they
may
not
recover
at
once
see Chapter I X )
(
but whatever relie f is given to the underwriters responsible fo r
those issues will be as nothing to the new di f culties o f those
who have taken charge o f speculative shares A s to what occurs
at the transition from o n e state to the other that will engage
our attention in Chapter VI I I H ere we are concerned with
the e ffect o f capital movements upon the relative progress o f
a credit expansion in di ffe rent countries F o r the present we
will leave aside o n e o f the most im portant classes o f capital
movements that i s to say war borrowings fo r war nance is
a subject which demands separate treatment So far as i n
vestment fo r the purpose o f economic developmen t ( whether
through Governments or through private enterprise) i s co n
cerned most o f the openings are to be found in what may be

broadly called new countries while the greater part o f

the supply o f savings accrues in the o l d countries O ld

countries go on steadily increasing th eir stock o f capital to
keep pace with the growth o f their population commerce and
industry and to equip themselves with the latest appliances
But their demand fo r xed capital i s moderate compared wit h
that o f a hal f developed country which is still S hort o f rail
ways harbours roads industrial machinery buildings etc i n
comparison with its natural resources Consequently there is
an export o f capital from the old countries to the new This
export o f capital is very much stimulated when cred it expands
and it shrinks again when credit contracts But as we s a w in
Chapter IV borrowing from abroad makes the exchanges
favourable and lending makes them un favourable
C o ns e
quently when credit is expanding and the new countries borrow
more than usual they nd the exchanges favourable and have
the choice o f importing gold o r ind ulging in a greater e x p an
sion o f credit than their neighbours When credit contracts
and they borrow less than usua l they lose gold and have to
fact

'

I NTE R N ATI O NAL CURRENCY M O VEMENTS

95

e ffect a greater contraction o f credit than their neighbours

And apart from thi s general tendency for foreign investment
to rise and fall as credit expands and contract s there may also
be fortuitous movements o f capi tal due perhaps to th e n ee ds
o f Go vern men ts being met by large foreign loans o r to new
openings being suddenly di scovered and attracting a rush o f
foreign capital t o devel op them
Thus it may happen that
the forei gn borrowings o f a particular nation are at a maxi mum
when those o f others are at a minimum These fortuitous
borrowings are presu mably transitory and there is no reaso n
wh y they should synchronise with credit movements
Even purely domestic capital movements may have an i n
ue nce o n the degree o f credit expansio nthat takes place in
a particular country Credit may be ex p anding more than
abroad and the consumers outlay be correspondingly swollen
but i f the surplus o f the consumers outlay i s applied to addi
t i o n al investment at home and not to the purchase o f goods
o r investments abroad there need be no adverse tendency in
the exc hanges The exceptional vol ume o f invest ment at
home will no doubt to some extent divert capital and labour
from the production o f goods for export and a Shortage o f
expo rts would have the same e ffect as an excess o f i mp orts
But this nee d no t apprec iably affect the position and indeed
the diversion o f purchasing power from the purchase o f co m
m o d i ti e s to investment might be so great as to counteract it
altogether B ut o f course one o f the most important o f all
the factors which go to deter m ine the degree o f p ar ti ci p i tati o n
o f any country i n a world credit expansion will be its o wn
cred it polic y If it tries to hold aloo f altogether it will be
deluged with gold The prices in its domestic markets will
be l ower than in foreign markets and its merchants will tend
However rigid a hand
to sell abroad rather than at home
may be kept upon the fabrication o f credit the gold itself wil l
be an addition to the stock o f purchasing power in circulation
and w ill produce some response to the movement o f world
prices But it is clear that a country which follows this policy
will experience a much more mod erate i n crease o f prices than
the other s This i s no t very di fferent from the principle which
.

CURREN CY A ND CR ED IT

96

the Bank Charter Act o f 1 8 44 was intended to embody The

disastrous crises to which the country had been periodically
subject ever since banking had d eveloped were quite rightly
traced to an excessive creation o f credits in the form o f bank
notes which were then the prevalent form o f banker s obliga
tion If the creation o f credit had been as rigidly restricted
by the Act as the issue o f bank notes the purpose o f the Act
might pe rhaps have been achieved But this was no t attem p
ted and probably i f it had been would have been found i m p rac
ti cab l e
Experience quickly sh owed that the consequences o f
the instab ili ty o f credit could not be avoid ed merely by rigidly
circumscribing one form o f credit money Th e esta sh ment
the
o f an automatic contr ol o f paper m oney simply r nsfe
s
r
ta
responsi b i lity fo r the reg ulat i on o f credit toth eb anks w
hi p}:
ces
arq e
rg gt e
m
ean s o f gj s u p s an d
by
p j
credi ts
Nevertheless the amount o f gold which a country m ust absorb
in order to permi t o f a prescribed expansion o f credit depends
upon its currency system As the expansion progresses each
country which participates in it will presently experience an
increased demand fo r money fo r internal circulation If the
law permitted the whole o f this demand might be met by un
supported paper money and the whole o f the stock o f gold
would still continue available fo r export i f required But the
law may prescribe a relation between the paper money and
the gold reserve held against it and it may proh ibit the issue
o f notes below a specied denomination s o that som e o f the
demand must be met by the issue o f actua l go ld coin All
the gold needed to provide directly or in directl y for these
additional supplies o f legal tender money will be subtracted
from the stock available fo r export
The d iminution o f this
stock wil l be o r should be the signal fo r a contraction o r a
relative contraction o f credit in order to replenish it from
abroad Whatever the law governing the note issue the free
surplus o f gold beyond what the law requires will play a
prominent part in the regulation o f credit fo r the regulatio n
o f credit is based o n the foreign exchanges and it is this free
surplus o f gold which is available fo r export i f the exchanges
become un favourable A country which has an inelastic cur
.

"

'

. .

I NTE R N A T I O NAL CUR REN CY M O VEME NTS

97

ren ey system ( such as that o f gold certicates with or without

a xed duciary issue) and w h ich i s also cautious in maintain
i ng its free gold reserve und iminished will tend to i m port
gold from those o f its neighbours whose paper money is more
elastic or whose reserves are less cautiously managed The
im portation o f gold is a S ign that credit is expanding faster
in the exporting than in the importing country The time is
bound to come when the general expansion o f credi t must
cease and a contrary movement set in The places in which
the expansion has been greatest will have to take the rst
step They wil l be losing gold fo r export and at the same
time will be experiencing a dem and fo r money whether gold
Now so long as there are
o r paper fo r internal circulation
still large stocks o f gold available somewhere a contraction o f
cre d it in o ne o r two countries which have run short need not
lead to any general interruption o f the expansive tendency
But when there is no gold to spare anywhere , the rst contrac
tion is the beginning o f a universal movement
,

C HAPTER V I I
TH E

M E C H AN I S M

F O R E IG N E XC H AN G E

OF

U P to this point we have assumed credits in o ne pl ace to be

exchanged fo r credits in another without inquiring too closely
into the means by which such exchanges can be effected
We saw indeed in Chapter IV that a bank dealing in ex
change between two places must have establishments in both
F o r in order that a debt may be trans ferred from o n e place
If a customer o f
to another there must be a debtor in each
the bank with a credit in o ne place wants to receive instead
a credit in the other th e simplest means o f remittance is a
message between the two o i ces o f the bank At the one
of ce the customer s account is debited with the sum to be
remitted and the message instructs the other o fce to credit
him with the corresponding sum The bank s indebtedness
to the customer remains o n the whole as before except that
a part o f this indebtedness is due in a di fferent p l a ce and in
a di fferent cur rency The customer can then d raw o n the new
credit he has received and use it as the means o f payment
in the place where it is due
This si m ple form o f remittance which a hundred years
ago was an abstraction has become common in the form o f
the telegraphic trans fer
Historically however remittances originated in a much
more complicated machinery the bill o f exchange The
reason why it i s complicated is that the bill o f excha n ge i s at
the same time a means o f remittance and a means o f borrowing
Bills o f exchange o f course are not used only fo r interna
ti o nal transactions
They are also used and very extensively
in some countries fo r nanc ing purely domestic trad e A
bank lends money to traders who are engaged in the produc
tion and sale o f goo d s I f the borrower is an o rd inary cus
,

98

T H E M EC H AN IS M O F FO R E I GN E X CH AN GE

99

tomer o f the bank an d the banker knows his a ffairs the money
may be lent to him by way o f an advance o r overdra ft fo r
whi ch he might perhaps fu rn ish some sort o f collateral security
But a loan o f this k ind is subject to the disadvantage from
the banker s standpoint that the cred itor cannot easily assign
his r ights in it to some o ne else Bankers like to hold as
l arge a portion as possible o f their assets in what is called

liquid form their liabilities are nearly all liabilities to pay

money o n deman d or at short notice and i f a considerable
portion o f such liabil iti es happen to be en forced simultaneously
the bankers m ust realise a part o f th eir assets in order to meet
th em Adv ances to customers m ay be per fectly good assets
but they will no t supply the banker with any ready money
till they become due for repayment And the bank may nd
a d i f culty in borrowing unless it can deposit as security
some assets which can be easily assigned away to the lender
A mere acknowledgment o f indebtedness from the ba nk s
debtor would meet this requirement But m any bo r ro w er s
are t raders i n a small way whose a ffairs and w hose names are
unknown except to their bankers and the fe w traders with
whom they have d ealings The credit o f a small gr ocer in a
country town may be in its el f unimpeachable ; he may be less
likely to de fault o n any o f hi s debts than a nanc ial house o f
world wi d e reputation ; but still his name on a promissory
note will carry no weight except with people w h o kno w
en ough o f him and his a ffairs to believe that they can trust
his solvency and his honesty B ut i f two di fferent traders
are concerned in a transaction fo r which it i s desired to
borrow each knows something o f the a ffairs o f the other
and the cred it o f each will rein force that o f the other If
both make themselves responsible for the debt the security
for th e debt becomes very much better fo r no t merely is the
ch ance o f both becom ing insolvent less than the chance o f
only o n e becoming insolvent but the mere fact o f either
having ple dged his credit fo r the debt shows i f the transaction
is genuine that he at any rate bel ieves in the solvency o f
the other
o arrange fo r the
t
d
the
purch
ser
some
goo
s
wants
f
o
a
If
,

'

'

CURRENCY A ND CRE D IT

I OO

purchase money to be borrowed o n the joint cre d it o f himsel f

and the vendor he can invite the vendor to draw a bill

upon him fo r the amount The vendor then writes out a

document ordering the purchaser who has become his debtor
fo r the value o f the goods to pay the money at some speci
ed future date to the man who is to lend it the date o f pay
ment being xed o f course according to the period fo r which
it i s desired to borrow To give the document its full validity
the person on whom it is drawn ( in this case the purchaser o f
the goods) must signi fy his acceptance o f the liability so
imposed upon him ; in the technical phraseology he must

1
n
f
the bill by writing his name o the ace o f i t
accept
Otherwise there would be no evidence o n the document itsel f
that the purchaser had ever given the vendor authority to
order him to pay at all A bi l l i s a negotiable instrument
The original lender o f the money can assign his rights in it
to another person by merely writing o n it and signing a dirce
tion that the money be paid to this other person instead o f

endorsing i t to him ) ; and the new holder

to himsel f ( i e
o f the bill can then endorse it o n to some one el se and so on
So long as the bill and the signatures o n i t are genuine each
holder becomes absolute owner o f the rights represented by
it ; he i s under n o legal obligation to satis fy himsel f that he
i s receiving it from honest hands B ut every holder who
sells the bill by endorsing it to some one else is regarded as
guaranteeing the payment o f the money when it becomes d ue
and i f the drawer and acceptor and the other e ndorsers all
fail to pay he may be compelled to pay it himsel f
Thus
every signature o n a bill gives an additional guarantee o f its
payment and when it ha s been several times endorsed the
security fo r ultimate payment becomes very good
In practice the purchaser o f the goods usually would not
invite the vendor to draw upon hi msel f but upon his banker
fo r his account
The ba nker s credit whi ch is probably
better than that o f any merchant would then be brought in
,

'

Th e

i s draw n

i s th erefore th e pri nci pal d ebtor , th e pers on o n w h om the bi l l

m ay al so be call ed th e d raw ee
i lls are s om eti m es cal led

acc ept o r

He

acceptances

T H E MEC H AN I SM O F FORE IGN E X CH AN GE

101

support the bill When the bill is thus drawn not u pon
the purchaser himsel f but upon his banker it may be drawn
either by the vendor and made payable to the person ( pro
bably the vendor s banker) who is to lend the money o r by
the purchaser and made payable to the vendo r who can then
en d orse it in favour o f the lender The essence o f the tran s
action i n that case is that the purchaser i s given a credit by
his banker which may be drawn o n at the appropriate future
date and w hether he draws on this credit himsel f o r author
i ses the vendor to draw upon it is a mere detail
O f course
when a bill is trans ferred by endorsement the new holder does
n o t pay the o l d its full face value ( which he can only receive
at a future date) but only that val ue less interest fo r the
period sti ll to elapse be fore the maturity o f th e bill This
interest i s called discount and the bill when sold subject t o
di scount i s said to be d iscounted
When a bill is used for an international transaction being
d rawn in o ne country to be accepted and paid in another it
usually has to be discounted in the rst instance bef ore it is
accepted The drawer sell s it to his banker in h i s o wn
country who tr ansm its it to the country o f the drawee in order
that it m ay be accepted K nowing hi s customer s affairs the
banker may be w illing to give him credit fo r the value o f the
bill at once without waiting fo r news o f its acceptance A
bill represents a debt due from the d rawee p er sonal ly
Strictly
speaking therefore th e l iability might follow him wherever he
may be and i f at the maturity o f the bill h e happened to be
hunting big game in A frica the holder o f the bill ought to
come a fter him to demand payment In practice however, a
bill is drawn o n a b ank o r house o f busin ess with an o fce in
a denite place If a bill is drawn on a house with several
branches it is drawn o n the hea d ofce o r o n a speci ed
bran ch ; i t is n ot a l iability o f all the branches indi fferently
A nd even i f the place at which payment o f the bill may be
claimed is no t determined in this way the bill may be ex

pressl y m ade payable at a particular place may be domi

ci led as it is called I t is well to remember that every foreign
exchange operation is in reality the exchange o f a debt in o n e

to

CURRE N CY AN D CRE DIT

1 02

place fo r a debt in another Be fore a debt can be so exchan ged

the pl ace in which it i s to be paid must be determ ined The
monetary unit in which i t is to be reckoned i s settled by the
place o f payment fo r debts will only be en forceable at that
place in the currency legally recognised So it comes about
that the exchanges relate the moneta ry units o f the p laces in
which they are quoted But the essential function o f the
exchanges i s n o t to relate debts payable in di fferent cu r r enci es
but to relate debts due in di fferent pl a ces And exchanges are
q uoted between di fferent places in the same country which
u s e the same currency unit
It i s easy to s ee why the bill o f exchange w as so long the
recognised form o f rem ittan ce When communication was
S low and uncertain the importer o f goods did not know when
they would arriv e o r when payment would be demanded the
exporter would have to wait fo r at least the length o f two
voyages be fore he received paymen t o r even news that h i s con
The importer when he ordered
s i g n m e n t had arrived sa fely
the goods authorised the exporter to draw a bill upon him
The exporter could send the bill with the goods to a corre
s p o n d e n t in the importer s country where it could be used to
pay any debts he might h ave there o r he could sell the bill
It is this
to some one w h o requ i red to make payments there
selling o f the bills that brought into existence a class o f ex
change dealers who m ade it their business to deal in bills
The i m porter could n o t know exactly when a consignment o f
goods would reach h i s country and i f a bill arrived with th e
goods demanding i mmed iate payment he might be seriously
embarrassed It w as more convenient not to make the bi ll
payable i mmediately o n presentation but to allow an interval
and n o t merely a breathing space an interval o f a month
o r three months or more to allow o f the goods being sold and
su fcient money accumulated to meet the bill
Thus the
remittance developed into a borrowing operation
The advantages o f remittance by bill are by n o means a
thing o f the past The bill reta ins its position especially as
the instrument by which foreign trade is nanced Inter
national trade requi res to be nanced The merchant wh o
.

TH E ME C H A N IS M O F F ORE I GN EXC H A N G E

1 03

buys in one co untry and sell s in another like other merchants

holds his stock in trade in part with borrowed funds But the
funds may be borrowed either in the country from which he
buys o r i n the country to which he sells or perhaps even in
some third co untry
If two countries trading together nanced the whole o f
the i r mutual trade with bills o f exchange d rawn by exporters
on im porters the natural course woul d be fo r each to nance
i ts o w n i mports
The bills would be drawn upon and ac
c ep ted in the importing country
and it would be much the
simplest course for them to be discounted in the country in
which they have been accepted and wil l ultimately be paid
In the interval between the drawing o f the bill and its ao
ceptance while i t is in transit to the importing country the
exporter s bank would have advanced the money but as soon
as the bill arrives it is accepted and discounted and fo r a
period ( possibly o f several months ) which elapses before the
m aturity o f the bill the money i s provided by the banks o f the
importing country Discounting is lending ; the holder o f a
bill fo r the time being is a le nd er u
In actual practice di fferent countries vary greatly in the
extent to which they nance th eir foreign trade O ne may
nance practically th e whole o f its o wn foreign trade and some
even o f the trade between other countries in which it has
othe rwise no i nterest whatever This i s the position o f Eng
land no w as i t was o f H olland in the seventeenth and
eightee nth centuries and o f Venice still earlier A nother may
nance practically none even o f its own foreign trade
It must be remembered that creditors do not ord inarily draw
bills directly o n their debtors but are paid with b ills drawn
o n bank s or other nancial houses with whom the debtors have
made the necessary arrangements A trader who exports
goods to a country whose credit institutions are but little de
v e l o p e d may d ecline t o be paid with a bill on any o f the local
banks and the importer may nd it d esirable to arrange with
a foreign bank o f world wi de reputation for a credit on which
a bill can be d rawn I n the previous chapters we have no t
consi d ered the quali ty o f credit we have in fact , tacitly
,

CUR RENCY AN D CRED IT

1 04

assumed that banks are al ways solvent and bank cred its alway s
good The j usti cation fo r so considerable an omission is
that the theory o f credit cannot be adequately understood ex
cept by an analysis which distinguishes the effects which do
from those which d o not depend upon the quality o f credit
In the nance o f international trade the qual ity o f credi t i s
very important Traders prefer bills drawn o n institutions
which are no t m erely o f sound but o f unquestionable credit
Bills o n o bscure bankers can only be discounted i f a t all o n
less favourable terms Consequently in a country nancially
weak importers may pay as exporters are paid with bills
upon a foreign centre An importer who takes this course
will receive payment fo r the goods when sol d in his o wn
country while the bill will fall due in the foreign centre As
part o f his arrangement with the foreign banker or nancier
who accepts the bil l he must undertak e to rem it the funds
necessary to enable the latter to pay the bil l when it matures
He will probably have to make this remittance th rough an
exchange dealer who will undertake to provide the requisite
sum in the foreign centre in exchange fo r the equivalent at
the market rate o f exchange The exporter who receives
the b ill by way o f payment bei ng a merchant who wants to
hold not bills but merchandise wil l send it to the for eign
centre to be accepted and discounted I t m ay very commonly
happen that the foreign centre i s in the exporter s o wn
country i f it is not it is sure to be o ne o f the great nancial
centres o f the world fo r other wise it would no t have been

selected in pre ference to both the exporter s and the importer s

countries In any case there fore it will be convenient for
the exporter to receive a credit there I t follows that bills
which are accepted at a nancial centre tend to be al so d i s

counted there Both credits which fo rm the banker s l i abi l

ities and hi ll s which are his most suitable assets tend to
collect there fore at such a centre And the consequent
developm ent o f banking adds to the nanc ial strength by
which it must in any case have been distinguished
O rdinary bank s both accept bills and discount them But
there are also institutions which specialise in o ne o f these
.

TH E IM EC H AN IS M O F FO RE IGN '
EXC H AN G E
function s t o

1 05

the excl usion o f the other Discount houses and

b ill brokers d iscount bills supplementing their o w n capital
with deposits o r money borrowed at call fo r the purpose
Accepting houses authorise merchan ts to draw bills o n condi
tion that the necessa ry funds are provided to meet the bills
when due Their liabilities are there fore the bills and thei r

assets are the merchants obligations to provide funds The

cred it o f the accepting house i s attached to the bill to enable
the merchant o r hi s creditor to discount it o n more favourable
ter m s and the merchant pays a commission as the price o f
what amount s to little more than a gu arantee It is no t quite
accurate however, t o say that the accepting house suppl ies only
a mere guarantee A claim cannot be made against the
guarantor o f a debt unless the debtor has failed to pay But
the acceptor is himsel f the debtor o n the bill The drawer
and endorsers are legally in the position o f guarantors The
acceptor must pay up on the spot when the bill i s presented
a fter maturity whether the drawer provides the stipulated
funds o r not
I t is a consequence too o f the acceptor being
the principal debtor that the bil l is payable at the place where
he carries o n business If he we re a mere guarantor this
would not necessarily be so
Go od credit has m any uses and a variety o f nanci al
operations tend to be concentrated in a great nancial cen tre
P ro minent among these i s that o f underwriting especially
underwriting issues brought o u t in one country to provide
capital fo r another Thi s class o f underwriting is naturally
associated with the accepting business for in substance the
underwriter s obligation is to provide credits at a nancial
centre fo r the borrowers to draw upon
The business o f a nancial centre d epends very much on
the exchange dealers wh o have establishments there and who
effect the actual remittance s between it and other parts of the
world These exchange dealers are o f course fo r the most
part banks They no t only rem it by buying and selling
cheques and telegraphic transfers but they buy and sell bills
and they gra nt credits in all the countries in which th e d o
bu siness Their assets are largely composed o f bills and
.

CU R RE N C Y A N D CRED I T

1 06

these bills are sure to be predominan tly drawn o n the nan

Consequently the local distribution o f their assets
c i al centre
and that o f their liabilities do no t corres pond At the nan
exceed their liab i lities At other
c i al centre their assets
places their liabil ities exceed their assets If at any time a
l arge portion o f their liabilities at o ne o f these latter places
has to be met owing fo r example to a sudden money strin
gen ey it may be necessary to make a part o f the central assets
available to meet the o utlying liabilities Bills can be sold
for credits at the nancial centre but the cr edits cannot be
remitted without loss th rough the exchange market because
it is the exchange market itsel f that is in dif culties The
credits must be turned into gold and the go ld sent to the
threatened spot Thus o ne o f the essential conditions o f the
business o f a nancial centre is the unrestri cted trans formation
o f credits into gold and the free export o f the gold
A nancial centre is likely to be very cosmopolitan The
exchange banks which possess l arge holdings o f bills drawn
upon it may derive their capital from m any countries The
essential ch araracteri sti c i s that even though the bills may be
drawn by foreig ners on foreigners yet they are drawn on the
centre and payable in i ts currency As traders in the more
circumscribed area o f a single count ry pay o ne another in
cheques which are passed through a single clearing house so
international traders pay o ne another in bills which are drawn
o n a s ingle nancial centre
Thus London is o ften called the
clearin g house o f the world s trade
.

C H A PTE R VII I

A C O NTRAC TIO N O F C R E DI T

I N currency systems like those which formed the subject o f

C hapters V and VI where the legal tender circulation i n
e ludes paper money convertible into gold
the regulation o f t
credit is based upon the gold reserve the free margin o f gold
which can be drawn upon either for export o r for internal g
ci rculation without violating the law This gold reserve may
be threatened either by an internal or by an external drain
An in ternal drain o f gold into circulation is usually gradual
and can only be modied gradually through the regulation o f
credit A n external drain is s ubject to much more rapid
changes and is there fore more susceptible o f management
The outward S ign o f the conditions that cause an export o f
gol d i s an un favourable exchange and the problem o f manag
ing the currency co ns tan t ly presents itsel f as the problem o f
inducing a favourable tendency in the foreign exchanges
The weapon fo r the de fence o f the gold reserve i s a co n

t raction o il credit By its means the consumers outlay is

dim inished and the country becoming a less favo urable
market to sell in foreign trade commodities tend to be re
p el led from it ; th at is to say exports are stimulated and i m
ports checked But in using thi s wea pon the r api di ty with
which it can d o its work is a matter o f the rst importance
and in the present chapter we shall examine the di fferent con
d i ti o ns which affect the sensitiveness o f a credit system to a
contraction o f cred it The contraction may be assumed to
be effected primarily by a rise in the rate o f interest on short
term borrowings ( incl uding o f course the rate of discount on
bill s) but t o be rein forced by such metho d s as are open to
banker s to discourage their customers from borrowing
.

1 07

CURRENCY AND CRED IT

1 08

We have already shown that a high rate o f interest acts

in the rst instance o n the wholesale dealer o r merchant wh o
restricts his orders t o the manu facturer or producer H o w
long will this restriction o f orders take to affect the consumers
income and the consumers outlay ? Clearly the answer must
depend partly on the state o f business at the time at which
the contraction o f credit begins If there i s an accum ulation
o f unexec uted orders containing the menace o f a great latent
demand fo r credit the arrears o f orders must be worked
through before the increase in the rate o f interest can have
any appreciable effect But even i f there be no such accu m u
lation o f commitments the contraction o f credit can o nly work
gradually ; there will still be an interval be fore al l outstanding
orders are completed If every manu facturer accepted a new
order only just be fore completing the last the di fferent orders
outstanding at any specied moment would be in all possible
stages o f manu facture some being j ust about to be begun
some in the early middle or late stages some j ust o n the
point o f completion When the rate o f interest is raised
even i f the merchants give smaller orders the e ffect on the
demand fo r loans from the bankers will not be completely felt
till the existing orders have be en worked through and i f there
is an accumulation o f arrears it may n o t be felt at all till
these arrears are overtaken The borrowings o f the manu
factu rers depend upon the vol u me o f work upon which they
are engaged and the borrowings o f the merchants depe nd
upon the goods o f which they have t o accept del ivery So
long as the manu facturers output i s undiminis hed the creation
o f credit will continue unabated ; it i s only when the manu
factu re rs having completed the o l d contracts have to cu rtail
their output in proportion to the diminished orders given by
the merchants that the contraction o f cre dit really begins to
take e ff ect
The full diminution in the demand fo r loans will only be
accomplished when the merchants are taking del ivery o f the
diminished orders and both their borrowin g s and those o f the
manu facturers are o n the lower level Thus even a fter the
completion o f all arrears o f orders an interval must sti l l el apse
,

'

A CO NTRACT IO N OF CRE DIT

1 09

equal approximat ely to the period required fo r the fullment

o f an order be fore the contraction o f credit is completely
e ffective The period required fo r the full ment o f an order
i s vague enough ; it d epends n o t only o n the size o f the order
and the nature o f the m anu facture but also on the capacity o f
the manu facturer s plant The time taken in the manu facture
o f a single articl e sets a lower l imit and for some trades e
g
shipb uilding this m ay be many months The construction o f
xe d capital is in most cases a lengthy process and large
capital commitmen ts are therefore specially apt to overstrain
credit when the turning point from expansi on to contraction
arrives These capital commitments may be nanced either
by advances to the contractors engaged upon the m or through
the instrumental ity o f unde rwriters In either case the ad
vances are real ly in anticipation o f the savings by which the
capital expenditure has ultimately to be paid fo r S o long as
the expenditure is proceed ing the necessary credits must be
forthcoming even though nancial conditions have become
U n favourable and the underwri ters would be glad to h e quit o f
their obligations i f they could
A contraction o f credit impel s the merchant to reduce his
indebtedness not only by restri ct i ng orders fo r new supplies
but by pressing on the sales o f his existin g stocks and per
haps also by leavi n g in the business prots whi ch might other
wi se be distributed Now so far as the home market is
concerned the possibility o f selling goods is limited to the
amount o f the consumers outlay When the consumers i n
come falls o ff the consumers outlay does not necessarily fall
o ff to a precisely equal extent because people may draw on
balances I n so far as they do so the credit situation is
d irectly rel ieved the bankers balance sheets are cut down on
bo th sides fo r the credits disbursed by the consumers are
extinguished as fast as the traders pay o ff their indebtedness
The application o f prots to paying o ff indebtedness has a some
what similar e ffect except that i t does not act through sales
It represents in fact a diminution in the
o f commodi ti es

con su mers outlay in which o f course any expenditure o n

commoditi es o ut o f the pro ts would have been included To
,

'

I IO

CURRE N CY AND CREDIT

that extent those who deal in goods and securit ies must nd
their sales falling off and the result is that the e ff orts o f o ne
trader to pay o ff h i s debts may merely increase the debts o f
his neighbours
I t might be supposed that a high rate o f in terest would

have a great and immediate effect upon traders balances

The more they have to pay fo r borrowing money the more
they will lose by keeping money idle But in practice a t rader
w h o habitually adj usts hi s balances by regulating the amount
o f his temporar y borrowing cannot easily reduce them further
And as contracting credit means agging markets and fall
ing prices the time is un favourable fo r buyi ng goods Even
while the rate o f interest is high the desire to reduce idle
balan ces may be counteracted by the rel uctance o f traders to
launch out into new purchases And the rate o f interest is
n o t l ikely to remain high
8 0 e ffective is the inuence o f
falling prices in reducing prots and discouraging the ac
cumulation o f stocks that once a contraction o f credit is fairly
started the market rate o f interest may and usually does
become very low without arresting its progress When that
happens the loss on an idle balance is actually less than under
normal c onditions

Thus traders balances like consumers balances will only

diminish slowly I t would seem there fore as i f all the e ffects
o f a contraction o f credit could only work slowly
But this is to assume that the merchants opportunities o f
selling o ff their stocks are limited to the home market in which
the people who deal with one another are all nanc ed by the
same set o f banks The moment foreign trade enters into the
problem all is cha nged The country which nds the ex
changes turning against it and its gold reserve threaten ed
merely has to nd purchasers who are nanced by another set
o f banks in order t o gain a vent fo r its surplus go
ods and to
acquire the means o f extinguishing its redundant cred it
In this respect there is a wide di fference between a country
which is a great nancial centre and one which is no t The
traders o f any country may be broadly divi d ed into pro d uce rs
and dealers The producers m ay be divided into those who
,

A CONTRACT I O N OF CREDIT

I n

produce fo r export and those w ho produce fo r the home trade

The dealers may be divided into those who buy and sell at
home those who buy abroad and sel l at home and those who
buy at home and sell abroad or more shortly home dealers
importers and exporters The home dealers may be assumed
to be nanced at ho me
The importers and exporters may be
nanced either at home o r abroad A country which i s a great
nancial centre will itsel f nance both its exporters and its
importers One which is not may no t nance either to any
appreciable extent
Consider the case o f a country o f the latter kind Suppose
that it contracts cred it The home dealers will respond by
curta i ling orders and pressing o n sales The producers fo r
the home trade wil l be adversely a ffected and will eventually
have to restrict output The export merchants will be u n
affected by the credit contraction and the producers fo r export
will experience n o dim inution o f orders The import mer
chants will have no inducement to increase their sales In
short as the effect o f high interest rates on producers is small
compared w ith the e ffect o n dealers and as a great part o f the
dealers in the markets o f such a coun try are outside the i n
uen ce o f its credit system the e ffectiveness o f the credit co n
traction is d iminished
The restriction o f ord ers affects in the rst instance only
the producers fo r the home trade They will try to compete in
the export and import markets and in so far a s they succeed
they will communicate the pressure to the import and export
dealers and will compete with the prod ucers fo r export But in
so far as th ey succeed they wil l at the same time reduce the
pressure o n themselves Thus the attachment o f a portion o f
the mercantile community to a foreign banking sy stem weakens
the effect o f the contraction o f credit upon prod uction
The contractio n o f credit work s no t only by curtailing
orders to the producers but by impelling merchants to increase
their sales The capacity o f the home market being limited
the home dealers will tend to encroach o n the export and i m
port trades either by selling to the e xport and import dealers
o r by competin g w ith th e former in the foreign markets and
.

CURREN CY A ND CREDIT

1 12

with the latter in the home market Be the process direct or

indirect what happens i s in effect that the home dealers get
rid o f their surplus stocks in exchange fo r foreign credits
This relieves the foreign exchange situation and it is clear
that the extent o f the relie f i s proportional to the quantity
Other things being e q ual the surplus
o f the surplus stocks
stock s wil l be proportional to the business o f the dealers co n
cerned Here again we see ho w the smallness o f the mer
c an t i l e element included in the country s credit system impairs
the effectiveness o f th e cred i t contraction
The case o f the country which nances i ts o w n foreign
trade presents a striking contrast In such a country the
prod ucers have little o r no direct contact with any merchants
who are no t subjected to the pressure o f the credit contraction
At the same time the import dealers and export dealers as
well as the home dealers are all interested in selling surplus
stocks abroad
In proportion as there are more merchants
the surplus stocks and the foreign credits obtained in exchange
fo r them are greater
And the mechanism o f credit rein forces the contrast In
the case o f a country which i s a great nancial centre both
exports and imports will be pai d fo r by bills drawn upon its
own bank s or accepti n g houses S o far as imports are co n
cerned the relation between the exchange market and the
transactions to be nanced i s simple When the goods are
consigned a bill is drawn u pon a credit a rranged by the i m
porter i n his own country and is discounted by the exporter
in his country The discounting o f the bill in a di fferent
currency from that in which it is ultimately payable i s an ex
change operation and directly affects the exchange market
A dimin ution o f imports immediately relieves the demand fo r
foreign currencies
The case o f exports is more complicated The purchaser
arranges a credit in the exporter s country draws upon it and
uses the bill to pay the exporter The exporter discounts the
bill in the s a m e country in which it is ultimately payable and
no exchange operation takes place till the importer wh o drew
the bill has to remit to the acceptor the means o f meeting it
.

'

CO NTRACTION O F CRED IT

1 13

When the country o n which both classes o f bills are drawn

contracts credit and its exports are stimulated and its imports
checked there is a great outstanding mass o f indebtedness due
to it from the countries to which it has been exporting in the
immediate past Day by day as the bills with which these
exports have been nanced fall due sums have to be remitted
to meet them from the countries to which the exports were
sent At the sam e time the export dealers who have been
nanced in this manner proceed under the inuence o f the
high rate o f discount to reduce their indebtedness by reducing
their stocks They abstain from buying and consequently do
n o t have to draw fresh bills ; they hasten sales in forei n
g
countries and consequently acquire additional credits abroad
Meanwhile the import dealers being equally subject to the
pressure o f the money market likewise abstain from buying
and fewer bil ls are presented fo r discount abroad All these
tendencies combine to make the excha nges react at once to
the contraction o f c redit
A country o n the other hand whose foreign trade is all
o r nearly all nanced abroad has
as we s aw less power o f
stimulating expo rt s and repe lling imports by means o f a credit
contraction And even such power as it has o f doing this
reacts less easily and i mmed i atel y o n the exchanges The
increase o f exports indeed is immediately effective being ac
companied with a proportionate increase o f bills on foreign
centres requiring to be discounted in the exchange market be
But the decrease o f imports only
fore they are sent abroad
decreases th e bill s which wil l mature in o ne two or three
months in the mean while it will d o nothing to relieve
the exchange m arket which has to provide remittances to
meet at maturity the bills drawn one t wo o r three m onths
be fore
The greater susceptibil ity o f the country which is a great
nancial centre to a contraction o f credit is largely the result
o f the greater proportion o f the short term indebtedness due
from merchants as compared with that due from m anu fac
turers manu facture rs being less sensitive than merchants to the
rate o f intere st Both sides o f the merchants response are
,

'

CUR R EN CY A N D CRED IT

I I4

importantthe restriction o f their purchases and the increase

Th e increase o f sales by heaping up credits
o f their sales
abroad gives immediate rel ie f to the exchanges but th is is n o t
sufcient If the pressure on credit were relaxed too soon

while the consumers outlay i s still excessive the exchanges

'
would at once relapse The contraction o f the consumers
outlay i s proportio ned to the restraint o n production and the
restraint on production is govern ed by the restri ctio n o f the
merchants purchases I f the home dealers alone are subject
to the contraction o f credit the restraint on production is only
partial ; i f home dealers and export dealers are both subject
to it the restraint is complete
Thi s gradual diminution o f the consumers outlay is o f the
essence o f currency control If the consumers outlay has
become excessive this is due to a too pro fuse creation o f credit
t o o pro fuse that i s in proport ion to the conditions and pros
peets o f credit abroad In the rst instance a credit expansion
stimulates production it i s when production ceases to respond
easily to the stimulus that prices begin to rise Ination con

sists in the spread o f the in fection o f high prices through p ro

duction to the con s umers income and thus to the consumers
o utlay When the whole productive machine is working at a
high level o f money values and markets have become unduly
attractive to foreign trade com modities imports increase ex
ports decrease and a balance o f indebtedness has to be paid
If matters are allowed to dri ft the balance is paid in gold till
the gold is exhausted A contraction o f credit by impelling
m erch an ts to increase their sales and to diminish their pur
chases helps to effect an immediate redress o f the adverse
bal ance of indebtedness and to preser ve the stock o f gold
from further depletion
But a radical cure cannot be effected
til l the cause o f the disorder has been removed that is to say
till the hi gh level of moneyy alu e s has been reduced
The position in rQard to securities is similar in principle
A rise in the rate o f
to that in regard to merch andise
interest lead s those who are holding securities with borrowed
money to sell and deters them from buying A nan cia lly
strong country is lik ely to car ry on under writi ng on a large
,

'

A CONTRACTI ON OF CREDI T

11

scale as wel l as accepting and there fore to have la rge hold

i n gs o f international securities which can be sold abroad in
case o f need
The movements o f merchandise and securities under the
inuence o f a con traction o f credit depend o n the action o f
borrowers There remain s to consider the effect o f a rise in
the rate o f interest o n the l end er s Suppose fo r a moment
that the rate o f interest rises in a country which has n o t the
same monetary standard as its neighbours s o that there are
no specie points to l i mit the movements o f the foreign ex
c han ges
If the rate o f discount o n three m onths bills were
1 per cent higher there than elsewhere the possessor o f a
cred it i n a foreign country would be tem pted to remit thither
in order to lend at this more advantageous rate But as the
prot on the transaction would be only I per cent fo r three
months that is to say g per ce nt this tendency to remit
could be counteracted by a movement o f the foreign exc hanges
o f n o more than
1 per cent in favour o f the country The
eff ect o n lenders o i a di fference o f I per cent o n short term
debts being so small it i s obvious that there might be a very
large di screpan cy between the rates in countries without a
com mon standard The direct e ffect on the exchanges
through the attraction o f remittances from lenders would be
slight compared to the e ffects o f a high rate o f interest o n
those w h o borrow to hold goods and securities
But where the rise in interest occurs in a country which
If
i s one o f a gold using group the case i s more complicated
the purpose is to check an i nation which i s occasioni ng an
e x port o f gold the exchanges are at the export specie point
If the inducement to a lender to remit from a foreign country
is to be extinguished the exchange m ust react away from the
export specie poi nt and apparently there fore even though
the additional rate o f interest be the smallest that o ffers any
prot worth considering it cannot be counteracted unless
there be a stream o f remittances from abroad su fcient to stop
the outow o f gold altoge ther So long as the ex change r e
ma i ns at the export point the fo reign lender gains t h e ex tf a
i nterest and he cann o t lose by exchange when the loan
,

'

'

'

'

CURRENCY A N D CRE D I T

I 16

matures and he wants to remit it back to his o wn count ry

because the exchange cannot go b ey o nd the export point s o
long as the gold standard is effective
In practice however there is room fo r a very considerable
di fference between the rates o f i nterest in different markets
at any rate fo r a short time A d i fference o f say I per cent
fo r th ree months o r i per cent in all may not be enough to
remunerate the extra trouble and cover the expenses o f com
mission perhaps involved i n the double rem ittance And
the art o f lending is largely th e art o f nd ing suitable borrow
ers A nancier cannot at short notice nd eligible borrowers
in a country which he does not know and there may be
obstacles to en forcing h i s rights in the courts o f a foreign
country i f this should be necessary at any rate without ex
ces s i ve legal expenses
This speculative lending would p ro
bably be conned there fore to those nancial houses such as
the exchange banks which already have a footing in the
country concerned as well as in their o wn country
We are supposing that the rate o f interest is raised to
check ination If there is an ination o f cred it at o ne o f the
places at which an exchange bank carries o n business there
will be in the rst instance a pressure to remit f r om that place
Its cash holdings there and its dem and liabil ities elsewhere
will grow The rates o f exchange will be put up against the
country o f the ination and i f when the expo rt sp ecie point
i s reached the remittances do not cease the cash will begin to
be sent direct in gold If the rate o f interest i s then raised
the exchange bank i s well S it uated to take advantage o f it by
lending the superuous cash which would otherwise have to
be sent abroad But it is easy to see that this may no t be a
very alluring source o f prot The tide o f remittances owing
o ne way modies the balance sheet o f the exchange bank by
substituting assets in th e country f rom which th e remitta nces
are m ade fo r assets in that to which they are made S o long
as the new assets in the former are cash and the cash i s either
gold o r paper convertible into gold the balance can be re
dressed by sen d ing the gold from the one country to the other
But as soon as the bank lends the gol d a di fferent kind o f
,

A CO NTRACT I ON

OP

CRED IT

1 17

asset is substituted fo r the gold a loan localised in the cou ntry

in which it is made
P r ovi d ed it is certain that the gold standard will still be
effective when the loan fall s due there will be no harm in this
substitution B ut this is a very large proviso I t means
that in order to attract lenders there m ust be condence no t
only in the b orrowers but in the currency in which the loans
are repayable If the ination fo r which the rise o f interest
is designed to be a remedy gets o ut o f hand and leads to a
suspension o f gold payments the prot to the foreign l ender
by th e extra interest wil l be wiped out by an ultimate loss o n
exchange And this will particularly embarrass the exchange
bank which has increased the proportion o f its assets held in
the depreciated currency against demand liabilities in gold
currencie s e lsewhere
The t w o conditions that must be fullled i f a high rate o f
interest is to attract loan s from abroad are that the solvency
o f th e borrowers and the stability o f the currency must com
mand the condence o f the foreign lenders These are the
ve ry same c o nditions that make a great nancial centre H ere
there fore is yet another advantage which be longs to the
nancially strong country in the regulation o f the foreign ex
changes When the rate o f discount i s raised foreigners are
immediatel y tem pted to invest in its bills in the assurance not
only that they will be punctually met by the acceptors but
that the currency in which they are paid will be maintained
at parity with gold
It is fo r this reason that a rise in the
London bank rate i s quickly accompanied by a rise in al l
other bank rates Any money market which maintained to o
l ow a rate would quickly nd th e exchanges growing adverse
owing to the desire o f len ders to remit abroad At other
centres ( I write o f course o f pre war co nditions) the foreign
lender must always allow fo r the possibility o f a loss on ex
c hange through a depreciation o f the currency in which h i s
l oan is repaid As a result o f the general prevalence o f the
gold standard rates o f interest in di fferent centres are linked
together They are free however to vary within l imits

l endi ng poi nts as i t w ere, not un li ke the s pecie poin ts of

,

CURRE NCY AND CRED IT

1 18

th e foreign

exchanges If an extra 1 per cent o n a three

months bill is j ust enough to attract a French lender to the
English market then the English bank rate cannot be more
than 1 per cent above the French Should the di fference
exceed this limit the remittances from Paris to London would
speedily necessitate a rise in the French rate
These lim its however depending as they do o n many
speculative factors are by no means s o denite or so constant
as the specie points in the foreign exchanges A slight dis
trust o f the currency may practic ally make the limits i n
O perative
Even when the limits are fully operative the di fference
between one rate and another i s quite enough to enable o ne
country to contract credit more severely than another and
this remains the only decisive remedy fo r ination High
interest may make the exchanges favourable while it lasts
but as soon a s it i s reduced the loans begin to be withdrawn
and the e ffect is reversed except in so fa r as the contraction
o f credit h as made way
At all points the country which has no position as a nan
When the exchanges turn
c i a l centre is at a disadvantage
against it it must expect the remedial measures to work
slow ly Such a cgu ntry m ust therefo re h ol d a relatively large
gold reserve o r b e exposed to the danger o f nding its re
serve exhausted and i ts currency depreciated in an emergency
To escape from this dilemma to avoid the insecurity o f
a small reserve o n the one hand and the expense o f a large
one o n the other a syste m h as been evolved which has o f late
years been widely adopted Even i f a country has no posi
tion at all as a nancial centre i f n o one draws bills o n it even
to nance i ts own import trade there i s nothing to prevent it
investing in bills drawn on other countries I n time o f stress
when the exchanges are adverse people come to the central
bank o f the country to withdraw gold fo r export This they
do solely in order to obtain credits in excha nge fo r the gold
in foreign countries and it would suit them just as well i f the
central bank could give them credits in those foreign countries
The central bank therefore mak es a regular practi ce
i nstead
.

A C O NT RA C T I ON O F CRED IT
of

ap pl yi n g a part o f its resources to th e purchase o f bill s

payable in o ne o r more foreign centres selected as bei ng those
where traders are most likely to w ant credi ts l The bi lls must
o f course be bought a fter acceptance an d must be presente d fo r
payment i f still held at maturity and consequently the cen
tral bank must have some agency o r representative in the
centre o n which they are d rawn While they are hel d they
may be either le ft in this centre o r taken home by the central
bank When the exchanges become adverse the central bank
can come into the foreign exchange market and ei ther offer
the actual foreign bills fo r sale o r itsel f draw bills on the
foreign centre in favour o f trad er s wh o want to remi t thither

The essence o f the arrangement is that the central bank

,
have
the
command
s ho ul d
o f assets at the fo reign centre
g
B ills accepte d at that centre are a convenient form fo r such
but money lent at cal l or on deposit or i n
, assets to t ake
vested i n easily real isable s ecurities would serve as well
The po ssession o f such assets in any form enables the central
bank to redress the balance in the exchange market by offer
ing fo r sale bills drawn upon them
This system h as the double advantage that it acts on the
exchanges even more direc tly a nd quick ly th an the export o f
gold and that the bi l ls or o th e L fo vei gn as sets unlike gold
yield i pj g res t The accumulation o f a vast reserve o f gold is
she; waste except fo r the nancial stabil ity wh ich it gives
and i f that stability can be equally well gained without the
sacrice involved i n steril ising s o great a part o f the co untry s
wealth there is no reason fo r i ncurri ng this waste Just as
gold reserves are usually kept primarily to secure the con
vertibility and the parity o f a paper currency so foreign bills
or balances abroad are maintained for the same purpose
When the exchanges become adverse bills on foreign centre s
are sold and are paid fo r with legal tender paper which is thu s
withdrawn from circulation Obviously the whole system
depen d s o n the pa per being deni t ely wi thdrawn ; i f it is lent
i
o u t ag ain nothing will have been achieved towards restor ng
,

s ee J ,

Keynes ,

I ndian C urrency and Fi

"

nance.

9118 96 ii .

CUR RENCY AN D CRED IT

1 20

the exchanges the central bank will merely have substituted

assets at home for assets abroad If the paper when once
withdrawn is withheld from circulation th e same eff ect ensues
as from an export o f gold ; the purchasing p ower in ci rcul a
tion is diminis hed by that amount but in order that a p ro
portional reduction may be made in th e stock o f cre d it the
rate of interest must be kept up
It does not much matter in what country the foreign assets
are held provided it be a suf ciently important nancial centre
fo r b i lls upon it to be always in considerable demand
If the
bill s can be sold at all the necessary withdrawal o f l egal
tender paper can be carried out and even i f the chie f demand
is fo r exchange on a di fferent nancial centre the s al e o f the
b ills wil l transfer the strain o f that demand to the centre on
which they are drawn
If the banks o f eve ry country held among their assets a
sub s tantial amount o f bills o r other loans payable at maturity
l in other countries all could regulate their foreign exchanges
without any transmission o f actual gold I n practice o f course
countries are no t willing to be unduly dependent o n their
neighbours in so im portant a matter as the regulation o f credit
or currency i f only because a war might at any time cut them
o ff from o ne or other o f the nancial centres in which their
But in spite o f this risk Russia
foreign assets are s ituated
Austria Hungary Japan Argentina Greece the three Scandi
navian countries have all made som e use o f this convenient
substitute fo r a gold reserve and co lonial d ependencies being
free from the war risk have i n some cases based their whole
currency system on assets held fo r the purpose in their mother
countries I ndia Nigeria the Straits Settlements the P hilip
pines the Dutch East Indies and German East A frica are
instances In these cases it is not merely a note issue which
i s so regulated but a silver coinage system
If there were a
free coinage o f silver the unit o f val ue would o f course be
silver but silver is only coined at the discretion o f the Govern
ment and by l imiting the amount coined the value o f the
standard coin is kept up ( in accord ance with the quantity
theory) to som ethin g materially ab ove the mark et value of the
,

'

A C O NTR A CT I O N O F CRED IT

12 1

silver bullion o f which it is com po sed An over valued silver

o
r
coin
token o f th is kind has been cal led a n ote printed

o n silver
an d p r ovi d ed the uctuations in the value o f silver
d o not bri n g its i n s tri ns i c value up to its nominal value it
beh aves in exactly the same way as a legal tender paper
currency The value o f th e Indian rupee i s kept within a
fraction at the ratio o f 1 5 rup ee s to
1 by means o f the Indian
1
o
t
G vernmen s exchange operations in London
A consider
able part o f the taxes collected by the Indian Govern ment in
India have to be rem itted to Londo n to pay interest on the
Indian debt pension charges and other l iabil ities due in
Engl and The Indi an Government e ff ects these remittances
by perio dically o ffering for sale in London bill s and telegraphic
trans fers o n India If it always sold as much as it could and
no more at the par o f exchange I s 4 d to the rupee the ex
change woul d tend to be permanently at that gu re If the
r upee began to d ep rec iate pe ople would be unwilling to o ffer
1 s 4 d fo r it and the Indian Government would sell none
I t wo uld pay its London liabilities from reserves which it keeps
i n Lond on fo r the purpose and it would retain the correspond
i ng ru pees in its vaults in India
If on the other hand the
rupee tended to appreciate there would be a great demand for
rupees at the x ed price o f I S 4d and the Indian Govern
ment would receive more money than it needed to meet its
liabilities in London I t would pass the surplus into its re
serve in London and would issue rupees f rom its reserves in
India to pay the bil ls and telegraphic trans fers sold in London
I f it h ad to coin fresh rupees it would pay fo r the silver from
its reserves in London but the p rot on the coinage o f the
rupee s w ould o f course remain in those reserves Thus the
i ssue o f rupees into circulation a nd their withdrawal would be
nicely regulated so as to prevent the exchange in London
ever vary ing from par
The actual manner o f proceeding
i s slightly more complicated than this since the Indian
Government d oes no t stop sell ing rupees unless their value
-

d
5
1 below par,
falls
32
-

no r

does it s ell them in unlimited quantities

refer , of cours e, to

ro-

war

di ti ons,

con

1 22

CURR EN CY A N D C RED IT

unless their

val ue rises

above par

32

The margin

of

32
in

either way is taken to represent the cost o f sending gold

stead o f buyi ng exchange and the system is thus not to k ee p
the exchange at par but t o keep it with in the specie points
It sometimes happens that the I nd ian exchange threatens to
,

fall

below I s

3d

notwithstanding that the Indian Govern

ment is selling no rupees In such a case the Indian Govern

ment o ffers to sell bills o r trans fers o n London in India in
unlimited quantiti es and it pays the bills o r trans fers o ut o f
the assets which it holds in reserve in London The system
is th us complete and would ensure the maintenance o f the
gold value o f the rupee without the use o f any actual gold
whatever Nevertheless it is the policy o f the Indian Govern
ment to maintain a gol d reserve in India and also to keep a
gold reserve in Lo ndon This London gold reserve forms
part o f the London assets necessary for the working o f the
scheme I t is not merely a bank credit payable in gold on

demand ; it i s a stock o f actual metal earmarked at the

Bank o f England as the property o f the Indian Government
That is to say it is no t paid into the Ind ian Government s
banking account but is left in the Bank o f England s va ults
merely fo r safe keeping like a private customer s deposit o f
jewel s o r securities
But the extreme o f economy o f gold which is characteristic
o f the gold exchange standard is only possible fo r a country
,
jwh i ch i s i n close union and there fore l ikely always to be at
with the centre o n which the exchange standard is
ba sed
I ndependent countries though they may s upplement
their gold with balances abroad pre fer to base the m ai nten
ance o f the gol d value o f their cu rrencies on gol d kept within
thei r o w n borders

The inclusion among the bankers assets o f bills based on

i nter national trade is n ot o f course the only factor whi ch goes
t o determine the sensitiveness o f a credit system to chan ges
in the bank rate Much depends upon the character o f the
co untry s b usi nes s, an d on th e pro portio n o f i t which is nan ced
.

A CO N TRACTI O N O F CRED IT

1 23

it Th e clas s mos t de p end ent on cred it and most

sensitive to cred it movements being the merchants a pre
dominantly commercial country will b e correspondingly se nsi
tive and its credit system will be the more easily contr olled
Manu facturers o n a large scale though less sensitive and
possessing less power o f economic initiative than the mer
chants
are nevertheless large temporary borrowers
The
manu factu rer be ing a purchaser o f raw material and a seller
o f his nished product has some o f the cha racteristics o f a
merchant He wil l ten d to let his stocks o f raw material ru n
down at a ti me when he cannot borrow o n favourable terms
though his desire to keep his work s going will lead him to
buy under conditions when a merch ant would no t Some
ti mes actuated by the same m otive he will m anu facture fo r
stock when he has no orders o n hand and when he has no
immediate hope o f selling In ord er to carry greater stocks
o f uns o ld goods than usu al he must borrow and the terms o n
which he can borrow will a ff ec t his action in some degree
though not to the same extent as that o f a merchant in si milar
c ircumstances
B ut dealing and manu facturing are only a part o f the
world s business A very l arge part o f the population o f the
world is engaged in agriculture The dealer in agricultural
pro d uce is like any other d ealer ; he borr ows when he buys
and repays when he sells and requires the assistance o f a
banker to nance him A farmer o n a large scale may like
wise employ c redit By borrowing i n anticipation o f his
h a rvest and repaying when it i s reap ed he can economise
his balanc es l ike the merchant o r manu factu rer But the
small peasant does not d o thi s H is unaided cred it does not
en able him to borrow and hi s business is to o small to s upport
a banking acco unt H e sell s his crops for money whether
metal o r paper and gradually d raws o n th e money in the
interval before his next harvest A nation of peasants like
Indi a o r Egypt devel ops comparatively l ittl e bank i ng busi
ness fo r its own needs If even the necessary mercantile
busi ness o f such a country is nan ced by its richer neighbours
n si tiv e to bank in
e
m
urrenc
i
s
al
os
o
letel
ins
c
m
t
t
s
c
i
g
p
y
y

on

cred

CURRENCY AN D CREDIT

1 24

control When foreign nations contract credit it can d o nothing

to kee p pace ; it m ust remain passive while its peasant p o pu
lation nding their sales in foreign markets dim inishe d
gradual ly pay away their hoards till the shrinkage o f purchas
ing power brings down prices to the international level
It may seem mysterious that so slight a change as an
increase in the rate o f interest on temporary loans by 1 o r
The ex
2 per cent should have such far reaching results
planation is in part to be found in the im mediate reaction
on the mt ants who are the e co nomi c lead er s But the
effect is very mu ch intensied by the fact that a contraction
o f credit starts a fall in the prices o f commo d ities and a fall
in prices itsel f has the same e ff ect as a further rise in the rate
We saw in Chapter I I how rising prices operate
o f interest
as an inducement to merchants to increase their stocks and
that the rate o f interest in order to lead to a di minution o f
stocks must be high e nough to o ffset this And just as rising
prices augment the merchant s prot and lead him to acceler
ate his purchases s o falling prices diminish it and lead him
In fact once the rate o f interest has
to accelerate his sales
begun to take e ffect and to depress prices the fall o f prices
itsel f rein forces its e ffects This is one more instance o f a
phenomenon which is constantly recurring in the theory o f
credit and which is indeed at the root o f the inherent insta
bi l i ty o f credit ; a disturbing cause gives rise to ulterior e ffects
which in turn hav e a tendency to stimulate the cause itsel f
When cred it has den itely turned the corner and a contraction
has succeeded to an expansion the downward tendency o f
prices is suf cient to maintain the process o f contraction even
though the rate o f interest i s no longer accord ing to ordinary
standards high Merchants w ho cannot see their way to sell
at a remunerative price are quite rel uctant enough to buy
without the added discouragement o f high interest To put
the same thing from another point o f vie w the monetary unit
is r i si ng in value and a borrower quite apart from the charge
fo r interest has to repay a greater amount o f purchasing
power in terms o f commodities than he originally received
Durin g an e x pansion o f cred it prices are risin g and pro ts
,

CO NTRACT ION O F CRED IT

12

are high and the rate o f interest rises in sympathy with prots
The expansion cul minates and ends with a further rise in the
rate o f i nterest to the point at which it just o ffsets the expecta
tion o f prot and thereupon there ensues a period o f c o n
tractin g credit and l ow interest And even a fter the bank
rese rves have been everywhere restored to the normal p ro
portion o f the banks liabilities interest will continue l o w fo r
a further period in order to induce merchants to resume the
business o f borrowing and buying The history o f the London
money market is full o f examples o f this alternation o f high
and l o w interest The periodicity o f expansions and co ntrac
tions o f credit has fo r long attracted the attention o f eco no m
1
i s ts
I n another work I have endeavoured to Sh ow how
this periodicity is the natural result o f the sl ow response of
people s cash balances o r in other words o f the cash portion
o f the unspent margin to credit movements
Credit is easily
induced to expand but its expansion is not immediately ac
compan ied by a proportionate increase in the earnings o f the
working classes o r in their power t o absorb cash Even when
earnings d o show a material increase this goes to a great
extent not in increased balances but in increased expenditure
In so fa r as the money paid out o n one pay day comes back
through the shops to the bank s by the next no additional
strain is put upon the banks cash reserves From the time
when earnings rst rise there begi ns a gradual accretion o f
people s cash balances which will continue until these balances
But even i f
are in d ue proportion to the increased earnings
there were no f u r t/zer increase in earnings this process would
take a considerable time So long as credit i s expanding
earning s are increasing When credit begins to contract
earnings are at the maximum and the cash portion o f the u n
spent margin is still short o f the level corresponding to this
maximu m The wage earners are in fact still absorbing more
money than they spend The rst impact o f the credit con
traction falls on prots wages cannot be immediately redu ced
nor wil l even employment slacken until pending contracts have
been worked through There there fo re intervenes a period
,

"

oo d an d B ad Trad e

CURRE NCY A N D CR ED IT

1 26

when the absorption o f money into circulation continues n ot

withstanding the contraction o f credit At last the current is
reversed and the d rain o f money rst ceases and then is re
placed by a return o f money to the bank s The depletion
o f people s cash balances is as gradual as the ir accumulation
and the return o f money from circulation continues fo r a long
time a fter the banks have ceased to contrac t credit When
the revival o f business begins there is a great accumulation o f
superuous cash in the banks which provides the opportunity
The whole cycle occupies
fo r a renewed credit expansion
usually from seven to ten years though it m ay be interrupted
by wars and other accidents by which credit movements are
affected The trade expansion which w as already showing
signs o f slackening in 1 9 1 4 w as followed by an orgy o f i n
ated and articial prosperity at the outbreak o f war j ust as
more than a century be fore th e period o f expansion which
collapsed with the outbreak o f war in I 7 9 3 was im mediately
followed by a renewed expansion which culm i n ated in a crisi s
only four years later
The trade cycles are distinguished by a n umber o f sy mp
toms Well known as they have long been it is only in the
past hal f century th at stat i stics have been recorded in so co m
p le te a form as to afford a full practical verication o f the
theory The period o f credit expansion is marked by rising
prices high prots good employment rising wages high
interest fall ing bank reserves The period o f credit contra e
tion is marked by falling prices lo w prots bad employment
fall ing wages l ow interes t rising bank reserves
.

C HA FTER

IX

F I NAN C I A L C R I SES

I F the remedy fo r a disorder in the cu rrency s ystem is to be

found in the control o f credit we have t o consider n o t only
the sensitiveness o f credit to the control exercised by the
banks but also th e possi ble m agnitude o f the disorder to which
the remedy is to be applied
What is the greatest strain to which the currency system
o f a country is like ly ever t o be subjected ?
From the point o f view o f any single nation the problem
presents itsel f as t hat o f control ling the foreign ex chan ges
and the maximum strain means the maximum drain o f gold
We have already seen that cred it is by nature unruly It
is always straining at its tether o r rather it is perpetually
star ting to run away and then b e ing pulled up with a jerk
when the l i mit o f ination consistent with the maintenance o f
the metallic standard i s reached Even with the test o f the
foreign exchanges always at hand to give warning when th e
situation is getting o ut o f hand the necessary preca utions
may neverthel e ss no t be taken and the result will be a break
down It may be that with som e new development o f business
the banks from Sheer inexp erience are beg u iled in to the easy
path o f granting cred it in ever growing volume They follow
the line o f least resistance like a novice in the art o f bicycling
who spin s gaily along be fo re the wind fo r the rst time sur
prised and delighted to cover the gr ound so easily and w i thout
suspici on of t h e struggle awaiting him when he has to return
against the wind O r it may happen that a Government i s
driven under the stress o f some imperative need to cre ate
credits which are known all the time to endanger the val ue o f
its currency This happens above all in time o f war and
,

1 27

CURR ENCY AND CRED IT

1 28

indeed the e ff ect o f war on credit and currency is o f s uch spec ial
importance that it will require separate consideration at a later
stage 1 Against the folly or ignorance o f bankers and govern ~
ments and agai n st the stress o f war no gold reserv e however
great i s an adequate protection It i s easy to see h ow the
line o f least resistance will always lead to greater and greater
ination I f an ination o f credits once begins the co u se
In a country
q uen ce s will be felt in a withdrawal o f gold
with a paper currency dependent o n the supply o f gold as
much as in one with a gold currency this will produce what to
the banker and trader appears to be a shortage o f currency
They will clamour fo r more currency and in so far as they are
guided by their immediate interests will resist proposals fo r
raisin g the rate o f interest and restricting credits It might be
supposed that a rise in the rate o f interest would be protable
and attractive to the banker since his prots are proportional
to the rate o f interest which he charges to his customers In
practice however this is not so The rst step is to raise not
the market rate but the bank rate The mark e t rate only
follows the bank rate because the high bank rate obstructs
advances o f legal tender money from the central bank In the
rst instance there fore a h igh bank rate intensies the shortage
o f currency and increas e s the embarrassments o f the bankers
It is a poor consolation to the banker who sees his Cash
reserves dwindling that the corresponding contraction in h i s
business will necessitate an increase in the rate o f interest
which he charges to h i s customers H e cares more to increase
o r at any rate to maintain the extent o f his business than to
reap such additional prot as even a high rate o f interest will
give him fo r a short time on a reduced volume o f loans To
the trader the high rate o f interest presents itsel f in the rst
i nstance as an expense to be subtracted from his prots but
behind this initial loss looms the far more serious menace o f
a di fculty in borrowing which will affect not merely himself
but those to whom he hopes to sell A central b a
nk o r a
government will only be human i f before the protests o f the
busi ness world it shrinks from the paradoxica l course o f
.

S ee ch aps

xi i i

xvi .

I 29

F INANC IAL CR ISES

remedying a shortage o f currency by making a stil l greater

shortage If it gives way i f it tries to make up the shortage
o f currency by further issues
and does n o t at the same time
insist on a high rate o f i nterest the in ation o f credit will
q uickly be inten sied the fresh s u pply o f cu rrency will be
steadily drained away into circulation and the withdrawal o f
gold fo r export will continue There will soon follow a renewed
clamour fo r more currency and if the same situation is dealt
with in the same way it is inevitable that the system by
which the note issue is related to the stock o f gold will break
down There will be o ne o f those in fringements or amend
ments o f the law t o which we referred in C hapter V This
will be an oppo rtunity fo r a reconsideration o f pol icy ; i f the
opportunity passes and stil l there i s no restriction o f credit
the next stage will be the actual or th reatened exhaustion o f
the stock o f go ld and a suspension o f specie payments The
moment the free payment o f the legal tender notes in gold
stops they will begin to fall to a di scount and the foreign
exchanges already up to the export S pecie point will become
more adverse still The fail ure to maintain specie payments
marks the cutting adri ft o f the country s currency system from
that o f the gold using world ; i t means that business which
till then h as been stimulated by the inated turn over o f credit
and there fore o f purchasing power begi ns to be di sorganised
by doubt as to the value o f the moneta ry unit Its val ue is
palpably falling but no one knows how rapidly it will fall ; it
cannot be permitted to fall indenitely or all measure o f value
will be lost but no o n e knows when the limit will be reached
or a recovery will begin The recovery can still be started by
a high rate o f i nterest but even without that the mere dis
organisation o f business may o f itsel f check b c rro w i ng and help
to stop further ination Once the vicious circle o f expanding
credits and rising prices has been broken the central bank can
regain control o f the S ituation but the accumulation o f un
executed orders to producers which usually accompanies a
period o f i n ati o n will probably prolong the expansion o f
credit fo r some time a fter the lo s s o f c o ndence has b e gun
It is likely there fore th at befo r e stable conditions have returned
.

CUR RENCY AN D C REDIT

1 3o

there will be a material depreciation o f the currency If the

o l d standard i s ever to be regained there must ensue a long
and pain ful period o f co ntracted credit
There h as been s o much bitter experience o f this rake s
progress in nearly every country o f the world that nowadays
the great central bank s are alive to the importance o f keeping
control Perpetually watching the foreign exchanges al l k eep
pace together and so long as they d o s o no serious gold
movements occur except fo r the usual stream o f metal from
the gold m ining countries It was shown in Chapter VI that
credit expansions and contractions tend to be
as a result
world wide though the susceptibility o f any particular country
to their effects will depend upon its special ci rcumstances A
world wide contraction i s only necessit ated by a pre existing
expansion The countries which participate in the expansion
experience a growing demand fo r money fo r internal circula
tion Th i s demand denudes the banks o f their reserves o f
legal tender money and they in turn have to draw fresh s u p
pl ies from the central bank The time arrives when in one
o r more countries these fresh
supplies cannot be provided
without denuding the surplus reserves o f gold and running
the risk o f a breach o f the law by which the paper currency
i s regulated
At t his point the contraction o f credit begins
The centres so threatened raise the rate o f interest o r take
other means o f contracting credit and as soon as these
measures become e ffective they begin to draw gold from
abroad But other countries will fo r the most part be unable
to spare gold and must respond by raising the rate o f interest
in their turn In a short time credit begins to contract every
where B ut the di fferent nancial centres are likely to nd
it more di fcult to keep pace in a credit C ontractio n than in
a credit ex p ansion In a general credit expansion the country
which g e ts a little ahead can easily slow down by raising the
rate o f interest somewhat above the prevailing level In a
general credit contraction the country which drops behind
can only save itsel f by increasing the pressure which though
per haps already grea t has been found i nsufcient If drastic
action be then taken , re sul ting in a corres pon d ingly severe
.

F INAN C IAL CR ISES

131

fall i n

the values o f commodities and securities there may

ensue a nan ci al crisis
The characteristic o f a crisis is wide spread bankruptcy
The fall of val ues diminishes the assets wi thout l i ghtening
the liabiliti es o f the merch ant who is carrying o n business
wi th borrowed money The failure o f the merchant may en
danger the solv ency o f his banker whose assets thoug h so
long as they are good they are o f a xed money value depend
fo r their security o n the assets o f his customers
The failure
o f som e banks
coupled with the relucta nce o f those which
remain to lend drives traders to sell i nstead o f borrowing in
order to raise the ready money necessary to meet their i m
mediate liabilities The extreme rigour o f the crisi s i s due
to the depreciation o f values already great enough in co u se
q uen ce o f the contraction o f credit being intensied by these
The catastrophic fall o f prices is ree cted in a
forced sales
violently f a vou r a bl e movement o f the foreign exchanges Gold
pours in and other countries to sa feguard their gold reserves
must resort to a contraction o f credit al most as drastic a s in
the crisis centre itsel f
P robably o f all the di fferent strains apart from war to
which a currency system may be expo s ed that o f a serious
exter n a l crisis that is to say a crisis in a neighbouring country
is the most severe
o f com mercial and nancial importance
A country subjected to this maximum strain su ffers a drain
o f gold due to causes beyond its own control which arises
with great suddenness and can only be coun teracted by drastic
measures fo r the contraction o f credit These measures them
selves m ay cause so d isastrous a fall o f values as to lead to
a cri sis at home and in that case the remedy may be worse
than the disease
In a nancial crisis there are two q uite distinct causes at
work to depress prices and to make the foreign exchanges
favo urable and these t w o causes th ough frequently found in
c onjunction may sometimes occur separately First there
is the curtail ment o f credit by the banks in consequence o f
the s hortage o f legal tender currency and the depletion o f
their reserves ; and secondly there is the i mpairment o f the
,

CURRENCY A N D CRED IT

1 32

solvency o f both the banks and their customers It is c lear

that the impairment o f solvency might occur without any
shortage o f legal tender currency A single very large failure
( which may be the result no t o f a sudden drop in price s but
o f a long course o f imprudent trading success fully concealed
until the deciency o f assets has becom e ove rwhelmi n g) may
lead to a multitude o f others A sudden change i n the con
d i ti o n s o f supply o f a single com modity o r in the demand
fo r it may land a number o f speculators in bank ruptcy
Whatever the cause a series o f commercial failures will de
stroy a part o f the assets o f the banks This may no t o f
itsel f restrict the operations o f the banks in any degree ; f o r
a bank which h as su ffered losses can best recover its position
by maintaining o r even extending i ts business and using a part
up a capital reserve But a crop o f
o f its prots t o build
business failures i s al most certain to make the banks cautious
They will be less likely to lend on the u n s u p
i n lending
ported security o f a merchant who may to morrow s u ffer the
same disasters that brought down hi s n ei ghbours yesterday
And every rm which was a creditor o f those which have
failed has lost thereby some o f its margin o f solvency and
h as become a less desirable borrower tha n be fore
The re
l uctan ce o f the banks to lend will diminish the total sums
lent and this retardation o f the fabrication o f new credit will
have j ust the Same e ffect in the rst instance as if it had been
undertaken expressly to check ination But i f the commer
c i a l failures have o c c ur e d at a time when there is n o ination
and when there fore the cash reserves o f the bank s bear an
adequate proportion to their liabil ities the curtailment o f
credit is not likely to last long Anxious though they may
be to avoid lending to those traders whose solvency i s under
s uspicion the ba nks will be ready enough to lend to anyone
whose solvency i s beyond doubt or w h o can o ffer ample
security In proportion as their business has shrunk in con
sequence o i their caution in dealing with the former class
they will be eager to extend it by increasing the accommoda
tion which they grant to the latter
Commercial failures however may have a more serious
.

F I NA N C IAL CR IS ES

1 33

eff ect than this upon the supply o f credit If they are severe
en ough they may ruin the banks w hich have lent to the i n
solvent rms The failure o f an i mportant bank h as a most
violent e ff ect upon cred it operations The obligations o f
a solvent bank are from the point o f view o f its creditors
simply the eq uivalent o f so much money Let the ba nk
become insolvent and these obligations are as it were petried
They become de ferred claims to share in a fund o f p ro b le m ati
cal value I f there is a prospect o f the a ssets turning out
well other banks may grant cautious loans on the security o f
these claims but well within their face value B ut a great
part at any rate o f the purchasing power represented by the
de funct bank s liabil ities is annihilated
Again a bank knows i ts customers a ffairs and i f it fails
th ey cannot so readily obtain loans fro m other banks to whom
they are strangers There fore not only does the prospect o f
the loss o f at any rate a part o f the sums due to them from
their bankers weaken their nanci al position but they cannot
easily nd lenders willing to advance even su ch loans as their
nancial position still j usties The destroyed purchasing
power cannot be immediately repl aced and till it begins to
'
be replaced the con sumers outlay w ill be proportionately less
than be fore The count ry becomes a bad market to sell in
and prices fall But the traders and stock jobbers wh o carry
o n business with borrowed money
and who nd thei r bank
balanc es suddenly impounded and their borrowing power cur
tailed or suspended are driven to sell whatever wealth they
can realise H elpless in the agging home market they rush
to o ffer goods and securities in any foreign market where they
can nd purchasers And the foreign purchasers still free
fro m credit di fculties in their own countries are o f course
ready and eager to buy goods o r securities at l o w prices The
sudden heaping u p o f credits in foreign countries at the d i s
posal o f traders who are in urgent need o f ready money at
home will o f course immediately react upon the foreign ex
changes The exchanges will become ve ry favourable and
gold will ow in this inux o f gold will help to make up the
shortage o f purchasing power If there were no recuperative
.

"

I 34

CURRENCY A ND C REDIT

tendency in credit at all the quantity o f gol d need ed to re

store equilibrium would be equal or comparable to the whole
amount o f credit money destroyed If the crisis occurred in
a country where credit i s highly developed the quantity o f
gold needed o n this basis m ight be enormous The a mount
o f credit money in such a c ountry may be three o r ve o r
even ten times the amount o f gold The bank ing deposits
o f the United States even be fore the war were much greater
in total value than all the gold c urrency in the world Those
o f the United K ingdom
tho ugh less even in proportion to
population were greater than all the gold currency in E urope
The banking deposits in other great commercial states ran to
total s o f several hundred millions each If a crisis suddenly
made a considerable gap in one o f these vast tota ls and the gap
could only be lled by gold a severe strain would be put upon
the currency systems o f all other countries But i f the crisis
is merely commercial and does not arise in the midst o f
a period o f ination when there is already a shortage o f cur
re ncy there are several remedial tendencies at work
Fo r one
thing the extinction o f a quantity o f credit reduces the pro
portion o f credit to money and the bank s are ready enough to
increase their advances to solvent borrowers in o rder to restore
the proportion
The sale o f good s and securities abroad
reduces the stock s o f both and makes the people w ho have
sold them ( and who will have re duced their indebted ness with
the proceeds) ready to borrow a fresh in order t o accumulate
new stocks w
hile pri ces are still lo w Th e gold imported i n
creases the d isproportion between credit and money and adds
to the wil lingness o f the bankers to lend In such cond itions
there fore the fabric o f credit is l ikely to be ve ry quickl y re
constructed and the amount o f gold actually imported may be
quite moderate
I n practice however commercial crises hardly ever occur in
this detached form they are almost invariabl y associated with
nanci a l crises So long as credit is expanding unsound
businesses can usually stave o ff bankruptcy and it is the failure
o f markets and fall o f values resulting from a contraction that
bring them down Prices have been forced u p to a level at
,

5
,

F I N A N C I A L C RI S ES

135

which the currency sy stems o f the world and the stock o f gold
canno t perm anently maintain them The drain o f gold o r o f
paper based on gold into circulation i s the signal fo r the i n
evitable contraction o f credit and deation o f values This
process o f dea tion threatens the solvency o f the weaker
tra d ers I n any country where the expansion has been exec s
sive and the contraction is proportionately severe a crisis may
break out
The distinguishing characteristic o f a crisis is the pressure
!
to sell caused by the peril o f bankruptcy
If a trader is i n ;
danger o f failing that is the result o f a fall in the value o f his
stock i n trade H e has been employing both his o wn capital
and the advances he can get from his banker to buy goods
in the expectation that he can sel l them as fast as he buys
them at a rising p rice Sales suddenly fall offa sign that
the period o f ex pa nding credit is at an end and that the banks
are initiating a period o f contraction The un fortunate trader
nds n o t merely that his goods cannot be turned into cash s o
quickly as he had hoped but that he cannot get so much cash
fo r those which he does sell and that the value o f the whole
o f the stocks on h i s hands h as to be written down to the new
level o f prices Failing to sell he has to renew loans from his
banker in order to carry the unsold stocks and he may have
to increase his indebtedness i n order to pay fo r new consign
ments o f goods ordered be fore the tide began to turn but
In such circumstances even i f the
only d el ivered a fterwards
excess o f his assets over his l iabilities does no t vanish al
together i t may well be that the margin is so narrow that he
cannot provide good enough securi ty to induce his banker to
grant the accommod a tion he needs In that case i f he is to
meet his engag ements he m us t sell But the curtailment o f
credit has already spoilt the home market and it is the failure
o f the home market that is the cause o f all his embarrassments
He is therefore driven to sell abroad i f he can But the
reme d i al ten d encies which would mitigate the severity o f
a purely commercial cri sis are absent when the situation is com
plicated by currency di f culties Foreign countries are them
selves short o f gol d o r at any rate cannot spare go l d consistently
.

CURR EN C Y A N D CRE DIT

I 36

with their currency laws Bank s at home and abroad alik e

are anxious not to extend but to curtail their advances
even to solvent borrowers The contraction o f credit in fact
and the consequent failure o f demand are n o t local but worl d
wide I n proportion to the difculty o f selling the depressing
e ffect o f the forced sales upon prices i s inten sied P rices are
fo r the moment at an articially low level and many traders
whose business according to t h e standards o f normal ti mes
would be perfectly solvent go under simply because they
can neither borrow nor sell
But though crises ari se out o f a world wide contraction o f
credit they are not themselves necessarily world wide As
the contraction progresses there may be a collapse in one
country or another and i f the crisis is severe and the country
in which it occurs i s important the others may be subjected
to a very heavy strain But they may stand the strain
There are in fact two ways o f escape from a state o f ination ;
a gradual way by means o f a restriction o f cred it and a violent
way by means o f widespread bankruptcy The rst i f ap
plied to o forcibly may develop into the second And i f one
country be un fortunate enough to su ffer this d isaster it be
comes d i ffi cult fo r the others to avoid it The fall in values
in the former h as been accelerated and h as outstripped the
fall elsewhere
Foreign markets remaining at a higher level
o f val ues are exposed to the stream o f forced sales and can
only de fend themselves against it by hastening to contract
credit and to e ff ect a corresponding fall o f prices Until they
d o so the exchanges will be against them and they will lose
gold Here the advantage o f hold ing a large gold reserve in
a crisis becomes apparent The disparity o f values in two
countries stimulates imports into that in which values are
higher and checks imports into that i n which values are lower
creating a balance o f indebtedness from the former to the
latter So long as this balance o f indebtedness can be dis
charged i n gold the disparity can continue The possession
o f a stock o f surplus gold may just enable a country to tide
over the critical period with a gradual instead o f a sudden
reduction o f prices B ut no gold reserve is unl imited an d
,

F IN AN C IA L CR I S ES

r 37

if

it i s to full its purpose a steady contraction o f credit is

essent i al Otherwise the exhaustion o f the reserve might nd
the country still at a level o f prices above its neighbours and
faced with the choice between a contraction s o precipitate as
probably to cause a crisi s and a su s pension o f gold payments
involving a temporary abandonment o f the gold standard
In fact i f all countries are to maintain a gold standard all
must su ffer substantially the same fall o f prices so far at any
rate as foreign trade commodities are con cerned Nevertheless
under this broad p rinciple are hidden many complications
Quite apart from the temporary means o f de fence a fforded by
the use o f a gold reserve to pay fo r an excess o f imports the
vulnerability o f a co unt ry at a time o f crisis is a ff ected by a
great variety o f com merc i al nancial and industrial conditions
When we speak o f a credit movement and in particular
crisis being world w ide we mean that the
o f a nancial
changes in t h e
are only
oo d s or securities abroad
To determine the susceptibility o f a country to the contagion
o f a crisis we must consider to what extent it will in fact buy
o r sell goods or securitie s
It will be convenient t o consider goods rst The failure
o f demand and the pressure t o sell which characteri s e a crisis
will affect di fferent commodities very uneq ually The con
sumers outlay i s diminished in correspondence with the con
traction o f credit and the man who nds he h as l e s s to spe nd
will econom ise more drastically o n some commodities than
on others H e will economise more o n luxuries than on
necessities and more o n durable goods which can be made
to last a little longer than usual than on those which are used
up in the process o f being consumed He will economise
more on tobacco than on bread but more on boots than on
tobacco The dem and fo r food especially fo r the staple kinds
will be maintained ; the demand fo r manu factured
o f food
goods will ag Where there are large accumulated stocks
especially i f they are due to speculative buying during the
preceding period o f expansion prices are likely to fa ll heavily
.

C U RRENC Y A N D CRED I T

I 3S

And where th e supply cannot be easily and prom ptly t e

s t ri cte d as in the case o f most agricultural products a similar
e ffect follows Raw materials o f manu facture are o ften very
sensitive in their price movements the supply not acco m
m o d at i n g itsel f quickly to changes in the demand fo r the
nished product
N o w it may happen that the particular commodities most
exposed to the failure o f demand at the crisis centre do not
play any considerable part in foreign trade The dealers in
these commod ities are precluded from raising money on the m
abroad perhaps because they do not suit foreign tastes or
perhaps because they will not bear tran sportatio n Th e com
m o d i t i e s which are exported or imported may happen to be
such that the money demand fo r them is relatively little
a ffected The prices o f these goods d o no t fall much the
merchants who deal in them su ffer little or no embarrassment
and there is no appreciable pressure to sell In such a case
the imports rejected and the goods diverted from the home
market to export would be small in volume and foreign
countries would experience but l ittle o f the effect o f the crisis
If o n the other hand it be assumed that the foreign trade
commodities are largely a ffected by the crisis that among ex
ports and imports are classes o f goods the home demand fo r
which has collapsed sensationally and that the consequent
pressure to sel l h as resulted in a large decrease o f imports and
increase o f exports the e ffect on any particular foreign
country may still be either great or small The effect will o f
course depend o n the extent to which the decrease o f imports
and increase o f exports are felt in the trade with the foreign
co untry concerned If the foreign trade o f that country with
the crisis centre i s large in proportion to the home trade o f the
former and contains a large proportion o f goods ( whether ex
ports o r imports) which are sensitive to an adverse market
that is to s ay such that the demand does and the supply does
n o t contract easily when the consumers outlay fal l s o ff then
the effect o f the crisis on the foreign country will be great I f
i ts forei gn trade with the crisis centre is smal l o r contain s a
s m all propo rtion o f sensitive commodi ties
the effect o f the
,

F IN A N C I A L C R ISES

I 39

risis upon it will be cor respondingly less But whether the

e ffect be small o r great the immediate practical mani fe station
o f it i s a balance o f indebtedness to the crisis centre
Traders
in the crisis centre have acquired credits in the foreign country
and wi sh to trans fer these credits into their o w n country In
the rst instance only foreign trade commodities have been
a ffected The existence o f the foreign demand m akes the
prices o f these commod ities fall less than they otherwi s e would
at the crisis centre while the inuence o f the crisis makes
their prices fall abroad at a t i me when other commodities are
unaffected But a s soon as traders at the cris i s centre begin
to withdraw their credits other tendencies begin to operate
The balance bet ween exports and imports having be e n upset
these credits can only be withdrawn in gold Every foreign
country from which cred its are withdrawn there fore begins to
lose gold The lo ss o f gold with which each i s threatened
corresponds to th e amo unt o f credits fo r which its banks have
on balance become liable to traders in the crisis centre A
loss o f gold will threaten the stability o f the banks and must
be met by a restri ction o f credit ( For the moment we may
leave the alternative o f a suspension o f gold payments out o f
account ) The extent o f the restriction necessary will depend
partly on the proportion o f the threatened gold withdrawal to
the whole stock o f gold in the country partly o n the state o f
the gold reserves i n comparison with outstanding credits at
the ti me It may be that the gold reserves are much above
wh at i s regarded as the standard pre portion and that the
credits acquired by traders in the crisis centre are so moderate
that practically no restriction o f credit is necessary In that
case the prices o f co mmodities other than foreign trade com
But in
m o d i ti e s will in the rst instance be hardly a ffected
general some material restriction of credit will be necessary
and there will ensue all the consequences which we have
already traced The contraction in the consumers outlay
will make the country a worse market to sell in and will
deter the traders a ffected by the crisis from disposing o f their
goods and gain i ng credits there If the threatened gold with
d ra wal s larg ely exceed the amount o f gold that can be spared

I 4O

CURRE NCY A ND CRED IT

and especially i f in a preceding period o f i n ation the bank

reserves have been denuded and latent demands fo r credit
have b een set in motion s o drastic a restriction o f credit may
be nece s sary as to precipitate a separate crisis in the country
The count ry which is liable to su ffer in this way
s o situated
is that whose foreign trade is large in comparison with its
home trade and whose exports and imports include a large
proportion o f goods sensiti ve to an adverse market But o f
course it is j ust such a country that wil l spread the e ff ects o f
Thus
i ts o w n crisis most extensively among its neighbours
a third country which in the rst instance escaped the con
tag i o n through the i n s i g ni cance o f its intercourse with the
original crisis centre may succumb when a new crisis centre
develops in a country with wh ich its foreign trade is more
extensive By the time the full world effects o f the original
crisis and all the consequential crises have been felt there will
have been a general fall in the world prices o f al l the sensi

tive commodities included among the staples o f i nternational

trade The commodities in each co untry unsu itable fo r export
and im port will be more or less affected in price according as
the country in question h as been driven to make a more o r
less drastic restriction o f credit The com mercial failures
which are the special characteristic o f a crisis are occasioned
by the fall o f prices and they occur mainly among dealers in
sensitive commodities whether the sensitiveness be d ue to
the normal cond itio n s o f demand and supply or to temporary
circumstances such as recent speculative buying Failures are
also more likely to occur a mong dealers who are holding
large stocks in proportion to their turn over whether they d o
so because it is the usual practice o f their trade or because
their stocks have been increased fortuitously above the usual
amount
Quite apart from its permanent econom ic position cha nce
may very greatly a ffect the responsiveness o f a country to an
external crisis It is assailed through i ts foreign trade the
drain o f gold i s made possible by an i ncrease o f i mports and
a shri n kage o f exports B ut j ust at the moment o f the crisis
its exports might happen to be unusually large A country
,

F I N A NC IAL CR ISES

14 1

which exports agricultural produce o n a large scale fo r example

may have an exceptionally bounti ful harvest Under normal
external conditions the consequent increase o f exports would
make the exchanges favourable and occasion an importation o f
gold If the exceptional harvest coi ncides with a nancial
crisis in a nei ghbouring country it may partly or wholly
counteract th e tendency o f fo rced sales from the latter to
increase im port} and dec rease exports and o n balance the
exchanges may be hardly a ff ected
Something like this
occurred in the United States when the effects o f the Baring
crisis in 1 8 9 0 were l argely counteracted by the good harvest
,

of 1 89 1

Whereas the forced sales o f commodities come from dealers

in those com mod ities embarrassed by the failure o f thei r
market the forced sales o f securities come from two sources
They come partly from embarrassed dealers in securities but
partly also from traders and bankers w ho keep a reserve o f
securities to borrow on o r in the l ast resort to sell in case
they cann ot raise cash by any other m eans in an emergency
These reserves are natural ly held as far as 'possible in securities
international reputa tion which can be readily sold
o f an
abroad As a rule the rst prem o nitory symptom o f a crisis
is a stream o f sales o f these securities A crisis does not break
out without wa rning in the midst o f a great trade expansion
According to the more usual sequence o f events the trade
expansion is rst o f all checked by a drastic curtailment o f
credit and there then fol lows an uneasy interval o f perh aps
some m onths while the weaker traders are battling against
During
failing demand and falli n g prices to keep solvent
this interval they will have recourse to the sale o f their re serves
and when these reserves are exhausted the
o f securities
A serious fall in the prices o f securities
fai lures Iv i n begin
will precede the crisis itsel f and thi s will impair the solvency
But these dealers are at the
o f the dealers in investments
same ti me as much exposed as the dealers in commodities to
the adverse inuence o f the cred it contraction Indeed the
nature o f their market i s such that they suffer more from the
credit contraction than the merchants
,

CURRENCY A N D CRED IT

x4 2

Just as the merchant depends o n the con sumers dem and

to dispose o f the commodities in which he deals s o the invest
ment market depends o n the investors demand to absorb its
securities If its indebtedness to the banks is not to increase
the sale o f securities to the public must keep pace with the
new i ssues fo r which the market makes itsel f respo nsible
B u t while the initiative in ordering new ~
c o ns i g n m e nt s o f com
m o d i t i es rests with the merchants the investment market does
not take the initiative in the production o f new securities
The origination o f new issues belongs rather to the promoters
and borrowers w ho are guided in their plans by the prospect
xed capital on
o f using advantageously o r protably the
which the money borrowed i s to be spent At a time when
credit i s expanding and production is protable and active
there is likely to be a great pressure o f new issues to provide
xed capital fo r the increased production and s o to take
advantage o f the favourable trade conditions When the tide
'
turns and steps are taken to restrict credit the consumers
outlay o f which invest m ent forms part suddenly shrinks
But the various schemes fo r the employment o f xed capital
cannot be abruptly abandoned or even curtailed beyond
a certain po int Underwriters have al ready been found fo r
some ; others are pressed on unwilling underwriters at the
price o f a large commission The result is that when invest
ment suddenly shows a great falling o ff the investment market
nds itsel f loaded up with securities largely new issues which
can only be carried by means o f increased loans from the
banks Savings being the surplus o n income a fter all personal
expe nditure h as been met are very sensitive to changes in the
amount o f income Investment i s there fore the most ya ri able
part o f the consumers outl ay and the investment m ark t has
to face greater uctuations in demand than the market fo r
commodit i es At the same time the forced sales o f securities
held by bankers and traders as reserves contribute further to
the overloading o f the market an d the depreciation o f security
val ues
Thus the solvency o f stock jobbers and nance
companies is more likely to be threatened even than that o f
the merchants and forced sales o f securit ies will be an even
,

FI N A N C IAL CR ISES
more characteristic feature
m o d i t i es

of

1 43

a crisis than forced sales o f co m

Stock exchange securities fall broadly into two classes

shares whether ordinary or pre ference which yield va r i a bl e
dividend s ; and debentures Government stocks municipal
stocks bonds etc which yield fix ed dividends o r interest
Variable dividends depend on prots and are susceptible t o
all the inuenc es which aff ect the market fo r the goods o r
services produced When easy credit sti mulates trade and
prices rise prots and dividends are high and the prices o f
shares are high fo r the prospect o f high dividends even fo r
no more than two o r three years adds very materially to the
value o f shares When credit contracts and prices and p rots
fall shares fall
Fixed interest bearing securities tend to
follow exactly the contrary rule
When trade i s active and
high prots can be obtained fro m the use o f money in trade
the prevailin g rate o f interest is high and consequently the
price o f a security bearing a xed rate o f interest is l o w
When trade is bad and pro ts lo w the price o f a x e d interest
security rises At a time o f crisis and i n the uneasy period
which precedes it the prices o f all securities are depressed
Share s fall because trade has passed i ts zen ith ; x ed interest
sec urities fall because o f the f orced sales
The extent o f the forced sales will depend largely on the

quantity o f international securities hel d in the crisi s centre

The traders and bankers who are in diffi culties will sel l all
they can Dealers in investments will al s o be sellers in order
that they may be in a position to buy other securities which
having no foreign m arket can be had at low prices The
private investor however will not want t o sell just when
prices are exceptionally lo w On the contrary he will tend
to accelerate his purchases o f investments ; he will risk a
reduction o f his banking account below its usual level in order
to get good investments cheap and will thereby help to re
lieve the situation
The appetite o f foreign ma rk ets fo r the securities will de
pend o n tw o facto rsthe actual or prospective investment
dem and and the nancial position o f the investm en t markets
,

CURRENC Y A N D CREDIT

r 44

Dealers w ill be gl ad to get securities cheap i f they can foresee

a demand for them but they will not be willing to buy them
unless they can pay fo r them without increasing thei r indebted
ness to their bankers to an inconvenient extent H ere we
see o ne o f the advantages o f a country which h as withstood
the temptation to indulge in credit ination ; it can a fford to
grant credits to the dealers in investments w ho there fore can
buy securities on advantageous terms and at the same time
relieve the needs o f its d istressed neighbours
Perhaps the most important factor o f all in determining
the dissem ination o f a nancial crisis is the distribution o f
international investment in new issues
A severe crisis will very nearly bring new issues to a dead
stop so far as this is possible ; those which are already under
way will rem ain as a source o f embarrassment rst to the
underwri ters and then to the investment market as a whole
N o w new issues are very largely required fo r the development
o f new countries
Consequently under normal con d itions
there is a steady export o f capital from o l d countries to new
When credit is expanding all over the world this export o f
capital increases in volume The consumers outlay i s greater ;
the surpl us o f it available fo r investment is greater even in
proportion ; the openings fo r investment i n new countries are
made more protable by the active demand fo r commodities
I f the expansion o f credit culminates in a crisis the export
o f capital suddenly contracts again
The suddenness o f the
reaction depends partly on the extent to which the under
writers o f the new issues are exposed to the e ff ects o f the
crisis If they remain solvent they must provide the money
according to their bargains and the new works will continue
But eve n i f they remain solvent work which has no t actually
been begun is likely to be postponed and i f they fail under
takings which are already in progress may have to be sus
pended o r abandoned There fore there may be a very abrupt
diminuti on in the importation o f capital into a new country
This woul d have an important e ffect o n the foreign exchanges
Whi le the crisis itsel f makes the exchanges on the cri sis centre
in al l o ther countries un favourable t o these latter the stoppage
,

FI N A NC IAL CR I SE S
of

14 5

foreign

inve stment is an additional inuence mak ing the

e xchange s
un favourable in all new coun tries o r countries
whi ch are norm ally borrowers and making them favourable
in the countries which are normally lenders I n the former
cth e e ff ect o f the crisis is enhanced in the latter mitigated
When a new or borrowing country i s itsel f the scene o f a
crisis the co llapse o f markets there is likely to discourage
in vestment and the slacken ing o f i nvestment will have an
adverse i nuence o n the foreign exchanges This will tend
to counteract the e ffect o f the forced sales in foreign markets
an d to impair the power o f the country to draw gold from
abroad Consequently new countries are more likely than
o ld to lo se control in a crisis and t o fail to maintain gold
,

nts

The susceptibility o f a country to the inuence o f an ex

ternal crisis may be a ffected by transitory movements o f
capital as much as by temporary movements o f commodities
If it is just e m bark i ng o n a large borrowin g operation when
the crisis breaks o ut and i f the borrowing o peration is not
interrupted by the cri sis the favourable movement o f the ex
changes req uired to nance the borrowing will tend t o counter
act the adverse m ovemen t caused by the crisis The stress
o f a crisis is transitory and may be tided over in this way
though when the tale o f bankruptcies i s complete and the
forced sales are past the borrowing country will nd that it
must accommodate itsel f to a new level o f money values It
must then face a part at any rate o f the ordeal through which
its neighbours have passed ; it must restrict credit until the
In fact the
foreign exchanges have recovered equil ibrium
disadvantage o f remedying adverse foreign exchanges by
borrowing abroad is tha t the remedial effect only lasts while
the borrowing continues The mere cessation or slackening
o f the borrowing produces an un favourable reaction in the
exch anges quite apart from any repayment o f the sums bor
rowed ( fo r we are here considering n o t temporary borrowing
but permane n t borrowing o r long
term investment)
A very i mportant factor in i ncreasing the vulnerabil ity o f
a country i n c ase o f a c ri s is i s an e xce ss o f speculation eith e r
.

'

"

10

I 46

C U RR E NCY A N D CRED IT

in commodities o r in sec urities Securities present the best

opportunities fo r speculation owing to their wide uct uations
A concern which has to pay no t only working ex
o f value
penses but interest on a large loan capital be fore it produces
any distributable prots m ay yield very uctuating dividends
I f it has a capital o f
o f which one hal f is in 5
per cent debentures then gross receipts o f say
less
working expenses o f say
would leave a net prot
which would pay the debenture interest o f 2
of
o f share capital
together with 5 per cent on the
If the gross receipts rise 2 0 per cent and the working expenses
1 0 per cent
the former will be
and the latter
The net prot will be
which will be
suffi cient to pay the debenture interest and leave
to
pay a 1 0 per cent dividend o n the shares Thus the dividend
can be doubled by a moderate increase o f prices and output
The shareholder is the residuary beneciary o f the speculative
prots and where the rise o f price is large the increase i n
di vidends may be enormous A dividend o f say 3 0 or 40
per cent with a prospect o f two or three future dividends on
a similar scale wil l send the market value o f the shares soaring
upwards
Now the speculator buys shares with a V iew to selling
them again at a prot and he buys them with borrowed
money To attain success in his venture he relies o n his
k nowledge o f the particular shares which he has bought and
o f the psychology o f the investors and o f his fellow speculators
I f he i s wise he will without doubt keep watch also o n the
money market conditions but he wi ll be a very exceptional
speculator ind eed i f he is prepared fo r all the reactions o f the
contraction o f credit when it comes upon commodity values
and the investment demand A crisis almost invariably takes
the main body o f speculators by sur prise Manu facturers and
merchants usually borrow fo r xed periods and in the interval
be fore payment falls due they are free from pressure to repay
whatever storms may break o u t in th e m o ne y markets But

the speculator in securities usually borrows either at call

as in N ew York he may be called upon to repay at any
.

F INANC IAL CR I S ES

1 47

ti me ) o r else fo r short periods e g from one London Stock

Exch ange account to another these accounts coming twice a
m on t h
A sud d en general fall in the values o f speculative
sha res precipitates a wholesale call ing up o f loans A feature
o f nancial c rises in the United States i s the violent rise in the
rate o f in terest o n call money which sometimes rises in the
fo rm o f a comm is sion o n renewal as high as ; per cent per
day 1
Speculators in stocks are so especially exposed to the strai n
o f a crisis th at particular crises are very commonly explained

as d ue to over s peculati on
I n po int o f fact however
there are examples o f periods o f furious spec ulation which led

to n o crisi s at all
The Kaf r boom o f the nineties ex
pended i tsel f without any crisis and several years o f sound
trade intervened be fore the comparatively insignicant crisis o f
1 90 1 in Ger m any u sh ered in the depressi on o f trade o f 1 9 02 5
The rubb er boom o f 1 9 1 0 came at a time when trade was re
covering from the great American crisis o f 1 9 07 ; there was
n o credit ination at the time
n o seri ous nancial crisis o c
curre d anywhere and the trade recovery continued unbroken
till 1 9 1 3
Speculation in fact may be induced either by the discovery
o f some new open ing fo r investment or by the general rise o f
co m modity values and increase o f investment demand which
occur at a time o f trade expansion In the former ca se over
speculation causes nothing worse than the embarrassment o f
th e spe culators ; but in the l atter over speculation i s o n e
among several sy mptoms o f an unsound cred it position
Speculatio n i n commodities though usually l ess co n s p i cu
is neverthele ss important
o u s than speculation in securitie s
But the l ine bet ween prudent and imprudent trading with bor
rowed money is here more diffi cult to draw Though com
m o d i t i es may occasional ly exhibit sensational variations o f
prices their values d o no t depe nd like the values o f shares o n
conj ec tu ral calculations as to the distant future and they are
,

'

n q uoted at th e fantas ti c rate o f 4

ee
v
e
b
a
i
t
o
h
a
d
i
s
s
e
m
o
n
In
y

s res p i te from bankruptcy , was

n
d
a
f
e
r
i
ce
o
o
h
i
s
t
e
h
T
y
d
a
n
t
er
,
p
y
p
per ce
mor e li ke bl ackmai l than i nteres t

1 88 4

cal l

'

10

CU R REN CY A ND C RED I T

4S

not l iable to become absolutely valueless even though they

may be unsaleable at anything that the holders would t e
gard as a reasonable price Undeniably it i s reasonable fo r a
dealer to increase his purchases in a rising market and thi s he
can only d o at the cost o f increasing his indebtedness The
dealer who i s cau ght by the fall loaded up with stocks i s
blamed as a speculator when it may be chance rather than
caution or foresight which led his neighbour to sell o ff in
time One test however may fairly be appl ied Wh en a
dealer borrows to extend his operations in a rising market he
ought to be as cautious as possible in distributing his prots
ll f instead o f spending his prots on himsel f as he realise s
hem
o r ( in the case o f a company) increasing dividends to
t
the utmost legitimate limit he puts back everything beyond
the normal p rot into the business to build up a res erve this
policy will steadily dim inish hi s indebtedness and by the time
the period o f prosperity is succeeded by the i nevitable set
back his indebtedness may be no greater than at the beginning
notwithstanding the increase in h i s stocks
It is hardly
necessary to point o ut what an el ement o f strength traders
who follow this course will be in a country which has to face
a crisis Indeed the crisis itsel f grows out o f the weakness o f
individual rms and i f all were strong i f all had kept down
their indebtedness to such a gure that no practically conceive
able depreciation o f their assets could threaten the ir solvency
there could be n o crisis
While credit is expanding a crisis i s very unlikely to
occur Whatever may happen to particular individuals there
will be a gener al tendency fo r assets to grow faster than
liabilities But crises may occur at any stage o f a credit co n
tract i on The same period o f contraction may be marked by
a series o f crises in widely separated centres at considerable
intervals
I n view o f the variety o f circumstances by which the effect
o f a crisis in one country o n another may be accentuated o r
diminished o r delayed it i s no t surprising that the crises which
occur in a single period o f contraction d o not exactly syn
I n 1 8 3 6 a severe crisis broke ou t in E nglan d In
ch ro ni se
,

F I N ANC IAL CR I SES

1 8 37

it

I 49

pread to the United States In 1 8 3 8 when England

had already entered upon a period o f quiet recupe ration it
broke out in Belgiu m France and Germany and in 1 8 39 it
spread again to England and the United States
The crisis o f May 1 8 6 6 i n London o ne o f the most severe
ever experienced though apparently isolated was really the
sequel o f the crisis o f the autumn o f 1 8 6 4 which extended
over th e Continent but which was not so acute in any one
c entre Failures were fairly numerous in 1 8 6 4 both in Eng
land and el sewhere and the bank rate was raised to 9 per
cent i n London and 8 per cent i n Paris As it turned out
the pressure o n the m oney market w as suf c ient to stop the
credit exp ansion in France but no t in England Apparently
the explanation is that whereas in France the trade activity
had bee n mainly commercial in England it had been rather
in the nature o f capital speculation Under the inuence o f
recent leg islation there was an im mense development o f
limited liability companies In pa r ticular there were a number
o f new nance companies which adopted the very dangerous
practice o f mak ing tem porary advances to railway contractors
The e ffect was
o n the security o f shares in the new railways
that a fter the mercantile fail ures o f October 1 8 6 4 in which
England had her full share the credit expansion was continued
in the form o f advances fo r capital expenditure So long as
the public c ould be induced to buy shares rather than co m
mo d i t i e s the ination o f the co n sumers income did not result
in an undue amount o f purchases from abroad o r make the
exchanges un favourable An isolated credit expansion thus
held progress in England when the similar movement abroad
had al ready been brought to an end by the crisis o f 1 8 6 4 and
the accompanying fall in values Finally in May 1 8 6 6 a fter
an interval o f a year and a hal f the crash came with the failure
Gurney one o f the largest nan ce companies
o f O ve re n d
and o f a number o f other i mportant banks and nancial houses
a
condition
o f things which puzzled e c o n o
d
e
r
v
e
n
e
p
For two months the bank rate
th then and since
n Paris w as no
at tra cted fro m
s

CURRENCY AN D CRED IT

50

F rance to Englan d The m agic o f the bank rate seem ed to

have vanished Macleod attributed this phenomenon to a
compl e te loss o f con dence in English borrowers Continental
lenders would not risk the loss o f their capital fo r the sake
even o f 1 0 per cent interest N o d oubt credit was shaken
but that it was shaken to this extent i s hardly conceivable
The credit expansion having continued in England a fter it had
ceased abroad it was only natura l that time should be need ed
to bring down values in Engl and t o the continenta l level
Neith er the force d sales o f th e crisis nor the pressure o f 1 0
per cent would necessarily have this e ect immediately
espe cially as the disposable assets o f the nance companies
which collapsed were largely shares in speculative English
railways which could certainly no t be sold abroad Probably
the Engl ish money market was so swollen with credit that
when the tide o f speculative investment ebbed the exchanges
would but fo r the remedial effects o f the crisis i tsel f have be
come violently un favourabl e The reason why foreign lenders
did not take advantage o f the I O per cent bank rate in London
was that they feared that these unsound conditions might
ece ss i tate a suspension o f gold payments and a failure o f th e
ol d standard I t was not the in solvency o f the borrowers
that de terr ed t h em but the possibility o f a loss by egggh ange
The year 1 8 9 0 saw a period o f great trade activity cul mi nate
in a nancial crisis marked by the suspension o f Baring Bros
in London The ebb set in in Europe thence fo rward but the
United Sta tes for the moment escaped its effects thanks to a
sp l endid harvest and a new tari ff In 1 8 9 2 there began that
export o f gold which was a sure sign that values were o n a
higher level in the United States than elsewhere and in th e
rst hal f o f 1 8 9 3 the export was accele rated There ensued
the inevitable contraction o f credit and a nancial cri sis all the
more violent fo r being belated
I ndeed it happens quite as o ften that a contraction o f cred it
spread over several years is marked by a series o f crises in
di fferent parts o f the world throughout its progress as that a
s ingle collapse o f values occurs as in 1 8 2 5
1 8 5 7 o r 1 90
al l
7
V
ov er the worl d at the s ame ti me
.

'

C H A PTER X

FI NAN C I A L C R I SES

( Conti nued )

A C R I S IS may be regarded as a struggle to maintain the

standard o f value I t i s indeed actually caused by a general
fall o f prices which i s merely another name fo r a r i se in the
value o f the monetary unit It being customary to measure
all values in term s o f the monetary unit this is called a fall in
the value o f commodities but o f course the util ity o f the
commodi ti es is n o t diminished and it is theoretically more
rational t o say that the val ue o f the monetary unit has risen
And this i s so even where the monetary unit is a xed quantity
o f a commodity such as gold fo r gold like lead or rubber o r
tram fares may rise and fall in relation to other commodities
The true signicance o f a crisis is there fore this that when
the monetary unit h as been allowed to depreciate it can only be
restored at the cost o f increasing the burden o f all debts and
that i f this is done t o o suddenly the debts outweigh the
assets o f the debtors and cause a multitude o f fail ures I f it
be assumed that the gold standard is to be maintained at al l
costs what measures ought to be taken to prevent a crisis o r
i f that be i mpossible to mitigate it ? Clearly what is wanted
is to save all those who are really solvent from being made
bankrupt through the purely temporary di fculty o f raising
The bankruptcies are caused
funds by borrowing or selling
by the fall in values but the fall in values is intensied by the
forced sales o f those who are threatened with bankruptcy
If al l the businesses concerned could be di vided once fo r all
into those which are hopelessly insolvent and must be allowed
to fail and those which can be saved and i f the latter were
enabled to borrow there would be no cri sis
Forced sales
f
o r the o th er
seless
r the one class and unnecessar
f
o
e
l
o
u
d
b
u
w
y
.

35 1

CURRE NCY AND CRED IT

52

This division into the sh eep and the goats may be impossible
What is to be the test o f solvency ? Are assets to be

calculated at normal values when they are fo r the moment

unsaleable at those val ues or anything like them ? If the
crisis supervenes on a period o f several years o f expanding
credit and inated val ues how far back i s it necessary to go

to nd normal values ? If an underwriter is loaded up

with securities which cannot be realised in exis ting market
conditions who is to estimate the probability that those
securities will yield a regular dividend in future ? In practice
the man whose solvency depends upon speculative assets can
borrow
H e must fend fo r himsel f and must nd
not
purchasers i f he can either at home or ab road
And the di fculties are aggravated by the general ten
d en cy to distrust bills o f exchange which are based o n the
If there are many failures
com bi n ed credit o f several parties
among the merchants and others who are nanced by means
o f bill s then the banks and other nancial houses whose nam e s
appear on the bills as acceptors o r discounters may be over
whelmed with claims from the holders o f the bills The
ordinary banks are unwilling to increase their commitment s
fo r any o n e o f them that is more liberal i n its advances than
its neighbours may have to meet an ad verse balance at the
clearing house The function o f making advances to solvent
borrowers
devolves
on
the
central
bank
and
the
problem
to be
3
solved is not an easy one In the rst place no limitation
u p n th e i ssues o f paper money ; i f legal
l o ught
o
limitations exist they ought to be suspended
The crisis
i p ro b ab ly originated in a dearth o f legal tender money
necessitating a contraction o f credit The failure s and forced
sales will do q uite enough to depre ss prices and raise the value
i o f the monetary unit
The central bank ought to make advances on any clearly
good security which any borrower may o ffer It ought not to
hesitate merely because the total amount o f its advances
appears excessive To re fuse a loan is probably to compel
a sale and every sale tends to depress prices in what is
The pl ed ging o f a good sec urity
alread y a panic market
.

F IN AN C IAL CR ISES

53

fo r

a loan avoids the necessity fo r inqui ring to o closely into

the solvency o f the borrower But though advances should
be made without limit so long as good security is forthcoming
they should onl y be made at a very hig h rate o f interest
This prevents t raders from borrowing more than they really
need ; i f advanc es were granted to o easily the crisis m ight
be surmounted only at the cost o f starting a new credit
expansion resul ting perhaps in a complete abandonment o f
the gold standard
This i s the generally recognised method o f deal ing with a
is evolved fro m the varied experience o f the nineteenth
tury The conditions may be such however as to make i t
More particularly there are two weak points in it
ency may be so widespread that advances l imited t o
good security m ay do little or nothing to save the situation or
the credit ination may be so excessive that the crisis itsel f i s
i ns u i ci ent to restore the gold val ue o f the monetary u nit
For the former there may o f course be n o remedy The
general insolvency may be due no t only to the fall in world
prices but to a u niversal imprudent speculation which has
'
really wasted the country s wealth N 0 nancial ingenuity
can altogether avert the consequences To sustain the solvency
o f traders w h o have thus betrayed the economic interests o f
their country i s like keeping an incompete n t general in his
command But the di f culty may be due not so much to
im prudence as to the poverty o r el ementary economic
organisation o f th a t country It may be that traders have
no good securities to pledge no t because they have been tying
up thei r capital in wild speculations but because they are n o t
rich enough to take money out o f their business in quiet times
In such cases the
fo r the purpose o f building up a reserve
central bank o r the Government may make advances on the
securi ty o f the produce o f the country or the Government may
even buy up the produce at a xed lo w price su f cient to
rescue the holders from extreme embarrassment b t not s o
A
high as to r i sk involving the Government in heavy loss
purchase operation however is dangerous Loans can be
ill
e b or row ers
h
o
f
h
l
e
d
hi
r
es
nterest
w
ic
a
t
w
h
h
a
t
i
g at
made
.

'

CURRENCY A N D CRED IT

54

repay them at the earliest opportunity P urchases leave

the vendors with money to spend whether they are debtors or
not
In the case where the credit expansion is too great to be
counteracted by the e ffects o f the crisis the central bank will
nd that the demand fo r gold fo r export continues It cannot
g o on granting advances freely without endangering its gold
reserves and it may be that no raising o f the rate o f interest
will be sufcient to de fend the reserve It is faced with the
choice between a restriction o f advances and a suspension o f
gold payments A restriction of advances cannot but mean
more bankruptcies The very purpose o f it i s to raise the
value o f the monetary un it still higher to make the burden o f
indebtedness still greater o r in the more fam il iar language o f
the balance sheet to depreciate the value o f assets still further
The suspension o f gold payments may well be the lesser evil
And it may be asked what is there so very terrible about
a suspension o f gold payments ? A compl ete abandonment o f
the generally recognised standard o f value o f the commercial
world would obviously be very undesirable but presumably it
need only be a temporary measure A contraction o f credit
milder and more prolonged than that whi ch would precipitate
a crisis m ight restore the standard a fter a year or two
Traders would rather su ffer the i nco nv i e n ce and uncertainty o f
variable i o re i gn exchanges fo r a time than face the ordeal o f a
restriction o f credit drastic enough to restore the standard
immediately For many countries this is true and they d o in
fact take refuge from the stress o f a crisis in a more or less
prolonged rgime o f inconve rti ble paper But the desirability
o f suspending gold payments depend s o n cir c umstances
and
for some countries it has grave disadvantages
This is
especially s o fo r o ne which takes a large part in nancing
international trade
The b usiness o f a nancial centre includes two functions
accepting and discounting The accepting business constitutes
the centre an international clearing house ; that is to s ay
international obligations are settled in its currency The
d i s counting business constitutes i t an in ter na tional mone y
to

F IN A NC IAL CR I SE S

55

lend er It is th e former class o f business that specially

depen d s upon con d en c e in the solvency o f the nanciers and
the soundness o f the currency at the centre The d iscounting
business depend s rath er on the suf ciency o f its resources
whether these resources consist o f permanently invested capital
o r o f bank deposits
B ut the bank deposits themselves will
be partl y compo se d o f the credit balances o f international
tra d ers w ho are accustomed to settle at the nancial centre
and these cred it balances would be withdrawn i f the centre
ceased to be a convenient place o f settlement
It was explained in C hapter V I I that when the whole o f
the forei gn trade between two countries is nanced by bills
upon o n e o f them the assets o f the exchange bank s which do
business between them will be composed predominantly o f bills
o n th is o ne and that in the event o f a monetary stringency
in the other it i s esse ntial that they should be abl e to co n
vert th eir assets i n the former into gold which can be pack ed
up and sent away to discharge their liabil ities in the latter
If at the critical moment they cannot get the gold the system
breaks down an d caution i mpels the exchange banks to
d imini sh their holdings o f bills o n the nancial centre The
extent to which they can d o this w ill de pen d o n there bei ng
If th ere are
s u itable accep tors to be found in other places
an d i f a pre ference i s given to bills drawn upon them as being
payable in a more trustworthy currency traders will tend to
desert the o ld centre Probably this cannot be done in a hurry
The accepting business d epends no t only o n the solvency and
reputation o f the acceptor but on the acceptor s knowledge o f
his clients business I nd eed the rst condition is really
bound up with the second fo r the acceptor s solvency depends
The
o n the solvency o f those fo r whom he pledges his credit
business connection o f a great accepting centre cannot be dis
placed i n a d ay N o r can the d iscounting business be easily
trans ferre d I t represents a huge investment o f capital The
tra d ers nanced by it are i ndebted to the holders o f the bil ls
even if they do draw o n a di fferent centre they will
an d
probably have t o h ave recourse to the same disc ounters who
f
n ew di sco unters
f
i
a
rs
f
I
a
r
t
h
ac
e
or
no
w
e
i
c
t
k
t
e
h
s
li ke
p
.

'

I 56

CURRENCY A N D CRED IT

appear at o ther centres credit will be extended at the new

centres and contracted at the o ld so that the exchanges will
turn in favour o f the latter and this tendency would be only
partly o ffset by the transfere n ce o f traders balances
Thus the only easy and rapid way by which the trans
ference o f business can be e ffected i s by the substitution o f
bills on the new centres fo r bills o n the old in the assets o f
the exchange banks I n this process there i s no movement
The same trader borrows fro m the same
o f capital at all
bank as be fore ; o n ly the debt i s repayable at a di fferent place
and in a di fferent currency
The upshot is that a loss o f condence in the stability o f
the currency may drive away some o f the business o f a n an
c i al centre almost i m mediately and may grad ually undermine
i t s position altogether
Th e process will be delayed however
and may be largely prevented by the business connection o f the
accepting and discounting houses and by the good credit o f
the former and the large investment o f capital i n the latter
But business goodwill i s vulnerable an d no country has
a monopoly o f investible capital Once the world s condence
in the currency o f a nancial ce n tre i s for feited its tenure/
becomes very precarious
Thus the almost superstit ious
loyalty o f the London money market to the gold sta ndard
may be right and wise and yet the comparative indi fference
to the m ai n tai nence o f gold payments in some fo reign countries
which have ne ver play ed the part o f nancial centres is not
necessarily the reverse
When it comes to coping with an external crisis the same
choice presents itsel f between a fall in val ues which may be
disastrous and a suspension o f gold payments which mean s
temporarily at any rate a departure from the gold standard
But in this case there i s a chance o f avoiding a crisis altogether
I f a premium is charged o n gold the extent o f the contraction
o f credit l ies entirely within the discretion o f the central bank
It might make no contraction at all and might charge s o high
a premium on gold that practically none would be withdrawn
But this would be to put the premium o n gold and co n se
o n forei n exchan e at a maxi
uentl
the
re
ium
m
u
m
m
y
p
q
g
g
,

F I NANC IAL CR ISES

57

It would be m ore j udicious to take a middle cou rse contract

ing credit gradua lly and letting a certain amount o f gold go
I t is sometimes contended that a small premium on gold say
1 per cen t is an adequate substitute fo r a large increase in
the bank rate Thi s view i s based on the assumption that
the high bank rate only brings in gold by attracting the foreign
lender The direct return to the foreign l ender can indeed be
counteracted by a moderate premi um But the really i m
portant co o n seq uen ces o f t he hi gh bank rate are to be found
i n the pre ssu re p u t u p o n merchants t o s ell and in the con
t ract inm c
ed i L a n d consequent depression o f pr i ces and
the se m ay be the equivalent o f a large premium perhaps 1 0
per cent o r more
H owever even a small p rgerni u m helps to avoid the extreme
severity o f the co n tr ac ti o nb cred it that would otherwise be
necessary It shelters traders from the full force o f the storm
o f forced sales and tumbling prices which rages outside though
o f course this benet does not extend to those who o w e sums
i n foreign countries These latter must pay the premium o n
gold or o n foreign exchange in order to di scharge their debts
If there is t o be n o gold premium an external crisis n e
The
ces s i tate s an ex port o f gold and a contraction o f credit
less the contraction o f credit the greater will be the export o f
gold I f more gold is asked fo r than can be spared the con
traction o f credit must be intensied and i f it i s too abrupt
there will be a crisis The multitude o f alternatives and the
variety o f circumst ances de fy any attempt to formulate general
rules One thing however we may safely say I nternational
The
c o o peration will conduce to the better control o f crises
occurrence o f a crisis in one country i s a danger to all the
o thers All are interested to prevent it and once it has broken
Their
o u t al l are intere sted to keep its effects within bounds
mutual help may take several forms The gold movements
may be regulated s o as to distribute the demand as equally as
possible among the countries which have gold to spare The
Bank o f France has never been obl iged unconditionally to re
deem its notes in gold ( having always the option to pay in
s ilver) but i t has from time to time sent large sums to London
,

'

CURREN CY AN D C RED IT

58

New York to mee t th e demands o f a cri sis In 1 8 9 0 the

threatened failure o f Messrs Barin g Bros lled London with
consternation The failure was staved o ff by a j oint guarantee
on the part o f the London banks and the resources o f the
money market were temporarily strengthened by the impo rta
in gold from Paris In 1 9 07 go ld was
tion o f ,6
sent from twenty s i x di ff erent countries through London to
N ew York I n 1 8 39 England as the sequel o f the continental
crisis o f 1 8 3 8 was losing gold A credit o f
was
created by the Paris bankers upon which the Bank o f
could draw and bil ls drawn on this credit took the place
gold A credit o f
was opened fo r the same purpo se
at H amburg
A crisis produces a sudden ineq ual ity between the level o f
prices in the centre o f crisis and the level o f prices elsewhere
To restore equilibrium the o ne level must be raised and the
other must be lowered If credit has been unduly expanded
prices cannot remain permanently at the higher level but h i s
t o the interest o f everybody that the general fall o f prices
should be as moderate and gr adual as possible Fo r the
moment at any rate they wil l wish by all means to raise prices
at the crisis centre The sending o f gold helps to d o this
since it increases the stock o f purchasing power Gold is sent
because it is the means o f acquiring credits but unless the i n
ux o f gold is accompanied by an extension o f other bank ing
assets such as advances and discounts the additional purchasing
power will be l imited to the bare equivalent o f the go ld itsel f
N o w one o f the chief d i i c ul t i es i n a crisis is to nd solvent
borrowers In ordinary times the loans and d iscounts granted
by the banks are limited only by the need fo r maintaining a
due proportion between cash r ese rves and the other items o f
the balance sheet At a time o f cri sis a di fferent l imit comes
into O peration The central bank perhaps is willing to issue
unlimited quantities o f cash in the form o f legal tender paper
and the other bank s are prepared to m ake advances in due
proportion to these fresh supplies o f paper i f only they can
nd sui table borrowers But those wh o want to borrow are
u n able to o ffer goo d sec u rity and i f th ey had to disclose their

or

'

F IN A N C IAL C R I SES

59

nan ci al position o n the basis o f panic prices would probably

show a decit Lending being impossible bank credits cannot
be created and paper money cannot be put into circulation

The shortage o f purchasing power cannot be relieved except

by sales o f goods and securities o n the part o f the embarrassed
traders
H ence the forced sales and the inux o f gold The
inux o f gold is not due as is sometimes maintained to a dis
trust o f any other medium o f payment A debtor can dis
charge his debt i n legal tender paper money whether it be
distrusted o r no and cheques are usually quite freely accepted
in the m idst o f a crisis except when drawn on a bank wh ich
is known to be shaky Gold i s i m p o rted b ecaus e th e i nterrup
,

g
-

e rati o n s

aa

h as

0f

m p er

money
I t is there fore the only means o f
increasing the supply o f purchasing power and so of reduci ng
ag ain the articially raised value o f the monetary unit and
other countrie s ought in the interests o f the commercial world
to send whatever gold they can to the crisis centre
When
the storm is over and traders have either weathered it o r
foundered le nding can recommence o n the normal footing the
supply o f c redit money will be reconstituted and the greater
part o f the go l d w i l l soon be sent abroad again The demand
fo r gol d in a crisis is sometimes articially intensied by re
strictions o n the issue o f paper Even where there is no limit
o n the amount o f paper money that may be legally issued o r
where the legal limit is temporarily removed paper money
may still be an inadequate medium o f exchange m erely be
cause the lowest denominations o f notes are to o high fo r ordin
ary use especially fo r the payment o f wage s This has o ften
been an important factor in English crises The drain o f
guine as which led to the suspension o f specie payments in
was partly due to the need o f coin fo r internal cir
1 7 97
culation there being no notes below 5 At the time o f
the crisis o f 1 8 2 5 Bank o f England notes below that limit had
been again withdrawn though they were n o t prohibited by
law In the midst o f the crisis a forgotten chest o f unissued
one pound notes was discovered and they were sent o ut to
the provinces where they contributed materi ally to relieve the

'

'

CURRENCY A ND CREDIT

160

strain In the nancial crises o f the n ineteenth century after

the Bank Charter Act o f 1 8 44 the us e o f small notes in lieu o f
gold would o f course have done nothing to avert the s us p en
sion o f the Act But at th e outbreak o f war in 1 9 1 4 the need
fo r small notes w as acutely felt and they had to be im provised
at ve ry short notice to meet the sudden demand fo r additional
currency fo r internal circulation which arose o ut o f the mobi
li s at i o n measures and the general dislocation o f credit
Be fore leaving the subject o f crises it will be worth while to
consider the position at a time o f crisis o f a country with a gold
exchange standard or with a currency system based in part on
I n case o f an external crisis
foreign bill s or assets abroad
there will be a sudden rush to remit money to the crisis centre
But this demand fo r remittances will be met by the sale o f
bills on foreign centres and the demand fo r gold will be trans
It is plausibly contended
ferred thereby t o those centres
that countries which adopt a gold exchange standard o we it to
their neighbours to keep a part at any rate o f their foreign
earmarked
When the
assets in the form o f actual gold
crisis comes and the foreign assets are drawn o n this ear
marked gold can be unpacked from the vaults where it is kept
and paid away thus adding to the world s stock o f gold in a
way that payment from a bank credit d 0es n o t B ut o f
course in s o fa r as gold is substituted fo r bills o r securities
one o f the great advanta ges o f the exchange standard i s l ost
since the gold yields no interest I t may be more convenient
t o have the gold in a great nancial centre where it can be
used at a moment s notice to reg u late the exchanges than in
a country where it is n o t used fo r internal circulatio n and
where there fore it can serve no purpose except by being ex
ported Even the Bank o f England has recently discovered
that it may j ust as well keep a part o f its gold reserve abroad
But this is no t the full development o f the exchange standard
And except in the case o f dependencies like India the
countries which have an exchange standard o r whi ch base
thei r currency systems in part on assets held abroad usually
pre fer to keep their gold at home
It i s no t o f the essence o f the system that a smaller pro
.

'

F I N A N C IAL CR ISES

16 1

portion o f gold should be kept than in the case o f a currency

based exclusively o n direct convertibility into coin The
foreign securities and bills may be regarded as tak ing the place
n o t o f gold but o f home securities
But even where all o r
part o f the gold i s replaced by foreign assets it need by no
means be admitted that there is any real failure o f duty to
the gold using world I t is quite true that a country with a
currency so organised has no gold to offer to a neighbour
distressed by a crisis But it i s equally true that when it in
tu rn su ffers from an internal crisis it will ask fo r n o gold from
abroad When its traders acquire cred its abroad by means o f
forced sales o f goods an d securiti es the central bank o r other
currency authority will purchase these credits with new issues
o f paper money
The traders in question those w hose credit
is tainted and whose embarrassments are the cause o f the
crisis will thus be easily and quickly supplied with the price
o f whatever they have to sell in their o w n legal tender money
and will n o t have to i mport any gold at all I cannot q uote
any concrete case where this method o f dealing with a crisis
h as been actually pursued 1 The gold exchange standard i s
o f recent adoption
and the countries in which it has been
given i ts completest form have no t su ffered from internal
cri ses since it came into being But the logical consequences
o f the system are clear enough and it i s quite fair t o claim
that it enables the country which adopts it to dispense with
imports o f gold in a crisis as at all other times In fact it
can stand aside from the world s gold market altogether ad
j usting its currency not to a gold standard as such but to the
standard which its neighbours use and which happens fo r the
time being to be based o n gold
Neverthe less though all this be granted it i s still true
that a country can better contribute to the monetary stability
o f the world by keeping a part o f i t s resources in gold than
by pushi ng the gold exchange standard to the logical extreme
,

Duri n g th e

Am eri can cri s i s of 1 8 7 3 th e S ecreta y of th e Treasu y w as urg

ed

h i s surpl us fu nd s to bu y exch a n ge o n Eur0p e , b u t h e d ecl i n ed to d o so

n gl and i n
of
an
am b urg i n favo ur of th e
Th e cre di ts op e n ed i n Pari s a n d
1 8 39 ar e s o m ew h at s i m i l ar i n pri nci p l e
to u s e

B k

II

CURREN CY A ND CR ED IT

1 62

The best sa feguard against excessive cre d it expan sions and

the inevitable consequences excessive contractions and nan
ci al crises is that there should be the greatest possible ac
cumulation o f gold i n central reserves i n the ea rly stages o f
ex pansion
Every c ountry whose legal o r ad ministrative
currency arrangements ensure the accumulation o f a relatively
l arge gold reserve as a condition o f a given ex pansion o f c redit
helps to keep the contraction within bounds A country with
a gold exchange standard may do its share i f it amasses a
gold reserve when its currency expands and releases it when
its currency contracts while i f it eschews the use of gold alto
gether it remains purely passive
A crisis is not a necessary o r universal accompaniment of
a cred it contracti on Nearly every world wide credit contra e
tion produces a crisis somewhere but there are n o t usually
more than two o r three separate centres o f crisis and some
times not more than o ne There is no reason i n the nature
o f th ings why the process o f contraction should n o t be co m
pl e te d without a crisis breaking out anywhere
,

CHAPTER X I

M O NEY

AN D C

OI NAG E

U P to thi s point o ur att ention has been turned to those

problems which proceed from the inherent nature o f a credit
system
We have found that there are disorders which
threaten the stability o f such a system from within even
th ough it be assailed by n o disturbances from without In
Chapter X I I I we shall pass to the consideration o f these ex
traneo u s disturbances especially o f those attributable to war
and we shall nd that they play a very large part in our subject
In the present chapter we shall d raw some general co n
elusions as to the nature o f money and as a preliminary a
short recapitulation will be convenient
At the o utset we adopted a purely articial hypothesis
the existence o f an economic community which used credit as
a m eans o f payment but had n o money We assumed that
there m ight be a money o f account fo r the measurement
o f debts and there fore o f prices and we found that apart fro m
the obvious disadvantage o f having no single legal medium
fo r th e di scharge o f debts the chief defect o f a credit system
carried o n without money was its instability Credit we
showed has an inherent tendency either to expand o r to con
tract in d enitely b ut esp ec ially to expand and in doing s o to
alter th e unit o f value beyond any assi gnable l imit The use
the means o f di scharging debts but it also
of
plays the very important part o f stabilising the unit o f value
In Chapter I I we passed to the theo ry o f a credit system
based on metall i c money Metall ic money u nder a free coin
age system provides ah independent sta ndard o f val ue But i
The dan J
th e su ppl y o f mo ney cannot be arbitrarily increased
o f an in d e ni te d epr eciation o f the unit o f val ue is replaced
et
g
by th at o f a d e nudati on of th e reserves o f money O wing to
.

1 63

1 64

CURREN CY A N D C RED I T

the activity of trad e d uring a credit expansion and the accumu

lation o f unexecuted orders which will re quire to be nanced
when they are undertaken there arise l a tent d em an d s fo r
c redit o f which the banks have no cogn isance At the same
time the e ffect o f the credit already created i n occasioning a
drain o f money into circulation i s gradual and a relatively
long interval must elapse before i ts full extent is felt There
are there fore latent demands fo r cash as well as l atent de
mands fo r cred it and both will c ause embarrassment to the
banks when they mature
This led us naturally to the currency system in which the
supply of money can be increased or diminished at discreti on
in other words to paper money Paper money has no intrinsic
value and th e rst problem was to seek the law by which its
value is determined This we foun d in the quantity theory
The quantity o f purchasing power o r command o f wealth
held by people in reserve is determined by their economic
circumstances The aggregate o f these reserves o f purchasing
power at any time is equal to the aggregate o f bank credits
and money in the hands o f the people at that time The
former i s an aggregate o f command o f w ea l t/z the latter is an
aggregate o f moneta ry u n i ts and their equality determines the
value o f the moneta ry unit in wealth or the prices o f the
various for ms o f wealth in monetary uni ts The quantity
theory so enunciate d merely states the relation between the
number o f the monetary units in circul ation and the value o f
the unit when all other economic circumstances are supposed
g iven in itsel f it says nothing as to what happens when the
inum ber o f units in circulation is changing and i f such a change
i s in progress the existence o f a state o f change must be i n
cl uded among the econo mic data assumed
A n acceleration o r retardation in the creation o f credit
itsel f causes a rise o r fall in prices o r in othe r wo rds a fall or
rise in the value o f the monetary unit quite apart from any
change in the quantity o f purchasing power in circ ulation
which may accompany o r follow it And we showed that the
less such a credit mov ement a ffects balances the more wi ll it
a ffect prices That part o f the credit created w h i ch on pass
,

M ON EY AN D C O IN A GE
i ng

16 5

into the hands of the people i s spent a ffects prices while

for the time being that which is le ft in balances does not
The bank s undertake to trans form credit into money and
money into credit at the will o f their customers Consequently
wi th a given supply o f credit the circulation o f money is de
t erm i ned by the convenience o f the peopl e ; it can only be
controlled through the control o f credit by which their business
and their incomes can be a ff ected The problem o f the
regulati o n o f currency i s t here fore resol ved into th at o f the
reg ula ti o n o f credit
Be fore dea ling with the systems by which paper cu rrencies
are regulated through credit we found it necessary to discuss
the foreign e xchanges An undue expansion o f credit in
com pari son with foreign countries makes the exchanges un
favourable and causes an el u x o f gold ; an undue contraction
makes them favourable and causes an inux o f gold These
effects being felt in t h e rst stages o f the credit movement
give an earlier warning than the internal drai n o f money into
circulation
By basing the control o f cred it o n the foreign exchanges
credit movements cannot be avoided altogether but can be k ept
in harmony wi th credit movements abroad But this system
does no t prevent world wide credit move ments And the same
d a n gers that were disclosed in Chap ter I I that is to say the
growth o f latent demands fo r credit and cashwill arise in the
case o f world wide expansio ns The form which the deman d
fo r cash takes depends on the currency system o f each country
I n some it can only be met in whole o r in part by gold ; in
others it can be met by paper money which according to law
must be wholly o r partly covered by gold As the demand
fo r cas h grows the surplus reserves o f gold are gradually used
up till at l a st they reach the point at which in o ne or more
countries there is no longer any certainty that the legal lim i t
o n the note issue can be observed o r perhaps even that the
convertibility o f the notes into gold can be m aintained There
follows a contraction o f cred it in these count ries which
But the drain o f cash the
i nevi tably spreads to the others
c onseque nce o f the previous credit expansion continues and
,

. .

CU RRENCY A N D C RE DIT

1 66

latent d emands fo r credit arising out o f past com m it

ments and unexecut ed orders cont i nue to press upon the
banks fo r further accommodation In those co untries where
the pressure i s greatest and the measures taken to contract
c redit correspondingly violent there m ay ensue a nancial
crisis
A n ancial crisis the consequence o f a general deprecia
tion o f values and o f the embarrassment o f people who are
carrying the depreciated commodities an d securities with
borrowed money i s important in two ways First in the
centre o f crisis itsel f it i s the penalty o f an imprudent use o f
credit and it demands special measures to save solvent traders
from su ffering failure through the disorganisation o f credit
and the panic fall in val ues Secondly the occurrence o f the
crisis subjects other countries to an extreme strain through th e
sudden and violent movem ent o f the exchanges in favour o f
the crisis centre
In the management o f a currency system the danger point
i s alw a ys to be found somewhere in the progress o f the credit
contraction Th e risk o f an indenite depreciation o f the
monetary unit such as would occur in a system o f cred it un
supported by money i s guarded aga inst s o long as the paper
money i s convertible into gold o r kept in touch with a gold
standard But a cond ition o f the preservation o f a gold
standard i s that a credit expansion m ust sooner o r later be
fo llowed by a credit contraction
To o abrupt a credit co n
traction produces a crisis yet i f the demand fo r legal tender
money persists either the contraction must be abrupt or the
prescribed limits on the issue o f paper money must be exceeded
And i f these l imits are exceeded the process m ay go further
the gold reserves may be exhausted and gold payments may
have to be suspended It may there fore be that a cri s i s is the
only alternative to a tem porary abandonment o f the go ld
standard The prudent country will look forward to this
danger and will endeavour to restrain i t s share in the general
credit expansion C aution during the expansion period w i ll
o f itsel f lead to the accumulation o f gold resources and these
gold resources can be used shoul d a cri sis occur in any other

th e

"

'

'

M O N E Y A N D CO INAGE

167

country d uring the inevitable c redit cont raction F o r some

di sparity betweeen the level o f values in two countries can be
maintained o n condition that that with the higher scale o f
val ues is able to continue exporting go l d to that with the
l ower so that a country which has gold to spare can defend
itsel f fo r a time against the violent fall of values which a cri sis
invol ves
.

H itherto we have assumed the standard o f value to be gold

Even when paper money falls away from this standard we
have supposed that th e standard is still kept in sight and that
endeavours will be made to regain it These assumptions
correspond closely enough with actual practice ( at any rate
under normal peace conditions) but o ur investigation o f the
quantity theory in Chapter I I I was sufcient to show that they
fal l short o f complete theoretical generality
The problem o f stabilising the moneta ry unit on which
the value o f debts depends can be solved by dening the unit
in terms o f a commodity such as gold o r sil ver B ut that is
no t necessarily the only solution
N o r is it a perfect solution
We have shown th at in spite o f its union with gold the mone
tary unit will vary and the world val ue o f gold will vary with
it The industrial demand for gold is a me re trie compared
to the vast stock used throughout the world a s currency
I n the event o f a credit expans i on the increase in the
quantity o f purch asing power lowers the value o f the monetary
unit The monetary unit is a gold unit and there fore gold is
cheapened but this is not due to any diminution in the demand
On the contrary there is an i ncr eased
for purposes o f currency
demand fo r gold the demand fo r gold is derivative from the
supply o f credit and when credit expands a greater amount
The banks in fact are under
o f gold passes into circul ation
an obligation to supply gold at a xed price The fall in the
value o f the moneta ry unit makes this price though in appear
ance xed in reality lower A lowering o f the price o f go ld
means an increased demand though as we have seen the i n
creased demand fo r currency purposes only makes itsel f felt
.

CURREN C Y AN D CR ED IT

1 68

very gradually
In order to equalise supply and demand
the supply h as to be supplemented from the reserves o f the
banks o r else replaced in part by an increase in the paper
circulation
It i s sometimes maintained n o t merely that gold i s a co m
In virtue o f the
m o d i ty but that m oney is a commodity
q uantity theory the greater the supply o f money the less will
be i ts val ue in other commod ities ; what i s this it i s asked
but the l aw o f supply and de m and ? The money in ci rculation
represents in the aggregate the amount o f purchasing power
that people choose to keep in hand in the form o f legal tender
They keep it in this form fo r certain denite purposes ; that is
to s ay o n account o f its utility The rich m an keeps his
pocket money the poor man keeps his stock o f cash the shop
keeper keeps h i s till money the banker keeps h i s reserves
Each is sacricing the advantages o f spending o r investing this
purchasing power fo r the convenience o f having ready money
in hand This demand fo r ready money i s analogous to the
demand fo r a com modity ; cash in hand i s part o f the capital
resources o f the individual
But it i s a mistake to push this analo gy too far I ndeed
when applied to paper money it is palpably no more than an
analogy Even though p aper money behaves like a commodity
in follo w ing the law o f supply and deman d it ob viously di ffers
from other commodities in having no appreciable cost o f pro
duction It resembles other entitling documents rather than
commodities A theatre ticket derives its value from the
right which it Con fers to a seat in the theatre ; a legal tender
note derives i ts value from the right which it con fers o f dis
c h a rg ng a debt
J ust as the value o f theatre tickets i s de
rived from the val ue o f theatrical performances s o the value
o f paper mo ney i s derived from the value o f debt s
We have
seen how the value o f the monetary unit i s determined by the
quantity o f credits ( debts) put into circulation by the banks
and how the deman d fo r legal tender money arises from the
unsuitability o f bank credits as a medium o f payment in certain
classes o f transactions The interchangeability o f bank credits
and legal tender money at the option o f the bank s creditors
,

M O NEY AN D CO I N A GE

169

makes the separation o f the total stock o f purchas ing power

into credit and money an articial o ne More p roperly the
quantity theory expresses a relation between the total command
o f weal th held by peo le i n reserve and the number o f units
p
o f purchasing power, credit and money together
by which
that command of wealth is expressed
It is not money
but purchasing power in general that must be the com
,

m o d i ty

The analogy between purchasing power and a commodity

rests practically on this one characteristic that the greater the
number o f units o f purchasing power the less is the value o f
the unit In the case o f a commodity the law o f supply and
demand tells u s that the price must tend to be that at which
the pro d uction and consumption over any period o f time are
equal The stock o r visible supply may be large or small
and the price may be lowered till the surplus is absorbed o r
raised till the deciency is made up but primarily it is no t the
stock but the output that i s i n q uestion The quantity theory
o f money and credit relates the value o f the monetary unit to
the stock and n o t to the output o f purchasing power I ndeed

it i s n o t easy to say what is the output o f purchasing

power Credit and m o ney are no t produced and consumed
like commodities Credit i s produced by banks and at rst
sight o ne i s tempted to suppose that the analogue o f the p ro
duction o f the commodity is the creation o f credit by a bank
The mere resh uf i ng o f credits when a consignment o f goods
passes from o ne dealer to another clearly should not be counted
any more than the goods themselves should be counted i n the
aggregate o f production every time they change hands We
have al ready ( chap i p 7 and chap iii p 40) had occa

sion to draw the distinct ion between the creation o f new

credit fo r new production and the mere substitution o f a
loan to o ne dealer fo r a loan to another But this distinction
based as it is o n the purp os e fo r which credits are created
however valuable fo r unravell ing tenden cies will no t stand
logical criticism For the trader borrows the net sum re
quired a fter allowing fo r the e ffe cts o f all his forthcom ing
transactions some o f which may be in the n ature o f new
,

P
H

C U RR ENCY AN D CRED IT

17 0

production and others in the nature o f deal ing F o r the pur

poses o f our analo gy there ought to be a correspondence betwe en
the output o f purchasing po wer and the supply coming into the
market N o w in the market which exchanges purchasing
power for commodities and services the supply o f p ur chasing
power i s simply the consumers outlay Here again it is clear
that transactions in the nature o f d eal i ng s should be disregarded ;
in other words that the supply should not include the traders
turn over as well as the co nsumers outlay If the consumers
outlay i s the s upply o f purchasing power then the output o f
purchasi ng power is the con sumers income and the di fference
bet ween the two is the change in the stock o r unspent margin
Up to a point the paral lel is good But what is to correspond
to consumption ? The purchasing power expended by the
consumer may be thereupon applied to the extin ction o f a
banker s loan ; it comes to an end and can be said to have

been consumed
But on the other hand instead o f comi ng
to an end it may go o n circulating The dealer who receives
it may pay it away in making a further purchase Whe n
money or credit goes o n circulating from hand to hand is it

prod uced every time it is earned and con sumed every

time
spent ?
The greater the number o f monetary units in the con
sumers outlay the lo wer the val ue o f the unit in terms of
wealth This corresponds well to the law o f supply and
demand But then the lower the value o f the monetary unit
in terms o f wealth the greater will be the number o f units in
the consumers income and th ere fore ( sub j ect to any variation
in the unspent margin ) in the consumers outlay In other
words in exactly the same degree in which an enlargement
o f supply lowers price
a fall o f price stimulates the supply
analogy with the law o f supply and demand C o m
p l e te l y fails and its failure is o ne o f the causes o f the instability
o f credit
I n order to counteract this instability the banks
have to have recourse to some other means o f controlling the
market fo r credit than through the p u rgh as i ng power of the
monetary unit they have to make use o f therate of interest
Th e operation o f the rate o f interest affords another example
.

"

M O N EY A N D CO IN AGE

17 1

of

the d i fference between purchasing power o n the one hand

and commo d ities o n the other
A rise in the rate discourages c7
the holding o f stocks and cheapens com modities It is not
merely that the value o f commodities in money is d iminished
but that the supply o f commod ities in the market is mo
me ntari ly increased by the dispersion o f stocks
At the same
time the rise in the rate o f interest retards the creation o f credit
and diminishes the consumers income and increases in pro
portion the val ue o f the mo netary unit
The theory that money be haves l ike a commodity has the ;
attractiveness o f a paradox which completes a general isation
But it mel ts away under analysis
a pp li ed to metall i c
m oney
Gold is undeniably a co m
modity But gold itsel f s o
long as it is being u sed as m oney is subject to all the laws
which govern the value o f money A gol d coin is itsel f
a ticket ; its character o f legal tender is derived not merely
from the material o f which it i s made but from the fact that
it has been through the Government mint and has been issued
for the express purpose o f being the means o f discharging debts
I t is stam ped on gold in pre ference to being printed on water
m arked paper because this arrangement facilitates the main
t e n an ce o f a standard o f val ue
S o long as the ticket fo r discharging debts can be trans
formed at a negl igi ble cost into th e ra w material o f indust ry
the unit repres ented by that ticket cannot depreciate below
the value o f the material which it contains But fo r al l that
I ts
s o long as the coin i s not melted it remains a ticket
quality o f discharging a debt is attached to it conven tionally
whether by law o r custom just as is the quality of admitting
to a per form ance to the theatre ticket
And though the metal o f which the coin is composed is a
commod ity it i s only under a system o f free coinage that the
value o f the commodity regulates the value o f the coin It is
true that the value o f the coin cannot fall much oel ow the
value o f the metal since it is almost impossible to en force
But the value of the coin may
any prohibition o f melting
b e raised in d enitely a bove the val ue o f the metal by merely
restricting the amount coine d ; fo r by the quantity theory the
.

"

-r

C U RRE NCY A ND CRED IT

17 2

fewer

the coins in circulation the greater their value Thi s

i s what h as actually been put in practice in those countries
l ike I ndia which ha ve a silve r coinage with a xed gold value
The rupee i s a mere ticket or token The same i s true ind e ed
silver coi n s in gold standard countries whether they
o f all
are unl imited legal tender like the ve franc piece in France
or limited l ike the subsidiary silver which i s everywhere used
as small change
In the case o f inconvertible paper money it i s easy to see
that its value arises from its power o f discharging debts
Debts have val ue As the purchase o f commodities and
services creates a debt and o n e debt can be exchange d o r
set o ff against another the ownership o f a debt con fers o n
the cred i tor that command over commoditie s in general
which we call purchasing power The possessor o f any quan
tity large or small o f wealth pre fers to retain a portion o f it
in an u ndz r enti a ted form an option which he can exercise
as he pleases when circumstances show which particular kind
o f wealth will meet h i s needs
H ence there is a demand fo r
credit o r purchasing power a s su e/z which is satised by the
existence o f the unspent margin By this demand the value
o f debts is determined and the value o f paper money i s de
rived from its interchangeability with debts Paper money
can receive its value from no other source
B ut though less obvious it is equally true that g ol d i tself
derives much o f its value from its convertibility into credit
Not only does the mi nt give a piece o f gold the same legal
tender property as belongs to paper money but a great part
o f the demand fo r uncoined gold bullion proceeds from its u se
as a symbol o f purchasing power
Because gold can every
where b e trans formed into credit it is stacked to the value
o f scores or hundreds o f millions o f pounds in the vaults o f
each o f the great central banks o f the world and hundreds o f
millions circulate in the form o f coin H o w great a part is
played in the market fo r the precious metals by the currency
demand i s clearly illustrated by the e ffect o n the value o f
silver o f i ts gradual demonetisation a fter 1 8 7 3 as well as by
the fall in the world val ue o f gold in comparison with other
.

,
.

M ON EY AN D C O IN AGE

17

commodities since so much o f the metal has been displaced

by paper money du ring the war 1
I n short gold is a standard only a degree less articial
than paper money and articial fo r the same reason that its
value is in part a conseq uence o f i ts legal o r c onventional
c h aracteri sti g o
f d i s chag gi n g d eb ts But it di ffers from paper
in two respects i n that it has s om e value otherwise than as
cy and that i s value as currency is r ecognised in the
qw
t
world market without regard to national fr ontiers
U p to this point we have hardly touch ed on the problems
o f coi n a e as distinct from thos e o f money
Under the system
g
o f free coin age the power o f legally discharging a debt belongs
not to gold in itsel f but to gold coi n Credits and legal
tender notes are alike payable in coin and the maintenance
o f the standard depe n ds or may depend o n the per fection o f
the coin As soon as the monetary un it begins to depreciate
below the gold value o f the coin it b ecomes protable to
melt or export the coin in circul ation and to convert credit
and paper into coin fo r these purposes If the coin is per fect
and o f full weight it behaves exactly as i f it were so much
bullion The problems begin when some o f the coins are

from wear
cl ipping inaccurate manu facture o r deliberate
debasement below the prescribed standard o f weigh t and ne
ness In that case it i s protable to m elt o r export those
coins the metallic value o f which is greater than their current
val ue in terms o f the monetary unit but n o t those whose
metallic value i s less
This is Gresham s law The worse mon ey drives out the
better It takes e ffect only when there i s a discrepancy
between the value o f the coin as a commodity and i ts val ue as
a ticket o r token Its value as a token is xed by the quantity
With changes in the state o f trade this value may
theory
change If the co in is perfect then when the monetary unit
tend s to become depreciated the coin begins to be melted and
exported and this process cannot stop until either the value
o f the monetary u nit is restored ( by a contraction o f credit o r
any oth er means) or the entir e stock o f currency is exhausted
,

S ee b elo w ,

ch ap xx i
.

p 37 2
.

C URRENC Y A N D CRED IT

174

some o f the coins are imperfect the better coin s will be

melted o r exported until none are le ft o f which the meta l
contents are worth more th an their value as monetary units
In the former case the monetary unit will be saved from de
preciation so long as there is any coin to be sent away in the
latter it will be depreciated to the level o f the least imperfect
coins le ft in circulation
When under a system o f bimetallism as it is called the
coinage con sists o f two di fferent metals gold and silver both
o f which are co ined freely from any bull ion brought to the
m int by the public the same principle is found to work
F o r the purposes o f coinage the monetary unit must represent
a denite quantity o f ei ther metal The consequence is that
the mint practically undertakes to buy gold and silver in un
limited q uantities and to pay fo r them at xed prices in the
money o f account This presupposes that the relative val ues
thei r relative mint
o f gol d and silver will co r respond with
prices For example in France under the bimetallic rgime
from 1 8 0 3 to 1 8 7 3 a kilogramme o f silver nine tenths ne
was coined into 2 00 francs and a k ilogramme o f gold o f the
same neness was coined into 3 1 00 francs C onsequently
rices were in the proportion o f 3 1 00 to 2 00 o r
But i f there is an increase in the supply o f one
son with the other so that but fo r
the bimetallic system o f coinage the more plenti ful would tend
to be cheapened the effect is that an increased quantity o f the
more plenti ful metal is brought to be coine d The increase
in the circulating medium causes in accord ance with the
quantity theory a depreciation o f the monetary unit and
a general rise o f prices This general rise o f prices would
but fo r the bimetallic system affect the less plenti ful metal as
much as other commodities but as soon as the price o f this metal
as bullion rises appreciably above its price as co in the coins
begin to be melted down o r exported In fact the mint price
over values the more plent i ful metal and under values the
other and the un d er valued metal is d riven out of circula
tion in exactly the same way as goo d coins are driven o ut by
those whi ch are worn o r debased This is what happene d in
If

MONEY AND CO I NA GE

17

F ran ce and the other bimetallist co u ntries o f Europe in the

nineteenth century A fter the gold discoveries o f 1 8 49 and
1 8 5 0 gold began to be over plenti ful and to d isplace silver
from circulation until at last there was such a dearth o f small
change that it became necessa ry to coin a limited supply o f
subsidiary coins o f in ferior neness which it would not be
protable to melt o r to export Hardly was this re form made
when the supply o f silver in turn became unduly plenti ful and
the supply o f gold insuf cient In 1 8 7 3 the free co inage o f
silver had to be suspended and bimetallism was at an end i
The concurrent use o f coin and paper money affords another
illustration So long as any appreciable amount o f coin re
mai ns in circulation coin and paper being eq ually available
fo r the payment o f debts bear the same value in terms o f the
money o f account But i f the amount o f paper money i s i n
creased the value o f the monetary unit falls and the coin as
a token becomes underval ued in comparison with the market
value o f the metal it contains Coins are then melted o r
exported (or hoarded in the hope o f a further rise in their
value) until the val ue o f the monetary unit i s suf ciently raised
to counteract thi s tendency
Thus here too in the end the
additional paper money a fter a certain amount o f adjustment
will have driven an equivalent a m ount o f metallic money o ut
o f circulati on
But though there have been countless instances o f the
operation o f Gresham s law all over the world it must no t be
supposed that this law is true without exception o r q ual i ca
tion It can only operate so long as the nominal value o f the
coins or notes in circulation is generally accepted ; that is to
say so long as they are actually used to discharge debts o n
If a debtor holds some coins
the basis o f tha t nominal value
which are and others which are no t worth more as metal than
as money hi s creditor cannot com pel him to pay the former
The debtor may stipulate that the more valuable coins be ac
l value Usually the
ce pte d at something above their nomin a
inconvenience o f making paym ents in a medium the money
val ue o f wh ich varies with th e mark e t prevents this but that
I n England in the latter part o f
i s no t invariably the case
.

17

CURRE NCY AN D CRE D IT

the seventeenth century the gold coin issued from the m int
was the guinea which was intended to be worth twenty
shillings o f silver
Thi s represented an under valuation o f
gold as compared with its market pri ce in England and abroad
and according to Gresham s law the guinea ought to have
been driven o u t o f circulation But at that period the grow
ing volume o f trade made so bulky a med i um o f payment as
silver intolerably inconvenient The merchants and gold
smiths or bankers found gold indispensable fo r large payments
Instead o f the twenty shilling guinea being driven out o f
circulation its nominal val ue became a dead letter and it
regularly passed fo r 2 1 5 6 d
This customary over valuation o f a coin which happens to
be convenient fo r commerce notwithstanding that legally it i s
under valued is n o t the only possible exception to Gresham s
law Money whether coin o r paper which i s legal tender
may cease to pass at its face value because in practice debtors
d o no t wish or d o not dare t o take advantage o f their legal
right to pay with it The French assignats which were still
the sole medium o f payment when they circulated at from o ne
fth to t wo fth s o f their nominal metall ic value in 1 7 94 fell
It can hardly be supposed
t o one three hundredth in 1 7 9 6
that in the latter year a debtor who valued h i s credit or hi s
reputation fo r honesty would have tendered a bundle o f notes
to the value in the market o f ten sous in payment o f a debt o f
1
1 5 0 livres
Under the rgime o f the si lver standard there w as never
any di fculty about the supply o f subsidiary coinage ; the
small silver coins represented as small a unit o f value as was
ordinarily required fo r anythi ng above the trii ng transactions
fo r which copper tokens were employed
Gol d co ins however
are n o t usually issued below about fty grains ( the weight for
example o f a ten franc piece) and coi ns o f twenty ve grains
are about as small as can be conveniently handled It w as
found that i f gold and silver co ins circulated concurrently and
i f the silver became under val ued inconvenience was caused
,

'

d ebts

L egal reco gni ti on of thi s s i tuati on Was gi ven by the Acts scali ng dow n the
contracted

d uri n g th e d epreci ati on

(s ee p

MO N EY A ND C O INA GE

17

by the d isappeara n ce o f the silver bec ause there was then a

shortage o f small change In the eighteenth centu ry in Eng
land this d i i cu lty solved itsel f fo r though all the best silver
coins were exported o r melted those that remained eventually
lbecam e so worn that it was not in any circumstances protable
t o export them
For a century and more the same o l d coins
eventual ly s o worn as to be nothing but plain metal discs
were the only subsidiary coins we had 1 At last the Coinage
Act o f 1 8 1 6 which denitely disestablished silver as a standard
mak ing silver coins legal tender only fo r sums no t exceeding
introduced the system o f subsidiary coins expressly de
signed to contain less ne silver than at the prevalent ratio o f
silver to gold was equivalent to their nominal value The use
o f an over val ued silver subsid iar
y coinage has now become
almost universal
The system is o f course inco m patible with the free coin
age o f silver The amount coined must be kept within the
control o f the Govern ment And the Government must regu
late the amount coined according to the public demand
People will draw o u t from the banks just s o much silver as
they need and no more If there is not enough to meet their
needs the banks will feel the scarcity and it is o n the banks
that the Government must rely to noti fy them o f the demand
When the banks as k fo r more subsidiary coin the Government
buys so much silver bullion as is required at the market price
coins it and sel ls it to the bank s at its face value If it issues
more than is required the surplus will soon accumulate at the
banks and they will ask fo r less I f neverth eless the G o v
e r n m ent persists in forcing more and more silver into circula
tion till the banks nd that they have inconveniently large
accu mulations the banks will eventually make a charge to
every o n e who d eposits silver ; i n other words the silver coin
age will be at a discount Indeed it may be advisable fo r the
Government to guard against this by undertaking to buy back
any redundant silver at its face value
,

Th ey were sup pl em ented duri ng th e B an k R es tr i cti on by S pani sh do l l ars ,

w h i ch w ere s tamped by the B ank of E ngl an d and i s s ued to pass at a pres cribed
1

val ue.

I2

17

C U R RENCY AN D C R ED IT

Fundamentally the issue o f th e standard money o f full legal

tender whether it be metal o r paper is regulated in the same
way as th e issue o f subsidiary silver The customers o f the
banks are free to trans form as much as they please o f their
credits into money The banks d etermine their demands o n
the central bank for legal tender in accordance with the de
mands o f their cus tomers The central bank issues paper or
pays o ut gold as the case may he in response to the demands
o f the banks
nd fo r money it is meces
To control the dem a
sary to inuence the individual from whom the demand ulti
mately proceeds H is need fo r money is incidental to his
dealings in credit he only needs it because money happens to
be a m ore convenient medium fo r some o f the transactions for
which he has obtained advances o f credit That i s why the
control o f money can only be effected through the control o f
credit
From the point o f view o f th e in d ividual the d emand for
gold silver paper o r credit i s determined simply by co nveni
ence Up to a certain point the banks can manipulate the
demand by insisting on thei r right to pay their debts in what
ever legal medium they choose but i f they run to o much
counter to the convenience o r the prej udices o f their cus
to m e r s the medium o f payment most in dem and will go to a
premium The high m ar ket val uation o f the guinea in Eng
land i n the seventeenth century was o ne example o f this
Another i s to be found i n the pre m ium o n bank money at
Amsterdam and Hamburg in the seventeenth and eighteenth
centuries fo r at the great centres o f international trade a mis
c e l l a n e ous
assortment o f coins o f many nationalities and
varying value s would accumulate deal ings in which were i n
tolerably troublesome in comparison with the si mple and
businesslike trans fers that could be made i n the books o f the
banks Yet another instance is to be found in the premium
which o ften prevails o n bank notes at the Treaty P orts o f
China though these notes have no legal tender character and
represent no value other than that o f the silver into which they
can be converted o n d emand at the issuing bank B ut the
i nconvenience of silver for large pay ments is almost prohibitive
,

MO N EY A N D C O I N A GE

17 9

and the pre ference o f traders fo r the notes is reected in the

value at which they pass
Gold has been selected as the s tandard o f value as the
result o f the law o f the survival o f the ttest For a long time
silver h eld the el d Till the discovery o f the New World
d was too scarce and val uable to be a suitable medium o f
goL
therea fter the supply o f both being increased
pay f nt
silver became too plenti ful and cheap It dropped o ut o f use
in England in the eighteenth century and in the United States
in the nineteenth the result in both cases o f an over valuation
o f gold under a nominally bimetallic system
Under the
French bi meta llic system also gold began to displace silver
a fter the go l d discoveries o f 1 8 4 9 and 1 8 5 0 In 1 8 7 3
Germany adopted the gold standard and thereupon almost
all the rest o f the world endeavoured to follow suit The
process w as spread over a period o f thirty years and i s even
n o w inco m plete
since China with o ne fth o f the world s
populatio n retains the silver standard ( no t to mention the
recent relapses to a paper s tandard in Europe under the stress
o f war
)
This superiority o f gold over silver in regard to co nve ni
ence h as tw o di fferent aspects Under the free coinage
system the legal tender money which people carry in their
pockets is made o f coined metal I n the Middle Ages when
t he world was poorer in material wealth and the purchasing
power o f silver was greater than it n o w is the largest coin in
use in England was at one time the penny o f
grains ( about
When the scale o f
th e size o f the modern th reepenny piece)
business transactions was such that that was the convenient
coin people were not l ikely to su ffer from the bulk o f silver
But in the
th at their business required them to keep in hand
seventeenth century when transactions reckoned in thousands
and when credit facilities
o f pounds had become common
were stil l primitive the unwieldiness o f the silver became a
i nc onvenience
N o w a days the development o f
s erious
bank ing and the u s e o f paper money have made the ques
tion o f handiness fo r internal circulation relatively uni m po r
The point at wh ich the superior convenience o f gold
tant
.

'

: 2

CURRENCY AN D CRED IT

1 80

is felt under modern conditions is in settling internation al

balances
For the purposes o f international trade it is important that
every foreign exchange should be kept as near as possible to a
xed par The exchanges among countries whi ch u s e the
same metallic standard oscillate about the par represented by
the metal values o f their respective m onetary units and the
maximum divergence from this par i s limited by the specie
points But the di fference b etween p ar and either specie
point represents the cost o f transporting the metal The less
bulky the metal in proportion to i t s value the smaller will
be the cost o f transporting it and the narrower there fore the
limits within which the rate o f exchange can vary O f course
in the transportation o f gold and silver insurance counts for a
large proportion o f the total cost and as insurance depends
not o n bulk but o n val ue the cost o f tra nsportation does not
by any means increase in proportion to the cost o f handling
But fo r all that the advantage on the side o f gol d is j ust great
enough to be decisive
Thus gold has become the international currency And
fo r this purpose no legal tender privilege has any virtue ; the
value o f a gold coin away from i ts o w n country is n o more
and no less than that o f an equal amount o f gold bull ion
F o r the measurement o f large quantities o f the precious metals
weighing i s a more convenient method than counting coins
Consequently the same currency system which is so gro
tes q ue ly cumberso me in i t s appl ication to the internal trade o f
China i s quite practical and convenient in its application to
internationa l trade between the great com mercial nations o f
the world Fo r in China the co nception o f a coin as legal
tender i s not recognised Silver the ordinary medium o f
large payments passes by weight though even there con
v e n t i o n al values are very apt to attach to well known coins
such is the inconvenience o f weighing
But though gold is the international currency it must no t
be supposed that international debts are necessarily payable
in gold A debt in fact is payable in the currency o f the pl ace
where it is due The reason why gold is employed in inter
.

'

M ON E Y AND CO I N AG E

18 1

national payments is that in every gold using country cred its

can be bought at a xed price fo r gold Whoever possesses
gold possesses the m eans o f acquiring credits practically
everywhere B ut in o rder to u s e the gold as the mean s o f
payment he must trans form i t into credit o r money he must
sell it to a bank or al ternatively take it to the mint to be
coined
The mutual convertibility o f g o ld and credit is the logical
consequence o f the free coinage o f gold The free coinage o f
gol d makes gold coin and bullion practical ly interchangeable
But debts and gold coin the means o f payment o f debts are
equ iv alent C onsequently debts and gold bullion are equi
valent
Sometimes a p er centage charge called seignorage is made
fo r coinage
The man who brings a certain weight o f bullion
to be coined receives back a weight o f coins less by this per
centage Under that system no bull ion will be brought to
be coi ned unless the value o f the monetary unit ( as determined
by the quantity theory) is s u i ci e nt to pay fo r the bullion ;
that is to say the value o f the unit must exceed the value o f
the bull ion contents o f the coin in which it is payable by the
seignorage percentage And the coin will no t be exported or
melted unless the value o f the monetary unit falls below its
actual bullion contents This system therefore permits a
wider range o f variation to the monetary unit than the free
co inage system It is as i f the gap between the import and
export specie points were increased by the amount o f the
seignorage A small seignorage a fraction o f I per cent is
a not uncommon feature o f present day coinage systems ; it
logically impl ies an equivalent di fference in the buying and
selling prices o f gold bullion at the banks Large seignorage
charges were formerly common but are n o w a thing o f the
past An exorbitant seignorage charge i s essential to a p ro
I f the debased co ins are
t abl e debasement o f the coinage
issu ed too freely the monetary unit is depreciated and the
prot vanishes
Even under the system o f free gold coinage and convertible
o i ts nomi nal
a
er
the
e
uivale
c
unit
of the monetar
n
t
e
p p
y
q
-

'

CUR RENCY A N D CR ED IT

I 82

value in gol d is never anything but an approximation The

appro ximation may be made very clo se indeed i f the coinage
i s per fectly executed and ef ciently regulated and the arrange
ments fo r the payment o f money fo r credit and credit fo r
money are genuinely free If a large part o f the co i nage is
below weight either from wear or from imper fect execution ,
o r i f obstacles are interposed to the conversion o f cred it into
coin or bullion there may be an appreciable discrepancy be
tween the nom inal and the actual value o f the monetary unit
in gold It is a mistake to suppose that even the general
circulation o f an uni m
paired gol d coinage i s a complete sa fe
guard against this Before even good gold coins begin to be
melted down the market price o f bullion m ust a l r ea dy be
high enough to make melting protable And a prot whi ch
will pay for the melting do wn o f a considerable quantity of
coin will no t pay fo r a small quantity The accumulation o f
sufcient quantit ies to pay fo r melting and the elimination
there from o f the lighter coins require time and trouble U n
less a gold circulation is supported by adequate arrangements
fo r the conversion o f large credits into gold o f ful l weight on
demand it will not by itsel f prevent quite a perceptible
premium being paid fo r gold In fact since the gold market
like all other markets fo r raw m aterials is concerned exclu
s i ve ly with large quantities the gold value o f credits can only
be regulate d by means o f the convertibility i nto gol d o f
suf cientl y large credits
The basis o f monetary theo ry shoul d be the money o f
account To treat the money o f account as the unit for the
cal culation o f p r i ce: i s to d o it less than j ustice I t is prim
ari l y the unit for th e
and i ts use in the
calculation o f prices mere ly follows fro m the fact that the
quota tion o f a price is a proposal fo r the creation o f a debt
The conception o f a debt en forceable by law lies at the ro ot
o f al l the economic relation s of human society an d th i s co n
cepti o n presupposes a m oney o f account fo r the reck o ni n
g of
the debt Every day ne w debts are created and o ld debts
d ischarge d but these changes o n ly modi fy and d o n ot destro y
the i dentity of the corpus o f debts whi ch co nti nu es in bein g
.

M ON EY AND C O INA GE
from d ay to d ay

1 83

If

at any time the standard co in is changed

the same debts that were legally en forceable imm e diately be
fore the change remain leg ally en forceable imme d iately after
it They 3 31d th e unit in whi ch they are reckoned continue
even i f their value in terms o f wealth be changed
A chan ge i n the metallic value o f theunit may be i nco n
ven i en t unj ust disastrous
In some circumstances it may be
both equita ble and benecial Or again it may attain justice
through grave hardship o r ease at the cost o f inju stice
Whatever its merits o r defects the change o f standard nds
the network o f debts in continuous existence In form the
network i s the same after the change as before it It is a
mistake to dene the unit o f account in term s o f the metall ic
standard ; fo r the un it o f account i s that which pe rsists even
when the stand ard gll anges Originally the English pound
sterling was represented by 4 9 9 5 grains o f ne silver R e
peate d red uctions gradually brought it down to 1 7 1 9 grains
in 1 6 0 1
From 1 7 1 7 to 1 8 1 6 it was represented alternatively
by 1 7 1 9 grains o f ne silver o r 1 1 3 grains o f ne gold and
since 1 8 1 6 it has meant 1 1 3 grains o f ne gold Yet it i s
al ways the same pound sterl ing ; it would always have been
wrong to de ne it as 499 5 o r 1 7 1 9 grains o f silver or as 1 1 3
grains o f gold The pound sterling can only be dened as
A pound is a
th e Engl i sh unit fo r the calculation o f debts
pound The French l ivre or franc su ffered a more persistent
deb asemen t than the English pound But both have pre
served a continuity o f existence from the Dark Ages a con
t i nu i ty hardly surpa s sed by an y human institution except the
days o f the week
The only interruptions suffer e d by this continuity have
occurred when after a debasement o r degradation o f the
sta ndard o r an over issue o f paper money an eq uitable adj ust
ment o f debts is ma d e those incurred during the period o f
disturbance being made payable at something less than their
We shall have occasion to mention more than one
face val ue
instance o f this in the succeeding chapters
Sometimes two monetary units are in use concurrently
of
has becom e
exam
l
wh
n
an
i
u
a
er
mone
e
or
e
s
s
e
p
F
p
y
p
.

.
-

'

1 84

CURRE NCY AND CRED IT

seriously depreci ated it may be that people take to making

bargains expressly payable no t in paper but in metallic
money Sometimes again the monetary unit becomes d is
connected from the legal money ; debts and bank credits re
main interchangeable but can only be converted into cash o n
payment o f a premium This has happened more than once
i n the great nancial crises o f the United States In the crisis
o f I 8 7 3 there w as even a small prem ium o n the paper money
though the paper money itsel f was at a substantial discount
in comparison with gold
.

C H APTE R X I I
TH E T H E O RY

O F B AN KI N G

T H R OUG H OU T the preceding pages currency has been treated

as something subo r dinate to credit It i s no t suggested that
that is the only legitimate standpoint to the exclusion o f the
more commonly accepted view o f metallic money as the
primary means o f exchange with cred i t as a use ful and
economical supplement to it B u t this treatment o f the sub
j ect has th e practical advantage that in business as at present
organised credit hold s the predominant position and the
functions o f money have in actual fact become relatively sub
ordinate And it has the t heoretical advantage that a sale fo r
metallic money is in all cases analysable into the creation and
extinction o f a debt i e into two credit transactions From
the opposite point o f view a sale fo r credit m ight perhaps be
regarded as the uncompleted portion o f a sale fo r money but
i n fact it usually happens that the sale is completed n o t by
the payment o f money but by being set off against another
similar credit transaction Nor can the signicance o f the
l egal tender quality o f money be understood except i n terms
An exchange o f commodities is something
o f debts ( credits)
vo lu nta ry ; nothing legally en forceable occurs until a debt is
created and it is onl y when a debt is created that the law can
prescribe how it is to be discharge d
The adoption o f this point o f view requires us to devote
some spa ce to th e theory o f banking Fo r bankers obli ga
tions are the form o f credit used as the medium o f payment
I n Chapter I we dened a banker as a d eale r in debts F o r
the m ost part however he does not buy debts he cr ea te: them
Even when he buys them as when he discounts a bill o f ex
ch an ge the d ebts h ave usually been created fo r the ex press
.

$8

1 86

CURRENCY AN D CRED IT

purpose o f being sold to him Apart from such transactions

a banker s purchases o f debts are usually from other bank ers
The debts created by bankers or created fo r the purpose
o f being assigned to b ankers are usually those that arise o u t
incl uding o f course the construction o f xed
o f production
capital Production may be regarded as making society the
debtor o f th e producer But the ultimate amount o f the debt
i s speculative i t depends on the market fo r the product
Society will no t pay its debt til l the product is ready and is
sold to the consumer In the interval the banker undertakes
society s debt ( subject o f course to discount) o r such part o f

it as the producer immediately requires The banker s obl i

g ati o n s o assumed i s to the producer a means o f payment ;
whatever wealth he needs during the process o f production he
can buy with it B ut he can only buy wealth which ex i s ts ;
the banker s obligations are n o t themselves wealth
At any
moment there is a balance o f indebtedness fro m society to
the producers in res pect o f all that they have contributed by
thei r services and their property towards the production o f
wealth which i s still incomplete o r which being complete is
n o t yet marketed
In s o fa r as this i n debtedness o f society
has been undertaken by the bankers it apparently gives the
producers the right to buy wealth which is not yet ready fo r
them B ut as against this the producers choose to kee p a
large part o f their purchasing power in reserv e unexercised
and this is what we have called the unspent margin To this
extent society i s n o t called upon to pay its debt to them i m
mediately and the bankers who have taken over the debt
reap the benet While they earn interest from the producer
and the trader in co nsideration o f their having taken over the
debt nevertheless they do not have to p eg/ thi s part o f the
debt at all
It should be observed that there is no necessary equality
between the bankers liabilities on the one hand and the i n
d e bted nes s o f society to the producers o n the other
The re
serves o f unexercised purchasing power may be l es s than the
stocks o f incomplete or unmarketed wealth I n that case the
di fference must be provid ed fo r as part o f the ca pital invest
.

'

TH E T H EORY

m ents

of

th e

O F BAN K IN G

1 87

c om m unity If; to take an extreme c ase no o ne

ever kept any credi t u nspent so th at there were never any
o utstanding bank in g deposits the advances made by the banks
could no t exceed their o wn capital a bank in fact would be
merely an agency fo r investing a part o f the savings o f the
community in tempora ry loans Savi ngs woul d have to be
applied in exactly the same way to accumulating the necessary
stock s o f commod ities in course o f manu facture o r awaiting
s ale as to providing the xe d capital o f industry and transport
If to take a more probable illustration the banks advances to
traders excee d the total o f their deposits the excess must be
covered by their capital Or again there may be side by
side with the bank s nance o r discount com panies which ap
ply their capital to mak ing tem porary a d vances If o n the
other hand the temporary advances made by the bank s are
l ess than their deman d l iabiliti es they must hold some other
as sets In any case o f course they hold a certain amount o f
cash but besides this they may hold some permanent invest
ments And in fact practically all bank s do hold some per
manent investments while in so me cou n tries they act as
underwriters and company promoters on a larg e scale
Thus there i s n o neces s a ry connection between the two sid es
o f a banker s business th e d e m an d liabil i ties which provide the
medium o f payment and the temporary advances to traders
The union o f these two functions in o ne agency is a great ad
vantage from the point o f vie w o f convenience and important
consequence s fl ow from th eir being s o united But in some
respects it is desirable to study each in isolation from th e other
I n the rst place let us consider the business o f mak ing
tem p o rary advances The sale o f goods to the consumer i s a
continuous process To a great extent production is likewise
a continuous process and where it is not continuo us it is usu
all y p eriodical depen d ing o u the recurrence of h arvests B e
twee n the processes o f p rod uction and consumption there
inte rven e those o f transportation and d ealing in which the
goods are almost necessarily dealt with in l arg e quantities
The s ales o f the manu facturer th e purc hases and sales o f the
merchant, and th e purchases o f the reta iler are al l mad e o n a
.

'

'

CURRE NCY AN D C REDIT

1 88

large scale and conseq uently the amount o f goods i n the hands
o f any o n e o f these i s subject to a successio n o f discontinuities
being large immediately be fore a sale o r after a purchase and
small immediatel y be fore a purchase or after a sale I f there
were no tem porary borrowing every man s permanent capital
would have to be enough to pay fo r the maximum quantity o f
goods that he at any time has in h i s possession and wh e nei rer
the goods o n hand fell short o f the maximum he would have
a b a lance o f idle money equivalent to the di fference From
the point o f view o f the individual trader the advantage o f
temporary bo rrowing is that i t enables him to escape the
necessity o f maintaining at ti mes a large balan ce o f idle money
which i s earning no interest In fact it enables him to eco no
mise balances It is immaterial wh ether the borrowing is
from a banker or nancier or from the trader s customers
It
might be done quite e ffectually eno ugh by means o f bills
drawn by sellers o n buyers or by mere book debts between
them with periodical settlement Whatever the practice may
be the purpose i s to economise balances And i f metallic money
i s used economy in balances means economy in the use o f
metal and a real saving o f wealth If however legal tender
paper i s in any case used ( and this as we have seen is some
thing distinct from bank cred its e ven i f the latter are re pre
sented by bank notes) there is no saving o f wealth to the
community Economy in balances means dim inished issues
o f paper money and the trader s saving is e ffected at the ex
pense o f the prots o f issue which would accrue to the issuing
authority
The advantages o f temporary borrowing however are not
limited to the saving o f loss o f interest on idle money Apart
from th e p o w e r o f borrowing a merchant would be l imited in
all h i s enterprises to the permanent capital o f h i s business
Even i f this permanent capital were enough to cover all ordin
ary uctuations in his stocks it would still be ins u ffi cient to
enable him to take advanta ge o f exceptional opportunities fo r
large purchases which his special skill and knowledge o f his
trade might disclose to him Thus temporary borrowing i n
into
tro duce s an al most necessary elem ent of le l as ti ci
the
ty
,

T H E T H E O RY O F BAN K I NG

1 89

m erchant s business; Without it hi s special function o f a n

t i c i pati n g the futul e need s o f the community would be
arbitrarily circum scribed
At a ti me o f crisis the panic stricken clamour fo r mo ney is
i n part at any rate the conseq uence o f the withd rawal o f the
usual facilities for temporary borrowing Traders are com
p el le d to keep l arger balances ( not necessarily o f cash they
m ay be o f credit) because th ey cannot rely o n borrowing
The other side o f the banker s business the assum ing o f
obli gations to be used by their cred itors as the medium o f
payment might be completely separated from the operations o f
making temporary loans The assets held by bank s o f issue
against their notes o ften include no temporary loans at all This
was true till a few years ago o f the United States National Banks
In th eory ordinary bank credits o n current account might be
based entirely on cash and permanent investments All that is
require d i s that th e assets should be su fcient to meet the
liabil ities and that the margin o f cash should be su f cient to
pay the credits o n demand whenever necessary If the
practice o f making temporary loan s did not exist it may be
supposed that the need for bank credits as the medium for
large payments would lead to the establishment o f banks o n
some such basis Th e service rendered by such banks to
trade would be the avoidance o f the trouble and expense o f
counting transporting and sa feguarding the legal tender money
which would otherwise have to be used If the legal tender
money were o f me tal they would also e ffect a saving by
economising the use o f it But here once more i f the legal
t ender money were paper there would be no real saving only
a gai n to the bankers at the expense o f th e prots o f issue
The existence o f the unspent margin a fund o f unexercised
purchasing power is an opportunity o f prot This o p por
tu n i ty may be deli berately waived in order to maintain a
metallic currency The whole of the unspent margin might
be held in the form o f cash under an unqualied free coinage
sy stem o r i f a part be composed o f notes o r bank credits the
notes and bank credits might be support ed by an equal amount
But i f this rigi d system be not adopted a
of coin or bullion
-

CURR ENCY A N D C REDIT

1 90

part o f this fund will provide prots fo r some on e In s o far

as the unspent margin is held in the form o f legal ten der paper
unsup ported by metal the prot goes to the i ssuing authority
In s o far as it i s held in the form o f bank credits unsupported
either by metal o r by legal tender paper the prot goes to the
banks though the banks may share it with their customers by
paying a certain amount o f interest o n current accounts
Banks are o ften spoken o f as providing capital
They
are said to receive capital from their customers w h o would
otherwise leave it idle and to l end it out to traders who are
in a position to u se it fruit fully The depositor who keeps a
balance idle does it i s true forego a power o f command over
capital which he might have exercised and the borrower from
the bank gains and uses the power which the depositor ah
stains from using But the capital itsel f the actual goods and
services which the borrower buys never comes into the banker s
possession at all The banker is never anything but a debtor
and creditor He provides capital in the sense that the share
holder and the debenture holder provide capital The trader s
balance sheet shows on the debit side sums due to the share
holders the debenture holders and the banker and on th e
credit side the value o f what the economist calls capital such
as buildings machinery stock in trade promotion expenses
etc The abstention from spending which provides the s av
ings subscribed by the shareholders and debenture holders i s
si mil ar from the standpoint o f the balance sheet to the ah

s te n ti o n fr om spending which provides the

unspent margin
and s o makes the banker s business possible though the motive
in the former case is the wish to acquire an income yielding
investment and in t he latter the convenience o f keeping a
certain amou nt o f purchasing power in hand
When banks are said to receive capital from their depositors
and lend it out to traders this is not quite an accurate d es cri p
tion o f what happens even i f capital be taken in the balance
sheet sense The only unexercised purchasing power that the
banks receive from their depositors is the cash paid in chiey
by those who receive cash rather than credit in the course o f
business such as retail shopkeepe rs railway and tramway
.

T H E TH EORY OF BAN K I N G

19 1

com pan i es collectors o f work ing class rents etc Apart from
this the banks cr eate purcha sing po wer in the process o f grant
ing credits It rests with th em t o increase o r di m inish the
u nspent mar in by accele rating o r retardin
g
g this p roces s o f
gran ting cred its And as they i n crease or diminish the nu
s p en t margin they increase o r dimini s h the suppl
y o f capital
fo r balance sh eet purposes
A s it i s for ci rcu l a ti ng capital
that bank advances are chiey used this increase o r decrease
in the capital items o n the debit side o f the traders balance
sheets is accompanie d by a corresponding increase or decreas e
in the stock in trad e o r goods in course o f ma nu facture o n the
credit side H ence the e ffects u pon productio n and all the
other consequences which we have followed o ut incl uding th e

reaction upon the consumer s income and outlay the deman d

fo r goods the level o f prices th e absorption of ca sh et c
Both the assets and the l i abilities o f the trader are com

l
o
n
m
capital and it is important to avoid the co n
y called
fusion which thi s double u s e o f the term may cause
When
the re is said t o be an abundance or s carcity o f capital what i s
u sually meant is no t that there i s an abundance or scarcity o f
wealth adapted for use in production but that the banks are
wil ling o r unwi lling to lend At the time when the scarc i ty
o f capital is most acute that is to say in a crisis there is an
emba rr as si ng plenty o f com mod ities because merchants are
selling them at a sacri ce fo r want o f the credit on which they
rel y for holding them

B ank er s obl igation s which are to serve as a medium o f

payment should be obligations a l r ea dy d ue ; in other words
they shoul d be demand l iabil ities If they were only due at a
future date it wo uld be necessary to allow discount in reckon
ing thei r val ue The trou ble o f calculation would make them
an i nconvenient means o f payment and th e exact rate o f d is
count allowe d might h ave to be the subject o f a bargain
P len ty o f exceptions may be found to this general rule In
th e eighte en th century many banks issue d notes which were
They might be payable
no t payable as o f right o n demand
at a cer tain interval a fter demand o r the banker mi ght r eserve
h i m sel f an opti on of postponing pay ment for a certai n ti m e
-

CURREN C Y A ND C REDIT

192

and paying interest And in Lancashire till the m iddle o f

the nineteenth century bills o f exch ange regularly passed from
hand to hand as the mean s o f payment fo r goods accumulating
an al most incredible number o f end orsements i n the process
Deposits subject to notice and yielding interest are a

form o f banker s l iability intermed iate between a reserve o f

ca s h and an investment But s o long as noti ce is n o t given
they cannot be used as a med ium o f payment ; the depositor
cannot assign them by cheque unti l he has trans ferred them
to current account
The circumstance that always tells against the common use
as a means o f payment o f any form o f banker s obligation
other than one payable o n demand is that a future obligation
w hich yields interest tends fo r that reason to be kept as an
investment till maturity Economists have o ften argu ed that

bills o f exchange are currency as much as bank notes o r

demand depo si ts But this at any rate i s an essential d is
tinction and in practice bills sleep quietly till maturity in
bankers port fol ios only exceptionall y being roused up to go for
a moment into the dayl ight to be rediscounted and change
their masters
Exponents o f the theory o f bank ing and practical bankers
al ike are obsessed with the dangers o f a great m ass o f demand
liabilities It is all very well to say that all the depositors and
note holders o f the Bank o f Engl and never wi ll demand pay
ment together but if they d i d the Bank o f England would be
unable to pay N o bank can be quite sa fe, unless l ike the
old bank s o f deposit at Hamburg and Amsterdam it retains
a stock o f specie equal to the whole o f its demand l iabilities
The practice o f maintaining a s large a propo rtion as p os
sible o f the assets o f the bank other than the cash reserve in
the form o f loans fo r short peri ods is commonly recommended
as the best sa feguar d against these dangers If the depositors
begin to draw out money the bank can protect itsel f by st0p
ping the grant o f fresh loans and letting the existing loans
run off day by d ay as they fall due Unless there i s th at

simultaneous rush fo r money which is called a run o n the

bank this process is likely s o to strengthen the b ank s cash
.

TH E TH EORY

O F BAN K I N G

193

reserves as to enable it to meet all demands If no t the bank

may ha ve to raise money elsewhere and fo r this purpose the
most e fcient method is the rediscounting o f bill s o f ex change
At a time o f stress lenders will be better satised with a
security o f which the capital will fall due in a short time than
by sto ck exchange securities the capital value o f which may
be subject to a heavy depreciation
This doctrine is true eno u gh as far as it goes But the
question o f the best assets to be held in support o f a banker s
demand liabil ities raises a variety o f other conside rations
I n the rst place there are two quite distinct conditions o f
solvency ; the assets m ust exceed the l iabilities by a su fcient
margin and cash must be always forthcoming s o far as re
quired to mee t the demand liabil ities The former i s a condi
tion which applies t o all businesses the l atter is peculiar to banks
And the rules o f maintaining general solvency are in many
respects the sa me fo r banks as fo r other businesses There
must be an adequate margin o f capital rein forced s o far as
possible by a balance sheet reserve ; every reasonable precaution
must be taken to be sure o f the solvency o f people to whom
loans are granted be fore prots are divided proper provision
m ust be made fo r bad o r doubtful debts and fo r th e d e prec i ati o n
A manu facturer has
o f assets such a s long te rm investments
a l arge xed capital and may have l ittle o r no temporary i n
d e bte d ne s s a merchant will have a relatively larger temporary
indebtedness But temp orary indebtedness will take a much
smaller place even in a merchant s balance sheet than demand
liabil ities in a banker s I n order to support this large l iability
o f a xed money Value the banker requires to have adeq uate
assets o f a xed money value L ong term investments are
liable to an inden ite capital depreciation and consequently
the banker needs short term investments not merely to help
him in maintaining cash pay ments on demand but to keep
him solvent The snare o f long term investments has been
demonstrated again and again by the failure o f savings banks
managed with scrupulous care and apparently with prudence
They cannot remain solvent i f they have to buy investments
at a high price w h en savings are plenti ful and to sell them at
.

'

'

C UR RE NCY AN D CRED IT

94

a low price when savings fall o ff In countries where the

mercantile business is relatively small as compared with the
vol ume of production banks are tempted to venture on long
term investments So long as they maintain a conside rable
proportion o f short term securities and choose suitable gilt
edged long term investments there may be no harm in this
The d anger is that they may assume the functions o f company
promoters o r underwriters and may get burdened with blocks
o f securities which are eith er unsaleable or can only be reali sed
at a heavy sacrice Or in an agricultural country th ey may
advance sums o n mortgages o f property which will not fetch
adequate sums in the market in case o f foreclosure The vice
o f such practices is not so much that the investments are fo r
long terms or that the capital is not repayableindeed in the
case o f mortg ages the capital i s repayabl e but that the value
But this uncertainty
o f the investments themselves i s doubt ful
o f value is itsel f a characteristic o f long term by contrast with
short term investments The chance o f a merchant who ap
pears perfectly solvent i n June failing in September is small
The chance o f land which form s the security fo r a mortgage
suffering a serious deterio rati on o f value in the course o f three
or ve o r ten years is considerable I t is rightly considered a
principle o f sound banking that a l arge propo rt ion o f the
bank s assets should consist o f bills advances or other short
dated securities but the most co gen t r e as o n for this is that it
is di fcult otherwise to maintain i ts general solvency
Even i f banks do n o t themse lves enter into the investment
market as underwriters and run the risk o f tying up part o f
their assets in unrealisable shares they may get into the same
di fculties by advancing money to the investment mark et
The embarrassed under w riter compelled to hold th e securities
which the public will not buy must have recourse to hi s
banker If he can put down adequate secu rity the banker
will grant h im an advance But i f h i s is not an isolated case
i f the investment market as a whole is embarrassed by a failure
o f the investment d emand from the publ ic it may be impossible
to realise securities which are in themse l ves irreproachable
When investment securiti es have to be sol d , the purchas e
.

TH E T H E O RY o r B A N K IN G

19 5

money can only be obtained either from the savings

the
investing public o r from the creation o f bank credit s
Consequently the extent to which the aggregate o f bank credits
can be reduced by the sale o f such securities is limited by the
supply o f savings available fo r i nvestment Advances on
investment securities even though they appear to be a very
liquid asset are someti mes found in an emergen cy to be
frozen up
The existence o f any large class o f traders
whether they be ban k ers underwriters nance com panies or
any others with long period assets and short pe riod debts
is
a l way s a source o f danger This is the real ground o f the
prejudice against what are called nance bills o r ao

commodation bill s i e bill s o f exchange d rawn no t to provide

money for the purchase o f goods destined for an early sale but
There is absolutely no
to cover a deciency o f ready cash
ha rm in borrowing to meet a deciency p r ov i ded the deciency
is temporary There is no special virtue in a deciency caused
by the purchase o f goods In the course of business there
may be a hundred and o ne legitimate reasons fo r anticipating
future receipts o r fo r abs taining from calling in loans to provide
funds for the purpose o f de fraying an immediate liability o r o f
seizing a promising O pportunity T he vice o f the nance bill
is in the use o f it to raise money for the construction o f xed
capita l when the necessary supply o f bona d e savings cannot
be obtained from the investment market This abuse o f the
system was a conspicuous feature o f the O verend and Gurney
cri sis o f 1 8 6 6 and al so o f the Unit ed States crisis o f 1 907
In considering the means o f maintaining the payment in
cash o f a bank s demand liabilities we must distinguish be
tween the requirements o f normal times and those o f a crisis
In normal tim es the respon sibility must rest exclusively o n the
individual banker ; in times o f crisis while he must play his
part more depends o n the attitude o f the authorities whether
the Gove rnment o r a central ba nk in whom the control o f
the banking situation ultimately rests In norm al times the
bank s are in competition with one another They endeavour
dvantages they offer in the form
t o attract customers by the a
either o f nancial facilities o r o f local convenience Each
of

13

CURR ENCY A N D CR E D I T

1 96

bank has its client ele peo ple wh o have chose n fo r o ne reason
Fo r the most part the
o r another to give it their custom
borrowers from it will be included among its d epositors If
a ban k i s a little too free with its loans its customers will on
balance pay away greater sums to the customers o f other
banks than they will receive It will nd day by day when
it sett les accounts at the clearing house that it has to meet an
adverse balance by paying away a part o f its cash reserve If
it is to kee p a cash reserve in due proportion to its liabilities
it must restrict its advances o r perhaps trans form some o f its
other assets into cash fo r example by rediscounting bills
Whatever measures it may choose to adopt the e ffect is that
it must n o longer outstrip its competitors in granting loans
And o n the other hand an unduly cautious bank will nd a
favourable balance d u e to it at the clearing house ; its cash
reserve will grow at the expense o f its other assets and its
prots will suffer through its interest earning assets being too
small in proportion to the total Thu s there i s a tendency
for all the banks to keep pace in the granting o f credits ; each
can only extend its business by nding new customers and
the loans and a d vances that it can grant a mong a given circle
o f customers are practically l imited
A loss o f cash m ay occur either through th e grant o f
excessive advances or through a loss o f con d ence in the bank
I n the latter case the remedy
o n the part o f its customers
i s fo r the bank to borrow from its fellow ba nk s S o long as
the loss o f condence i s not deserved so long as it can p resent
a balance sheet that is demonstrably solvent it can do this
The banking community will always be anxious to help o ne
o f their members
provided he be really solvent for any
banking failure wil l cause a shortage o f the m eans o f payment
and w i ll put them in di f culties But it i s o n e thing to be
solvent and quite another t o be able to give conclusive
evidence o f solvency The solvency o f a banker depends in
the last resort o n the solvency o f those o f his customers to
whom he has lent O f some o f these he alone knows the
affairs Many a bank has come to grie f and has yet paid 2 05
in the poun d when woun d up with a han d some balance over
,

TH E T H EO R Y

O F B A N KIN G

fo r

197

the partners or the shareholders There is thus a tendency

which may cause so me injustice fo r banks to pre fer the claims
o f borrowers with large busi n esses whose credit is a m atter o f
general knowledge to tho se o f smaller borrowers who in all
other respects may be better deserving o f accommodation
unless the l atter can o ffer unimpeachable collateral security
n assu ming demand obl igations a banker s functions are

p as ve ; it i s in lending that he plays an active part in trade

In lending he takes the responsibility fo r two kinds o f
decisions he selects the borrowers and he determines the rate
o f inter est
The borrowers want credit fo r the purposes o f
production All production is more or less speculative since
its success cannot be measured till it is complete and the
product has been sold to the customer By lending the
banker to some extent participates in the speculation though
o f course he can guard himsel f again st the chance o f loss by
exacting coll ateral security from the borrower o n whom the
main burden o f the risk fal ls By making the market rate o f
interest the bankers as a class keep the demand fo r advances
and consequently the supply o f credit in their control
Bankers aim at keepi ng a xed proportion between their
cash rese rves and their demand liabilities The nature o f
these cash reserves depends very much o n the credit and
currency system in vogue They do not necessarily consist
entirely or even mainly o f legal tender money In England
the practice i s fo r banks to keep considerable deposits at the
Bank o f England They settle balances with o ne another by
drawing cheques on these deposits and they only draw o ut
legal tender m oney when they need it to hand over to their
customers
The great Engl ish joint s tock banks have a
m ultitude o f branches and their cash reserve which gures in

their balance sheets usually under the description cash in

hand and at the Bank o f England consists partly o f the

working balances o f cash needed fo r the day to day needs o f
al l their branches and partly o f their credit balances at the
Bank o f E ngland These reserves are supported by another

item in the balance sheet cash at call o r short notice which

is money lent chi ey to bill brokers practically from day to
.

CUR RE N CY AN D CREDIT

198

day Although it can be withdrawn almost o n deman d it is

di fferent from a deposit with a bank in two respects ; rst it is
not assigned away by cheque and so cannot be used as a
means o f payment ; secondly it earns interest no t at the
specially l ow rate allowed o n a deposit subject to notice but
at a rate only a little below the full value o f the use o f the
money The bill brokers w ho borrow this day to day money
invest it in the discounting o f bills o f exchange They

resemble bankers in that their l iabil ities are more liquid

than their assets and they are in practice mor e exposed to
F o r the
sudden demands than the bankers themsel ves
bankers regard this money at call as the means o f replenishing
their reserves i f necessary If thei r reserves run short they
cal l some o f the m oney up The bill brokers may be able to
pay the sums called from the proceeds o f bills falling due ; i f
not they borrow from the Bank o f England Whenever credit
begins to outstrip cash in the London market the effect is felt
in a ten dency on the part o f the bill brokers to borrow from
the Bank o f England and indeed the Bank rate is prac tically
the rate at which the bank i s prepared to lend i f requested
in those circumstances When the Bank so lends its assets
are i ncreased by the a mount lent and its liabilities by an

equal amount The Bank s liabilities are deposits , and the

additional deposits in the hands o f the bill brokers are pa ssed
on by them to the banks w ho have called money from the m
Thus th e e ff ect i s that the credit balances o f the joint stock
banks at the Bank o f England are increased and the shortage
in their reserves is made good
When the B ank rate is high
the bill broker s cannot a fford to b p rro w unless they charge i
correspondingly hig h r ates fo r di scountin g
C on
sequently the rate o f discount as wel l as the market rate fo r l
day t o day money tend s to fol low the Bank rate This
system o f keeping money at call enables the great Lon don
b anks to conduct their business in normal time s withou t
borrowing
The bank ing system o f the United S ta ms resembl es that
o f England in that o ne bank deposits a part o f its reserve with
another Be fore the passing o f the Fe deral Reserve Act of
,

THE ( TH EOR Y OF BA N KI N G

1 99

a nu mber o f large towns were designate d reserve cities

e
and there w re three central reserve cities ( New York
Chicago and S t Louis) The National Banks in the reserve
cities held deposits from the N ational B anks in the smaller
places round them and these deposits were counted as part o f
the statutory reserves o f the l atter The National Banks o f
the central reserve cities likewise held deposits from those in
the rese rve cities This di ffered from the Engl ish system in
that there was no centralisation o f the deposits which were
thus counted as cash reserves in a single institution The
Federal Reserve Act has however made a furth er approach
towards the Engl ish system in that though even yet there i s
n o t a singl e central bank fo r the whole o f the United States ,
the country i s divided up into districts and there is only one
Federal Reserve Bank fo r each district Moreover the Federal
Reserve Board introduces some unity o f control into the
Federal Reserve Banks o f all the di fferent districts If cir
cu m s tances demanded a general contraction o f credit it would
be possible to m ove the Federal Reserve Bank s to make
a simultaneous advance in the rate o f interest The United
States system still di ff ers in many important respects from the
English Every national bank i s required by statute to main
tai n a reserve equal to a certain proportion o f its l iabilities
1
and th is reserve must be deposited in the Federal Reserve Bank
If the reserve fal ls short it will be replenished by rediscounting
bills with the Federal Reserve Bank National Banks are p ro
hi bi ted from having branches s o that there are tho usands o f
independent banks some very large and others very small
On the continent o f Europe the prevalent practice is to
hold the c as h reserves in legal tender paper issued by a central
bank and to replenish them when necessary by rediscounting
bi ll s with the central bank
Under al l these systems the e ffect is that in order that the
1 9 1 3,

For d em and d epo si t s th e pro por ti o n was xed by th e amendi n g Act o f

n et J un e, 1 9 1 7 , a t :1 3 p er ce n t i n c en tral re s erv e ci ti es, I O p er cent i n reser ve
Th e propo rti on for ti m e d eposi ts i s 3 per ce nt
ci ti es and 7 p er cent e l s ew h ere
n
ri gi nal ly th e proport io n s w e r e 1 8 , 1 5 , an d 1 2 per c e t and the reser ve was to be
h eld p artly i n cash and partl y i n the form o f d e posi ts wi th th e ed er al R eserve
1

Bank

CURRENCY AN D CR EDIT

2 00

ordinary banks may replenish their reserves when necessary

the central bank has to l e nd When gold is wanted for export
as the ordinary banks d o not keep more gold than i s required
fo r their day to day needs th e gold is withdrawn from the
central bank Thus the demands on the central bank are
always the index o f the nanCi al situation
I n times o f nancial tranquillity when the re is no crisis or
threat o f a crisis it is discredi t able fo r a bank to suspend
payment It may be as m uch the banker s mis fortune as his
fault but the hard fact remains that he has failed to meet his
engagements when his neighbours have fullled theirs The
failure o f a bank like all acts o f bankruptcy i s a breach o f
But it i s somewhat more blameworthy than the failure
faith
I t is part o f the business o f a merchant
of a mercantile rm
to take risks ; it is the duty o f a banker to avoid them If
al l merchants take risks then some o f their ventures must fail
The mere fact o f failure i s not evidence that a merchant has
taken u nd ue risks But the mere fact o f failure is evidence
against the banker
On the other hand at a time o f crisis the case i s rather
di fferent If all the banks are su ffering no t from an i n
s u f c i e n cy o f assets to cover their liabilit i es but fro m a short
age o f legal tender money no o ne o f them is discredited by
embarrassments which are obviously attributable to a m i s
carriage o f the currency system The currency system i s in
the last resort regulated by the legislature and it is not within
the power o f any individual banker to control it I f it breaks
down the responsibility rests on the legisl ature or on the
authorities entrusted by law with the management o f the
system
I t may perhaps be retorted that this is only so i f the
legislature has set up so me articial and unsound system and
that i f the clear and sim ple principles o f the free coinage o f
gold be adopted and en forced the responsibility may be le ft
with the bankers s o to shape their a ffairs as al ways to be able
to meet their engagements From this point o f V iew a
banker s business may be regarded as composed chiey o f

dealings in options and futures in gold A b ank credi t

,

T H E T H EO RY O F B A N KI N G

20 1

is

an option to buy gold at any time ; a loan or bill is an

undertak ing to d eliver gold at some xed future date If then
the banker is given the right to pay in paper instead o f gol d
he is thereby enabled to avoid the fullment o f his engage
ments unless the paper itsel f is convertible into gold But
i f this is the correct theo ry the banker is exposed to the same
dangers as any other dealer in futures and O ptions If the
state o f the gold market makes it protable fo r his customers

to exercise their
options in other words i f the market value
1
o f gold tends t o rise above its coinage price
he may be called
upon to nd more gold than he possesses or can lay his hands
on
At such a time he cannot get it from his fellow speculators
because they are in the same di fculties as he Neither he
nor they are necessarily to blame ; the gold market may be
inuenced by conditions abroad over which they have no con
trol an d o f which they have no direct knowledge It seems
therefo re that o n this theory the risk s o f the speculator are
inseparable fro m b anking unless the practice o f the o l d banks
o f H amburg and A mster d am be adopted and the whole o f the
deposits be covered by bullion o r specie
But in reality this i s no t a tenable theory o f banking at
'
all I f the banker s obligations are payable in gold that is
because a l l debts are payable in gold If the law makes them
payable in go ld the law can at any time make them payable
in something el se I t is vain to say that it m ust not d o so ;
in practice it frequently does There i s much to be said fo r
the view that al l currency systems oug lzt to be based o n a
metallic standard and that once the standard is chosen it
ought to be adhered to at all costs But however rmly th e
[sta ndard may be entrenched in the law the law always ca n be
al tere d o r even broken The power o f issuing paper money
al w ay s ex i sts in the backgro und even i f it be expressly fo r
f o f this po wer
bid
n
by
law
The
State
cannot
d
ivest
itsel
d
e
,
o r o f the responsibility attached to it
When in the throes o f a crisis all the banks are faced with
.

'

gol d fr o m the b an er at

n
o
f
t
h
a
n
r
b
i
o
e
e
s de bt to h i m ,
l
n
c
e
l
a
t
th e co i n age pri ce , pay i n g fo r i t b y a ca
whi ch l i e al l d ebts i s com pu te d i n th e l egal m o ney of accou nt
l

Th e

opt i on en ti tl es th e c ust om er t o rec ei v e t h e

k
.

CURR ENC Y A N D CR ED I T

2 02

a desperate shortage o f currency the responsibility fo r taking

measures o f relie f necessarily devolves o n the State Even i f
the fault lies with the individual banks the remedy i s not
within their power The pressing necessity is to provide the
means o f payment and only the State can do this The State
cannot be relieved o f this respo nsibili ty unless as in C hina
the means o f payment are settled by custom and the powers
1
o f sovereignty are really insu f cient to modi fy this custom
So long as the power o f enacting what shall be the law ful
means o f payment resides in the State the State has the re
sponsibility fo r using that power If it decides fo r good
reas ons o r bad not to help the banks there i s likely to be a
universal suspension o f payments such as has occurred more
than once in the United States Where all the banks suspend
no individual banker need feel ashamed Suspension becomes
the vogue j ust as when George I I I was mad it became the
fashion fo r every o ne at Court to claim to have had a period
o f insanity in his past
In fact there is real ly n o reason why the banker who has
conducted h i s affairs with ord ina ry prudence should ever lie
awake at nights oppressed by the abyss o f demand liabilities
at the edge o f which his business is carried on The demand
fo r cash is n ot cap r i ci ou s
S o lo n g as crisis conditions d o not
arise the circulation o f money being determined by the con
v e n i e n ce o f the
publ ic will be approximately steady A
banker whose cash reserves fall o ff can readily replenish them
from his neighbours fo r the aggregate o f cash reserves will not
diminish suddenly On the other hand when a general short
age o f cash does occur this i s a sign that there has been an
undue expansion o f credit and that is a matter fo r which the
responsibility rests no t with the individual banker but with
the central bank as the representative o f the State So long
as the ordinary banker takes care that his assets are good and
does n o t swell h i s loans and discounts beyond the due propor
tion to his deposits he i s do ing his duty to society
I f this responsibility necessarily rests on the State ought
,

O r , theore ti call y

be l i m i ted by

at any r ate ,

wr i tten

th e

co n s ti tu ti on.

pow er

o f th e

S tat e

ov er curre ncy

m i gh t

T H E T H EO RY O F B A N K I N G

2 03

not the State to exercise some control over the activities o f

bankers at all ti mes ? It may be conten d ed with some force
that to de fer the very beginning o f control till the moment o f
crisis is to leave the preparations fo r de fence till the outbreak
o f war
This is a much controverted question It is not
generally di sputed that a close regulation o f the right o f note
issue is desirable It i s usual indeed to restrict the right to
a central bank and to make its notes the paper money o f the
country with the privilege o f legal tender Even where private
banks o f issue are permitted it i s usual as in the United States
and C anada to make elaborate arrangements to secure the
convertibility o f the notes in al l possible circumstances The
reason o f this is that there i s not the same personal relation
between a ba nk and its note holders as between a bank and
its depositors There i s a greater danger o f the bank s obli
gati o n being either t oo much o r too l ittle truste d when it is
represented by a note than when it takes the form o f a deposit
Moreover bank notes may in an emergency be made legal
tender even i f they are no t norm ally so o r ,not being made
legal tender they may become by force o f circumstances the
o nly means o f payment available fo r retail transactions and
the payment o f wages When the emergency comes the d i i
c u l t i es o f the situation may be greatly increased if the issuing
banks have been allowed to get into an unsound condition
A close State regulation o f bank s o f deposit is more doubt
It is easy to j usti fy in principle The banks p ro
fu l policy
vide what is in practice the principal means o f payment in
business transactions That s o vital a service should be well
and honestly rendered is a matter o f primary public importance
It is arguable however that it will be better rendered under a
free system than i f subjected to articial l imitations
The question is not one that can be decided entirely by
general principles The purpose o f control is to secure that
the banks both have and dese rve the condence o f the publ ic
They must have su fcient cash reserves to pay their deman d
liabi lities and they must have good general assets One bank
ca nnot be more liberal than the rest in granting loans and
discounting bills without having to meet an adverse balance
,

CURREN CY AN D C RE D IT

2 04

'

at the Clearing H ouse This operates as an automatic check

One bank may it is true adopt
o n the ination o f credit
a lower standard o f cash reserves than another and may i n
crease i t s prots at the expense o f its power to maintain cash
payments But the narrower its margin o f cash the less scope
it h a s fo r inating its loans If its reserve is already cut down
to the minimum su f cient fo r its day to day needs the slight
est laxity i n the extension o f loans will put it in di ffi culties
and compel it to bo rrow C onsequently though the susp en
sion o f payments whe n it does occur is caused by the ex
h au s ti o n o f the cash reserve this is really less likely to be due
to a settled policy o f cutting the reserve too ne than to an
outburst o f lending which dissipates a reserve originally s uf
cien t I f a banker is tempted to seek the large prots which
may be gained from imprudent banking he will proceed to
increase h i s loans Were he to reduce his reserve he would
only hamper his own freedom
A statuto ry regulation o f reserves such as i s established
in the United States does l ittle to promote sound banking
Apart from the obvious criticism that j ust at the time when
the banks ought to be using their reserves they cannot pay
them out without reducing them below the legal proportion
there is the serious weakness in the system that it does nothing
to prevent that ination o f credit which leads to the depletion
o f the reserves
Either an individual bank or the banking
community as a whole remains free to set in motion forces
which must in time reduce the reserves below the proportion
and when this i nevitable result comes about the e ffect o f the
legal lim itation is only to intensi fy the di f culty by stopping
fresh business
Three times in 1 8 7 3 1 8 9 3 and 1 9 07 there
h as been an al most general suspension o f cash payments by
the American banks The Federal R eserve Act h as done
much to guard again s t the dangers to which the system estab
li s h ed by the N ational Bank Act o f 1 8 6 3 was subject
I f the
reserve o f any bank runs short it can be replenished by redis
counting paper with the Federal Reserve Bank and i f paper
money is required rather than a bank credit , the Federal Re
serve Bank has a power o f issue which though restrained by
-

'

T H E T H EORY OF BA N K I NG

20 5

sli d ing scale o f taxation is no t subject to any cast iron

li mit Thus it is no longer the statutory reserve proportions
b ut the control o f the reserves by the Federal Reserve Board
that is relied o n to prevent ination And that being so it is
arguable that the statutory reserve proportions (which have in
fact been substantially reduced below the ratios a d opte d in
1 8 6 3) no longer serve any use ful purpose

the

C H A P TER
W AR

X I II

I N AN C E

W H E N we criticise human institutions as they are a nd at

tempt to gauge their soundness under strain on the assumption
that whatever the strain they remain unaltered we are i m
p l i ci tly tak ing it fo r granted that the strain is subject to a
certain limit We have no t been supposing that the currency
systems which we have been considering were capable o f re
maining in all circumstances unaltered We have recognised
that at a time o f crisi s the law may be broken or even amended
We have seen the statutory limitation o f the Bank o f Eng

land s right o f note issue suspended by an executive act o r

banks o f issue charging a premium o n gold when an excessive
export i s threatened We have shown that the greatest
nor m al strain to which the currency system o f a country can
be exposed is that which arises from the occurrence o f a crisis

in a neighbouring country This strain can be called n ormal

bec ause nancial crises are as unavoidable in credit systems as
shipwrecks in navigation The management o f credit is peril
o u s j ust as i s the management o f a ship and nancial crises
like shipwrecks are the penalties o f a miscalculation immu ni ty
from which is al most unattainable
But so long as crises o f
this type arising from the inherent difculties o f the regula
tion o f credit are in question the departures from the law
like the law itsel f may be assumed to be directed excl usively
to the ma i ntenance o r restoration o f sound conditions T his
singleness o f purpose constitutes the limitation implicitly
assumed
The c ircum stances which we now have to investigate are
di fferent We shall nd an imperative national need over
riding all other consid e rations and leading to disorders in the
credit syste m which could hardly arise fro m any less over
,

2 06

WAR F I NANC E
whel mi n g cause
s uf c 1e n tl
y grave

2 07

Scarcely any contingency but war 1 is

to prod uce these consequences and there

War nance is a branch o f Governm ent nance By

nance we mean the art o f providing the means o f payment
I n theory the sovereign state can exact services from its sub
j ec ts without payment as fo r exam ple it may compel them
to serve o n j uries o r in the army But in practice this method
o f compuls i on i s limited in its scope and the State pays for
those services which it cannot conveniently co mpel and buys
those goods which it cannot conveniently requisition I n
fact v astly the greater part o f the activities o f the State are
carried on by the services o f paid employees and with co m
m o d i ti es bought in the market
I t is the function o f Govern
ment nance to provide the means o f payment needed fo r these
purposes This is do ne primarily by means o f taxation Th e
individual citizens are com pelled to contribute money to the
Government The taxes paid fo rm part o f what we have

called the consumers outlay o f the taxpayers The money

i s received by the Government and expended upon the goods
and services necessary fo r carrying o n the business o f the

State it is then included in the consumers income o f the

Government employees and o f the people who produce good s
which are sold to the Government If the income and ex
p e n d i tu re o f the Gove rnment are e q ual the correspond ing
items in the consumers outlay and the consumers income
taken over the whole community balance
But o f course even i f income and expenditure are ulti
mately equal the proceeds o f the taxes cannot be expected
always to come in exactly as and when they have to be spent
At o n e time income will overtake expend i ture at another it
will fall behind and tem porary borrowing i s needed to equal
ise the balances o f the Government as much as those o f p ri vate
traders Moreover Governments like private traders from
.

Revol uti on , i t i s true, h as as s i ni ster a record as w ar i n th e wr ec i n g o f

B ut th i s h as us ual ly been the wor o f evol uti o n co m pli cated
cur rency s y st ems
i

by

ei th er

fo rei g n

or

do mesti c w ar

CURRENCY A ND CRED IT

20 8

time to time have to incur large items o f capital expenditure

As to how they ought to draw the l ine between expenditure
chargeable to revenue and expenditure chargeable to capital
and what provision they ought to make fo r sink ing funds these
are questions which d o not arise here I t is enough that
besides raising revenue by taxation Governments nd it ad
visable to raise it by borrowing both temporary and permanent
When they d o s o they borrow from the sam e sources and
through the same chan nel s as private traders Their temporary
borrowing will be mainly from bank s and disco unt companies
Their permanent borrowing will be from the savings o f the
community
How does it come about that Gover n ment nance tres
passes o n the domain o f currency and credit ? So long as the
Government only raises money by taxation by loans which
are supplied exclusively from genuine savings and by te m por
ary borrowings in anticipation o f such taxation and such loans
which are completely discharged from their proceeds when
received it i s doing much the same as a private trader though
on a larger scale The sums that it takes by ta x o r loan from
the public are subtracted from what is appl icable o ut o f the
consumers outlay to form the demand fo r other commodities
and services exactly as i f the services o f the Govern ment were
just one among the various objects upon which the consumer
could elect to spend his money I n applying the sums so
raised the Governmen t diverts a portion o f the productive
resources o f the community to publ ic purposes For the goods
and ser vices so diverted it has to compete in the market just
The Government is a trader
as i f it were a large private rm
selling law order and the organ isation o f society to its
customers the taxpayers
S uppose that owing for example to the outbreak o f war
the expenditure o f the Governme nt is enormously increa sed
I t has to raise increased sum s by tax and loan and it has to
divert to its own purposes a correspondingly increased propor
tion o f the productive resources o f the country By raising
more money it diminishes the sums le ft in the hands o f the
public fo r other expenditure If it coul d raise all the requisite
.

W A R F I NANC E

2 09

taxati o n and by borrowing in the home market this

diminutio n in the expenditure o f the public would so red u ce
the demand fo r com modities as to set free all the capital and
labour needed
Any considerable amount o f war borrowing m ust a ffect the

world s market for capital The borrowing country may be

normally either a b o rrower o r a lender or perhaps on balance
its savings may just meet its own no rmal capital requirements
Con fronted with the task o f raising War Loans i f it is a
l ender its power o f lending will be diminished o r suspended
o r it may be turned into a borrower from foreign countrie s ;
i f it is a borrower its borrowings will be increased ; i f it is
neither it wil l become a borrower The mere diversion to
war purposes o f part o f the domestic savings ordinarily avail
able will have this e ffect even i f no money is directly borrowed
Thi s import o r diminished
from abroad by the Government
export o f capital will a ffect the foreign exchanges A s we
Si
have already seen in Chapter I V i mp O W
take the form o f i m orts o f oo d s and in order that the addi
the market fo r them must be
ti o n
improved In other words there must be a higher level o f
prices and unless a su f cient expansion o f credit occurs to
raise prices to the level required the exchanges will become
favourable and gold will be importe d
At the outbreak o f war there will al most certainly be a
considerable credit expansion A war usually starts with a
heavy initial expenditure o n mobilisation and other prepara
tions and it is i m possible to raise large sums immediately
Time i s required to prepare either
from loans and taxes
and in the me a ntime the yield o f the ord inary revenue is likely
to be adversely a ffected by the derangement o f business the
interruption o f foreign trade etc The result is that war
nance almost invariably begins with a large amount o f tem
m er ely
borrowing
thi
s
temporary
borrowing
were
f
I
r
r
o
a
p
y
in anticipation o f future receipts from loans a nd taxes it need
The prospect
n o t necessarily mean any expansion o f credit
o f the curtailment o f demand which should occur when these
future receipts are realised might be suf cient to damp down
funds by

'

I4

CURR ENC Y A N D CR EDI T

2 10

enterprise to such an extent that the temporary borrowi ngs by

private traders would fall o ff as much as the temporary borrow
ings o f the Government increased I f that were s o the ad
d i ti o na l import o f capital direct or indirect would necessitate
some importation o f gold to stimulate the creation o f credit
and to attract the corresponding additional import o f goods
But the presumption is that the private demand fo r loans will
not immediately fall off N ot on ly is the shrinkage o f demand
something still in the future and uncertain but in any case a
sudden c/za ng e in the character o f demand tends to increase
temporary borrowing The stock s o f goods fo r which the de
mand i s stimulated are depleted but the production o f these
goods becomes more active and needs more money to nance
it The stocks o f goods fo r which the dem and becomes less
tend in the rst instance to accumulate and the indebtedness
o f the dealers in those goods is fo r the moment
increased
rather than diminished The e ffects o f war o n trade vary
almost inden itely according to the circumstances but perhaps
the nearest approach to a principle o f general applicatio n is
that there will be a considerable re shaping o f demand There
will for example be an incre ased de mand fo r all kinds o f war
l ike s upplies and a diminished d emand fo r luxuries while the
demand fo r necessaries will presumably continue unabated
And cutting across these tendencies there may be all the co m
plicated reactions arising from a partial interruption o f foreign
trade The prospect o f forced borrowing by the Government
on a large scale will stie the demand fo r existing stock ex
change securities and stock exchange operators and under
writers w ill nd themselves loaded u p with securities which are
saleable i f at all only at a great sacrice The disorganis ation
of
business may be so great that an almost universal
bankruptcy can only be staved o ff by special measures fo r
suspendi ng the obligations o f debtors l ike the crop o f mora
to ri u m statutes with which Europe blossomed out in 1 9 1 4
A Government indeed faced with a great war cannot
afford to let hal f the business o f the country slip into bank
r u p tcy and i f the embarrassed traders are propped u p either
by lavish advances granted th em by arrangement o r by a
-

'

WAR FI N ANCE

21

special statutory moratorium the result is an increase in the

aggreg ate tem porary loans t o traders
At the o utset there fore the nancing o f a great war is
almost invariably accompanied by a considerable amount o f
temp orary bo rrowing o n the part o f the Government against
whi ch there is at any rate no set o ff in the shape o f any d imin
u t i o n o f private borrowing
The exception would be where
the violent changes in val ues are allowed to culminate in a
nancial crisis and a collapse o f credit Apart from such
a catastrophe there will at the start be o n balance some ex
The extra credit created is paid away by
p an s i o n o f c redit
the Government just as it would be by a private trader i f it
were created in the ordina ry course to nance production I n
so far as the Governm ent keeps down its borrowing by post
po ming payment it merely shi fts the task o f raising money on
t o the shoulders o f the contractors and others from whom it
buys What is temporarily withheld from them they have to
borrow from their bank ers The credit created in this way
directly o r indirectly o n behal f o f the Government wil l be
extinguished not like an ordinary advance to a t rader w hen
the goods produced are sold to the consu mer but when the
Government is en abled to raise the necessary funds by per
manent loans o r ext ra taxation Till then it remains in ci rcu
lation and swells the purchasing power o f the public Those
to whom it is rst paid o n being created like everybody w h o
receives a sudden accession o f prots or earnings will probably
At the outbreak o f
s pend some and retain some in hand
war when the future is uncertain and when moreover there is
every likelihood o f opportunities fo r investm ent being quickly
offered that are both p rotable and patriotic people are likely
to retain more and to spend less than from a similar wind fall
The creation and disbursement o f this
i n ti me o f peace
additional cred it wil l there fo re add s omething to the c o n
sumers outlay but less o f it will be so added and more will
be added to balances than in time o f peace so that the
quickeni ng o f trade wil l not be in ful l proportion to the
q uantity o f additional credit created But some quickenin g
o f trade there will o f course be and this i n itsel f would tend
,

14

CURRENCY A N D CRE DIT

212

produce an adverse movement o f the foreign exchanges

since the increase o f the consumers outlay draws on stocks o f
com modities attracts additional imports and diverts possible
exports to some extent to the home market The actual
state o f the exchanges ( apart fro m the ve ry serio us results
which may ensue in particular case s from the interference
with foreign trade) will be the resultant o f this trade activity
which tends to make them un favourable and o f the import o f
As
foreign capital which tends to make them favourable
to which tendency will predominate that depends o n several
factors such as the magnitude o f the temporary borrowing
and the degree o f caution o f the public in spending but
specially on the country s power o f borrowing from abroad
At the outbreak o f war in 1 9 1 4 England w as in a unique
position o f nancial strength Vast sums rising someti mes to
2 oo o o o o oo in a year were being sent abroad fo r invest
ment A very large proport ion o f the international trade o f

the world w as nanced from L ondon ; the bill on London

was the recognised medium o f payment not only fo r the
greater part o f the trade t o which English rm s were parties
but fo r much o f the trade in which England was not otherwise
interested at all Thus the assets o f the London banks i n
cluded a ve ry great mass o f loans secured by bills ba sed upon
goods in course o f production or transit o r awaiting sale all
over the world The declaration o f war the prospect that all
the country s resources would be needed to support a struggle
d ou tr a n ce the uncertainty as to the sa fety o f comm unication
by sea the prohibition o f trade with enemy countries p ro
d u ce d a sudden derangement o f all this nancial machinery
Th e expo rt o f capital came to an abrupt stop
The drawing
o f bills o n London was interrupted
partly because merchants
were a fraid to consign goods while the marine insurance
market w as in a state o f c h aos partly because London had
become unwilling to lend partly because the nancial hou ses
o n which traders were accustomed t o draw were faced with
embarras s ment s owing to the impossibility o f receiving money
from their enemy debtors and others
The sudden cessation o f bills on London complete ly dis
to

WAR FI NAN C E

213

located the foreign exchange markets The bill o n London

was the norm al means o f remitting money between L ondon
and other countries ; it was also the instrument by which
London bankers lent money fo r the purposes o f international
trade When London stopped lending it incidentally de
stroyed the usual means o f remittance Dealers in exchange
found multitudes clamouring to remit t o London : hardly any
I t seemed
o ne want ed to remit in the contrary direction
t hat no quotation could be xed which would come near to
equal ising supply and demand The usual resource o f send
i ng gol d was fo r the moment cut o ff partly by various s u s p e n
sions o f specie payments and prohibitions o f export in other
countries partly by the new complications o f war risk s which
insurance companies were unwill ing to accept Th e result
was that the foreign exchange m arkets were fo r weeks in a

welter o f con fusion All quotations were nominal

and
credits in London could hardly be bought at any price As
they emerged from this state the exchanges were found to be
highly favourable to London and as the trammels o n the
movements o f gold were removed enormous quantities o f gold
were received by the Bank o f England
The experience o f this exchange crisis showed in an ex
treme form the favourable movement o f the exchanges occa
o f war in a country s o favourably
s i o n e d by the outbreak
s i tuated as England fo r drawing largely and instantaneously
on the capital resources o f the world In appearance the
crisis arose from the dislocation o f the normal exchange
machinery In essence it w as caused by the re fusal o f L o n
don to lend It was no t merely that London had become
less wil ling to nance interna tional trade by accepti ng and
discountin g bills b ut that the usu al stream o f n e w capital
issues o f an international character which in time o f peace
creates a steady dem and fo r remittance from London to the
foreign countries where the capital is to be spent was inter
The case was exceptional on account alike o f the
r u p te d
special position o f England and o f the magnitude o f the war
But the same tendency occurs though i n a smaller degree
In 1 9 1 4 i n
when ever a grea t len d in g nation goes to w ar
.

CURRENCY A N D C RED IT

2 14

the case of France in spi te o f the severity o f the economic

crisis and o f the perils o f invasion the exchanges were fo r
some time favourable Even in Germany the exchange o n
the United States was favourable fo r a fe w weeks Russia an d
Austria H ungary being borrowers rather than lenders ex
If the great
p er i e n ce d adverse exchanges from the beginning
lending nations had no t been the mselves involved in the war
and had been in a position to help them nancially they also
might have kept their exchanges up notwithstanding the pro
fuse issues o f paper and credit required to nance mobili sation
As it was they found it di fcult to raise money even to pay
their existi ng liabil itie s abroad
The initial di ffi culties once surmounted it becomes neces
sary to provide funds from taxes and loans p a r 2 paw n with
the expenses o f the w ar Such taxes are imposed as the
count ry can stand and the balance o f the war expenditure
The issue o f the rst War Loan
h as to be provi d ed by loan
nds an accumulated burden o f temporary debt representing
the expenses incurred since the beginning o f the war and a
da i ly decit in the present and future What are the sources
from which money can be raised ? In the rst pl ace there are
the savings o f the people The people may abstain from
spending money that they would otherwise have spent either
on their own enjoyment o r on investment and may surrender
the purchasing power thus kept unexercised to the Govern
ment in exchange fo r hold ings in the War Loan I n the next
place existing securities m ay be so ld But o f course it is no
u se subjects o f th e borrowing country selling securities to one
This will not increase the available fund o f savings
a n other
to be subscribed to the War Loan The selling o f securities
will only b e fruitful i f they are sold abroad Thirdly there
may be direct foreign subscriptions to the War L o an es peci
ally from all ied countries which fo r one reason or another d o
not need all their nancial resources fo r their own warlike
preparations or from favourably disposed neutrals I ndeed
belligerent nations o ften oat loans i n foreign countries the
terms being specially devised to attract subscribers in those
In th e Russo J apan ese War, Rus sia bo rr owed
co untri es
,

W AR F INANC E

21

largely i n France and Japan i n England I n the Balkan

Wars o f 1 9 1 2 1 3 the Balkan States borrowed from France
The present war has o f course seen England and Germany
lend ing to thei r respective al lies o n an enormous scale and
England in turn borro wing from the United States But even
when a belligerent brings out what i s ostensibly an internal
loan payable and repayable in its ow n currency forei gners
m ay be induced to subscribe to it as an investm ent
But suppose that the most has been made o f all these
sources and that the funds raised are no t enough A man
in business w ho cannot raise all the capital he needs either
abandons o r curtails a proj ect which he cannot carry through
Is a nation at war to leave i ts forces i nsu i ci e ntly equipped
because it cannot raise money ? If it is at war at all success
must be a matter o f li fe and death ; there is no hal f way house
between a whole hearted prosecution o f the war and an i m
mediate peace And as we have already seen it is possible to
stave o ff a want o f funds by temporary borrowing Tempo
rary borrowing has this advantage o r this dangerthat the
money to be borrowed need not ex i s t Directly or indirectly
the lender is a bank er What he lends is a credith i s own
obligation This obligation he can himsel f create If the
gold basis o f credit i s to be preserved it is no doubt necessary
t o cont ract the credits granted fo r other purposes in order t o
make room fo r those granted fo r th ewar If this condition
is to be observed the new intrusion o f the Government into
the short loan market will lead to a raising o f the rate o f
interest Traders will thereupon be discouraged from holding
stocks o f good s in hand and in fact in so far as advances to
the Government are substituted fo r advances to traders the
war is being practically nanced by drawing on the existing
stocks o f com modities When in time o f peace credit is co n
tracted the consumers outlay is dimin ished But now we
are supposing the advances to private traders to be contracted
only to m ake room fo r equal advan c es to the Govern ment
The credits granted to the Government are spent as rapidly
as those granted to the traders would have bee n so that the
consu mers inco me an d the consum ers outlay are presumabl y
,

2 16

CURRE NCY AN D CRE D IT

undiminished Goods are bought as quickly as be fore and

the high rate o f interest operates to prevent orders being
given fo r the replenishment o f s tock s
In the case o f a country like England which possesses
such vast bank ing assets based on merchandise in all parts o f
the world the stocks to be drawn upon in this way are cor
But neither in this case nor in any other
r e s p o n d i n gl y great
are they unlim ited If stock s are reduced below the point at
which it is possible to keep them fo r the duration o f the war
they must presently begin to i ncrease again To the extent
that they increase they will tend to crowd the Government
o ut o f the temporary loan market ; s o that the problem o f
raising money will to that extent be only de ferred not solved
And no t only are stocks kept down by the high rate o f
interest and the di fculty o f borrowing but there is also great
dif culty in getting orders executed owing to the diversion o f
the productive resources o f th e community to war work In
time o f peace the contraction o f credit will occasion a fall of
prices But the reduction o f stocks the di f culty o f replenish
ing them and the continued demand from consumers will
combine to send prices up In fact the approaching scarcity
o f non warlike commodities threatened by the absorption o f
the nation s economic e fforts in war will enable the holders
o f those commodities to sell them at high prices and to dis
charge a great part o f their indebtedness more in fact than
merely in proportion to the reduction o f stocks A merchant s
indebtedness may be normally equal say to two thirds o f the
probable selling value o f h i s merchandise If he reduces his
stock in trade by one third and sells this th i rd at 5 0 per cent
more than he expected he will realise a s um equal to hal f the
original valuation o f the whole stock If he applies the whole
o f the sum s o received to discharging his indebtedness he will
reduce it to o ne fourth o f i ts former gure The com bination
o f a tight money market high prices and extreme caution on
the part o f both lenders and borrowers will there fore lead to
a reduction o f stocks but to a still greater reducti on o f bankers
loans Moreover o ne result o f the di fculty o f borrowing is
that traders take advantage o f their n ancial stren gth to free
.

W A R FI NANCE

217

themselves fro m dependence o n their bankers

The usual
process by which they eq uali se balances borrowing when they
buy and paying o ff advances when they sell exposes them to
unwonted risks and they may choose to keep large sums idle
occasionally rather than trust to borrowing whenever they
have large payments t o make These idl e bala n ces need not
be money ; credit will d o j ust as well unless there i s a want
o f condence in the solvency o f the banks
Cons equently just
at the time when the bankers loans to traders fall o ff there
may be a steady increase in the bank balances o f those same
traders the consequent gap between the assets and liabilities
o f the banks be i ng lled by the advances to the Government
The result is that the banks can increase their loans to the
Government by much more than th ey red uce their loans to
traders without disturbing the equilibrium o f the money
market Money is thus being provided fo r the Governm e nt
by traders devoting sums which m ight have bee n used fo r
buy ing commodities not merely to paying o ff their o w n i n
A striking
d ebted ne s s but to accumulating liquid balances
example o f this tendency is to be seen in the immense quantity
o f paper money which France has been able to digest with a
comparatively small disturbance o f the exchanges A similar
explanation may be given fo r the remarkable demand fo r
Treasury B ills in England fo r it is even more convenient fo r
a merchant to hold his balance in the form o f a short dated
bill tha n in the form o f an idle bank credit If he holds a
bank credit he gets no interest or at best interest only at the
If he holds a Treasury
l o w rate allowe d on time deposits
Bill he gets in the form o f discount the full rate o f interest
o n his money and he can discount the Bill at any time with
o ut loss i f he need s cash
I n applying their receipts either to pay o ff their indebted
ness o r to accumulate balances merchants are not merely
abstaining from laying o ut capital o n purchases fo r business
purposes they are also abstaining fro m spending prots which
they m ight use fo r their personal expend iture This is a form
What the merchants abstain from spending they
o f saving
can e mp ow er the Govern men t to s pend
.

C H APTER X IV
W AR I N F L A T I O N

T H US beside s taxation and permanent borrowing at home and

abroad and temporary borrowing in anticipation o f these a
Government has three legitimate forms o f temporary borrow
ing open to it At the outbreak o f war when the direct or
indirect importation o f foreign capital favours an e xpansion o f
credit it can borrow up to the point at which this tendency
is exhausted ; next i f loans to traders are restricted loans to
the Government can be substituted fo r them nally in so far
as traders seek to accumulate liquid bal ances the banks can
increase their loans p a r z p qi m with the consequent increase in
ni y the traders may hold their
their liabilities o rm
additional balances in the form o f short term loans to the
Go vernment
But the sums that can be so raised like the available supply
o f savings
are still l imited Suppose that the Government
takes full advantage o f these resources and still has n o t enough
The exigencies o f war pay no more regard to the resources o f
the money market than to the supply o f savings The
Government goes o n day by day and week by week incurring
liabilities which are dictated by national needs The War
L oan is intended to meet the excess o f those l iabilities over the
yield o f taxes fo r the past and fo r an appreciable period into
the future I f it does not the Government m u s t meet the
deci ency If temporary borrowing within prudent limits is
still insu f cient the only resource le ft is to borrow from the
banks beyond those limits This is the point at which the
stress o f war begins to drive the Government to overstep the
l imits o f sound managemen t o f curren cy and credit The
i m mediate n eed of the Government is fo r the mea ns cy p ay rnent
,

'

'

21

W A R I N F LAT IO N
T h is

ed

n
can be met by the creat i on o f a bank e r s oblig ation
The banker will assume such an obli gat ion in return for a
suitable a sset It need no t be by way o f a te mporary loan
he may take long term war loan stock since he holds a certain
amount o f investments among his assets and at a pinch he
can add to this holding But the credits which bankers are
prepared to grant are lim ited by the necessity o f holding an
adequ ate reserve o f legal tender money If add itional credits
are created prices wil l tend to rise and in particular the prices
o f foreign currencies ; the foreign exchanges will become um
favourable and gold will be exported while more money will
be need ed fo r i nternal circulation
In time o f peace the
remedy fo r both tendencies would be found in a high rate o f
interest but we have supp osed that all that is practicable in
the direction o f a contraction o f credit has already been done
The indispensable conditi on o f further assistance from the
b ankers to the Government is that they should be secured
against the consequences o f thi s drain o f money Thi s can
only be effected by a suspension rst o f the limits placed upon
the note issu e in relation to the gold reserve and then i f need
be of the convertibility o f the notes into gold
H ere then we see h o w a Government at war may be co m
pel l ed to supersede the most w isely framed currency system
The fear o f this catastrophe is perhaps the chie f motive which
leads Governments to accumulate vast reserves o f gol d in time
It was a fter the Agadir crisis o f 1 9 1 1 t hat the
o f peace
German Government deliberately set o ut through the i ns tru
mentality o f the Reichsbank to make a large increase in the
country s holding o f gold Fran ce responded b y making
a large increase in the already very great reserve o f the Bank
Both countries were certainly actuated mainly
o f Fr ance
The greater the gold reserve the longer
by a fear o f war
the credit system can stand the strain o f nancing the
Government without suspending specie payments o r i f
specie payments are formally suspended but gold continues
to be exported without lettin g the paper currency fall to a
disco unt
o
h
d
t
et
o
s
f
rantin
cr
it
e Gove rnm en t
o
s
t
e
d
h
e
h
m
T
g
g
e

CURRE NCY AN D CRE D I T

2 20

di ffer under different sys te ms

In th e rst place the great
central bank s may make advances direct to the Government
In France a sum o f no less than 2 3 mill iards o f francs has
been so advanced by the Bank o f France since the beginning
war
The I mperial Bank o f Russia had advanced
o f the
1 5 milliards o f roubles to the Government by the time o f
the Bolshevik outbreak in November 1 9 1 7
The Austro
H ungarian Bank h as made adva n ces to the two Go vern
ments o f 3 3 milliards o f crowns Thi s system i s not with
The notes or deposits o f the central bank
o u t its dangers
are held by the other banks as their cash reserves and a
material increase in them permitting an increase in these
reserves may produce an unnecessarily great extension o f
cred it and a heavier depreciation o f the monetary unit than
the situation really calls fo r I n a country like France or
Ge rmany where the legal ten der notes are themselves very
largely used as the means o f payment in large busi ness trans
actions and bank credits play a less important part this
consideration may not be o f great moment In England on
the contrary a large increase in the deposits at the Bank o f
England i s very dangerous If the Bank makes an advance
to the Governm ent s o long as that advance remains outstand
i n g it swells the assets and consequently the liabilities o f the
Bank The Government quickly pays away the credits so
granted to it and they pass into the hands o f people with
accounts at other banks In the books o f the Bank o f Eng
land the credits are trans ferred to these other ban k s who nd
their cash in hand and at the Bank o f Engla n d correspond
Th e deposits at the Bank o f England cannot
i n g ly increased
be diminished again unless its assets are di mini shed Unless
the banks are to be given the opportunity o f extending c redits
in proportion to their increased reserves the assets o f the Bank
o f England must accordingly be reduced either by a c o n trac
tion o f advances to private traders or by a loss o f gol d o r by
the repayment o f part o f the advances to the Government
There fore while the Bank o f Engl and frequently m akes tempo
rary advances to the Government in time o f peace as well as
i n ti me o f war, i t is fo und a dvisabl e to m ak e arran gemen ts fo r
,

W AR

I N F LA T I ON

22 ,

an early repayment o f such advances Fo r the rst fe w

months o f the war the London money market was kept i n a
somewhat unsound condition Apart from any tem porary
advances made by the Ba n k to the Gov ernment the Bank was
loaded up w ith large advances made to the acceptors o f bill s
wh o could no t recover the sums destined for the payment o f
the bills in consequence o f the war Eventual ly the Govern
ment relieved the Bank and the market by assuming the
direct liability for these advances which in any case it had
guaranteed fro m the beginning
If the temporary advances are not obtained from the cen
tral bank they must be provided by the other banks Only
banks can provide them Any other agency must either draw
upon fu nd s already available which er hypothes z have been
exhausted or must have recourse to the banks fo r the means
o f lending
The Govern ment may either approach the banks
direct or may enter the market along with other temporary
borrowers There are some advantages in approaching the
banks d i rect since they can make arrangements with their
eyes open The banks can agree with the Govern ment as to
what policy they shall follow with their customers how they
can best exercise inuence in the direction o f restricting
private c redits what steps the Government should take to i n
crease the supply o f legal tender money I f all these measures
are wisely concerted the expansion o f credit consequent on
the de mands o f the Government can be kept i f not under
control at any rate under observation On the other hand
i f the Govern ment enters the short loan market by the ordina ry
paths the automatic adjustment which follows may be more
effective than the most el aborately devised plan o f control
If the market i s le ft to itsel f and is n o t led to expect t o o easy
an extension o f paper issues the contraction o f private credits
may well be more effective than i f the ba nkers are in a posi
tion to stipulate fo r terms o n behal f o f their customers across
a con ference table But then the Government must pay what
ever rate o f i nterest may be requisite to yield the s u m which
it needs Moreover an appeal to a free ma rket for temporary
as fo r lo ng term loans may fail to yield the su m desired o n
.

'

CURR ENCY AN D CRED IT

222

ter ms and in that event a d i rect arrangeme nt with the

banks is the o nly resource le ft If the Government appeals to
the banks d irect it may ask as has already been poin ted out
no t fo r temporary advances but fo r subscription s to a b ug
term loan The long term loan appears to put the Gove m
ment in a more secure position since there is then no need to
bargain with the banks fo r recurrent renewals but unless the
disposition o f the banks is doubt ful the di ff erence is very much
one o f form The essential characteristic o f these arrange
ments is the nancing o f war by the cr ea ti on o f bank credi ts
instead o f by the surrender to the Gov ernment o f part o f the
people s spending power
The consumers income may be d ivi ded into tw o portions
that which is derived from war work and Government work
o f all kinds and the remainder which is stil l derived from the
production o f no n warlike commodities and servi ces The
consumers outlay may be simil arly divided into o ne portion
which is paid i n taxes o r inve s ted in war loa ns and the balance
which is spent on consumption The individual consumer
may of course receive the whole o f his income from war work
or the who le from no n war work but h i s outlay will be divided
between contributions by loan o r tax to the Government and
expenditure o n himsel f The expe nditure o f the Government
may exceed i ts receipts from taxes and loans by
the value
o f commodities that can be taken from stock towards satis fy
ing the consumers outl ay ; and ( 2 ) the additi ons the public
are willing to make to their unspent balances o f c redit o r paper
money When Government expenditure goes beyond this
limit when the recipients o f the sums it spends s pend them in
their turn and there results a greater d epletion o f stocks than
is economically practicable the effect is that stocks begin to
be replenished not from home production which is ex lzypotlzes:
a lr eady strained to the utmost but from abroad There is an
excess o f imports and an un favourable exchange It should
be observed that the un favo u rable exchange is the result not
o f the additional credits in themselves
but o f the additional
expenditure by the consumer In s o far as the people into
whose hands the credits are pa id away by the Government
any

WAR I N F LAT I O N

2 23

abstain from s pe n d ing those credits on themselves but eithe r

accumulate the m in balances or else subscribe th em to war
l o a ns th ere is no tendency to attract add ition al imports or to
d ivert potential exports to the home market
Even when
peo ple spend the credits o n themselves s o far as the demand
is met from stocks the forei gn trad e balance is not a ffected
A cushi on o f stocks is interposed to take the thrust o f demand
o ff the forei gn trade commodities
I t is only when these
mitigating circumstances have lost their effi cacy that the
balance o f trade becomes adverse and the un favourable ex
changes deman d an export o f gold In time o f peace the
remedial e ffects o f an export o f gold result chiey from the
propo rtionate contraction o f credit which is forced upon the
banks I n th e case we are considering there is no room fo r a
contraction o f credit except in s o far as th e as sets and there
fore the liabilities o f the banks are diminished by the value o f
the actua l gold withdrawn So long as gold is paid out free ly
for cred its o n deman d a depreciation o f the monetary unit as
measured by the forei gn exchanges will be staved o ff As
soon as gold paymen ts stop the depreciation will begin A
country which uses gold co i n in actual circulation will in s uch
circu mstances quickly lose it A premium o n foreign ex
ch an ge will soo n make a withdrawal o f gold from circulation
for export prota ble and the banks into which the coin in
circulati on is being continually paid can easily with draw it
and pay their o wn obl igations in paper provided a sufcient
supply o f legal tender paper be i ssued Should there be no
the foreign drain o f
sui ci ent supply o f legal tender paper
gold will soon leave the banks without the means o f d i s charg
ing their obligations Even i f the bankers do no t collect gold
coin fo r expo rt others will do s o as soon as there is an ap
Consequently the only al terna
p reci abl e prot to be realised
tive to the issue o f pape r is an immediate suspen sion o f
payments by the tank: bank credits themselves woul d become
i rredeem able ( as th ey have done more than once in nancial
crises i n America) and the banks would charge 'a premium o n
the pay ment o f their o w n obligations in legal tender A
complete divorce o f all bank cre d its from any tan gible
,

'

C URRE N CY A N D CRED IT

2 24

standard o f value is very dangerous and unl imi ted paper

issues remain as the only practicable resource
Faced with these problems a Government has to decide
whether to pay out its gold reserve freely to the en d o r
whether t o stop sho rt and keep some gold in hand The
former course will keep the exchanges up while the gold lasts
but will leave the country with less favourable prospects o f
resuming specie payments when it is exhausted ; the l atter
will start the depreciation o f the monetary standard as soon
as the gold payments stop but the gold rem ain ing in reserve
will facilitate the resumption o f specie payments when this is
decided on and may even help the country s credit abroad
At the outbreak o f war in 1 9 1 4 all the belligerents except
England suspended s pecie payments although all had very
larg e gold reserves
England however had still larger
p oten ti a l gold reserves in her command over the foreign ex
change market l n her large gold circulation and in the large
gold production o f the British Empire As time went o n it
w as found that the world wide extent o f the war itsel f facili
tate d the maintenance o f gold payments in Lo n don
The
general susp ension o f specie payments in the belligerent powers
o f Europe so narrowed the area in which gol d continued to
circulate that the British exports o f gold to the Uni ted States
and the other countries which still constituted that area bore
a very considerable proportion to their pre exis ting stock o f
gold and stimulated in them a corresponding expansion o f
credit Their monetary unit s were consequentl y cheapened
practically as fast as the British pound sterling and the great
expansion o f credit necessitated by war nance in this country
could be carried o ut without depressing the foreign exchanges
at any rate below the rather articial export specie points
corresponding to the great di f culties in the way o f moving
gold in time o f war
Since the famous report o f the Bullion Committee in 1 8 1 0

which investigated the reasons fo r the hig h price o f bullion

o r in other words the depreciation o f the Bank o f England
notes during the restriction o f specie payments by the Bank
it has been generally recognised that the depreciation o f paper
,

WAR I N FLATI O N

22 5

money may be measured by the fo reign exchanges and also

that beyond a certain p oi nt the adverse movement o f the
foreign exchanges cannot be adequately explained by an u n
favourable balance o f trade but necessarily implies a d e reci
p
ation o f the standard The relation o f the foreign exchanges
both to the balance o f trade and to the value o f the monetary
unit we investigated in Chapter IV The conclusions we then
reached are as valid in war as in peace The un favourable
balance o f trade in time o f war i s primarily the result o f borro w
ing from abroad either direct through the oating o f loans in
foreign countries or indirect through th e diversion to war
loans o f money that would otherwise have been sent abroad
fo r investment through the attraction o f foreign savings to
replace money that would otherwise have been invested at
home and through the sale o f securities abroad But fo r the
expansion o f credit this borrowing from abroad would produce
not an un favourable but a f a vgnr a bl e movement o f the ex
changes until the attraction o f imports and repulsion o f
exports had produced an additional balance o f imports e q u i va
lent to the proceeds o f the foreign loans It is only i f there i s
an expansion o f credit m ore than su fcient to make a market
fo r the additional imports that the exchanges become u n
favourable
In that case so long as the gold value o f the
monetary unit is maintained the excessive circulation o f credit
attracts an excess i ve balance o f im ports more that is than the
foreign loans will cover and the consequent excess o f payments
due abroad results in a drain o f gold When the gold i s ex
h aus ted o r gold paym ents are stopped the gold value o f the
monetary unit i s no longer maintained The market gives the
unit such value as will keep down the imports to what the
exports and the foreign loans etc will pay fo r Th e imports
to be paid fo r take var ious forms The Government may
borrow abroad the means o f paying fo r supplies which it
purchases abroad That is a sel f contained transaction and i s
more or less outside the ordinary operations o f the market
The Goverment may o f course purchase supplies abroad merely
becaus e i t can get them a little che aper or a little better than
at home an d in that case it is acti ng l i ke any other purchaser ;
,

CURRENCY A N D CREDIT

2 26

the supplies s o purchased like any other import s are a co n

sequence o f the high prices in the home m arket But o ften
foreign suppl ies are purchased without much regard to price
because even when al l the available resources are drawn upon
at home additional supplies will give a better prospe ct o f
success in the war Moreover it is likely enough that the
prices o f warlike suppl ies at home are so articially regulated
that they hardly constitute a market at all
There i s a nearer approach to normal market conditions
where contractors who have undertaken to furnish warlike
supplies nd it necessary to buy part o f their materials etc
abroad The credits raised by the Government and paid to
these contractors give them the means of payment o u t o f which
the foreign su ppl ies are to be purcha sed H ere the demand
o f the Government as a buyer operates d irectly to make a
market fo r i mports And where the supplies are produced at
hom e the remuneration o f the people engaged o n production
including the prots o f the contractors and the interest o f the
capitalists as well as wages and salaries is paid from the
Government credits and in s o far as the receipts o f these
people are spent on consumption in excess o f wh at home pro
duction can satisfy commodities have to be i mported
N o w nance is the art o f provid ing th e means o f payment
The m eans o f payment will only be fruit ful in so far as there
is something to be paid fo r It is no t possible to provide
supplies fo r a great war by juggling with bank credits A
country at war must endeavour to produce more and consum e
less Its spending power for the purposes o f the war is limited
to the excess o f production over consumption pl us any surplus
stocks that can be d rawn upon pl us any wealth that it can
raise from abroad by borrowing or by the sale o f commoditi es
o r securities
There is some d i fculty in completely adapti ng
to war production the productive resources previ ously appli ed
to th e production o f superuous non warlike commodities but
o f course goods may still be produced fo r export and imports
suitable to the new natio nal needs may be obtained in return
The un favourable foreign exchange s the loss o f gold the
d epreciation o f the monetary unit t hese are si n s that the
g
,

'

W AR I N FL AT ION

227

country i s consuming more th an it can pay for by its produc

tion by borrowing abroad o r by sel ling its possessions So
long as all the money raised and spent by the Government
re pr esents the equivalent o f something o f val ue surrendered
by the people from whom it is rais ed these adverse signs wil l

not appear
The problem o f nancing imports is then
completely solved Whether the sol uti on be to borrow more
abroad o r to produce more o r consume less at home solved
it is It is when the Government raises credits which re
present nothing but a cross entry in its book s o f account with
its own subjects that ination begins As soon as gold pay
ments are suspended and th e creation o f redundant credits
proceeds without li mit th e prices o f c o mmodities begin to rise
indenitely The consumers income in any week is d rawn
as we have seen partly from the credits granted to the
Govern ment partly from the ordinary trade credits
The
consumers income proceeding from the latter source corre
spond s to the consumption o f n o n warlike commodities ; that
proceeding from the former source corresponds to the war
expenditure o f the Government An increase in war e x p end i
ture increases the consumers income and i f the consumers
devote their increa sed purch asing power to their own co ns ump
tion this means that an increased money demand is applied to
a limited output o f com modities If the values were still
based o n gold a rise o f prices would attract increased imports ;
now however it only makes the exchanges more un favourable
The whole increase in the consumers outlay there fore exhausts
itsel f in raising prices As prices rise o r in other words as
the value o f the monetary unit falls both branches o f the
consume rs income that derived from Government credits and
that d erive d from trade credits rise in proportion for a greater
quantity o f credit is needed to nance a given output o f com
o f course the unspen t
warlike
or
non
warlike
And
t
i
o
d
i
es
m
balances also tend to rise ; that i s to say a part o f th e credit
mains unexpe nded
pai d out re
The mere fact that the bankers who grant credits have
suf cien t assets to cove r them p erhaps several times over
It is only
d oes no t prev en t th e cred its fro m be ing redundant
,

15

CURRENCY A N D C RED IT

22 8

in so far as the credits give comman d over wealth which can

be applied to the purposes fo r which it is nee ded over labour
over supplies o f food over weapons and ships and rolling
stock over the services o f soldiers and sailors over th e us e o f
suitable xed capital that they are more than a mere nancial
conj uring trick The same i s true of contributions by private
individuals to war loans an d even to taxes in s o far as the con
~
tri b u to rs raise the necessary funds by b o rrg wi ng and d o not
take adequate steps fo r repaying the sums borrowed All the
new money available fo r investment comes ultimately from
savings out of income Money once invested is spent and
though the title to the i nteres t 'o r d ividen ds yielded from the
investment may be sold and the seller can put the price which
he receives into a new investment that does not release the
labour and cap i tal expended The patriotism o f shareholders
cannot trans form a tramcar into a howitzer or a cinema theatre
into the boots o f an army corps Fixed cap ital i s xed and
In s o far as it i s
i ts adaptability fo r use in war is limited
adaptable the Government may tak e it ; the Government may
requisition the ships o f a shipping company and the share
holders may invest the cash they receive in war loan They
abstain from spending the cash o n themselves Or again
capital assets which are not adaptable may yet be sold abroad
and th e proceeds placed directly o r ind irectl y at the disposal
increasing thereby the country s power
o f the Govern ment
over foreign resources But even this is subject to the limit
that only that part o f the foreign resources which can be
utilised for the production o f warlike supplies o r for releasing
domestic resources that can be so util is ed is available It i s
primarily foreign savings from i ncome that can be so u tilised
An attempt to spend sums greate r than the amount o f wealth
which the world o ffers to be purch ase d can only inate prices
Up to the declaration o f war between Germany and the
United States in April 1 9 1 7 the problem o f war nance pre
sented itsel f to this country above al l as the problem of
nancing im ports In ord er to mak e full use o f the great ad
vantage con ferre d by the command o f the sea i t was ne ce ss ary
to make lavish purchases in neutral c ountries and es peci all y i n
,

WAR
the

I N FL AT IO N

229

United S tates The l imit o f those purchases was to be

found nowhere short o f the power o f the United States to
produce what was requi red and the possibility o f transporting
it to Europe H o w were those supplies to be paid fo r ? The
receipts o f the Govern ment normally took the form o f credits
in London The American manu facturers wanted credits in
their own country If they had been willing to be paid with
holdings in British war loan s no di fculty would have arisen
But some o f them at least wanted to be free to spend the
sums received as they pleased and even those wh o were
willing to i nvest them outside their own businesses wanted
investments in their own country payi ng interest and princi
pal i n their own currency The British G ove rn m e n t acc o r d
i ngl y resorted to three princi pal measures fo r providing the
means o f payment I n the rst place vast quantities o f gold
were sent gold displaced from circulation by the new currency
notes issued in England gold freshly mined from within the
British Empire gold sent by France and Russia gold which
had come in a great stream from the United States a fter the
outbreak o f war when th e exchanges were all in favour o f
London 1 The gold received by the Un ited States from all
these sources in t i o years was something like i f;
N ext a number o f loans were oated chiey by England but
also by some of her Allies in the United States the interest
and principal being payable in the United States in dollars
Thirdly special arran gements were made fo r handing over
British held American securities t o the Government which
could either buy them and sell them in America or borrow
them and pledge them as security fo r American loans
In essence what happened was that Great Britain became
indebted to the United States fo r the value o f the supplies
furnished and had to nd equivalent assets in gold or securi
ties t o pay the d ebt The pro blem was quite accurately de
scribed as that o f paying fo r ou r imports At the same time
this problem was really inseparable from that o f paying fo r
.

S
B k

tl an ti c but
t at es w as n o t s en t across the
ni ted
Th e go l d sen t from th e
n gl a nd at O tt ai va , w h ence i t was
an o f
was d epo s i ted to th e cred i t o f th e
ni ted
tates
sent bac wh en th e exch an g e tur ned i n favour o f the
1

C URRE NCY AN D CREDI T

2 3o

our supplies If the amount o f genu i ne money raised at

home wa s more than su fcie n t to pay for th e warlike suppl ies
purchased at home that meant that the home consumer was
abstaining from spending so much money o n himsel f and
that an equivalent amount o f the country s productive t e
sources were set free for the production o f goods for export
If o n the other hand complete provision had been made fo r
paying fo r all the warlike supplies purchased abroad but
nevertheless the home purchases were nance d with inated
credits the exchanges woul d be adverse
The excessive
amount o f purchasing power in the hands of the people would
make a disproportionately attractive market fo r foreign goods
( or securities) so long as the monetary unit remained at its
nominal par In fact in that case the i nation o f credit by
nancing the war with less than the due amount o f sacrice
o n the part o f the people actually attracts superuous imports ;
the problem is then not so much to na nce the imports as to
avoid attracting them The sol ution is to be found no t in
borrowing more money abroad but in encburagi ng or e nforc
ing abstinence at home An alternative solution and one o f
considerable practical importance is to excite a correspond
ing ination in foreign countries In a war between two
powers only in a ne utral world this is hardly possible but
when the greater part o f the world was involved i n the war
some degree o f sympatheti c credit ination al most inevitably
occurred in a neutral area s o much narrowed The United
States coul d not digest 2 00 o oo ooo o f gold in two years
without being involved in an enorm ous expansion o f credit
even i f it were somewhat less than in proportion to the i n
crease o f some 6 0 per cent s o e ffected in the country s stock
o f gold
This exp ansion o f credit tended to attract goods
from the European to the United States m arket an d to
counteract the e ffect o f the Eu ropea n ination o n the ex
changes
The ood o f gold indeed caused some misgivings both in
the United States and in other gold using countries The
three Scandinavian countries Norway, Sweden and Denmark
and later Spain actually suspende d the free coi nage o f gol d
a ll

'

WAR I N FLAT I O N

23,

and

their banks o f issu e were no longer legally bound to grant

credits i n exchange fo r gold at a xed price
For Germany the problem o f nancing imports can hardly
be said to have arisen at all From the beginning o f the war
she was cut Off from all opportunity o f gaining any app reci
able amount o f m aterial assistance from neutral resources
Fo r all that however the problem o f p aying for supplies arose
fo r her in an acute fo rm
In appearance her war nance
wi th regularly recurrent hal f yearly war loans has been re
m ark ab ly systematic
At the outbreak o f war a series o f
emergency m ea sures were put into operation Gold payments
were suspen d ed ; various measures o f rel ief to debtors were
put into force ; an organisation was created fo r making ad
vances to traders o n every kind o f tolerable security and a
special iss ue o f paper m o ney was made as a med ium fo r these
ad vances I n the rst instance no new taxes were imposed
and nothing was do ne to sustain the foreign exchanges It
was i n appearance a system o f war nance without sacrice
The gold standard was deliberately discarded in favo ur o f
unli mited paper without any prior effort by contracting credit
and paying o ut gold to retain it as lo n g as possible No
doubt it was calculated that the ample issues o f paper would
provide the peopl e with the means o f subscribing liberally to
th e war l oans the rst o f which was brought o u t within tw o
months When credit expands it is prots which gain the
advantage in the rst instance ; wages are only rais ed a fter an
interval So long as wages l ag behind the effect is to make
the rich richer and th e poor poorer
Now it is much easier
for the Govern ment to extract money from the rich either by
taxation o r by borrowing than from the po or A restriction
o f ex enditure which i s child s play t o the rich may be a
p
terrible burden to the poor Sacrice can be forced o n the
poor by means o f h ig h prices accompanie d by no proportional
increase o f wages From the money thus lched from the
poor the rich cut o ff from alternative channels o f investment /
can be ind uced to subscribe to war loans In fact the German
sy stem far from being on e o f war nance without sacrice
put the sacri ce upon the poorest people Moreover the rich
.

CU RRENC Y A N D CRED IT

2 32

evidently failed to play their part Tho ugh they subscribed

many milliards o f marks to the war loans the depreciation o f
the mark as measured by the neutral exchanges in Europe
showed clearly that these mil liards were partly ctitious
credits that they did n ot all represent real wealth It may be
supposed that the weak point o f the system was the absence
Sound war nance
o f any adequate scheme o f war taxation
depends on abstinence and abstinence cannot be en forced ex
cept by taxation
O f course it is not to be i magined that every nation which
has to nance a war invariably exhausts all the methods o f
sound nance be fore having recourse to methods o f ination
There are plenty o f examples in histo ry o f undisguised i na
tion e ffected by direct issues o f legal tender Government notes
without the intervention o f any bank ing system This was
the character o f the assignats issued during the French Revo
In the American Civil War there were both Govern
l uti o n
ment notes ( or
Greenbacks
and notes issued by the
N ational Banks established under the Act o f 1 8 6 3 These
latter were allowed to issue notes against United States bonds
so that al l the National Bank notes issued represented an
equal amount o f money len t fo r the purposes o f the war The
currency notes issued in this country since the outbreak of
war are similar but they are issued only as the smal l change
o f credit
Like subsidiary silver they are issued in such
quantities as the banks may need and their existence favours
i nation inasmuch as it removes the limitation which the nee d
to maintain an adequate supply o f gold coin would otherwise
impose B ut ination can only result in so far as the control
o f the creation o f credit is relaxed and consequently the issue
o f these notes in reality only plays a secondar
y part in the
process
.

C H APTE R X V
TH E

ASS IG NATS

WE have n o w brought our subject to a point at which it can

be better elucidated by concrete historical examples than by
further theoretical analysis
In the present chapter and the
next we shall describe tw o examples o f the effects o f war
nance upon currency Therea fter we shal l devote three
chapters to i llustrating the various problems arising o ut o f a
eka ng e o f standard problems which are o f great practical i m
portance and o n which we have as yet hardly touched This
will be followed in Chapter X X by a brie f discussion o f the
similar problems which are b eing stored up fo r the future
under the stress o f war nance In Chapter XX L returning
to theory we shall draw some general concl usions
The nearest parallel to the great war o f o u r own day is to
be found in the wars o f the French Revolution and Em pire
Somewhat less concentrated and more intermittent those
wars shared with it nevertheless the terrible characteristics o f
economic ruth lessness and world wide extent The economic
protagonists were France and England
F o r both the
economic strain made itsel f apparent in grave currency d i f
cu l ti e s
In the case o f France these di fculties belonged
chiey to the early years o f the war The assignats have
taken their place in histo ry as the classical example o f pap e r
money m ade wo rthless by over issue A fter thei r nal col
lapse i n 1 7 9 6 French nance reverted per force to a metall ic
basis and so remained till
In England the currency
di f culties began j ust when those o f France ended The re
striction o f cash payments by the Bank o f England occurred
1 T
h e B an k of France h ad to s us p end cash p ay m en ts m o e th an on ce but
.

i n th o s e day s i ts c i rcul a ti o n pl ay ed a mo d est p art i n t h e bus i nes s

Far th e greater part of trans acti on s w ere i n s p eci e
.

233

of th e co untry .

CURRE NCY AND CRED I T

2 34

on the 2 7 th February 1 7 97 and continued throughou t the

war ending only in 1 8 1 9 four years a fter the concl usion o f
peace
The issue o f the French assignats was not in the rst i n
stance a war measure at all The immediate occasion o f the
Revolution was the nancial impasse in which the Govern
ment found itsel f Minister after minister had failed to d evise
a way o u t ; the decit grew and it was above al l the ex e mp
tion o f the aristocracy and the church from taxation that
o b s truc te d every attempt to balance the budget
Wh en there
fore the Etats Gnraux met in 1 7 8 9 it was their special
mission to nd the means o f averting bankruptcy and even
in the enthusiasm o f the creation o f a new polity this pressing
duty could not be evaded Privilege fell But the unpopular
taxes were repealed and the disorder and loss o f condence
paralysed the taxes that remained In its disinterested en
t hus i as m the Assemble Constituante voted compens ation for
vested interests in many o f the feudal dues and other limita
tions o n l iberty which it abol ished and the hoped fo r balance
o f the budget seemed further o ff than
ever Necker the
Minister o f Finance attempted to borrow but his loan s were
little more than hal f subscribed
The provision o f the immediate mean s o f payment became
urgently necessary In the conscated lands o f the king and
the clergy the S tate had become posses sed o f an a ss et more
than suf cient to meet the accumulated decits o f many years
The oiens na ti ona ux are believed to have been worth 3 5 00
millions o f livres 1 while the whole expe n diture of the bu dget
was some 5 00 o r 6 00 millions and the decit fo r 1 7 8 9 was
estimated at 1 40 millions Here was a guarantee o f solvency
but the problem was to make it i mmediately available A
succession o f forced sales would sacrice a great part o f its
val ue In December 1 7 8 9 the Assembly decided to is sue a

f
o
o
r
series
notes
as signats of 1 000 livres each bearing
interest at 5 per cent to be accepted from purchasers in pay
ment fo r the bi ens na ti ona ux These notes were part of the
,

Th e l i vre was al mo st the

i n 1 8 03 ,

s o th at

25

l i vres

exact equi val ent o f th e

.

franc whi ch too i ts place

TH E

A SSI GNATS

235

oating debt ; n ot being legal tender they were not paper

money The rst legal tender issue was decreed in April
1 7 90 the amount authorised being 00 millions part o f which
4
however was to be appl ied in payment o f the Government
debt to the Caisse d E s co m pte and the withdrawal o f the notes
o f that institution
( which had been made inconvertible and
legal tender) These assignats bore interest at 3 per cent ;
they were fo r sum s o f 2 00 3 00 and 1 000 livres From the
very beginning they circul ated at a discount o f about 5 per
cent In September 1 7 9 0 a further issue o f 800 mill ions w as
decreed this time without interest This issue was m er e cur
reney and the o ld is sue was put o n the same footing interest
on it ceasing in October The total authorised issue was
thus 1 2 00 millions but meanwhile the bi ens n a ti onaux were
being sold and the assignats received fo r them were all burnt
The discount however rose to 1 0 per cent N ecker had
estimated the total stock o f m etall ic currency in France a
few years be fore at 2 2 00 millions and at rst sight i t seems
surprising that a paper circulation o f so mething less than
1 2 00 millions should fall so substantially below par
Memories
o f John L aw s debauch o f paper money in 1 7 2 0 and distrust
o f the new system o f government may have contributed to
the depreciation But the principal cause o f it seems to have
been the relatively large denomination o f the assignats The
minim um o f 2 00 livres had not been retained in the issue o f
September 1 7 9 0 but even so the smallest assignats were fo r
S o long
5 0 1ivres and there were comparatively fe w o f these
as assignats were n o t i ssued in sums convenient fo r the pay
ment o f wages their sphere was very restricted and it is only
natural that when issued to an amount equal to more than
hal f the entire monetary supply o f the country they should
In the rst months o f 1 7 9 1 great di f culty
fall to a discount
was felt from the scarc ity o f small change Even assignats
o f 5 0 livres were at a premium compared with those fo r larger
sums In May the discount being then 1 5 per cent an issue
o f 1 00 millions in assignats o f 5 l ivres w as authorised in r e
placement o f an equal amount o f those o f larger denomina
tions Th ere was an i m mediate rush fo r these 5 livre notes
.

C URR EN CY AN D CR EDI T

2 36

and speculation quickly raised them to a premiu m Perhaps

i f the substitution o f small notes fo r large had been conti nued
and no fresh issues o f large
s o long as the demand lasted
assignats had been made the whole issue might have re
covered But by a decree o f 2 8 th June a further issue o f
6 00 mi llions had been approved and these soon began to
pass into circul ation In the period o f tw o years and two
months from the I s t May 1 7 8 9 to the I st July 1 7 9 1 the
public expenditure had amounted to 1 7 1 9 mill ions o f which
no more than 4 7 0 millions had been met from revenue The
decit was thus some 1 2 5 0 millions and it w as growing day
by day To meet this decit there was no resource but paper
money
N o pretence w as any long er made o f setting a nal limit
upon the circulation Each successive decree prescribed a
l imit but there w as no expectation that the limit would con
t i n ue in operation and no surprise when it had to be raised
In November 1 7 9 1 the assignat w as still worth 8 2 per cent
1
but the ever growing ination aggravated by
o f i ts face value
the approach o f war rapidly depressed it War was declared
1 7 92
In J une the assignat fell to 5 7
o n Austria in April
By the beginning o f August a net circulation o f 2 000 millions
( after the deduction o f assignats withd rawn ) w a s authorised
and assignats o f 5 0 2 5 1 5 and 1 0 so us were n o w being i ssued
In September however there w a s a recovery In August the
monarchy fell September s aw the September massacres the
meeting o f the Convention the declaration o f the Republic
the ignominious retreat o f the Prussians from Valmy In
that crowded month the assignat stood at 7 2 the same gure
as in J anuary and remained at approximatel that level till
y
the end o f the year Was this a sign o f revi vi ng condence ?
A nal break with the monarchy and all its subterfuges and
vacill ation s and the establishment o f a Government o f u n
divided Republican sympathies may have seemed a great gain
but the danger o f anarchy must have weighed heavily o n the
.

Th e

S ch

e d ul e

to th e L aw of 5

th e av erage val ue o f t oo

i
C ourto s

H i stoi

re

de l a

l i vr es

es s i d or ,

as s i gn at s

Banque d e F

in

An V ,

s p eci e

ran ce , etc.

for

( a3 rd J une
e ach

m on th , i s

gi vi ng
quoted i n

T H E A SS IGN AT S

2 37

'

other side I t seems more probable that the fall in the summer
was overdone I t w as a speculative movement which the
economic as d istinguished from the political conditions did
not j usti fy The year 1 7 9 2 w a s o n e o f great credit expansion
of which the trade activity in England was clear evidence and
the consequent fal l in the val ue o f gold o r rise in the prices o f
commodities would be reected in a rise
a
.

sion This is an example o f a very freq uent phenomenon

the relie f o f ination in one country through the occurrence o f y
a cred it expansion in another But such w as the ood o f new
paper in France th at the reaction from the English market
could only delay the fal l ; it could not o n balance produce an
actual rise beyond the level marked at the beginning o f the year
In January 1 7 9 3 Louis X V I w as guillotined and war
The spell o f prosperous trade in
w as declared o n England
England ended in a sudden and disastrous crisis
The
foreign exchanges turned violently in favour o f L o ndon but
none more so th an that on Paris The exchange on Faris
had been keeping pace approximately with the value o f the
assignats ; as gold was wanted primarily fo r export and was
there fore more valuable in L ondon than in P aris there w as
generally a greater premium o n exchange than o n louis d or
In December 1 7 9 2 the 1 00 livres in assignats were worth 7 2
in coin The exchange o n London averaged in November
9
As the par w as 2 8 % d to the
1 9 3d and in December 1 8 T3 d
cu o f 3 livres the assig n ats were worth 6 8 3 and 6 4 6 per
cent o f their par val ue in terms o f sterling in those two months
In January 1 7 9 3 the assignat fell to 5 1 and the exchange to
A fter violent uctuation s values seemed to collapse
16d
altogether The average fo r June was 3 6 and fo r August 2 2
7

The exchange in June was 9 1 6 d and in August 6 % d Indeed

momentarily 0 n the 2 nd o f August the exchange was only 4}d
So serious a deprecia
o r hardly 1 5 per cent o f its par value
tion called o ut fo r a remedy Free dealing in the precious
metals made the persistent decline in val ue pain fully evident
and a decree o f the 1 1 th April prohibited the buying o f gold
o r s ilver at a premium and provided that all monetary obliga
.

CURRENCY AND CRED IT

2 38

tions were to be obligations to pay in assignats ; i f paymen t

were made in coin it must be at par B ut it was impossible
to improve the dog s temper by wag gi n g his tail and the
prem ium on specie rose apace
But the depreciation o f August 1 7 9 3 though mil d com
pared with what was to follow a year o r two later was again
little more than a speculative vagary This w a s the great
crisis o f the Revolution The peril o f new enemies arising
on eve ry frontier the destitute condition o f the armies the
treason o f the general s the outbreak o f civil war the paralysis
o f a new and untried Constitution based on a systematic
weakening o f the executive combined to menace the new r
gime Love o f their country no l ess than love o f the i r liberties
i mpelled the French to rally to those lea d ers who were ready
to dare everything The Jacobins were installed with absolute
power in the Committee o f Public Sa fety ; th e Constitutional
Party the Girondins who were the embodiment o f the revo lu
t i o n a ry virtues but were t o o timid o r too moderate fo r so
desperate a crisis were thrown into prison soon to be
butchered in the rst o f that demoniac tale o f judicial murders
which we call the Reign o f Terror The assignats the legal
status o f which d epended absolutely o n the Revolution suffered
in value from the dangers that thre atened the country an d th e
G overn ment The prem ium on gold and silver could no
longer be openly quoted indeed and the fal l in the foreign
exchanges was a matter o f l ittle practical moment to a coun
try which was at war with near ly the whole o f Europe But
one consequence o f depreciation could not be ignored An
indenite rise in the prices o f the necessaries o f li fe occasioned
acute d istress and discontent and called for a remedy In the
spring o f 1 7 93 the Jacobin opposition had pressed upon the
rel uctant Girondin Government a measure prescribing a maxi
mum price for corn and when the Jacobins themselves came
into power the principle was extended by successive decrees
to all necessaries including not only food but cloth leather
fuel wood etc ( Decree o f 2 9 th September
The Jacobins saw cl ea rly enough that i f ord er was to be
restored in the nances the volume o f paper money in circula
.

TH E A S S I GN A TS

2 39

must be reduced The assignats remaining in circulation

after deducting those withdrawn through sales o f ozens
nati on aux now came to 3 7 7 6 millions
Three measures were
relied o n to reduce this total The as signa ts a eg i e r oy a l e
issued be fore the fall o f the monarchy were bel ieved to be in
the han d s o f royalist sympathisers and those above 1 00 livres
to a total value o f 5 5 8 m illions were demonetised
They
lost their legal tender cha racter but were to be accepted for
a period in payment o f arrears o f taxation o r o f the purchase
price o f the bi ens na ti onaux The arrears o f taxation amount
ing to from 5 00 to 7 00 million s were to be collected And
a forced loan assesse d o n income was to be levied and was
calculated to yield 1 000 millions There was no hope o f the
ordinary budget balancing but with these resources the ple
thora o f paper might at any rate be reduced
In August the law o f April en forcing the use o f assignats
as th e means o f payment was strengthened It became an
o ffence to sell co in o r to di fferentiate bet ween coin and as
s i gnats i n any t ransaction or to re fuse payment in assignats
o r to negotiate assignats at a discount
By a decree o f the
8 th September the dea th pe nalty itsel f was i mposed
Here was a forced currency indeed At some pe riods o f
the world s history such crude expedie nts have b een rightly
deride d by economists as being unen forceable and ine ffective
But Fran ce in return fo r her fear ful sacrice in submitting to
the Terror received at any rate the advantages o f a strong
Governm ent a Government which could organise victory and
save the Republic a Government which could make realities
o f a forced loan a sche d ule o f maximu m pri ces or a legal
tender law Economic or uneconomic regulations might be
evaded o r ignored unde r the Gironde and afterwards under the
Directorate but under the Terror even economic regu lations
were n o t to be tri e d with The prospects o f France and the
prospects o f the Revolution rose In November 1 7 93 the
as signat was at 3 3 o r 5 0 per cent above the panic quotations
In Decem ber it leapt up to 48 Thiers states
o f August
that it even rose to par and at any rate it may have been
appreciably above 4 8 whi ch was th e average quotation fo r the
t ion

'

CU RR E NC Y AND CRED IT

2 40

mo nth Like the l o w level o f August this rise was in part

articial Gold and silver themselves were depressed in value
in consequence o f a l aw against hoarding ; hidden treasure w as
l iable to be conscated hal f to the Govern ment and hal f to
the in former Specie and foreign balances were al ike needed
by the Govern ment fo r the purchase o f supplies abroad an i m
portant re q uirement in spite o f all the interference o f the war
with commercial intercourse
The Government exacted a part o f the taxes not in as
s i gn at s but in
kind Other supplies were requisitioned at
prescribed prices N ot merely were war supplies requisitioned
but the people o f Paris were fed with requisitioned corn Yet
notwithstanding all the requi sitions and transactions in kind a
vast expenditure in money was necessary The e m ergency
measures themselves destroyed enterprise ; there were no free
markets except fo r luxuries and it w as no time fo r luxuries
The ordinary sources o f revenue were almost dried up The
administration o f th e all important I mpot Foncier w as un
wisely devolved on local authorities who had no interest in
gathering it in The decit was made u p by incessant addi
tions to the authorised issue o f assignat s Speak ing on the
1 7 94
Cambon the Minister o f Finance
4 th November
estimated that the expenditure in 1 7 9 2 had been 1 8 00 millions
and in I 7 9 3 2 000 mill ions and that it had risen to 300
millions a month At that time the assignats in circulation
amounted to 6 4 00 millions and they were still worth 2 4 per
cent o f their nominal value
At last there came a relie f o f the tension ; the circle o f
enemies w as triumphantly broken i t was no longer necessary
to subordinate every private interest to the absolute will o f t he
Executive The Terror in fact perished o f its o w n success
Victory brought security and the remoter the danger the more
odious became the butcheries perpetrated by the bitter fanati
c i s m o f Robespierre and the vindictive brutal ity o f his evil
col leagues With the fall o f Robespierre on the 9 th The rmidor
the Terror c eased but the military economic and
( July
political system o f the Committee o f Publ ic Safe ty did not
immediately come to an end
.

"

ASS I GNAT S

TH E

24 ,

S o far

as the economic system is concerned the rst i m

portant step w as the repea l o f the law o f the maximum o n
the 2 4th December 1 7 9 4 Maximum prices have a p araly s
ing e ffect on trade N o o ne i s willing to sell and goods have
to be wrench ed from the dealers hands and forced into the
market by the Govern ment Let the lim itation o f price be
withdrawn and eve ry o n e is willing at once to resume busi
ness But there is no rece n t experience by which to measure
demand and the result is a bewildering uncerta i nty o f prices
and an orgy o f speculati o n
This is what happened in France in 1 7 9 5
Even in
Septe mber 1 7 9 4 three months be fo re the actual repeal o f the
law there were complaints that the maximum was no longer
en forced 1 At the same time it was said that there were
goods in plenty 2 Once people saw that the maximum simply
p re vented them from buyi n g and that i f they could evade the
law they could have wha tever they could pay fo r the system
w as doomed
But the repeal let l oose forces the e ffects o f
which had no t been fo reseen Traders who had been paid in
assignats fo r all that they had been compelled to sel l fo r
eighteen months past and had been unable to buy anything
because no one would sell at the maximum prices pressed
forward to s pend all this idle money on replenishing their
stocks In proportion as traders hastened to spend prices
went soaring upwards and in proportion as prices rose traders
became the more eager to turn money into com modities and
t o reap the prot o f the almost unlim ited rise which they fore
saw This sudden dissipation o f balances ooded the market
with assignats and produced a headlong depreciation
And this d eprec iation n ow became directly measurable
against specie For a time indeed the prohibition upon deal
i ng s in spec i e remained legally in force
But even before
th e repeal o f the maximum S pecul ators were beginning to sell
,

Aul ard

Thi s w or ,
s ta te o f p ubl i c o pi ni on ,

ari s sous l a Reacti on Th erm i d or i enn e,

Pa r i s

91

co n

etc ,
p oli ce o n th e
toge th er wi th extracts fr o m t he n ew s pap ers , pr ovi d es i n val uabl e m ateri al for
s tu dyi n g th e s ucces s i ve p h as es o f th e as s i gnats
9
ul ard , i , 1 3 9 an d 1 5 5

tai ni ng th e d ai l y

r ep or ts o f

th e

I6

CURREN CY A N D C R E D I T

242

gold and silver as na nkin

mu slin and the po l ice were
unable to prevent the traf c l With the repeal o f the maxi
mum there came a decree o f 2 md January 1 7 9 5 permitting
th e exportation o f specie provided products necessary to li fe
were i mpo rted in ex change This did no t authorise dealings
i n spec ie at a premium but it opened the d oor to the quota
tion o f specie prices
O nce coin had become the legally
recognised means o f purchasing foreign com modities its place
as a measure o f value was ree stabl ished and al most i m
mediately we nd evidence here and there that the law against
di fferential prices is being deed and payment in coin sti pu
lated fo r This i s still the exception in Paris itsel f but it
i s fast becoming the rule in the country districts even quite
2
o
close t P aris
Til l the end o f F ebrurary 1 7 9 5 th e depreciation though
continuo us was not perce ptibly accelerated Indeed whereas
the assignats fell from 2 8 per cen t in October to 2 0 in
December they were still at 1 7 in February Nevertheles s
this was the l owest point yet recorded and represented a drop
o f o n e hal f since the fall o f Robespierre seven months be fore
There had no t been so severe a decline since that o f the
summer o f 1 7 9 3 The Convention turn ed their attention
seriously to the problem at the end of February Cambon
the Minister o f Finance proposed a lottery o n a gigantic scale
and a number o f other proj ects were discussed all being
designed fo r the purpose of raising a large sum o f money in
assignats and withdrawing the paper so received from
circulation The principle was the same as that o f the forced
loan o f 1 7 9 3 but the magic o f deci sion was gone
The
various plans were re ferred to the Committee o n Finance and
while the Comm ittee deliberated the collapse o f the assignat
went on apace By April when the Committee s spokesman
J ohanno t presented its repo rt the paper m oney was worth
l ittle more than 1 0 per cen t o f its face value The report
embodied a variety o f prO po sa l s Its general tendency was
towards greater freedom Bargains were to be permitted in
any medium o f payment, whether metal o r paper ; the Bourse s
9I
Aul ard i 1 7 2
bi d i 42 0 480 490
or

.,

A SS I GN A TS

THE

24 3

in Paris and el s ewhere were to be o pened ; the val ue o f silver

bullion in assignats was to be of cial ly ascertained and
published month ly
A [nal batch o f 3 200 millions in
assignats was to be manu factured not to be immediately
issued but to be held in reserve and thereupon the plates
were to be once and for all des troyed The biens na ti onaux
were to be paid fo r in assignats at their silver value
A land
bank was to be started to issue a new kind o f security
eed nl es d lzy potizeque secured o n sp ecied portions o f th e bi ens
na ti on a we n o t legal tender but trans ferable by endorsement
and bearing interest at 3 per cent
An impo rtant instalment o f th ese proposals was passe d
Specie was declared to be merchandise
o n the 2 5 t h April
The Bourses were opened The 3 2 00 mill ions o f assignats
w ere authorised ( though the plates were not destroyed and
the issue was far from being nal
The discussion was resumed in May
A member named
R affron put forward a motion that the value o f the assignats
should fall automatical ly by 1 per cent every month This
aroused a storm among the Jacobins and a resolution rul ing
o ut o f order any proposal in the di rection o f demonetising the
assignats was carried by acclamation
P erhaps Raffro n s
motion w as no t meant to o se riously and the real aim was to
outmanoeuvre the proposal for xing the val ue o f the assignats
in silver according to the market quo tations Fo r this latter
proposal which certai nly partook of demonetisation inasmuch
as it divorced the assignats from the money o f account and
set no limit to their possible divergence w as no t further
discussed
The growing turbule nce o f the Jacobin faction broke o ut
into open violence i n the latter part o f May and the discus
sion on the J oh anno t report was interrupted On the Z I st May
in the midst of the turmoil according to a brie f notice in the
M on i teu r the law declaring specie to be merchandise was
again repealed
Quiet being restored the discussions o n currency and
nance were resumed On the 4 th June a law was passed

uthoris
ng
the
syste
The same law
o
f
e
e
dul es d ltyp otlzequ e
m
i
a
.

16

CURRENCY AN D C RED IT

2 44

declared that assignats and coin bearing the stamp o f the

Republic were the sole legal money The eff ect o f the various
decrees relating to specie i s not very easy to un ravel For
some reason o r other the hasty repeal O f the law which made
specie merchandise o n the 2 1 s t May seems neve r to have had
any operative e ffect At any rate the dealings in gold and
silver on the Bourse were in n o wise interfered with and
when a law w as passed at the end o f August giving the
Bourses in Paris and el sewhere a m o no p ly o f dealings in the

precious metals
s oi t en ba r r e en [i ng ot on
s oi t m on nay es

there was n o suggestion that transactions n o t other

ou v r es
wise law ful were being legalised Finally, o n the 1 2 th March

i
r
again records that the law which declared
1 7 9 6 the M on teu
gold and silver merchandise w as repealed
It is possible that
the law o f the 4 th June which recognised no other metallic
money than that coined by the Republic was interpreted as

l egalising dealings in l ou i s a or and em s o f the o ld rgime and

in bullion and foreign coin The Republican coinage included
francs up to
no gold and very little silver (only
May
and i f that alone w as n ot to be treated as
merchandise the continuance o f free dealings in other forms o f
specie is explained
The eeanl es d ltypot/tqn e were a failure Indeed what was
the us e o f expecting people to lend with the prospect o f being
repaid in assignats ? N O p rO p o s al fo r borrowing from the
public could succeed so long as the lenders had no sa feguard
against an indenite depreciation o f the medium in which they
were entitled t o repayment When the proposal for xing
the val ue o f the assignat in silver every month was dropped
this part o f the J o h ann o t report lost all i ts utility
But in any case i t w as too late The critical months had
already been lost Th e assignat which had been worth o ne
sixth o f i ts value when Cambon made his report in February
and o ne tenth when J o hann ot made his in April was now
hardly worth one fteen th and w as uctuating wildly and
falling rapidly
The Jacobins however remained the
champions o f the paper money which had saved the Republic
The Convention turned to the public lan d s which had always
.

TH E ASS IG N ATS

24 5

b een reg arded as the security fo r the assignats All that was
needed to rehabilitate them was to make them convertible
.

amount o f land H itherto the lands had been sold by auction

and the price rose as the assignats depreciated
N o limit
could be set to this pro cess and to sell the land to the highest
bidder was undeni ably to give less land than had been
originally contemplated The valuation o f 1 7 90 a fforded a
basis for xing the price o f the land and a decree ( 2 9 th May )
was passed that it should be sold to the rst comer at seventy ve
years purchase o f the annual value o f 1 7 9 0 o r s ay three
times its capital value The Church and Crown land s seized
in 1 7 8 9 had been worth 3 5 00 millions ; the lands o f the
em zjgr es seized i n 1 7 9 2 were worth 2 000 more 1
The sales
up to date amounted to 3 6 00 m ill i ons in pap er ( o f which about
two thirds still remained to be paid up)
Allowance being
made fo r the ination o f paper values the portion unsold
might have been su fcient to withdra w many milliards o f
redundant assignats But at the then value o f the assignat
the land was being sold at only three years purchase o r
thereabouts o f its real annual value and fo r all that the o b
ligation s o f the State were not being unequivocally met The
Jacobins could n o t stand such a sacrice o f the Republic s
most cherished asset The decree was hastily repealed and
the sales under it were annul led ( 7 th June) This game o f
fast and loos e was n o t calculated to revive the credit o f the
assignat O n the 7 th June the l ou i s o f 2 4 l i vr es was quoted
at 5 8 5
On the 1 3 th it le aped up to 1 000 on the 1 5 th it
dropped to 6 00 and on the 1 6 th even to 4 5 0 The position
was becoming de s perate H o w cou l d paper money subject
to such w ild vagaries be used as a medium o f payment at all ?
One o f the vices o f the situation was that the public
revenues dwin dled in proportion to the assignats I t had been
di f cult enough to col lect the taxes and the arrears were
enormous but when the assignat w as wor th only 5 4 o r even
2 per cent o f its nominal value the money w as hardly worth
.

Stourm,

Fi na ces (18
n

l anci en Regi me e t de la

Rvol uti on,

"

chap. Xxx

2 46

CURREN C Y A ND CRED IT

collecting In J une an act was passed mak i ng the assig nats

pass in payment o f taxes fo r a r e d IIced value bearing the same
proportion to their face value as a standard su m o f 2 000
millions to the actual amount in circulation ( rounded down to
the nearest 5 00 millions) To avoid inicting hardship o n
landlords who had to pay taxes o n property which they had
let o n lease the sam e rule was appl ied to rents payable under
leases
Nothing could demonstrate better than the operation o f
the proportional scale the manner in which the assignat had
lost ground It was estimated that in 1 7 8 9 there had been
2 000 millions o f specie and 7 00 millions o f paper in circula
tion Some o f the specie had undoubtedly remained hidden
in the country all through th e Terror notwithstanding the law
against hoarding If the gap to be lled by the assignats in
the currency system be taken at 2 000 millions then the 6 400
millions in circulation in November 1 7 94 which were worth
1 5 00 mil l ions at 2 4 per cent o f their face v alue nearly su fced
to ll it At the time o f J o ha n not s report in April there were
about 8 000 mill ions in circulation which at 1 0 per cent repre
sented only 8 00 millio ns in specie I n J une there were
mill ions in circulation and the average value o f the assignat for
the month w as only
per cent so that the whole issue
was wort h no more than 4 40 millions
While the Convention had been debating and re ferring
bills back to Comm ittees and passing and repealing futile de
crees the assignat had practically ceased to be a medium of
payment and had become a mere O bject o f speculation
Country people expressed their contempt fo r the assignats
calling them l arg ent d e P a r i s
The Paris shopkeepers t hem
selves re fused to give change fo r the assignats o f large de
nomination o r sometimes even to accept them at al l o n the
ground that the country people were re fusing to take payment
2
f
r
in paper o their produce
The C onvention remained in
existence till the end o f October but during its last months
its attention was occ u pied i n Con stitution mak ing and in pre
.

Aul ard

r st

ul

y,

7 95 ,

2 0th

June,

17

95

TH E

ASS IGNATS

247

par i ng for the a d vent o f the new Government

Currency
matters w ere al lowed to dri ft and th e credit o f the assignats
was not assisted either by the grant o f extra pay in metall ic
value to the troops o r by the computation o f the legi slat ors
allowances in term s o f co rn The premium o n specie grew
no w rapidly n o w slowly ; occasionally there was a moment
ary set back but never fo r lon g By the beginning o f Sep
tember the high quotation o f 1 000 which the l oui s had touched
during the spasmodic movements o f June had been surpassed
A fter remaining at 1 1 00 to 1 2 00 fo r several weeks the lou i s
shot upwards in the middle o f October Th e Republic was
changing horses while c rossing a very torren tial stream and in
the last days before the ne w constitution with its D zr ectoz r e
Ex eentif and its Corp s Legrlsl a tzf o f two Chambers came into
operation quotations oscillated madly u p and down O n the
2 6 th October 2 000 was reached o n the 2 8 th 2
7 5 0 o n the
2 9 th 3 4 5 0
o n the 3oth the l ou i s opened at 2 6 00 rose again
to 34 5 0 and closed at 3 1 5 0 and o n the 3 1 $t it was back again
at 2 45
The paper money in circulation had grown to
millions and with the l oui s at 3 000 this was equivalent to only
1 5 0 millions o f specie
Writers o n the assignats have made much o f th e amazing
pr ices at w hich com m od ities were bou ght and sold at this
period O f these it is really enough to say that they were
proportional to the rise in the val ue o f specie In other words
they were fty fold their normal level in September a hundred
fold and more by the beginning o f November
These prices
were a reality in Pa ris and in other places where Government
disbursements kept up a perpetual fresh sup p ly o f assignats

In Paris the assignat l a rg ent d e P a r i s really w as the medium

But even in P aris a system was growing up o f
o f payment
regulating prices o f goods by the price of gold as quoted on
the Bourse 2 From xing d i fferential prices the merchants and
farmers in th e provinces had taken to re fusing to receive as
The country was stead ily restocking itsel f with
s i gn ats at all
The quotations o f the foreign exchanges on
meta l currency
the Bourse from the time when they begin in the late summer
9 A ul rd vol ii
1
0
i
r
e
o
t
i
u
o
t
t
o
s
i
n
t
a
B
M
e
n
u
se
a
a
il
our
S ee d y
h
4
n
p
7
q
.

'

.,

CUR REN CY AN D C R E D IT

2 48

consistently show an enormous prot o n the i mportation o f

gold The premium on l ouis d or and on foreig n gold coin
was very much greater than the premium on foreign bills I n
September and October the di fference was as great as 2 0 per
cent til l the end o f January 1 7 96 it was as m uch as 1 0 per
cent 1
When the Directorate came into power at the beginni ng
On
o f November they turned their attention to the currency
the 6 th December they made their rst important propos al
There was to be a forced loan pay able in specie or bullion o r
corn or in assignats taken at one p er cent o f their face value
by which it was hoped to raise 4 00 millions in specie and to
withdraw
millions ( coun ting as 2 00 millions) in as
The assignats were to become convertible into coin
s i g nats
at the same rate of 1 per cent the manu facture o f assignats
was to be brought once and fo r all to an end the plates wer e
to be destroyed o n the l gth February B ut meanwh i le the
Government could no t be left without any nancial resource
whatever and they were authorised to continue the m anufac
ture o f assignats till the total issue reached the fantastic gure
millions Great hopes were aroused and when the
of
forced loan decree passe d the louis which had been above
The reg i me o f the assignats
5 000 fell in two days to 3 5 00
was clearly coming to its close The Government was indee d
still meeting its l iabilities in assignats Civil Se rvice sala ri es
however had al ready been raised thirty fold ( 2 8 th November)
I n December it was enacted that hal f th e Customs duties
should be paid in coin The valuation o f the assignat at 1 per
cent might well provi d e a bridge by which th e Government
could return as private traders had alread y practically returned
to a metallic standard
But the Directorate was limited in its free d o m by a legisla
ture predominantly Jacobin I t d i d not command condence
The assignats were still over valued even at 1 per cent and
the Government could no t start red eeming them in spe cie at
that rate I n d eed practically no specie came in to its hands

For the seri ous effect of this on En gl i sh currency. see n ext chapter p
,

262

TH E

A S S I G N A TS

2 49

A continuance o f pape r money in some form seemed absolutely

inevitable and the next step was to devise a new issue o f paper
money which should be absolutely secured again st deprecia
tion The assignats though they were supposed to be secured
upo n the public lands did not entitle the bearer to any par
ti cu l ar share in this security
The new note s the m a nd a ts ter

mtor i a ux
were to entitle the bearer to
( 1 6 th March 1 7 9
obtain land on d em a nd at the xed val uation o f twenty two
years purchase o f the annual value o f 1 7 9 0 ( o r eighteen years
purchase fo r buildings ) Though there are plenty o f o bj ec
tion s to such a currency system it may be plausibly argued
that so long as the supply o f lands remained unexhausted
depreciation would have been prevented But it was never
g i ven a fair trial Th e Com m ittee o f the lower Chamber ( the
Council o f Five H undred ) introduced an amendment m aking
assignats convertible into m a nda ts ter ri tor i a ux at one thi rtieth
o f their nominal value and raising the amount o f the mandats
from 6 00 to 2 40 0 m ill io ns to provide fo r the exchange ( with
an ample margin I) If o ne hundredth had been to o high a
valuation o f the assignat one thirtieth w as impossible The
l oui s fell it is true from 7 000 to 5 3 00 in o n e day and to
4 800 in one d ay more b ut it soon reacted to about 6 000
If it was to be valued in mandats at 7 2 0 there would merely
be a repetition o f the asco o f June 1 7 9 5 when the Convem
tion unable to stand the sale o f the bi ens na ti ona ux at two o r
three years purchase had annul led the sales retrospectively
To add to the d istrust the new currency when it came out
consisted no t o f mandats but o f p r omes s es d e m a nd a ts

Rescriptions o r Government
( authorised 1 9 th March)
promises to pay cash were already in circulatio n at an
enormous discount and pro mise s to pay mandats could no t
be expected to fare better Week a fter week month a fter
month people wondered when the mandat s proper were com
ing The p r omess es were given forced currency and could be
used to pay th e rst deposit fo r the purchase o f land but
apparently the Government could not summon up courage to
assume the l iability to pay land o n demand Meanwhile the
t the be innin o f
uot
ations of the manda ts fell and fel l
A
g
g
q
,

'

CURR EN CY AN D CRED IT

250

April they were worth no more than 2 0 per cent at the end
o f April only 1 2 at the end o f May they fell to 5 recovered
Though
to 1 0 in June and fell away in J uly even below 5
they were given forced currency and gol d and silver were

declared no longer merchandise the mandats never gained

the same acceptance as the assi gnats Whereas the l ou i s d or
was quoted in assignats o n the Bourse it was never quoted in
mandats ; the mandats were quoted in terms of specie as i f

they were themselves merchandise

The assignats while
they lasted really were the basis o f the money o f acco unt ; as
fast as they lost ground the metall ic standard took their place
and a new network of debts and accounts reckoned in coin
came into being
The mandats were intended l ike any
ordinary issue o f paper money to take the place o f coin but
n o trader wh o cared fo r his business would take a d van tage o f
the law ( 2 3 rd March) which made stipulations for payment
oth erwise than in mandats unen forceable in the Courts There
remained fo r the time being two moneys o f account one fol
lowing specie and the other the assignats the two being linked
"
together by the daily quotation o f th e l oui s a or But even
the xed thirty to one relation between the mandats and the
assignats never led to the use o f a third money o f account
following the mandats
In currency questions the money o f account is fundamental
The difference between high and low prices is in itsel f o ne of
nomenclature only ; it only acquires impo rtance through th e
relation o f prices to pre existing debts Even rates o f wages
the observed tendency of which to lag behind price movements
is one o f the mo st serious evils o f ination are only a particular
case o f debts reckoned in the money o f account The con
tract o f service creates a debt every day from employer to
employed and the amou n t o f the debt can only be adjusted
to a change in the purchasing power o f the monetary unit by
a revision o f the contract I t i s worthy o f remark that so long
as the Paris workmen were ordinarily paid in assigna ts there
were no complaints o f unemployment the high prices ( always
attributed to the knavery o f speculators) were the per petual
evance
1
6
t
arl
in
h
he assi gn a ts had al most
E
n
w
e
79
g
y
.

'

T H E A SS I GNATS

25 1

entirely given way to specie unemployment becomes o ne o f

the chie f grounds o f discontent But i f wage contracts were
not easily adapted to a monetary unit which depreciated by
h al f every two or three months commercial contracts were
thrown into a worse chaos still
The Convention had not been able to evade this question
altogether In August 1 7 9 5 an emergency law was passed
s uspending the right o f redeeming o r commuting ann ual pay
ments and prohibiting debtors fro m paying up be fore the due
date The win d ing up o f the assignats in February 1 7 9 6
necessitated some sort o f equitable adjustment o f Contracts
If th e m andats were to be eq ual to specie and debts were to
be payable in this new medium an utterly un fair burden would
be placed on those wh o had contracted during the depreciation
to pay in assignats If a m an had contracted in December
livres in assignats then worth about 5 0
1 7 9 5 to pay
livres in cash was he to pay
livres in mandats three
months a fterward s ? If he was allowed to pay less what was
to be paid by the man who had contr acte d i n December 1 7 94
when the 1 0 000 1ivres were worth 2 000 or in December 1 7 9 3
when they were wo rt h 4 8 00 ? A law was passed soon a fter
that authorising the issue o f the m andats establ ishing a
statutory scale o f depreciation Every debt was to be adj usted
according to the rate appropriate to the date at which it was
contracted This was in principle a concession to debtors
and by way of some compensation to the creditors the scale
did not at any poin t allow the ful l degree o f depreciati on which
had actually prevailed
Thus in M arch 1 7 9 5 the prescribed
rate was 4 0 per cent and the actual value o f the assignat no
more than 1 3 2 8 A fter J anuary 1 7 9 6 it was 2 per cent an d
the actual value o f the assignat only about per cent
The collapse o f the p romes s es a e m a nd a ts raised the same
problem in an almost more acute form since the fall to 4 pe r
cent was accom plished in only four months I n July it wa s
deci d ed that the mandat should thence forward be accepted even
by th e Government only at its market val ue which was to be
periodically announced ofciall y At l ast a law o f the 4 th
February 1 7 9 7 d e monetised al l the pa per money remainin g
,

CUR REN CY AND CRED IT

52

in circulation and permitted the m andats to be received in

payment o f taxes and o f instalments o n the purchase o f the
1
public lands at 1 per cent o f their nomi nal value
The adjustment o f debts w as not nally provided fo r till
the law o f the 6 th October 1 7 9 7 which enacted that obliga
tions incurred between the I st January 1 7 9 1 and the 2 9 th
Me s sidor IV ( 1 7 th July 1 7 9 6 ) should be reduced to their
'
value in metal accord ing to a table o f depreciati on scheduled
to the law This di ffered from the law passed in March 1 7 9 6
when the assignats were wound up in that it took the metallic
value and no more as the basis o f the debt
One e ffect o f the failure o f the p r om es s es a e m a nd a ts was
that a large quantity o f assignats remained in circulatio n
Apparently the amount in C irculation at any one time never
actually reached the authorised maximum o f 4 0 milliards
The highest i s said to have been 3 2 milliards The result o f
the forced l oan w as disappointing ; up to J anuary 1 7 9 7 only
6 2 milliards had been received 2 A considerable proportion o f
the assignats ought there fore to have been exchanged for
B ut there was no
pr om ess es ale m a nd a ts at the ratio o f 30 to 1
prot in doing this and much o f the issue remained outstand
ing till the general demonetisation o f paper money in February
,

17

97

The end o f the mandats was the end o f the Revolutionary

paper money But that did no t m ean that the Government
paid cash Contractors received or aonna nees the holders o f
'

rentes received two thirds o f their capital in bans aes a eux ti ers
and interest on the remaining third in oons d a r

r er a es
req uisitions fo r the army were paid fo r in 6074: de
g

r e u i si ti ons
All these were obligations to pay in cash, but
q
obl igations with n o denite date o f maturity
Sometimes by
corrupt means the holders could get them paid on grounds o f
S ometimes they had to wait
urgency
Like the as
s i gn ats and mandats these instruments could be used in pay
ment fo r the bi ens na ti ona ux L ike them they depreciated
( though not quite to the same extent) But there was one
vital di fference ; they were n o t legal tender Contracts were
.

Stour rn, i i

.,

p 3
.

I bi d

ii

p 3 8 4,
.

TH E

A S S I GNAT S

253

made exclusively in metallic mo ney and the vagaries o f

Government nance no longer deranged the money o f account
Thus w as the way prepared amid all the nancial humiliations
o f the
Directorate fo r the sound system inaugurated by
Napoleon
Much has been written o f the fallacies inheren t in the i s sue

o f the assignats
They were su pposed to be based on the
publ ic lands but were n o t in fact convertible into land or
anything else o f value There w as no denite relation be
tween the total value o f the publi c lands and the total amount
o f the circulating medium which the French people needed
In real ity the sale o f a capital asset l ike land is as much limited

as the issue o f loans in i t s power o f attracting oona a e savings

from the publi c
The failure o f Necker s loan s in 1 7 8 9 proved
that surplus savings were not available the ordi n ary revenu es
were drying up and ination was the sole resource remaining
for providing the means o f payment
Wh ile the history o f the assignats illustrates almost every
possible phase in the abuse o f paper money the period o f their
decline is in some ways the most interesting and instructive
It is almost unique as an instance o f the currency o f a great
nation gradually fading away into nothing It i s really as
How
to ni sh i ng that the agony should have been so prolonged
did it come about that when the assignat fell in four months
from 1 7 per cent t o
per cent o f its value people still
went on using it ? The Government o f course i nsisted on
paying the paper but how w as it that people were induced to
accept it ( apart from the un fortunate renti er s who had no
choice ) ? Probably the explanation is that some people were
willing to speculate o n the Government being induced to do
something to save the assignats The Jacobins always r e
Ordinary
mained faith ful to the cu rrency o f the Revolution
political leaders are fairly free to C hange their minds and no
body blames them much fo r dropping a policy fo r which they
have striven in the past But a faction which has en forced i ts
policy by bloodshed cannot so easily di savow i ts past To
admit that al l o r any o f the causes fo r which
men and
women were done to death were wrong is to assume too great
,

C URRENCY A N D C R E D I T

2 54

a burd en o f guilt The Jacobin lead ers probably did not like

being called drinkers of blood by their opponents and this

was an unpleasantly e ffective political cry To retain their
sel f respect they were impelled to contend that what they had
done had been really necessary that the measures taken during
the Terror had saved the Republic a n d that any evils that
had fo l lowed were due rather to the weakness o f their suc
c es s o r s than to their o w n errors
From the obduracy s o thrust
upon them sprang that loyalty o f the Jacobins to the assignats
which gave hope to the speculators The r ent i er s contractors
Government servants and others who were paid in assignats
would n o t keep them longer than necessary ; eve n a week s
delay might cause a perceptible loss On the Bourse and at
the bucket shops o f th e f a r a i n Eg a li te those who were in
has te to r i d themselve s o f this tainted paper could deal with
the speculators who were prepared to buy it up o n the chance
o f political favours from the Jacobins
The outcry against
speculators was incessant and intense B ut it was only the
speculators wh o gave any support at all to the assignats when
everyone else was di s crediting them by spending them the
moment they were received
Th e Jacobins made more than o ne effort to j usti fy the
speculators hopes The ephemeral d e c re e o f June 1 7 9 5 for
the sale o f lands at seventy ve years purchase o f the value of
I 7 90 was o ne exam ple the exchange o f assignats fo r m andats
at the ratio o f I to 3 0 w as another
We have seen h o w the aggregate metallic value o f the as
From 1 5 00 millions in N ovember
s i g nats in circulation shrank
1 7 9 4 it had dwindled a year later to 1 0 millions and at the
5
e n d w a s hardly 1 00 millions
E ven o f this reduced total the
greater part had probably by that time found i ts way into
speculative holdings s o that the q uantity kept fo r currency
purposes must have been very small
.

C H A PTE R XV I

TH E B AN K RE S T RI C T I O N O F

I 7 97

T H E currency di ffi culties in Engl a nd di ffered completely from

those o f France occurring as they d i d in a highly develop e d
credit system whi ch had al ready bee n adapted to nance a
great mercantile and industrial organisation and the conti nuity
of which was distu rbed by no revolutionary outbreaks I n
the preceding generation to the credit facilities provided by
the Ban k of Engl an d for the great London merchants there
had been added a network of country ban k s providing s i milar
facilities all over provincial England
These ban k s l ike the
Ban k of Engl and issued notes They also received de posits
but che q ues had not yet come into such general use as to
make a deposit on current account a convenient medium of
payment
This extension of ban k ing was naturally not
exe mpt fro m those disagreeable ev idences of th e instability of
cred it periodical nancial cri ses O ne such crisis had occurred
in I 7 8 3 and a ft er an interval of ten years credit was in a state
of danger ous ination when the outbreak of war with the
con sequen t revision o f val ue s i n J anuary 1 7 9 3 precipitated
another A t that time Bank of England notes did not circulate
to any great extent far from London but the country banks
held part o f their reserves either in Bank of England notes or
in deposits kept with L ondon Banks T here were no bank
notes below :6 5 and ( till 1 7 9 5 ) no B an k o f England notes
below 1 0 There was very little silver coin and for the all
important purpose o f th e p ayment of wages and for reta il
purchas es gold coin ( guineas half guineas and seven shilling
pieces) was indispensable and the characteris tic o f a crisis was
always an urgent demand upon the B an k of England for gold
to be sent out to the pr ovinces T he usury l aws limiting
-

z5

C U RR E N C Y A N D C R E D IT

2 56

interest to 5 per cent were a serious obstacle to an ef cient

control of credit I n I 7 9 3 the Bank o f E n gland endeavoured
to cope with the crisis by restricting cred it it re fused to lend
The natural result followed : solvent rms were threatened
with failure The Government intervened and obtained statu
tory powers to make advances to merchant s The advances
were not m ade in cash which the Government could only have
obta ined from the Bank itsel f but in exche q uer bi l ls The
merc h ant embarr assed with a stock o f commodities on which
no banker w ou ld lend was thus provided with a security
whi ch he could get discounted H aving gained the power of
borrowing he could a fford to see his cash balances fall and the
demand for guineas was relaxed I n the end the whole
amount of
advanced by the Government was re
paid by the borrowers
A t the beginning of the war there was no appreciable
nancial strain on the Government T he nancial year in
thos e days ended in O ctober In the year 1 7 9 2 9 3 which i n
cluded eight months of war little was borrowed, and in
I 7 9 3 9 4 only about 1 0 m illions ( the revenue being about 1 8 to
I t was in the course of 1 7 94 9 5 that the d i i
I 9 millions )
I n that year the de cit met by bo rrowing was
cu l t i e s bega n
besides a guaranteed loan o f
raised
2 0 millions
for the benet of A ustria and in the following year it was
ne cessa ry to borrow 2 5 millions In those days such loans
put a sev ere stra in on the national resources From time to
ti me Pitt was compelled to ask for advances from the Bank
The Bank was prepared to go a long way to accommodate the
Government as it had done before in time o f war But in the
spring of I 7 9 5 the foreign exchanges showed an omi nously
unfavourable tendency The practice prev ailed of nancing
'
the forc es abroad by means o f bills drawn on the Paymaster
General o r the Treasurer of the N avy and payable at the
Bank of England W hen the bi lls arrived the Bank was ex
p e cted to provide the money to pay them and sta tutory
authority had recently been obtained for the advances made
by it for this purpose The perpetual arrival of new bil ls for
the payment o f which the Government had made no separate
.

TH E

B A N K R E S T R ICTI O N O F

1 7 97

25

provi sion was the cause of growing m isgivin g to the Bank

and led the D irectors to mak e repeated protests to Pitt pro
tests which grew i n urgency as the foreign exchanges became
more adverse T he D irector s urged h im to keep do wn the
advances for the purpose of meeting these bills to a maximum
of
outstanding at any one time In practice this
was an ideal never attained : at ti mes they exceeded
,

A t that period the most i mportant of the London ex

changes were those o n H amburg and L isbon Lisbon was
important because mo s t of the ne w supply of gold came from
the mines o f Bra z il a nd travelled 0222 Por tugal H amburg
was important as bei ng the grea t entr ep t for the trade of
N orthern Europe I n normal times the exchange on Paris
was q uite as important but though war d id not necessarily
i nterrupt the quotation of the exchanges between the belli
gerents ( and indeed the Paris excha nge was regularly q uoted
in London from 1 8 0 3 to
this exchange was not q uoted
between O ctober 1 7 9 3 and A pril 1 8 02
Germany and the other countries o f which H amburg was
the commercial centre had sil v er currencies and the Ban k of
Hamburg only g ave credit for si lver gold being bought in
the Hamburg market as a commodity There was therefore
no real par of exchange with Lon d on For th e p urpose of
quotati ons there was an a s s umed par price o f gold six marks
banco ( or 9 6 stivers) to the gold ducat This price making
the ratio of gold to Silver 1 4 8 6 to 1 had become too l ow
the ratio had reached that of 1 5 } to 1 instituted in
the French coinage by Calonne ten years be fore The London
exchange was q uoted in schilli ngs and gro tes banco ~to the
pound sterling ( a schilling of 1 2 gro te s being 6 stivers o r 3
mark banco) A t 9 6 stivers to the ducat the gold in 1
A
t
the
ratio
of
1 5 } it was worth
was worth
:
banco
L
A llowi ng for interest for
months a bill on Ham
35 : 9
burg was at par when the ex cha nge was about 3 6 In the
years 1 7 9 5 and 1 7 9 6 the l owes t p rice of gold q uoted in H am
burg was 9 8 1} stivers ma ki ng the par 3 5
In the rst
quarter o f 1 7 9 5 the ex change averaged 3 5 : 7 ; i n the s econd
.

'

17

C U RR E N C Y AN D C R E D I T

2 58

quarter it h a d fa llen to 3 3 :
and in the third it w as no
more t ha n 3 2
I n O c tober the Lisbon exch a nge of whi ch
the p ar w as 6 7 % d to the milrei s rose to
representing
nearly a s gre at a depre c i ation of sterling as in H a mburg
A t l a st in self defence the D i re ctors of the B a nk re c ogni s
ing th at the needs of the Go v ernment must remain p aramount
dec ided th at they must restrict trade dis c ounts and on
3 s t D ecember I 7 9 5 they adopted a re s olution limiting the
total a mount of bill s to be discounted eac h d ay for their
customers other th a n the Gov ernment If on any day the
bills presented for di s count in the a ggreg ate exceeded the
limit laid do w n a proportion of the bills presented by each
applicant w ere to be retu rned on h i s hands A part from the
ad v ances to the Gov ernment this Procru s tean reduction of
discounts gave the Bank c omplete control ov er c redit and at
the s ame time the ad va n ce s to the Gov ernment ( of w hich the
obnoxious a dv a nces on Treas ury bill s in reality formed quite
a moderate proportion) were themselves s teadily reduced
H aving exceeded 6 I
in D ecember 1 7 9 5 they were
reduced to less th an
in S eptember I 7 9 6 But it
was not ti l l O ctober 1 7 9 6 that the foreign ex changes w ere
restored and e v en then the B a nk w as not reliev ed from the
drain of gold A t last in Febru a ry 1 7 9 7 the signs of a crisis
appeared A n invasion scare precipitated it and the gold
stock of the Bank a lready seriously depleted by the strain of
1
t
the preceding w o ye ar s began to melt a w ay The Govern
ment c ame to the con c lu s ion that the Bank c ould not stand
the s tra in and they obtained an A ct of Parliament s topping
the payment of its notes i n cash
It might perhaps be thought that this crisi s bears its ex
pl anation on its face D id not the Ba nk Di rectors go to the
root of the matter when they pressed Pitt a ga in and again to
keep down h i s demands for temporary ad v a nc es ? N o doubt
they w ere right i n atta ching so much importan ce to this but
a glance at the a ctual variatio ns which occ urred in these ad
vances w ill show that the explanation of the c risis is not to be
1 I
t h ad b een 6 % m i ll i ons i n A u gus t I 7 9 4
2
} mi ll i ons i n Decem ber I 7 95 ;
an d fe l l t o
} m i ll i ons o asth Febru a y 1 7 9 7
,

14

TH E
found

BA N K R E STR IC T IO N O F

17

97

2 59

in them I n 1 7 9 3 th e rst ye ar of the war they

averaged a little over
I n 1 7 94 they w ere lower
the avera ge being about
At the beginning of
1 7 9 5 they rose quickly and exceeded 1 1
a n d except
fo r a temporary rise to
in D ecember 1 7 9 5 they
varied between
and 1
until the s us pen
sion of cash payments i n Febru ary 1 7 9 7
A t the moment o f
the crisis the advances were
N ow in 1 7 9 1 and
the adva nces had exceeded
1 7 9 2 under peace conditions
and it is perfectly obvious that they coul d be i n
creased to 1 I or 1 2 mill ions in time of war without threa teni ng
a nancial catacly s m Indeed while the B a nk D irectors were
right to insist on the limitation of advances i t may fa irly be
contended that Pitt in substance compl ied w ith their demands
Though the incon v enient bills drawn abroad were con s tantly
above the stipulat ed l imit of
th e adva n ces as a
whole were not excessive
But what spe c ially agitated the Ban k D irectors at the
time w as that so l arge a part o f the money raised by the
Government was spent abroad either on subsidies to our allies
or on the maintenance of our own forces The amount so
spent in 1 7 9 4 was
i n 1 7 9 5 ( besides a guar antee d
loan of
for the A ustrian Emperor)
and in 1 7 9 6
U ndeniably these large remit
tances would have an unfavourable e ffe ct on the exc ha nges
But it mu s t be remembered that this e ffec t would be no greater
than that of the investment of the same a mount abroad in
peace time And any curtailing o f the amounts annu a lly i n
ves ted or len t abroad and any additional sums bor rowed
abroad during the war must be set o ff ag a in s t it The opera
tions of I 7 94 d o not seem to have had much e ffect on the
exchanges which did not become seriously unfavourable till
The large remittances of that yea r must
th e spring o f 1 7 9 5
have been an importa nt contributory cause of the
o f cours e
drain of specie that then set in But so long as war ex p en d i
ture is nanced with genuine money provided by a dim inution
o f private expenditure and not wi th in ate d ban k credits th e
effect of ev en large remittances abroad will be moderate
.

C U RR E N C Y A ND C R E D I T

26 o

S ir Francis Baring writing in 1 7 9 7 stated that the war

loan of 1 7 9 6 had been taken by subscribers of insu fcient

n a ncial standing who h ad recourse to circulat ions opera

tions on foreign pl a ces a nd other expedients to enable them
to make good their payments which produced some e ffect on
the course of exchange but s till more on the rate of interest
in the country w hi ch was soon pushed beyond w hat is allowed

by l aw to be recei ved
I n so far as l oans w ere raised from
people wh o could not pay for them without borrowing there
would of c ourse be a tendency to wards unsound conditions
But i f the s ubscribers succeeded in obtaining credits abroad
a s S ir F Baring suggested the e ffect on th e exchanges would
be f a vou ra bl e at any rate s o lon g as the fore ign credits were
not called in A nd in any c ase the disturbance of the ex
changes occurred long before the war loan o f 1 7 9 6 was
issued
The c riti cs of the Bank blamed the D irectors for restricting
discounts The Bank restricted discounts in order to keep
down its note issue S ome of the witnesses before the S ecret
Committee of the House of Lords appointed i mmediately
after the crisis argued that the demand for guineas was due
to this cause Trade must have some means of payment ;
b ank notes will do but if they are not forthcoming the only
The country banks it was
a lternati v e i s to as k for guineas
said restricted their issues in sympathy with the Bank of Eng
lan d and henc e the drain of gold This argument is palpably
wrong The guineas were draw n out in exchange for ba nk
notes It is true tha t a curtailment of borrowing facilities
leads traders to hold larger bal a nces but those balances may
just as w ell be i n c redit as in money The demand fo r gold
in exchange for credit must have been due to one or all of
three causes a need fo r gold for export a need for gold as a
means of s mall pay ments especially payments of w ages or a
los s of condence i n the banks A loss of condence in some
of the country banks there may wel l have been ; failures
among them were fre q uent enough Bank o f England notes
did not circulate m uch outside L on don and su ch 105 5 of con
d e nce in the local b an k s would probably l ead to a demand
,

TH E B A N K R E S T R IC T IO N O F
for

17

26 1

97

guineas But this loss of condence itsel f call s for ex

planation
Why then should th e banks have been in di fculties ?
Wh y should gold have been exported ? Why should guineas
have been in demand fo r internal circulation ? N o petty litt l e
movements will be enough to explain so great a crisis
The fact is that the nancial s ituation i n England ev en in
1 7 9 7 cannot be adeq uately studied i n isolation from the nan
ci al situation on the Continent
For the rst tw o ye a rs o f
the war the forei gn exchanges w ere highly favourable to Lon
don This was the period o f the Terror in France when the
assignats were forced into circulation by all the rigours of th e
Committee o f P ublic S a fety when the possession of a hidden
hoard of gold or sil ver was a criminal o ffence w hen everyone
who had wealth i n France was anxious to send it abroad
Th e countries adj acent to France were soon saturated with
specie and England got her s hare as is shown by the ex
cep ti o nal ly heavy purchase s of foreign gold for the Mi nt in
1 7 9 3 and I 7 9 4
The total for these two years was 33 millions
as compared with a normal average o f about
a year
A nd of course more foreign gol d was imported than was
brought to the M int
The fall in the exchan ges beg an i n the spring of 1 7 9 5
The exchange on Hamburg which was above 3 6 at the end
of March fell in six week s to 3 3 6 and in A ugust to 3 1 1 0
Even at 3 3 : 6 it was already protable to send specie thither
and in A ugust it was protable also to send it to Lisbon
This is just the time at which France was returning to a
metallic currency The L aw of the Maximum the foundation
of the whol e system of assignats under the Terror was rep ealed
on 2 4th D ecember 1 7 94
I n January 1 7 9 5 a difference
bega n to be m ade ( contrary to l aw ) between specie prices and
paper pri ces and soon there followed ever growing complaints
that farmer s or merchants rst of all in the provi n ces and
a ft erward s i n Paris re fused to accept assi gnats at all The
laws limiting dealings in gold and s ilver were partly abrogated
partly ignored B y the end of the year the hopelessly dis
credited assignat had become an object o f speculation rather
.

C U RR E N C Y A ND C R E D IT

26 2

th an a means of payment In the course of 1 7 9 6 the R evo lu

In July
ti o nary p a per money was prac ti ca lly demoneti s ed
it w as stated that s pecie though scarce w as su f cient
1 7 96
to meet the requirements of the markets and specie prices were
beginni ng to rise
How intense w as the pressure to send gold to France
during this period of return to a metallic c urrency is proved
by the quotations of the foreign ex changes on the Paris
Bourse For the period from 2 3 rd A ugu s t 1 7 9 5 to 2 2 nd
February 1 7 96 ( except for an interval from 1 4 th D ecember
1 7 9 6 w hen the B ourse w as C losed )
1 7 9 5 to 1 3 th J a nuary
the pages of the M om teu r gi ve us an al most complete series
of daily quot ation s of the price s o f gold and sil v er and of the
exch a nge on H a m burg and s ome other places The following
table shows the monthly av erages The a s signat being then
in its death agony a n d valued at only a small fraction o f its
fa ce value eac h quotation is given at s o m a ny ti m es the par
val ue
.

'

Fr en ch
Go d C o n

Au g

pt

17

se '
O ct
Nov

95

40 8 5

P rem

39 3

7 96

u m on

ngzg

per

cen

7 3 83
1 29 8 3
1 7 2 85
2 I 8 99
2 5 7 21 2

76

05

4 08 3

H am b ur
E xchang

D ec
l am .
F eb

F o re i n
Go d C i n

623 4
1 1 7 88
15 69 7

IO I

1 97

II 0

2 44 7

'

'

W hen it is reme m bered that throughout these months the

H amburg Ex c ha nge w as from 8 to 1 0 per c ent ag a inst Lon
don i t will be s een h o w enormou s w as the prot to be made
by i mporting guineas fro m London to P a ris It was possible
on 2 0th S eptember for example for a man who w anted gold
coi n in Paris either to buy it at 4 6 5 0 livres per French ounce
( 4 7 2 % grains English ) or to buy a bill on Hamburg at 7 3 5 0
livres per 1 00 marks banco to s ell the bill in London for
guineas at a bout 3 3 s chill ings ( 1 2 % marks) to the pou nd ster
ling and to smuggle the proceeds across the Channel As
every 1 00 marks banco yielded more than 8 in English gold
.

T H E B A N K R E STR IC T I O N O F

17

263

97

equivalent to 2 1 French ounces he would get 97 6 5 livres

W orth o f gold leaving a margin of 2 4 1 livres to pay for the
5
cost and ris k
But to appreciate the full signi cance of these gures it
is necessary to understand that S eptember 1 7 9 5 was pre
C i sel y the month in which the Ban k of England rst began
to su ffer a drain of specie This was expressly stated in the
Report of the S ecret Co m mittee of the Lords and co n rm a
tory evidence is afforded by the actual text of the repeated
remonstrances submitted during the year by the Bank to Pi tt
By A ugu st thes e remon s trance s had become very grave yet
no actual referen c e w as made to any lo s s of specie before the
urgent w arning addressed to him on 8 th O ctober w hen the
price o f bu ll i on ( on whi ch the premium in Paris was less than
on coin) was sta ted to be 4 3 5 to 4 4 5 per ounce
The de mand i n Hamburg an d Lisbon for S pecie from
England which remained intense for practically a year was
merely a re ex of the demand in France The S ec ret Com
m ittee of the L ords obt a ined from the Customs statistics o f
the export o f gold bullion The exports recorded in I 7 9 5
and 1 7 9 6 were a l m os t negligible A t rst sight this seems
to show that whatever th e intensity of the demand for gold
on the Continent Engl a nd esca ped with a tri ing loss B u t
the Customs gures are really worthless The export o f
guineas or even of g ol d melted down fro m guinea s , was pro
hi bi ted and t hough gold melted from guineas was often ex
ported with a false de c laration it was also often exported
secretly When receiving a deputation from the B ank on
a ccording to the
February
Pitt
mentioned
that
1
6
t
h
79
5
British resident at Hamburg a large consignment of guineas
had been sent thither in the pac k et from Y armouth and
melted down A s the dire c t demand came from France it
seems probable that much of the gold w as surreptitiously sent
across the Channel There would of course be no Customs
declaration even of French gold coin so shipped to an enemy
By A pril 1 7 9 6 the H amburg Exchange wa s no longer q uite
so unfavourable though it d id not rise consistently above the
export specie poi nt till the autumn T he Lisbon Exchange ,

C U R RENCY AN D CR E DIT

264

which was le s s important was very adverse all through the

The slow
s ummer of 1 7 9 6 and only fel l to par in O ctober
e ffect of the drasti c c ontraction of discount s put into operation
by the Bank in D ecember 1 7 9 5 shows how great was the
pressure to be resisted But even when the export of gold
The large additions
w a s stopped the cri s is was not over
made before the turn of the tide to the stock of gold had had
the effect of s timulating and ha s tening the revival of trade
w hich w as i n any case likely to follow the crisis of I 7 9 3
A ccording to Jevons index number prices w hich had risen
from a level represented by 9 3 in 1 7 9 2 to 99 in 1 7 9 3 had
stopped short at 9 8 in I 7 9 4 and then s prang up to 1 1 7 in
1 7 9 5 and 1 2 5 in I 7 9 6
Certainly a part o f this sensational
rise of prices was due to w ar conditions w hich created new
demands and interrupted v arious sources of supply but there
is no doubt at all that it was in part d ue to credit ination
Though it w as said th a t the country banks had not increased
their i s s ues to the level of 1 7 9 2 9 3 it w as recognised that a
great part of the reduction which then occurred had been t e
c overed
The sequence o f events was exactly w hat might be
expected First an in ux of gold then an expansion of c redit
then a demand for legal tender money for internal circulation
a demand whi ch could only be suppl ied by guineas But for
the v iolent movements of gold on the Continent the demand
for guineas might have been supplied w ithout any excessive
strain on the Bank The coincidence of the external and i n
ternal demands for gold necessitated the restri ction of dis
counts by the Bank of England C redit w as successfully
c ontracted
the foreign exch a nges were turned in favour of
London but as usually happens the internal demand for
guineas was not immediately stemmed And what w as more
serious the contraction of credit me a nt a heavy fall of values
Jev ons index number for 1 7 9 7 w as only 1 1 0 a fall of 1 2 per
cent from that of 1 7 9 6 A fall of values mea ns the failure
of merchants and the failure of merchants mea ns the failure
of banks H ence the loss of condence whi ch accentuated
the demand for guineas B ut the actual number of fail ur es
in the year was not very much above the average and was
,

T H E B A N K R E STR IC T I O N O F

17

26 5

97

far below the heavy total of 1 7 9 3 The distrust by itself

would have produced l ittle effect but for the persistent drain
of gold to which the banking system of the country had been
previou s ly exposed When the crisis came it w as appeased
not by special advances of credit such as were made by means
of the exchequer bills i n 1 7 9 3 but by the i s sue of Ban k of
England notes of small a mounts ( one and two pounds ) such
as could take the place of gold in the payment of wages and
in retail transactions
It is a curious feature of the bank restriction that the
notes of the bank were not made legal tender till 1 8 1 2 They
were accepted by the Government in all payments and the
principal merchant s and bankers formally agreed together to
accept them This was enough to establish them as the
acc epted means of payment a lthough legally they were
nothing more than debts of the Bank of England which the
Bank was expressly forbidden by law to pay in legal currency
The restriction w as ostensibly temporary but w as prolonged
from time to time The Peac e of A miens in 1 8 02 did not
bring it to an end and on the renewal of w ar in 1 8 0 3 it w as
enacted that the restriction should last till six month s after
the end of the w ar In 1 8 1 1 ( when the controversy raised
by the report of the Bullion Com mittee was in full swing)
L ord King demanded payment from his tenants in coin as
being the sole legal tender Ev en then the bank not e w a s
not i m mediately made legal tender but an A ct was passed
forbidding any di fferentiation between c oin and paper so that
paper i f it c irculated at all as it w a s bound to do in the
almost complete absence of coin could only circulate or dis
charge a debt at par This ensured that the money of account
should be tied up with ban k paper and not with gold A t
last in the following year the bank note was expressly made
legal tender
A fter the crisis of February 1 7 9 7 the effect of the con
traction o f d iscounts w hich had been in operation a ll through
1 7 9 6 made itself felt on the internal drain as it already h a d
some months be fore on the external drain of gold C ondence
was q uick ly res tored and the foreign exchan ges grew more
.

C U RR E N C Y AN D C R E D I T

266

and more favourable the usual consequences of the contraction

of credit and lo w ering of values in a country which has pas sed
through a crisi s
At the ti me how ever it seemed paradoxical that the Eng
lish cri s i s w as h a rdl y over and the curr ency denitely estab
l i s h e d for the time being on a pa per ba s i s before the Hamburg
exchange started rising By April it w as above 3 6 and by
A ugu s t above 3 7
In D e c ember it touched the quite ex cep
t i o n a l m ax imum of 3 8 : 5
For 1 7 9 8 the average was 3 7
and the ex cha nge remained con s istently abov e 3 7 till the
s pring of I 7 99
In the rs t instance London h a d suffered
more severely from the French demand than Germany N ot
w ithst a nding hostilit i e s proximity h ad counted for s omething
and s ince the adoption of the ratio of 1 5 % to I in 1 7 8 5 gold
w as no longer u nder v alued in Fran c e as c omp a red with s il ver
W ar n ance weakened the Bank of England s power of res i st
ance a nd the Engli s h credit s y s tem succumbed rst But the
Germ a n s ys tem did not outl a st it fo r long In the summer of
1 7 9 9 the inevitable collap s e ca me
There were many fa ilures
a n d s u c h w as the s tringen cy that the exch a nge whi c h had
still been a t 3 6 in June h ad fa llen to 3 2 by the beginnin g of
O c tober and to 30 in the follo w ing year I n May 1 8 00 gold
beg a n to be quoted at a premium in London the pri ce being
or 9 p er cent a bove the Mint price of
4 5 5 an
3 1 7 s 1 05 d
This w as the beginning of the depreciation of the Bank of
England n o te It i s not easy to nd a s ati s fa c tory mea s ure
of the depreci ation Three t e s ts may be applied : the prices
of b u llion and s pecie the foreign exchanges and the prices of
commodities The rst i s the most d irect The premium on
gold mea sured the dep arture from the gold standard But
gold w as needed only as the means of remittanc e and as nearly
a ll our tr ade w a s w ith silver using countries the gold m arket
w as in an articial condition
For l d ng period s there was no
market at al l There w as no quotation from M a rch 1 8 02 to
A pril 1 8 04 nor from O ctober 1 8 0 5 to February 1 809
S ilver is therefore a better test than gold We have a nearly
continuous series of quotations either fo r standard si lver bars
,

T H E B A N K R E S T R I CTI O N O F

17

26 7

97

or for S pani s h id o l l ars or for both The ratio o f gold to silver

alway s gravitated towards that of 1 5 } adopted in France at
whi ch the price of standard s ilv er w as 6 0 8 4d and that of
S panish dollars 5 9 3 d and the premium as C ompared with
these prices gives a fair approxi m ation to the measure of de
preciation S ilver and gold howev er being both merely the
means of rem itta nce the market for them was practically one
with the market for foreign ex change in so far as the foreign
currencies dealt in were on a specie b as is Portugal which
had been i mportant as the ch a nnel through which Bra z il ian
gold reached E urope laps ed into a paper money regi me
Amsterdam afte r th e French inv as ion lost much of its business
as a great nancial centre There remained as the principal
exchange markets o n the Continent H a mburg and Paris
From 1 8 02 onwards the London ex change on Paris was regu
l arly q uoted notwithsta nding the w ar nor was the quotation
of the London exchange on H amburg suspended during the
French occupation But w ar pl ays h avoc with specie points
In 1 8 1 0 the actual cost o f sending s il v er between London and
Hamburg was estimated at from 1 1} to 2 per cent but i n s ur
ance which in peace w as about 1 05 6 d per cent was an i n
calculable factor ; it might be 4 per cent or more or l ess
In 1 8 1 1 the average price of sil v er dollars in London was
under 6 5 an 0 2 For 1 it w a s possi ble to purchase 3 %
containing 3 025 of n e sil v er which at Hamburg would be
worth about 1 1 marks banco or 2 9 sc hillings 4 grotes For
the same year the exchange on Hamburg averaged 2 4 1 1 so
that a prot of nearly 1 8 per c ent was to be made by sending
silver
I n some other ye a rs at about the same time the
disparity though not s o great was still substantial th e ex
planation being undoubtedly th a t N apoleon s continental
system threw obstac les in the w ay of the transmission of silver
Contemporaneously the exchange i n Lon don on Paris was in
as articial a condition
For these reasons the prices of the precious metals and the
foreign exchanges do not give an unquestion able measure of
depreciation There remain the prices of commodities A n
index number measuring the purchasing power of money 15
,

'

C U RR E N C Y A N D C R E D IT

26 8

in some res p ects the most perfect te s t of depreciation But it

does not pretend to measure the dev iation from the metallic
standard A nd in cons tructing an index number we have to
be content with su c h price records a s we can get Jevons
obtained a serie s of index numbers from the statistics of prices

collected by Tooke in his H istory of Prices

These prices of
cours e covered only a limited range and index numbers do
not distinguish between a rise of price due to scarcity and a
rise due to curren cy in ation D uring the l atter years of the
war price s w ere v iolently disturbed by the desperate economic
war fare
Jevons c alculated both paper and specie prices The actual
From them he obtained
q uot a tions were of course in paper
the specie prices by abating the premium on gold but un
fortunately he u s ed a table of average prices of gold given by
Tooke which w as as he himself suspected inaccurate The
inaccuracy was more serious ev en than he supposed for neither
he nor the other w riters w h o used Tooke s gures seem to
h a ve observed that they refer to the year ending I st February
with the result that they are practically one year wrong ; so
that fo r i n stance to the year 1 8 1 6 w hen the maxi mum price
of gold as returned to the Committee of 1 8 1 9 was 4 2 5 and
1
the average barely 4 is attributed an average of 4 1 3s 6 d
However the long intervals when the q uotations for gold
were either non existent or nominal make it impos s ible to
con s truct a table of specie prices on the basis of the price
of gold alone When both gold and sil v er were quoted their
prices usually corresponded nearly to the prevailing ratio of
and therefore the price of silver may be taken as a fairly
-

ta i ls o n th e H i gh and L ow Prices 1 82 3 ) To oke

h ead th e t abl e Acco unt of the a erage m a k et p ri ce of go ld
from Febr u
ary
1 8 00
to Feb ruary 1 8 2 1
e x t rac t e d f om M r M us h et s t ab l es
bu t i n hi s
H is t ory of Prices (vol ii 1 8 38 ) h e o m i ts all m en tio n e i ther o f F ebruary or of
M r M us h et a d d escri b es t h e t abl e as
fro m o f ci a l d o cum e t s
For s ome
r eas o n w h i c h I h av e n o t fath om ed M u s h et s t ab l e s i
h i s G ai an d L o ss to th e
Fund ho lde ( 1 8 2 1 ) d o n o t co res p o nd e xact ly w i th Took e s o n e of h i s gu es
d i ff e i n g by as m u c h as 48 an d two or th ee oth ers by as B ut M ush et s tat es
qui t e cl early th at th ey u from F ebru ary 1 8 00 to Fe brua y 1 8 2 1 and h i s ex
am ples s h o w th at h e m ean s from th e year en d e d 1 s t F e b ruary 1 8 00 to th e y ear
en d ed 1 s t Fe b ruary 1 8 2 1 i ncl us i ve
1

Thou ght

In h i s

De

s and

"

TH E

B AN K R E S T R ICT I O N O F

17

26 9

97

trustworthy test of specie prices I n the following table are

shown the prices of gold and silver and of bills on Hamburg
and Paris expressed on a percentage basis par in each case
being 1 00 The last three columns show Jevons index
numbers of prices the computed prices in silver and the ratio
of gold to silver at H amburg
.

P E RCE N

T A G E VA LU E S

C o m mo d

E xc

gg

E xch ange
o n P am

nge

H am burg

Act ua

p r ce s

l
.

it i

es .

i
6 1d t
S il

'

Rat o 01
ces
p f

( S i lver )

ver

bg

Par

mi d

p er o z

1 00 0

1 80 0

1 07 0

1 8 01

1 09 0

Fr

ii

p er

p er 02 .

97
1 7 98
1 7 99

17

6o 84d

'

co
I

1.

98
96
I 03
113

1 00 o
I 06

s'

p er

1 02

PI

S?

7 82

s?

17

82

1 07 2

1 18

11

1 30

121

7 9
-

9
1 24 3

1 04 8

1 05

1 01

1 22

1 127

05

98 8

1 03

36

1 267

1 8 06

1 03 0

1 05

1 33

1 04

1 32

1 06

1 49

1 21

161

1 45

1 20

1 64

1 44

1 47

1 21

1 28

1 48

1 17 o

1 30

1 49

119

1 14

1 32

1 00

1 09

1 02 0

1 02

1 20

1 04 3

1 05

135

1 80 3

1 05

1 03 0

1 8 07
1 8 08

1 07

1 08

4
1 23 3
1 21 6

1 8 09
1 81 0

11

1 81 1

1 207

181 2

I 30 2

1 81 3

136

1 09

1 02 9

04

39

39

1 28

1 36 7

1 8 14
1815

117

1 06

N ata Th e

15

7 4

15

3
1 19
1 28

1 802

15

113

73
1 137
111 9
1 08 3

11

ur

1 10

1 41

H am

41
15 7 9
-

1 20

4
1 1 98

44

53
1 123
1 5 28
'

1 26 7

go ld si l e and th e fo rei gn exchang es a e b as ed o

Co mm i ttees o th e
the Append i c es to t h e Re p o ts o f th e L ord s and C o m m o
t s i 1 8 1 9 B e fo e 8 1 th e qu o t at i ons fo gold ar
Res um p ti o n o f C as h P aym
s
ere
er co er i g a com p l e t e c al e nd ar y ar and th e average a e th
s pasm o d i c n
F o r a n u m b er o f y ear s th e g ures for s i lve r are b as ed o t o
fore not r el i ab l
bu t o n do ll ars (w i th a par o f 5 9 3 d ) The at i os i n the l as t
s tandar d s i l er
Th e fo r e i gn exc hang e col umns g ive th e
co l um n are t aken fro m S oetb e er

ars o u ght s t ri ct ly to b e g iv en as
t
e
f
b
y
p
i
a
h
o
n
m
e
n
co
a
d
c
s
a
n
e
m
n
r
a
n
mi
u
o
pr
to th e banco sch i ll i n g
d
d
6
a
n
f
c
t
r
n
1
d
t
h
e
a
o

95 5

ur e s

for

ev

ns

en

"

'

e.

r,

C U RR E N C Y AND

27 0

R E D IT

The statistics show a genera l tendency tow ard s increa sing

depreciation re ac hing a maximum rather before the end of
the w ar B ut thi s general tendency is broken by v ery co n
The m a ximum index number both for
s i d e rab l e u c t u a tion s
p a per pri ces an d for specie prices c omes in the ye a r s 1 8 09 and
The m axi mum deprec i ation as te s ted by the foreign
18 10
exchanges come s in 1 8 1 1
As tested by the pri c e s of gold
and s il v er it come s in 1 8 1 3 the l as t complete year of war
The depreci ation begins as w e h av e s een w ith the Ham
burg c risi s o f 1 7 9 9 I t i s not cured by the ephemeral Peace
of A miens The prelimin aries of peace w ere signed in O ctober
1 8 0 1 w hen the pri c e of standard s ilver was between 5 5 9 d
1 1d
U pon the conclusion of the denitive treaty
an d 5 3
( 2 5 th M a rc h 1 8 0 2 ) it fell to a n av erage of a bout 5 5 6 d re
covering to 5 3 7 d at the end of the year A t its lowest
5 3 5 15 d i n July it was stil l 8 per cent above p ar
The renew a l of w ar in M ay 1 8 0 3 s aw no appreciable rise
the average for the yea r being 5 5 7 2 7 d and the average
for 1 8 04 w as even lo w er for the mean quotation for dollars
s tandard silver
arket
there
being
no
m
for
) w as 5 5 4 2 d
(
6 d for standard s ilver
In 1 8 0 5
c orresponding to a bout 5 5
dollars fell to 5 5 3 6 7 d Commodities on the other hand fell
a bruptly 0 n the c e s s ation of the w ar and rose a ga i n to a slight
extent on its resumption The interpretation of these move
ments is simple The recovery on the Continent from the
crisis of 1 7 9 9 w a s e a sing the strain on the English paper cur
re n cy though the up w ard tendency of s pe c ie pri c es is masked
by the effects of w ar and pea ce on markets and on the s ources
of supply The depreciation which w as caused by the strin
Till 1 8 08 the
ge n cy at Hamburg disappeared w ith its cause
premium on s ilver w as appre c iably greater than the premiu m
on foreign exch ange a sign that specie w as owing aw ay fro m
H a mburg an d t h at c redit w as re c overing on the Continent
D uring the s e years the depre c iation wa s no longer important
From 1 8 0 3 til l N ovember 1 8 08 the exch ange on Hamburg
nev er dropped belo w 3 2 : 9 and for the most pa rt was above
In A ug u st 1 8 08 it was above 3 5
By N ovember it
34
had fallen to 3 1 : 3 I n 1 8 09 it averaged only 2 9 : 9
,

'

TH E BAN K R E S T R ICTI O N O F

17

97

27 1

The continental blockade w as already beginning but still

in a m ild and in c omplete form Engli s h good s being s muggled
into the C ontinent in l a rge quantities through both Holland
and H amburg English traders sought for n ew opening s in
the ne w ly freed c ommer ce w ith S pa nish A meri ca to com
pens ate them for the partial closure of the continental m arkets
After the period of caution which had j ust p assed there w as
plenty of room for cred it expansion and the grow ing d eprec i a
tion of the Bank of England paper show ed th at the c redit
expa nsion in England being free from the trammel s of con
vertibility into spe c ie w as ou tstripping that on the Continent
For the rst quarter of 1 8 1 0 the H amburg exc hange averaged
barely 2 9 Then came the ca tas trophe Firs t emb a rras s
ment a ros e from the disappointing results of the S outh A meri
can trade
Credit began to contract and the exchange on
Hamburg ro s e s uddenly i n A pril to 3 1 I n July, N a poleon
seeking to complete h i s sy s tem of ex c l usion annexed Holl and
in A ug u st he i mposed a prohibiti v e tari ff on c olonial products
such as had been s o l ibera lly s m u ggled in ; in D ecember b e
annexed Hamb urg an d O ldenburg Partly a s the inev ita ble
reaction after the fev erish a ctivity of 1 8 0 8 and 1 8 09 partly as
the result of the incre as ed s ev erity of the c ontinental sys tem
the second half of 1 8 1 0 w as m a rked by a violent n ancial
crisis in En gl and Mea n w hile the credit expa n s ion abro ad
continued a fe w months longer fo s tered by the exc lus ion of
Britis h goods and con s equent protection of continental ma nu
Europe w as for the most p a rt on a spe c ie basi s and
facturers
a more violent con traction of credit occurred there th a n in
Engl a nd The crash ca me at the beginning of 1 8 1 1
Fail
In
u res o c curred throughout Germany H oll a nd and Fran c e
England the pri ces of commod ities a s me as ured by Jev ons
index numbers fell from 1 6 4 in 1 8 1 0 to 1 4 7 in 1 8 1 1 O n
the Continent the fa ll must have been far greater The av er
age exchange on Hamburg fel l from 2 9 2 1 1 3 in 1 8 1 0 to
in 1 8 1 1 ; that on Pari s from 2 0 7 3 to
The
rigorous exclusion of British good s had the same adv ers e e ffect
on the exchanges as a prohibitive foreign tariff but this
effect w as accentuated by the extreme nancial stri ngency at
,

C U RR E N C Y AN D C R E D IT

27 2

Hamburg and else w here The crisis of 1 8 1 1 is the explanation

o f the gre a t depreciation of the Bank of England note in that
yea r just a s the crisi s of 1 7 9 9 i s the explan a tion of the rst
period of depreciation E a rly in 1 8 1 2 e v en before the relaxa
tion of the contin e ntal system the exchanges began to be less
For the rst quarter o f the year the Hamburg ex
a d v erse
change averaged
and that on Paris
But the
depreciation w a s still great A paper currency permit s of
a more lenient treatment of a crisis than a metal lic currency
and English traders had got o ff more l ightly than their con
t i ne ntal neighbours adv ances being m a de in exchequer bills
But the country paid the penalty in a continued
as in 1 7 9 3
redundancy of currency For the moment this redundancy
facilitated a quick and rather ctitious recov ery The creation
of credit was stimulated by the crumbling of N apoleon s power
and the prospect of access to European markets But as
credit expanded the deprec iation o f the currency again became
more m arked I t is true that the rate s of ex c h ange w ere not
so adverse as in 1 8 1 1 but the prices of gold and silver rose to
their maxima at the end of 1 8 1 3 Gold was quoted at
silver dollars rose to 7 5 an ounce
5 [ 05 and even 5
This depreci a tion was a sign that the nancial system of the
country was overstrained The Go vernment sec urities held
by the Bank of England rose from
in Au gust
in A ugust 1 8 1 3 and
in
1 8 1 2 to
A ugust 1 8 1 4 I n other words in tw o years nea rly
of the w ar expenditure had been met by the creation of bank
credits O nly peace could restore th e curren cy and peace
was at h and N apoleon abdicated in April 1 8 1 4 At the
beginning of June the price of gold had fallen to 5 For
the last six months of 1 8 1 4 it averaged 4 7 5
But this rise
in the gold value of the pound w as re ected in a fall in the
money prices of commodities The a v er ag e lev el of prices for
1 8 1 4 indeed was sl ightly higher than in 1 8 1 3 but the maxi
mum was reached early i n the year and merchants who had
speculated on the re opening of the continental markets q uickly
fo u nd themselves involved in loss
T h e process o f recupera
tion on the Continent after the crisis of 1 8 1 1 had been delayed
.

TH E

B A N K R E STR IC T I O N O F

17

97

27

by the war which had raged on a scale never known before

As the tide o f invasion closed in rst over the outer boundaries
of the N apoleonic empire then over France itself credit O pera
tions dwindled almost to nothing T he portfolio of the Bank
of France amounted at last in A pril 1 8 1 4 to no more than
francs
With credit dried up the continental demand for goods
was in abeyance T he result was a nancial crisis in England
the aftermath of that o f 1 8 1 0 The advances to traders which
had then relieved the situation had really only postponed the
crash The fall o f values to the continental level had been
held o ff at the cost of a depre ciation of the currency W ith
the peace and the sudden changes of values which acco m
p an i ed it the crisis was renewed and the fall i n the prices of
commodities or r i s e in the value of the currency which had
b een avoided be fore w a s brought about by the widespread
destruction of credit M ultitudes o f country banks collapsed
so that there was an enormous decrease in the country cir
culation
In March 1 8 1 5 N apoleon escaped from E l ba and the
renewal o f war immed iately caused a renewed depreciation of
the bank note
Gold which had been at 4 8 3 in February
reached 5 7 3 in A pril and was still at 5 5 3 when the
Battle o f W aterloo practical ly nished the war By S eptem
ber it had fallen again to 4 8 3 S o rapid a rise and fa ll m ust
have been speculative At any rate markets returned after
the c ri si s to much the same state a s be fore it
The contraction
of credit in E ngland continued In three weeks the price o f
gold fell to 4 33 ( 1 3th O ct ) and at the end of the year it
was at 4 2 3 Meanwhile cred it was at last reviving in Europe
By O ctober 1 8 1 6 the Bank of England was buying gold at
3 1 8 3 6 d I t was o fferi n g th is price with a view to accu m u
lating gold for an early resumption of cash payments ; i f it
had le ft the market to nd its own level gold w ou ld have been
at the mint price o f 3 1 7 s 1 05 d The Hamburg ex change
t ouche d 3 8 that on Pari s reached 2 6 1 0 In fact so drastic
had been the contraction of credit in England that sterling
Gold was owing into
was at a premium of 4 or 5 per cent
,

18

27

C U RR E N C Y AN D C R E D IT

count ry and a c cumulating in the vaults of the ban k The

bank actually undertook in S epte mber 1 8 1 7 to pay cash for
notes issued before I st Jan uary 1 8 1 7 and the complete re
sumption of cash payments seemed to be in sight But there
A crisis
w as a hidden source of weakness i n the s ituation
such as that which shoo k credit in Engl and in 1 8 1 4 makes
the foreign exchanges favour able the destruction of purchas
ing power makes a gap which has to be lled by the importa
tion of gold But this only last s til l credit rec overs By 1 8 1 6
the recovery on the Continent from the crisis of 1 8 1 1 which
had been delayed by the stress of war was in progress while
England was for the moment in the trough of the wave As
soon as credit began to recover in England also sterling was
al most bound to depreciate aga in In July 1 8 1 7 gold had
risen again to 4 and at the end of the year it was at 4 03 6 d
The following yea r 1 8 1 8 was a year of crisis on the Continent
S ince 1 8 1 6 credit expansi on had be en rapid and the prices of
commodities had risen substantially A credit expansion is
brought to an end sooner or later by a sho rtage of gold or
under a bimetallic system of gold and silver O n this occasion
the shortage was caused prematurely N ot only England but
A ustria H ungary R ussia and other countries having made
ex c essive is sues of paper during the war were trying to return
to a specie basis England was accumulating gold ; Austria
H ungary and R ussia silver England absorbed g o ld a s the
natural sequel of a crisis and a violent contr action o f credit ;
the others issued foreign loans and drew the proceeds in silver
N one of the three succeeded in regain ing a metallic standard
i n 1 8 1 8 ( though England and Austria Hungary accompli shed
this soon afterwards ) and thi s was partly because their own
competition forced up the val ue of the precious metals in terms
of commodities and therefore also i n terms of their paper
currencies With the fall in the prices of commodities there
came a nancial crisis which began in France th e bi meta llic
meeting ground o f the d emands for gold and silver I n O cto
b er 1 8 1 8 the Ban k o f France took measures to contract its
discounts refusing to discount any paper having more than
forty ve days to run as compared with the normal ninety

th e

T H E BAN K R E S T R I CT I O N O F

17

97

27

days Early in 1 8 1 9 the price of gold rose to 4 3 3 and that

o f silver to 5 3 7 d
a premium of 6 5 d per cent on the former
and 1 0 per cent on the latter The exchange on Hamburg
fell to 3 3 7 and that on Paris to
The resumption of
cash payments seemed as far o ff as ever Committees of both
Houses of Parliament were appointed to consider what should
be done A s the outcome of their investigation s an A ct was
passed providing for resumption by gradual stages The bank
was not to pay out coin but to gi v e bullion in large amounts
6
0
not
less
than
in exchange for its notes rst from I st
(
D ecember 1 8 1 9 at 4 1 3 an
then from I st N ovember 1 8 2 0
at 3 1 9 3 6 d and nally after May 1 8 2 1 at 3 I 7 S 1 05 d
the coinage price But so far as this provision was concerned
the Act was a dead letter Before the I st D ec ember 1 8 1 9
arrived gold had fallen naturally and easily to the coinage
The pressure due to the crisis on the Continent was
price
q uickly over The crisis itself was by no me ans as s evere as
that of 1 8 1 1 which preceded it or as that of 1 8 2 5 w hich fol
lowed it and England after the drastic li q uidation of 1 8 1 4 1 6
found it easy to fal l into step again with the European money
market when the e ffects of the crisi s had pas s ed o ff
This troubled period ill ustrates well the variety of cause s
that affect the depreciation of a p aper currency Fund amen
tally the depreciatio n w as due to na nci a l s train The u n
funded debt re a ched
before the Peace of A miens
i n 1 8 02
I n January 1 8 04 it w as
and fell to
and rose steadily to
in January
in January 1 8 0 8 I n Janu ary 1 8 1 3 it
1 8 07 and
was
and in January 1 8 1 4
The
Penin s ular campaigns and the great continental coal ition of
1 8 1 3 and 1 8 1 4 made these years the most expensive of the
war But though the exigencies of war nance compelled an
over issue the extent of the depreciation v aried widely from
time to time accord ing to world currency condition s The
original suspension in 1 7 9 7 and the unforeseen set back in
1 8 1 8 were both d ue to the abnormal absorption of the precious
metals on the Continent The beginning of depreciation in
1 8 00 and the acute d epreciation in 1 8 1 1 were due to the
.

'

18

1
,

27

C U RR E N C Y AN D C R E D IT

nancial cri s es of 1 7 9 9 and 1 8 1 1 abroad The favourable ex

changes i n 1 7 9 7 9 9 and i n 1 8 1 6 1 7 were due to crise s at home
sync hronising one w ith a condition of in ated credit and the
other with a period of recovery abroad The depre c iation in
1 8 0 8 1 0 w as due to a commerci a l credit expansion in England
outstripping the expan s ion elsewhere The depreciation in
1 8 1 3 1 4 w a s due to a commercial rec overy occurring in Eng
l and while the re c overy i n Europe was still del ayed by war
The continental bloc k ade being e s pec ially an obstruction to
Briti s h exports made the exchanges more adverse in 1 8 1 0 1 2
than they would otherw ise have been
In the great c ontroversy which w as s tarted by the R eport
of the S elect Com mittee on the high price of bullion in 1 8 1 0
insuf cient ac c ount was taken of this variety of caus es The
Committee accepted the quantity theory of money and appre
c i ate d also the fact that th e monet a ry requirements of the
community might v a ry so that an i ncrease in the circulati ng
mediu m might s ynchroni s e with a fall in prices and an ap
preci ation o f the currency or vi ce ver s a But neither they nor
their antagonists ever grasped the very complex theory of the
var iations in monet a ry requirements Especially d id they fail
to unders ta nd how rapid and h o w great are the changes in the
value of gold and silver themselves caused by credit move
ments in the countries which u s e metallic currencies Even
index numbers of prices do not adequately mea s ure the changes
in the v alue of the prec iou s meta ls since a contraction of credit
diminishes the v olume of transactions as well as the level of
price s
The members of the Committee and their s upporters able
and enlightened as they were did not penetrate to the bottom
of the quest ion B u t for a l l that the rep ort repre s ent ed an
important step forw a rd in currency theory and they had much
the best of the a rgument Y et i n the H ou s e of Commons they
found the Government against them a nd not only w ere the
res ol utions moved by Francis H orner in May 1 8 1 1 embodying
the C ommittee s conclusions rejected but a set of resolutions
denying all their doctrine and asserting i nter a l za that bank
notes were held in public esti mation eq uivalent to the legal
.

'

TH E BAN K R E STR ICTI O N O F

r

17

97

27

coin of the realm was mo ved and carried by Vansittart then

an unoi ci al s upporter of the Government ( shortly to become
Chancellor of the Exche q uer)
M o rti e d at this de feat of
pure reason the economists mercilessly pilloried the u nfortu
3nate Vansittart and ridiculed his preposterou s resolution s
B ut perhaps the Government were not quite so foolish as
they seemed The B ullion R eport itsel f was rather a diagnosis
of the disease from w hich the currency w as su ffering th a n a
prescription for treatment It was easy to say that the note
issue must be contracted and a return made to cash payments
But w hat if the money for the w ar could not be rai s ed ? The
Bank of England was the only po s sible u nderw riter of Govern
ment loans the only certa in purch a ser of ex c hequer bill s I f
the Bank s pow er of c re ating credits w ere subjec ted to a l imit
the last resort of the Tre a sury might fail A nd like ne a rly all
Governments that have to rely on in ationary nance the
Ministers of I 8 1 1 were anxiou s to keep up the preten ce that
the metallic s tandard w as stil l in force A n o f cial admi s sion
that the standard had lapsed might have mi l itated against
Government borrow ings
It may be guessed that these were the real motives of the
Government though they could not be openly avow ed M uch
was made of the d i s astrou s e ffe ct s of too great a c ontrac tion
of c redit and of the inevitable drai n of coin for sub si dies to
allies and foreign expenditure The Prime Mi n ister Perce val
frankly a dmitted that the diminution of paper in c ircul a tion
w ould make a favourable altera tion in the exchange but then
he said it w ould be necessary to di s continue the exertions we
w ere making abroad and to abandon our a llie s
What
res ponse could the H ou s e of C om mon s make to a Pri me
Minister mak ing s uch an a ppeal at the greatest c ri s i s of the
war ? N apoleon had st a mped out the e m bers of resist a nce all
over Europe except in the l ittle corner w hi c h Wellington w as
defending behi nd the l ines of Torres Vedras an d the few t e
maining centres o f rebellion in S p a in Perh aps i t w as thi s
rather than Va nsittart s perverse ingenuity an d laboured
statistics that gu i d e d t th e minds o f the many m embers w h o
m er s resol utions
ave
sil
nt
ot
s
a
ainst
o
H
e
v
e
g
g
,

27

C U RR E N C Y AND C R E D IT

When the war was over the party of pure reason came
into their own The doctrines of the Bullion R eport seemed
to have gained universal ac ceptance N o one was found to
argue as in 1 8 1 1 that as guineas could not legally be melted
or exported the price of bullion which w a s sought only for
export was no test of the depreciation of th e b ank note In
re s pon s e to an appeal from the Gov ernment party the
opponents of Peel s resolutions embodying the recommendations
of the H ouse of Lords Committee did not e ven challenge a
division
Traces are to be found in the debate of 1 8 1 9 of the views
w hi c h h a d led Ministers to s uppres s the mov ement to w ards a
resumption o f cash payments in the midst of the war eight
year s before C a stlere agh w h o wa s in o fce at both periods
defended the c onduct of the Bank D irectors aga i nst the
accu s ation of interested motives He declared that they had
never perm i tted s u ch mot i ves to hinder them from a ffording
that prompt and v igorous relief whi c h had it not come from
them he was him s elf utterly ignorant w hence it could have
proceeded A nd it is signicant too that the contribution of
the Bank D irectors themsel v es to the proposals embodied in
the Committee s recommend ations was a request that the
Government should rep ay
of its indebtedness to
the Bank The D ire c tors unfortun a tely did not sh are i n the
general c hange of attitude to w ards the teachings of the
Bullion Committee but here at any rate they showed an
a ppre c i ation of the pri mary cau se of in ation
,

C H A PTE R
A C H AN G E

X VI I

OF S

T AN D A RD

WH E N EVE R in consequence of war or any other cause the

,

monetary unit o f a country deprec iates the d i i cu lt prob

lems arise : w hether it is to be restored to its former value ;
if so by w hat means ; if not at w hat new v alue is it to be
xed
We hav e n o w reached a point at whi ch question s s u c h as
these c an be be s t a pproached by reference to the practi c al
teachings of history and this method will incidentally have
the advantage of supplyi ng illustrations of many of the
theoretical principles reached in the preceding chapters
The problems of a change in the monetary standard are
not pe culiar to a fully devel oped credit system They existed
even w hen metalli c currency was the only means of payment
But the introduction of credit payments modied them pro
fou nd ly
The di v iding l ine between the old conditions and
the new is to be found in the s eventeenth century
I n the Middle A ges the movements of s pecie from one
country to another w ere caused ju s t as they are in modern
time s by the need to discharge liabilities not covered by the
balance of trade But whereas now ad ay s the loss of gold is a
signal for a contra ction of credit which should re s tore equi
librium this resource did not then exist I f production in a
country fell o ff so that it had less to sell abroad and if there
were no i mmedi ate counteracting decrease of consumption it
would begin to lose its money I t is e asy to say that according
to economic law this los s of money ought to make the m oney
which remained more valuable ; that is to s ay ought to bring
about a fall of prices B ut prices did not respond so easily as
N ot only prices but wages were often narrowl y
they do now
,

79

C U RR E N C Y AN D C R E D IT

280

prescribed by custom or ev en by law D ifculties and delays

of co mm un i cati oh m ad e the creati on of a world m a rket with
approximately si multaneous changes in q uotations an i m
possibility
The conse q uence w as that a country would
sometimes be exposed fo r years together to a steady drain o f
gold and s ilver till the scarcity of money began to cause great
inconv enience
A nd a special c o mpl ication was that in
acc ordanc e with Gresham s law the best coins were always
taken for export B efore the introduction of modern systems
of coinage coins were apt to issue from the Mint of very
unequal w eight I f gold or sil ver w as wanted for export the
he aviest and least worn coins were selected When there was
so serious a d isturbance of the equil ibri um o f trade as to cau se
a prolonged drain of money it was found not only that
currency had become very scarc e but that what was left was
made up of coins which on a cc ount of wear clipping or errors
of m a nufacture were materially below the nominal weight
Thi s situation occurred again and again in all countries and
the remedy was usually found in a reduction o f the w eight of
the s tand ard coin In fact pri ces and wages bei ng too rigid
to yield to the altered condition of markets the value of the
unit in which they were reckoned was reduced The monetary
unit refusing to rise legal rec ognition was given to its fall
Many perhaps the majority of the medieval deb a sements of
the c oinage in Europe w ere caused in this way S ome
deb asements like those in Fran ce during the Hundred Years
Wa r or in England under Henry VI II and Edward VI w ere
impudent attempts to gain illicit prots from coinage or to
redu ce the burd en of the K ing s debts without an avowed
b a nkruptcy
B ut there was nothing dishonest about the
debasements which were e ff ec ted to keep money in the
country and in medieval conditions with wages and prices to
a great extent stereotyped su c h debasements were by no
me a ns inv ariably ill judge d O f al l countries England w as
the free s t from illegitimate debasements The following table
shows the successive alterations o f the weight of the silver
old
being
t
h
e
sta
dard
coins silver rath er t h an
n
g
(
)
.

A C H A N GE O F ST A NDARD
Yea r

Va ue o f
Tower Pound
( 1 1 % oz s Tr oy)

O ri

gin al S t andard

22

22

1 2 99

2 08 .

1 3 43

2 28 . 2 d .

1 3 46

228 .

135 1

25 3.

18

1 41 1

3 05
3 7 s 6d
42 3 a1d }

15

6d

46 4
1 5 26

D ebas emen

1 p er

cen

84}

2 01115,r
20

Pu

id

G ra n s

2 03 .

3d

28 1

10

12

20

10

11

T he debasements may be regarded as a device for meeting

the di f c ulties caused by the pers istent ri s e in the value of
silver Till the discovery of A merica there was no adequate
fresh supply from the world s mines The use of a standard
o f value w hich is perpetual ly appreciating hampers business
It increases the burden of debts and i f money wages cannot fj
be reduced pa r e p a ssu with the rise in the purchasing power ?
of money it increases the cost of production The rise of real l
wages may not even be in the interest of the wage e arners l
themselv es i f it diminishes employment S o long as thes e;
conditions obta ined the tendenc y was to acquiesc e i n a de l
preciation once it was an accompl ished fact and to s c ale down
prices and wages in relatio n to silver by means of a debase
ment whenever there was an excessive out ow of money
After a period of illegitimate debasement on the other
hand the common p ractice w as to return towards the old
standard of value thou gh often it was not fully restored In
1 5 43 H enry V I I I
faced with the expens es of a war agai n st
France and S cotland initiated a period of debased coinage
the only re a lly agra nt debasem ent in our history A t rst
the deba sement was slight The w eig ht of the coin s was only
diminished by 116 the pound Troy being c oined into 4 8 3 i n
but the ominous fea ture of the measure was that
stead o f 4
the standard of neness which had been ma intained at 2JOL for
nearly v e centuries was reduced to
A s the Mint price of
silver of the new standard was xed at 4 03 a pound equi
valent to 4 8 s a pound of ne silver the K ing reaped the whole
.

'

'

Le

45 s th e
.

oun

d Troy of 1 2 o s
z

C U RR E N C Y A N D CR E D IT

28 2

prot arising from the reduction of neness and weight As

the seignorage had previously been only 1 3 a pound the mint
price had been 4 43 a pound of the old s terling standard and
this w as very nearly equivalent to 48 3 a pound of ne silver
S o l ong as the Mint price of silver w as kept up that was a
sign that the monetary unit w as not deprec i a ted B ut then
the old coins would remain in circulation ; th e new c oinage
w ould be limited and the prot correspondingly s mall
The war was prolonged for three years and c arried on in
H enry V I II s characteristically extravagant manner costing
l
in all
Tudor autocracy could not be maintained
000
35
without some degree of nancial independence of Parliament
Henry could not i mpose on him self the parsimony w hich w as
so characteristic of his father and his daughter and the spoils
of the monasteries being dissipated he inv olved himsel f deeper
and deeper i n the deb a sement of the coinage In I 5 44 a new
coinage w a s commenced one hal f ne and the mint price raised
to 5 6 s a pound ne and in the following ye a r the neness
w a s reduced to one third
The K ing as S ir John Ra i ns ford
2
for the
s aid had been m ade with a red and copper nose
alloy being double the a mount of the silver gav e its colour to
the coin W ith the mint price at 5 6 3 it became protable to
melt down a ll the s ilver coined before I
In 1 5 4 7 the death of Henry V II I left the burden of
government and his nancial embarra ssments to a regency
under the presidency of the D u ke of S omerset w ith the title
of Protector the new King Edward V I being hardly ten years
old The rst Mint i ndenture of the new reign continued the
same stand ard of 4 8 3 to the pound one third ne but the
M int price w a s raised to 6 03 the pound ne This price
equi v al ent to 5 5 s 6 d for a pound of the old sterling standard
i s evidence of a depreciation of 2 0 per cent in the metal value
of the money of account since 1 5 4 3 It was now protable
to melt dow n the coi n s 3 ne of 1 5 43 The nancial d i ffi
c u l t i e s were intensied by a recrudescence of the war with
3
S cotland and France
I n 1 5 49 perhaps in order to tone
B ur gon
L ife o f S i r Th omas G res h am A pp en di x IV
Ru d i g
Annal s of th e C o i nag vo l ii p 44 0
3
Edwar d V l s w ar ex pend i t ur e amounted to
.

e,

A C H AN GE O F S T AN D A RD

28 3

down the K ing s red and copper nose the neness was i n
creased to one half and the weight reduced by one third so as
to make the silver contents of the coins the s ame as before
S ince 1 5 4 5 the shill ing had weighed 1 2 0 grains and contained
4 0 grains of silver now it was to w eigh 8 0 grains only and
still to contain 40 grains of sil v er The M int price of silver
however w as raised to 6 4 s per pound ne
The autumn of 1 5 49 s a w the fall of S omerset but the new
Protector the D uke of N o rth um be r land did not make any
immediate improvement Indeed in 1 5 5 1 though peace had
been restored in 1 5 5 0 and attention w as alre ady turning to
wards a reform of the coinage an even more debased issue
w as resorted to
The weight remained the s a me a pound
being coined into
but the neness was reduced to one
fourth S ilver w as to be bought by the Mint a t 1 03 per 0 2
ne being a depreciation of 6 0 per cent as compared with the
price of 4 8 s a pound prescribed in 1 5 4 3 But this coinage
di ffered from the rest in being l i m i ted i n a mou nt It w as to
be no more than su f c ient to provide a prot of
and
subsequently it was decided to be content with
to
pay the K ing s debts and
for the fortications of
Cal ais and Berwick I t a ppears that the Protector hoped by
this l as t deb auch to restore nancial equilibriu m as a pre
l iminary to a return to s obriety I f the M int pri c e really re
presented the conditions o f the bull ion market it was high
time for this return But it w as ob v iou s that a further issue
of debased currency howe v er stri ctly l i mited in amount could
not but cause a further depreciation
At the very moment when this last issue was being author
ised the rst step towards a restoration of the standard w as
actually taken in a proclamation dated the 3 o th A pril reducing
the current v alue of all the debased coins by 2 5 per cent so
that the teston or s hilling was to d i sc h arge a debt of ninepence
only A more incongruous series of n a ncial measures there
could hardly be C ondence was at an end and doubtless
with a view to facilitating the absorption of the new issue of
1
w ould requ i r e co i n o f th e face val ue of
To pro i d e a p o t o f
Accord i n g to an e ntry i n Ki n g E dwar d V I s Journal on th e 6th
Sep tember 1 5 5 1 th e to tal i ss ue was
,

C U RR E N C Y A N D CREDIT

284

ne a proclamation was issued in July i n

s
invent speak
i cti ng savage penalties on any w h o hould

mutter or devise any manner of tale news or report of a

further reduction in value Y et in August that further re
duction the mere report of which might have cost the un
fortunate tale bearer his ears was actually carr ied into e ffect
and the teston was reduced from ninepence to S ixpence
By this time the debased coins formed a large part of the
total stock of cu rrency and to halve thei r value in terms of
the monetary unit w as to make a very serious reduction in the
supply of legal tender money The next step was to set the
Mint to work on a new coin age of reas onable neness to ci rcu
late at its metallic value A standard of 1 1 0 2 3 1 dwt ( or
very slightly less than the old sta ndard of 1 1 02 3 2 dwt ) was
adopted and a pound of silver of this sta ndard was to be
coined into 6 03 with a s eignorage of 1 3
I n other words
the M int price of 1 1 31,S 0 2 3 of ne silver was reduced from
1 1 03 6 d to 5 9 3
Even though the former price was higher
than that actually prevail ing in the m a rket it is evident that
the rise in the metallic val u e o f the monetary unit was enor
mous A nd presumably owing to the arbitrary reduction in
the current value of the deb ased coins it was immediately
effective
The D uke of N orthu m berland can hardly be
blamed for not reverting to the old st andard of 4 5 3 to the
pound Troy The retur n to 6 os mu s t have caused hardship
and disturbance enough to say nothi ng of the loss to the
holders of the debased coins
A dditional light is thrown o n the e ff ects of the debasement
by the foreign exchanges The principal foreign centre fo r
the purposes of English trade and nan c e was Antw erp The
current coin there w as the guilder of 2 0 stivers and the unit
of account was the Flemish pound equal to six guilders A
l
6
a
z
e
n
guilder contained 39 6 7 4
or 2 9 3 6 grains Troy of ne
silver and the par o f exchange wa s 2 6 3 1 03d Flemish to 1
sterling ( on the basi s of the silver coin age of 1 5 2 6
S ir Thomas Chamberlayne w rote from Flanders on the 7 th
June 1 5 5 1 that since the call ing down o f the money ( i e the
reduction o f the teston from 1 2 d to 9 d on the 3 oth A pril
)
3
H i story of Currency Ap pendix IV
See W A S haw
co i ns

o ne

fourth

'

"

A C HAN GE O F S T AN DA R D

28 5

the exchange had} fallen from 1 5 3 to 1 4 s Flemish fo r

a pound o f our money 1 The Mint w as then paying ten
testons fo r an ounce of ne silver Ten testons became
worth 7 3 6 d and this price of sil v er would have made the
Flemish par of exchange 1 4 3 6 d Flemish to
It
1
is not surprising therefore that the exchange fell to 1 4 3
In A ugust the teston being reduc ed to 6 d the Mint price of
silver bec ame 5 3 per ounce ne corre s ponding to an exchange
of 2 1 3 9d The exchange howev er only recovered slowly
Perhaps people feared a further reduction o f the current value
of the debased money a n d were relucta nt to hold balances of
it At any rate when S ir Thomas G resh a m went out as
nancial agent to the British Govern ment at Antw erp i n
D ecember 1 5 5 1 the exchange was still no more than 1 6 3
T he new coinage then introduced made the Mint price 43 1 1 d
for an ounce of silver 1 1 o z s 1 d w t ne and 1 became
equivalent to 2 03 5 d Flemish Yet even in August 1 5 5 2
this rate had not become operative for we nd Gresham ask
ing to be supplied with 1 2 00 or 1 3 00 a wee k at A ntwerp
to support exchange s and he mentions that merchants were
saying that ere the payment of the K ing s dett be made it
will bring the exchange to xii i s iiii d wyche I trust never to
see that daye 2 By A pril 1 5 5 3 the exchange had reached
S ee Tyt l e
H is tory o f E dw a d V I a nd M ar y v ol i p 3 80
A pparen tly 1 3s 4d b ei g a depr c i ati o n o f j us t over 5 0 p er cen t w as t e
membered as th e l owes t p o in t to uc h e d by t h e A n tw er p exchan g e
I n a s tat e
ment suppl i ed to Queen E l i z ab et h o h er acces s io n i n 1 5 5 8 G res ham say s :
Ytt may pleas e y o r M aj e ty t o u n de s tan d e that th e rste occas io for t he
fall of th e exchan ge d i d grow e by th e Ki ges m aj es ty your l atte ff ather i n
abas i n g hi s
W h er euppon th e ex
quoyn e from i o u ces n e to iii o ce s e
chang e fe ll fr om xxvi 8 vi ii d to x iii s i v d
w h ic h w as th e occas io n that : all your

i n e gold was convay d o ut o f th i yo

T here i s an inaccu acy here
eal m e
for El iz abeth s l atte ffath e
H y V III ever re d ced th e neness o f th e
co i n to th ree ounce s
Th e feren ce m us t be t o E dwar d VI s l as t d eb as em en t
At the access ion of E dw a d V I th e d e preci at i o w as s t i ll m o d era te th e M i n t
price of si lver b ein g 6 3 p ne po n d Th e A ntw erp ex chan ge at 1 3 3 4d
corresp on d ed t o a M i n t pr i ce of ab o t 9 6 3 p
n e p ou n d
It w as on th e s tr e gth o f th e p ass a g e h e e qu o t ed that H D M acl eo d l n
to th e p r i ncip l e th at
1 85 8 rath er h as ti ly ga e t h e
G s h am L aw
am e of
bad coin dr ives go o d o t o f c i cu lat i o n th o gh h e aft rwards found that th e l aw
was known b efore G r s h am s t i m e at a y rat e to C o p ern i cu s and O resm e
There i s really no evi dence that th p rin ciple was not known to others even i n
the fourt eenth centur y w h en O r esm e li ve d
.

r,

'

r,

un

ur r

enr

re

er

er

re

'

C URRENC Y A ND CREDIT

286

and though it then fell to 1 9 5 ( and woul d have fallen

Gresham said to
but for his arrangements for meeting
the King s debts) Gresham rais ed it in tw o bourse times
In August I 5 5 3 in a memorial to Queen Mary
to 1 9 5 8 d
asking fo r the continuance of h i s employment G resham claimed

whereunto
to have raised the exchange from 1 6 3 to
it yet remaineth
Perhaps Gresham genuinely bel ieved that
this improvement in the exchange w as d ue to his o wn skill in
outwitting o r blackmail ing the English merchants
His

m achinations may o ften have affected the exchange in two

bourse times but a permanent improvement must have been

due to a permanent cause Ever since the reduction o f the
teston to sixpence tw o years before there had been a shortage
a shortage which made i t
o f legal tender money in Engl and
sel f more and more felt as condence returned and trade re
vi ve d and which could n o t be made good except by the gr ad i g l
issue of the new coinage at 6 03 a poun d fro m the Mint The
exchange there fore was bound eventually to rise so far above
the new par o f 2 05 1 d as to attract silver from abroa
d
In those days seignorage charges and obstacles to the move
ment of the precious metals m a de the gap betwee n the specie
points very wid e and 2 2 5 w as not at all a remarkably high
maxim um
Substantially the return to a m eta llic standard had been
effected The depreciation was a thing o f the past But the
late K ing s red and copper nose was stil l to be seen The
base teston s o r shillings o f H enry V I I I had w eighed 1 2 0
grains and contained rst 1 00 then 6 0 and then 40 grains o f
pure silver The light shillings of Edward VI had weighed
8 0 grains and contained rst 40 and then 2 0 grains of silver
All now passed for sixpence The new sixpence weighed
Consequently
4 8 grains and con tai ned 44 2 grains o f silver
while the o l d testons c on taining 1 00 o r 6 0 grains o f s ilver
would be melted down those containing 4 0 and 2 0 grains
were still over val ued and still continued to circulate N ine
teenth and twentieth century experience has shown that the
circulation of over valued coins limited in amount can con
B ut this d ependS on
tin ne without inj ury to the standard
2 05

4d

'

A C H AN GE O F STAN DARD

287

in the discretion o f the Govern ment and respect

ts d ec rees
foL i~
In th e sixteenth century the existence o f such
coins was felt to be a danger and Queen Eli z abeth soon after
her accession determined t o remedy it Her re forms were
initiated by a procl amation o f the 2 7 th September I 5 6 0 which
reduced the current value of the testons containing 4 0 grains
to 4d and o f those containing 2 0 grains t o z i d ( oth er coins o f
the same standards in proportion) The publ ic were instructed
to disti ngui sh the coin by the M int marks and authorities were
set up locally to settle di sputes and to mark the doubtful
coins ( those wo rth 4} d with a portcull i s and those wo rth z i d
with a greyhound) At the sa me time the o l d standard o f
did
neness $7, ( from which Edward V I s standard of
not di ffer appreciably) was restored
A s 40 grains o f pure
silver were there fore worth 5 4 d the debased coins were no w
under valued and con sequently there was no di f culty in
getting them brought to the Mint ~ The loss in flict ed o n th e
holders in fact was substantial ly greater than it need have
been and the con sequent prot to the Govern ment was s uf
cient to cover the whole expense o f recoinage with a consider
able margin At last seventeen years a fter Henry V III s
disastrous venture there was n ot merely a metallic standard
but a metall ic currency The immemorial standard o f neness
o
% was in operation the foreign merchant could once
more rely o n measuring the value o f Engl ish silver by weight
al one The met allic value o f the monetary unit however had
been reduce d by 2 5 per cent for the penny weighed only 8
grains instead o f
But this un it had practically been in
O peration sin ce I 5 5 1 when the redundancy o f the base coins
was cured by N o rth u m ber l and s summary methods Silver
had been coined at the M int at 8 grains to th e penny ever
since 1 5 5 2 an d the comparative steadiness o f th e Antwerp
exchange showed that this coinage really governed the silver
val ue o f the unit There w as nothing sacred about the
metallic value o f the unit in those days and there would have
been little advantage to set against the hardshi p which a re
version to the o ld standard o f weight would have caused
The returns o f the Eli z abethan recoi nage give us so me
gnce

con

'

'

CURRENCY AN D CREDI T

2 88

indication o f the extent o f the debasement The debased coins

recoined weighed
lbs and were c oined into 6
The average neness was therefore a l ittle less than one third
showing that very fe w of those containing even 6 0 grains o f
ne silver can have been left If the coins averaged say 5 45
to the p ound the total face value o f the debased coins dealt
with must h ave been about ,6
This period the middle o f the sixteenth century marks the
The m ine s of the New
e n d o f the med i aeval dearth of silver
Worl d were beginning to p roduce their effect The ol d system
of xing wages by statute broke down Formerly successive
debasements of the coinage had saved Europe from a p e
fall o f prices Perhaps in England u p to 1 5 4 3 they had hardly
been su fcient to accomplish this But n o w that the purchas
ing pow er of an ounce o f silver was falling the inducements to
d ebase th e co inage were greatly d iminished
Temporary d i i
a country might
c u l t i e s might be caused by trade movements
still be draine d of its money to pay fo r an adverse balance of
trade if p rices were too long maintained above the economic
level B ut w ith the prevail ing u p ward trend of prices this be
came m u ch less probable In fact except for the almost
negligible re d u ction of the weight of the silver coins in 1 6 0 1
w hen they w ere coined at 6 2 5 instead of 6 0 5 to the pound
Troy there w as no further debasement i n England and though
deb a se ments were still frequent in France in the seventeenth
century the series ceased with the vagaries o f John L aw in
1 7 2 0 an d thereafter there was no important change in the
silver contents of the livre o r franc s o long as it remained a
standar d coin
The beginning o f the seventeenth century was marked by
the fo u n d ation o f the banks of Venice Amsterd a m and Ham
burg The p rimary function o f these banks w as to provide a
stable an d uniform money of account for international trade
They assessed the value o f all the m a ny varieties of gold and
silver coin which circulated in Euro p e and undertook to buy
them from traders p ayin g for them with credits rec koned in
this money of account which was called bank money As
.

Rud i ng ,

vol

ii i

p 37
.

I
l
I

A C H A N G E O F STANDARD

2 89

experts in the value o f coined gold and silver they discharged

the functions which in the East belong to the
shroffs
Since the intrinsic value of a coin depends not only on its
weight but o n its neness and since its market value even i n
a foreign country may be materi ally ra ised above its intrinsic
value by its quality o f passing current in the country where it
is issued no o ne but an expert can be relied on to say what
credit ought to be given fo r it The banks o f Hamburg A m
sterd am and Venice however w ere n o t mere coin experts since
they not only val ued the coins but bought them On the
other hand they had no t all the characteristics of modern
banks since they only cre ated cred its in exchange for coin or
bullion ; they did not create them in exchange fo r discounts
and loans
In England the course of event s w as di fferent The Lo n
don merchants had no o i c i al s h ro ff l They had recourse
therefore to dealers in bull ion This trade of dealing in bullion
was in the hand s o f the goldsmiths and the practice grew u p
o f entrusting surplus balances of cash t o them
The gold
smiths were not subject to the same narrow restrictions as the
continental banks Like the old p rivate bankers o f Venice
they created credit by lending 'and discounting and d i d not
p retend to hold coin and bullion to the full amount o f their
liabilities It is someti mes assumed that the goldsmiths took
up the business o f banking because they necessarily had strong
rooms in w hich they coul d keep the money entrusted to them
It is much more likely that it was their knowledge o f the
bullion trade which specially tted them fo r their new func
tion At any r ate they made full use of their expert know
ledge It was they wh o gave a market p rice to guineas above
alue at which they were coined It w as they w h o made
th e v

an illicit p rot by clipping the silver coins o r sorting out

the heavy coins for export or melting Throughout the seven
teenth century while gold and silver were both becoming
more plentiful this was specially true of silver and the value
of gold in proportio n to silver was steadily growing The
'

h aps Ch arl es I s eph m er al eviva l of th e

i n 1 6 2 6 may h ave b een i n ten d d to m eet th i s need
1

Per

I9

of ce

of

Ki ngs

Exch anger

CURRENCY A N D CRED I T

2 90

coinage ratio was altered spasmodically in di fferent countries

each in turn lagged behind the others and began to lose its
gol d an d then perhaps raising the value o f gold too high
began fo r a time to lose i ts silver This was true o f England
An ef ux o f gold was stopp ed in 1 6 1 2 by raising the ratio to
as compared with 1 0 9 at which it had stood eight years
1 33
before For thirty years gold being over valu ed in England
Dur
w as imported and it was silver that was drained away
ing the Commonwealth the ratio o f gold to silver in the
European coinage syste ms having risen above 1 3 3 this was
again reversed and there w as a tendency for gold to go abroad
In 1 6 6 3 the weight o f the gol d coin was reduced 44% pieces

cal led guineas being coined o ut o f a pound Troy

of
1 ne instead o f
1 but the ratio o f 1 4 s thereby established
4
{;
was still too low and i f the nominal val ue o f the guinea had

been observed the country s stock o f gold coin would soon

have been lost The goldsmiths however were in a position
to charge what they pleased for gold They were entitled to
pay their depositors in silver which was the standard coin and
were in a po sition to stipulate fo r more than 2 05 for the guinea
if gold w ere wanted Gold being much the more convenient
med ium fo r large payments often was want ed and the m arket
price o f the guinea was kep t u p to about 2 2 5 S o long as thi s
high pri ce prevailed silver w as undervalued as compared with
gold The goldsmith nding tha t he could sell his silver for
more gol d abroad than at home beca me unwilli n g to pay out
silver coins o f full weight to h i s Engl ish customers He put
by the heavy coins to be ultimately melted or exported and
When he had no light ones left it
p aid out the light ones
seemed a pity to waste heavy ones and so he clipped them
l
and made them light
The clipped coins in practice ci rcu~
lated as easily as those which h ad been coined light o r reduced
by wear and the clippi ngs were s o much additional gain By
1 6 9 0 some m isgiving was already caused by the bad state of
the silver coins and a Parliamenta ry inqui ry was instituted
,

'

Th e n ew coi ns , those manu acture d s i nce th e Restorati on did

,
i f c i pped , si nc e th ey had mi ed edges w i ch sh owed the c i i n
pp g
for the mo st par t me ted 0r exported
1

ll

not ci rcu ate

T hey were

A C H AN GE O F STANDA R D

29 :

but nothing was done At that time though m uch o f the

silver coin w as light and unt fo r export it had n o t d e p re ci
ated The clipped coins and the heavy c o ins circul ated side
by side at a value equal to the silver contents o f the latter
The market price o f silver bull ion did no t di ffer greatly from
its mint price o f 5 5 2 d an
though now and then when
there was a special dem a nd fo r export it might rise to 5 5 3 d
}
The monetary u nit o f account w as still at i ts silver par
But in 1 6 8 9 there occurred a n e w d evelopment England
being brought into the political orbit of Holland joined in
the coalition against Lou is X IV The eight years o f w arfare
that followed put a strain on the nances o f all the combat
ants and on e o f the most important functions o f England
was to supplement the resources o f the great n a ncial centre
Amsterdam w ith the newly developed credit system of Lon
don The London gold smiths however w ere rather luke w arm
supporte rs of the Government and o f the w ar Though
Charles I I had half ruined them by co n scati ng their cash
reserves there was a danger that the Revol ution a ry Govern
ment would not recognise the obligations of the Stuarts and
their chances of recovering their money w ere diminished so
long as the dyn a sty w hich had robbed them w as not on the
throne The result was that in 1 6 9 4 an entirely ne w credi t
institution w a s set o n foot by the London merchants inde
pendently o f the goldsm i ths to provide money fo r the Govern
was to be
ment T he money to the amount o f :6
subscribed not to the Government but to a new bank which
in turn w ould lend it to the Government The Bank o f
England w a s incorporated by a statutory charter and w a s
empow ered to issue notes to an amount equal to its capital of
an d to di s
count bills and make advances of money
The scheme was well calculated to attract the merch ant s
money He could afford to open hi s strong box and to p ut
the hard cash which it contained at the disposal o f the Govern
ment because he co uld rely on borrowing from the bank as
soon as he needed the cash again The goldsmiths were ac
cused o f making loan s o n usurious terms and s ome o f them
were o f doubt ful sol ve ncy ; the credit fac ilities o ffered by the
.

'

19

CURRENCY AND CREDIT

29 2

new bank would enable merchants to economise balances

more effectively than before
Thus the foundation o f the bank added
in
paper to the purchasing power in circulation and at the same
time enabled traders to carry smaller balances than before
The effect w as ination H ad the currency been in a sound
condition the consequence would have been an export of gold
silver B ut there w as no heavy silver and the gold
a nd
smiths could put what val ue they plea sed o n gold The
currency began to depreciate The capital of the bank was
subscribed by the 2 nd J uly 1 6 94 the charter w as granted
on the 2 4th July and it began business forthwith Even be
fore the end o f 1 6 94 the prices o f gold and silver bullion be
gan to be slightly higher than usua l The guinea which
usually passed at 2 2 5 or less rose in December to 2 2 5 6 d
silver of which the mint price w a s 5 3 2 d an ounce touched
1
The guinea rose steadily throughout
5 5 5 d in N ove m b er
the rst half o f 1 6 9 5 and reached a maximum of 39 5 on the
Silver also rose but neither so quickly nor so
1 4 th June
much It was at 6 5 5 d in September Neither silver nor
gold reacted far from these maxima for the remainder of the
year What was of more immediate importance was that the
exchange on Amsterdam fell to 2 9 2 8 and even 2 7 as com
pared with a par value o f 3 7 that is to say it was at a dis
count o f 2 2 to 2 7 per cent Remittances from England to
the Army in the Netherlands lost about a quarter of their
va lue by exchange
It was seen that the only remedy w as a re form of the
coinage But this presented many di fculties Should the
silver contents of the pound sterl ing be maintained o r dimin
i s he d ? Should the cl ipped silver be received at its nominal
value o r as in Eli z abeth s recoinage at its bullion value or
at some intermediate value ? I f it were received at anything
above its bull ion value what would th e cost be and how was
i t to be met ? A Parliamentary Comm ittee was appointed in
January 1 6 9 5 when the depreciatio n was on ly beginning
.

on

For parti cu ars of the pri ces of go d and si ve r and th e rates of

ms terd am , s ee T oro d Rogers Fi rs t N i ne Yeat s o f th e B ank o f

exchange

England

A C H A N G E O F S T A N DAR D

29 3

and reco mmended a slight red uction in the weight of the

pound sterling But the evil developed rapidly and the
Government cal led fo r a report from the Secreta ry o f the
Treasury W ill iam Lowndes
L owndes proceeded to examine previous similar cases
H e found that precedent was against any alteration in the
neness o f the silver coinage The standard o f g}, had been
maintained unaltered centu ry after centu ry save for the un
happy excepti on i n the reigns o f H enry VI I I and E dward
VI A departure from a standard supported by so long a
tradi tion would be al most dishonourable
All foreigners
that deal with us regard the intrinsic value more than the
extrinsic denomination and exchange with us accordingly
If base money should be made the intri nsic value t hereof

would be uncertain o r might be disputed

In fact the value
o f British
silver would no longer be ascertainable by the
weight alone and condence would no longer be felt in it
But though the standard o f neness had so l ong a tra
dition behind it Lowndes found that the standard o f w eig ht
had been repeatedly reduced The reason he held was
that whensoe ver the extrinsic value o f silver in th e coin hath
been o r shall be less than the price o f silver in bullion the
coin hath been and wi ll be melted down
This was exactly
what the country was suffering from in 1 6 9 5 The monetary
unit o f account had parted company from the metalli c stan
dard Silver b ullion was quoted at 7 7 d an ounce and
shillings containing more than 5 % o f an ounce o f standard
silver were necessarily exported o r melted down

says Lowndes that continuing the

O ne may fores ee
silver monies ( either old o r new coins) upon the present foot
whil st bull ion is s o much dearer will inevitably produce con
sequences pernicious to the whole in e ffect it will be nothing
else but the furnishing o ffenders with a species to melt down
at an extravagant prot and encouraging not a necessary
but a violent and exorbitant exportation o f our silver to the
foreign parts for the sake o f the gain only till we shall have

little o r none l e ft in the Kingdom

He therefore recom
mended that the amount o f silver in the pound sterling should
.

CU RRE NC Y AN D C R ED I T

294

be diminished by o neT fth that is to say that the mint price

V
In order
o f silver should be 7 7 l d an ounce instead o f 6 2 d
to avoid the expen se and inconvenience o f recoini ng the silver
o f full weight which was still believed to exist though hoarded
and kept out of circulation he pro posed that the value of the
coins should be i ncreased rather than the weight di mini shed
s o that the shilling would pass fo r 1 5
3 d the crown for
6s 3 d and so on

L owndes proposals were published and el icited a famous

reply from the masterful common sense o f John Locke This
reply ad mirably expressed in Locke s characteristically vigor
ous English denounced the raising o f the val ue o f the coins
as a futile pretence
The increase of d enom ination does or
can d o nothing in the case for it i s silver by its quantity and
no t denomination that is the p rice o f things and the measu re
o f commerce ; and it is the weight o f silver in it and not the
name o f the pieces that men estimate com modities by and ex

change them for

Money di ffers from uncoined silver only
in this that the quantity of silver in each piece o f money is
ascertained by the stamp it bears ; which is set there to be a

voucher o f i ts weight and neness

An o unce of silver
whether in pence groats or crown p ieces stivers or ducatoons
or in bulli on is and a lw ays eternally wil l be o f equal value to
any other ounce o f silver un der what stamp or denomination

soever
An excellent theory of currency this with the great

advantage o f being intel ligible and Locke s reply has done

much to promote the maintenance o f a xed metallic standard
in his day and ever since B ut with all its merits it had one
defect i t completely missed the point at issue If the value
of the silver coins had depended solely o n the quantity of
silver they contained the di f culty would n ever h ave ari sen at
all Lowndes notwi thstandin g his submissive acceptance of
mediaeval precedents could see the distinction between the

intrinsic val ue and the extrinsic deno mination o f the

coin ; between its value when melted as a raw material o f in
d us try and its value as the legal means o f discharging a debt
He understood that the tw o values might diverge , that a
clipped coin might contain less than its nominal val ue in silver
,

A C H AN G E O F STAN DA R D

29 5

and a heavy coin more that the price o f silver meant some
thing more than the price o f silver in silver But of course he
had not arrived at the conception of a money o f account
measurable by its purchasing p ower in terms not only o f silver
but o f commodities generally a monetary unit a change in
the value o f which meant a change in all prices and wages
H e argued th at if the price of silver had risen that must be
bec ause silver was scarce owing as he said to an unfavourable
balance of trade And yet further on he attributes to the clipt
raising the price not only of merchandises
or bad moneys the
but even o f edibl es and other necessaries fo r the sustenance of

The rise in
the common peo ple to their great grievance
silver and the rise in go ld were merely symptomatic of a
general rise o f prices or in other words of a fall in the value
of the monetary unit Nowadays such a fall can be correcte d
1 69 5
not
without
tribulation
by
a
curtail
ent
o f credit
In
m
)
(
if the cl ipt coin was withdrawn
no such metho d w a s known
and coin o f full weight issued in its place silver must be ex
ported until the scarcity o f money compel l ed a reduction o f
prices Lowndes foresaw the export of silver though he did
not see that it w ould eventually be checked by a fall of prices
Locke remained bl ind to the danger Locke however a mi d
all his vigorous irrelevancies produced one argument which
deserved to be d ecisive If the mo ney be raised o n e fth he
it will weaken
aid
if not totally destroy the public faith
s
when all that have trusted the public an d assisted o ur p resent
necessities upon Ac ts of Parliament in the million lotte ry
Bank Act and other loans shall be defrauded of 2 0 per cent
4
f
o
r
o f what those Acts o f P arliament were security
,

'

beth ; currency problems had been transformed by the develop

ment o f credit England w as p laying a leading part in a
great continental wa r
Her greatest contributions to the
coalition o f which she formed part were then as they were
against Napoleon and as in t he present w ar wealth and sea
power To utilise her wealth it was indispensable that her
Government should comman d condence The Government
had become the greatest of all debtors Was it calmly to
.

C U RR ENCY A N D CRE D I T

29 6

educe the b urden o f its debts by the simple process o f calling

a pound ? If so where was it to stop ? Perhaps when
1 65
the old shillings had been C irculating a s testoons at I S 3d
for a year or two the Secretary o f the Treasury rein forced
by one more precedent might have found it necessary to urge
that the value h e raised to 1 5 6 d to
indeed to any sum
without l imit Moreover the national debt w as not the only
new circumstance The mediaeval debasements had usually
been effected when the money had already been clipt and de
Edward VI
rst
p reci ated fo r a long period o f years
attempt to coin good silver at 6 05 to the pound Troy was
made seven years after the rst issue o f silver 5 0 per cent
ne ; and the successfu l recoinage of 1 5 6 0 took place seventeen
years a fter the beginning of H enry V III s debasement B ut
the depreciation o f 1 6 9 5 took every one by surprise In
December 1 6 94 the prices of guineas and silver bullion were
almost normal B y June 1 6 9 5 the guinea had risen one
third ; and by September silver had reached its maximum of
6 5 5 d an ounce
To stereotype the e ffects of so sudden a
disturbance was a very d ifferent thing from giving legal re
cognition to a fal l in the monetary unit which had persisted for
seventeen o r even for seven years
Further the j ustication for the mediaeval debasements had
been the intractabil ity o f prices and wages But prices
wages had become very much more p liable I t was still
in 1 6 9 5 as indeed it is at the present day that it is much
easier to reduce the metall ic sta ndard to the monetary unit
than to raise the monetary unit to the metallic standard A
reduction i n the metallic standard involves no more than a
recoinage perhaps even no more than a proclamation altering
the denominations o f the existing currency A rise in the
value o f the monetary unit of account means a change in al l
prices and nominal values But in 1 6 9 5 it might be regarded
as certain that trad e would soon accommodate it self to a re
stored level of values The process must necessarily be un
pleasant but the maintenance o f a stable metallic standard
was worth the sacrice
The sacrice was a serious o ne The mere direct cost to
r

'

'

A C H AN GE O F STAN DARD

29 7

the E xch equer was fo r those ti mes prodigious Lowndes had

estimated that the silver coi n in circulation was :6
that O f this total
was probably clipped and
seriously decient in weight and that the cost of res toring the
to the o ld standard would be
The
actual amount recoin ed in the years 1 6 96 9 9 w as no less
than
Lord Liverpool writing in 1 8 0 5 estimated
the tota l cost at
The transition period while
the recoinage was taking place was ful l of di f culty and
danger I n February 1 6 9 6 the value o f guineas was reduced
immediately to 2 8 s and prospectively to 2 6 s as from the
following 2 5 th M arch and a further Act reduced it to 2 2 5 as
from the r o th April This measure by itself if effective
would have soon l ed to the d isplacement of gold from circula
tion by the overvalued clipped silver but it was accompanied
by arrangements fo r withdrawing the silver at face val ue up
There followed an interval o f extreme
to the 4th May 1 6 9 6
embarrassment when business had to be carried on almost
without coins below the val ue of the half guinea The natural
consequence was that everyone w ho had the right to draw

si lver from the banks the B ank o f Engl and and the Goldsmiths
banks alike proceeded to d o so The Goldsmiths themselves
presented batches o f notes to the Bank o f England for pay
ment M acaulay quoting l H er m i tage says that this was the
result o f a plot and that the Directors on that ground refused
payment H owever pleased the Gold s miths may have been
to see thei r Wh ig rival in di f culties little plotting can have
been requi red to bring about a simultaneous exercise o f their
rights to demand silver from it at a time when they must have

been at their wits end to satisfy the demands o f their o wn

customers The result was that the B ank of England had to
suspend cash payments excep t fo r such partial payments as
And
the gradual issue o f the new coins enabled it to make
when the new silver did get into circul ation the Bank o f Eng
land note was at a discount o f 1 6 per cent The discount
continued subject to uctuations t ill September 1 6 9 7 reach
ing a maximum o f 2 4 per cent in February 1 6 9 7
In fact
ti ll the end o f the war there were two monetary units o ne
,

CU RRE N C Y AN D C R ED I T

29 8

based on specie and the other on paper and the latter remained
simply unaffected by the recoinage There were two quota
tions o f the foreign exchanges the quotation in pa p er being
practically a s adverse as before When the B ank o f England
relieved from the strain of nding money fo r the war sur
mounted its d ifculties and paper and money pric es were again
i d entical the exchange on Amsterdam w as again unfavourable
From J u ly 1 6 9 7 t o the end o f 1 7 00 it remained between
This was
3 5 I a n d 3 5 1 0 a s compared with a par o f 3 7
nothing l ike the state in which it had been in 1 6 9 5 but it
meant that the money o f account had never quite ac co mmo
dated itself to the restored silver standard The guinea it is
true passed regularly at 2 1 5 6 d as compared with the legal
maximum of
but even 2 1 5 6 d was an overvaluation
The newly coined silver w as steadily drained a w ay just as
Lowndes had foreseen As the value of the guinea became
stereotyp ed the country settled down to a virtual gold stan
dard In 1 7 1 7 the dearth of silver beco ming serious Sir
Isaac Newton w h o held the post of Master of the Mint warned
the Government that unless something w ere d one silver coin
would soon be quoted at a premium i e the money o f account
and the metallic money would again part company He cal
cu lated that in order to counteract the overval uation o f gold
the guinea ought to be reduced to 2 05 8 d and recommended
that at any rate it should be red uced to 2 1 5
It w as xed at
by p roclamation and this being still an overvaluation,
2 15
hardly any silver was brought to the Mint to be coined for a
ce n tury The resid ue of the co ins o f William I I I remained
in circulation becoming more and more worn till at last in
1 8 1 6 the restricted coinage of ove rval ued silver o f l imited legal
tender w as in troduced Thus in the end the silver standard
so earnestly advocated by Locke never was effectively restored
The monetary unit o f account remaining persistently below
'
its nominal silver value assumed by use a gold basis Locke s
arguments however were not wasted They were called in
aid in the nineteenth century to de fend the gold standard more
effectively than in his o wn day to defend the silver standard
,

C HA FTER XVI I I
THE

GOLD ST

A N DA RD

T H E nineteenth century s aw what was p erhaps the most re

markable and far reaching of al l changes of standard the
almost univers al ado p tion o f the gold stan dard The change
came very gradual ly I t may be said to have begun w ith the
English Coinage Act o f 1 8 1 6 which put the coinage o f this
country practical ly o n its present footing This Act gave
legislative recogn ition to a state of affairs which had already
been long in existence From 1 7 1 7 to I 7 8 5 practically no
silver was coined because silver was undervalued in our coin
age i n comparison w ith gold
When the guinea was xed at 2 1 5 the ratio of the val ue
The market
o f gold to silver worked o u t at 1 5 2 1 to 1
ratio approximated to that o f 1 4 5 to 1 w hich prevailed in
France for the population and wealth of France were much
greater r el a ti vely to the rest o f Europe in the eighteenth
century than l ater o n Consequently whi le the French co in
genu inely bimetall ic With silver on the whole
age w as
predominating the British like those o f Spain an d P ortu
gal which had an even higher ra
was almos t exclusively
gold
A fter the Seven Years War
stabil ity o f this system
began to be thr eatened o w ing to {the worn condition of the
gold co inage In 1 6 9 5 the mon etary unit had beco me de
1 bein g below weight ; n o w
owing
to
the
silver
coins
r
c
e
i
a
t
e
d
p
the abrasion o f the gold coins prod uced the same effect It
seems likely that in the second c a se as in the rst the real
cause was an improvement o f credit faci lities which made the
currency relatively redundant and drove the b est coins abroad
-

'

2 99

C UR RE N CY A N D CRE D IT

300

For it is from 1 7 5 0 that the great and rapid growth of the

country banks dates B y 1 7 7 4 the evil h ad grown serious
enough to d emand a remedy At the instance o f Lord Liver
pool then M a ster o f the Mint the entire gold coinage was
recoined at the publ ic expense and provision was made in an
Act o f 1 7 7 4 fo r the regular recoinage of light gold coins for
the future The silver coins though even more worn than the
gold for they dated fo r the most part from the years I 6 96 99
were left untouched Silver however w a s d isestabl ished from
the position of nominal equality with gold as unlimited legal
tender I t rem a ined unli mited legal tender by w a g/ti but by
ta l e it w as ma d e legal tender for 2 5 only
As there was no
silver in circulation that was not far below the legal w eight
payment by weight was a dea d letter This Act of I 7 7 4 how
ever w as passe d fo r a limited perio d only and though twice
renewed w as allowe d to lapse in 1 7 8 3
In 1 7 8 5 there occurred a ne w d ev el o p m en t w h i ch was not
appreciated at the time Under the ministry of Calonne a
change was made in the French coinage The mark of gold
w as to be coined into 3 2 l ou i s d or instead o f 3 0
This raised
the ratio from 1 4% to
and it ceased to be protable to
bring silver to be coined It may be asked w hy gold w as not
immediately attracted to the French Mint from all quarters
till the e xisting silver coins were driven out of circulation
The explanation i s that there were coinage charges amount

ing to about 2 per cent and that so considerable a remedy

1
of neness was allowed (and regularly taken advantage o f)
that the coins w hich ought to have been 11% ne were usually
only T9U ne The bullion dealer who sold a mark o f ne gold
for its Mint price in gold coin and exchanged the gold coin fo r,
silver did not get 1 5 1} marks o f ne s ilver but hardly 1 5
There w as therefore no im mediate e ffect on the m arket ratio
B u t four years later came the Revolution and with the
Revolution came the assignats B y 1 7 94 most of the French
stock of gold and silver had been driven abroad and much of
it no doubt w as melted The undervalued silver would be sure
.

S ee

l
l a
Append i x A
cy

th e r esu t s of a c tua

Colon i al C u

rr en

ys

s sa

quo ted

in S i r R

n ow

L ord)

Chal me s
r

G OLD STA N DARD

TH E

30 1

to go rst and would ood the silver market and raise the
relative val ue o f gold The market ratio at Hamburg which
was 1 5 in 1 7 9 3 rose to 1
7 the highest level fo r sixty years
in 1 7 94 and 1 5 5 5 the highest till then known in 1 7 9 5
And this rise was perm anent In 1 7 9 3 9 5 the price o f silver
in London fell below the coin age price o f 6 2 d an 0 2 With
the un favourable movem ent of the exchanges in 1 7 9 5 9 6
both gold and silver rose above the coin a ge prices but a fter
the cri sis of 1 7 9 7 silver fell again and in January 1 7 9 8 was as
low as 6 0d
There was a danger that silver might begi n to
displace gold as the standard of value and an Act wa s hastily !
passed absol utely suspending the coin a ge o f silver and re
enacting the lim itation of legal tender which had been in force
from 1 7 7 4 to I 7 8 3 This Act o f 1 7 9 8 was intended to be
temporary and a Comm ission o f Inquiry was set up with
Lord Liverp ool as one of its members to advise as to the
future system of coinage But as the Bank Restriction Act
was prolonged and the country settled down to a p aper cur
ren ey it seemed su p eruous to discuss the coinage and the
inquiry was suspended Lord Liverpool took the opportun ity
to record his o wn recommendations in his famous letter to the
King which is recognised as o n e o f the greatest authorities
u p on the British coinage In this letter written i n 1 8 05
almost o n h i s death bed he po inted o ut that the gold sta ndard
had practically been al ready esta blished and elaborating a
suggestion made by Ada m Smith 1 he advocated the legal
recognition o f this condition of things by making silver legal
tender only fo r sm a ll amounts and by mak ing a substanti al
coinage charge fo r silver The coinage charge would dis
courage people from bringing silver to the Mint to be coined
and would make the use o f silver as the standard o f val ue
,

'

Weal th o f N ati on s

coi nage of

li mi t

ed

l egal t

B ook

e n d er

w as

h p v Th e s uggesti on o f a s ubs id iary

lt g th er n ew N ot only h d i t alre d y

not a

been appl i ed as Adam S m i th poi ted ou t to th e capper coi nag but i t w s

appl i ed exp er i m e n ta ll y to s i l v er h al fpenn i e s and fa th i ngs i n th e re i gn of H enr y
VI
B y a n Act of 1 44 6 for a peri od o f t w o years th e pound of s ta ndard s i lver
w as to b e coi n ed i nto 3 3 5 w o rth o f t h es e co i ns as co m pared wi th 3 5 w orth o
in
groats or penn i e s and t he s mall er co i s w e e to be l egal tender o n ly for 1 5

i
e
vol i i
every 2 05
pp 3 35
( Ru di ng Annals of th e C o nag
n

e,

CURR ENCY AN D CRE D IT

302

impossible Years afteward s Lord Liverpool being then dead

and his son Prime Minister the Comm ission o f Inquiry was
called together again in view o f the approaching resu mp tion
of cash payments by the Bank and issued a report reco m
mending a gold standard o n these principles that is to say the
free coinage of gold which w as to be the sole u n limited legal
tender and the coinage o f silver subject to a charge to provide
a subsidiary coinage o f limited legal tender The silver was
a pound Troy
to be bought at the o l d Mint price o f 6 2 5
and the coinage charge was to be
( equal to 6 2 d a n
s o that the p ound would be coined
into
of which 45
would be retained by the Mint Th e Act of 1 8 1 6 embodied
these recommendations It p rovided fo r the free coinage of
gold at the then existing Mint price which w as 3 1 7 s 1 o5 d
an
I t removed the prohibition on the coinage o f silver
which had been in force sin ce 1 7 9 8 and authorised the Master
o f the Mint to coin any silver brought to the Mint at the new
rate o f 6 6 s a pound It also enacted that f rom a day to be

i
e
d
l
P
t
R
o
l
a
b
r
a
m
o
n
it shall and may be law ful for
oc
ya
x
y a

any person to b ring silver to be coined and there shall be

delivered to the person bringing in and delivering the same
a sum in silver coins
after the rate o f 6 2 5
for every

pound Troy o f the standard neness and weight

N o w this provision comp el l ed the Mint to b uy silver at 6 2 5
a pound and to pay for it in silver coin At that time the
market was governed by the ratio o f
w hich had been
established in France by Calonne and had survived the Revo
l u ti o n the Em p ire and the Restora tion
Silver was worth at
that ratio 6 05 1 0d a pound and i f a higher price was to be
o ffered in England all the silver in France might be d rawn
across the Channel True the silver wo uld only have been
paid for in coin o f li mited legal tender but the p rice of 6 25
a pound would none the less have been e ffective until the
redundancy o f silver had become so great as to drive the silver
coin to a discount In short the scheme recommended by
the Commission and the Act o f 1 8 1 6 as based upon it were
,

'

As 44} gui neas were coi ned from a pound and a guinea was worth
pound was wo rt h 46 1 4s 6 d , and th e ounce 3 : 7 3 rod
1

th e

TH E G OLD STANDARD

303

unworkable
Lord Liverpool had foreseen th ese dangers
though he had by no means appreciated their importance
and he had as an afterthought suggested the remedy The
mere levy o f a co inage charge was no t suf cient in al l circum
stances to li mit the coinage o f s ilver ; the coinage o f silver
must be placed within the absol ute discretion o f the Crown
and no right could be le ft to private p ersons to have silver
coined at any stated price And l uckily the Act o f 1 8 1 6
could be ve ry readi ly adapted to apply this remedy N 0 p ro
clamation was ever issued xing the day after which people
might insist o n selling silver to the Mint 6 2 5 a pound 1 Their
right to do so th e re fo re re m ained in abeyance till the Act was
repealed by the Coinage Act 1 8 7 0 by which o ur coinage i s at
present regulated and which has nothi ng to say rega rd i ng the
price at which silver is to be purchased
The system might equally well have been threatened with
failure if th e market price o f silver had risen above 6 6 5 a
pound ( 6 6 d an ounce) for in that case it would have paid to
melt or export the silver coin But the French bimetallic
syste m was a safeguard against this hap p ening w ithout am p le
warning F o r so long as France had silver to export and
was bound to buy gold at the ratio of
the wo rld p rice of
silver could no t rise to 6 6 d an ounce which corresponds to
a ratio o f 1 41
It is a striking proof o f the degraded condition of the o ld
silver coin that the considerable quantity ( about
remaining in C irculation in 1 8 1 6 had survived the Bank re
strictio n without being ex p orted in spite of the p remium
which was at o ne time nearly 4 0 p er cent above th e coinage
price o f 6 2 d
Since 1 7 1 7 the British gol d coin had been the guinea o f
w hich di ffered inconveniently from the pound sterling
the unit o f account The opportunity o f the Coinage Act o f
gold piece (the value
1 8 1 6 was taken to revert to the 2 05
originally intended fo r the guinea ) and the o ld nam e o f
.

At th e

of s i ver

was

end of

actua

evi dence that th e

l l y 5 5 ai d
.

ro

pos ed

per

oz

M i nt pr i ce

l
H

Ac t recei ved th e Roya A s s ent , the pri ce

ere w as pr acti ca
or 6 05 6 d a pou nd

une , 1 8 1 6 , w hen th e

of

26 .

w as too

h i gh

CURRENCY A N D CRED IT

304

sovereign w hich had belonged to the Tudor coins of that

1
value w a s revived
Thus w a s completed the establ ishment o f the gold s tandard
in England and thus perished the Mint price o f silver xed in
the l a st yea rs o f Queen Eli z abeth and fought fo r s o strenu
o u s ly by Locke
But even then the gol d standard did no t immediately come
into p ractical as well as legal o p eration The Bank restri c
tion w as still in force and though the p remium o n gold had
fo r the moment almost vanished the steps taken towards the
resumption o f c ash payments su ffered a s et back in 1 8 1 8
The p remium on gold reapp eared There follo w ed the P arlia
mentary Committees o f 1 8 1 9 and P eel s B ill providing for
gradual resum p tion Th ough there was no division against
the resolutions embodying the principles of the Bill a small
coterie of i nati o n i s ts found a spokes man in Lord Folkestone
w h o like Lowndes in 1 6 9 5 w a nted to reduce the sta nd ard
He argued that the t e establ ishment of the coinage price of
3 1 7 s 1 o1d an ounce w ould cause unnecessary hardship
and he urged that a new coin ag e price o f about 4 05 6 d
corres p ondi ng to the then market pri ce o f gold should be
adopt ed P eel following in the foots tep s of Locke roundly
declared that a depa rture from the long established legal
st andard
was a proposition which could be viewed in no
other light than as a fraud on the public creditor
Indeed it
would have been a mea n spirited course to go back o n the
century old standard o n account o f so triing a premium on
gold a premium w hich as it turned out the action of the
market w iped out in a few month s before any o f the provi
sions of the Act of 1 8 1 9 had come into operation
The next country to a dopt a gold standard w as the United
States As in the case of England the United States passed
from silver to gold in the rst place no t by a denite act of
pol icy but by an accidental over valuation o f gold As in the
case o f E ngland too the currency history o f the Unite d State s
was varied during the tra nsitiona l period w ith excursions into
1 T e
h so ver ei gn of 2 0 5 w as r s t coi n ed b y H enry V I I i n 1 489 of the old
all oy )
Th e so er ei gn s of Hen ry V III and Queen El iz abeth
s tandar d (on ly
were of C ro wn go ld {1; ne l i ke th e m od ern sover ei gn
,

TH E GOLD STA N DARD

30 5

the rea l m of paper currency The Americans may even be

said to h ave invented paper money Some o f the Colonies
had indulged in it before John L aw embodied a forced currency

in his system and by I 7 6 3 at the end of the long conict

between Englan d and France fo r supremacy in the North
American Continent s o grea t had been the abuse o f legal
tender notes that the Im perial Parl iament by an act o f
paternal leg islation in the spirit o f the o l d coloni a l system ,
forbade further issues
At that time the unit of value in
America w as practically silver in the form espec ially o f th e
Spanish dollar Far the greater part o f the w orld s supply o f
silver came from the mines o f Spanish America It w as
coined o n the spot at a number o f loca l mints for it is c o n
veni ent to trans form the precious metals into coin o f known
wei ght and nenes s at the ea rl iest stage after extraction in
order that even when bought as commo d ities the quantity
and value can be readily and certainly estimated
The su p ply o f the p recious metals naturally came to N orth
America direct from the Mexican or Peruvian mines and as
gold was over valued in Spain and Portugal as com p ared with
silver ( the ratio in bo th countries be ing 1 6 to 1 ) it w as silver
rath er than gold that came and the silver S p anish dollar held
the eld as the sta ndard o f value and the medi um o f exchange
in 1 7 7 5 when the War o f I ndependence broke out The
rebel Col onies were ill equippe d to stand the strain o f w ar
nan ce There was no adequate machinery o f taxation and
so desperate a cause did not command the condence o f
lenders at any rate befo re Saratoga Indivi dually and col
lect ively the Colonies resorted to the expedient o f paper money
with which they were already familiar In their collective
capacity they were represented by an Assembly of delegates
called the Continen tal Congres s and the paper i ssues authorised
rival
by this body to the p rep osterous total of
the ill starred fame o f the French assignats under the name of
Continental Currency Depreciation began in 1 7 7 7 By 1 7 8 0
the paper dollar had sunk to 115 of its value in silver In that
l
The success of the
year the system was brought to an end
Americans had brought th e help of France Spain and Holland ,
.

"

20

306

C URR E NC Y AN D C REDIT

both military and nancial Congress took advantage of the 5

consequent i mprovement of its credit to make an issue o f 5 per
cent ve year notes or bonds to be subscribed for in the ?
d epreciate d paper money which was taken at not more than
of i ts value and when received was destroyed A large
port ion o f the paper money still remained unredeemed but
from 1 7 8 1 it cea sed to be used as a medium of payment at all
Having become almost valueless much o f it was not even
thought worth p reserving and when in 1 7 90 the remainder o ut
standing was accepted i n subscription for stock at T3,, o f the
nominal value only
out of
estimated
to be in existence came to light P resumably the balance of
1
had been destroyed as worthless
From time to
time Congress had issued internal l oans , which had been sub
scribed i n paper To repay $1 000 in silver to a man who had
subscribed $1 000 in paper when that sum was the equivalent
of only $2 5 in silver would have been as extravagant as to
re p ay $1 000 in this depreciated pa p er to the lender of $1 000
in silver would have been dishonest Liability was acknow
ledged in respect of the successive loans accordi ng to a scale
measuring the actual depreciation of the paper in the market
at the date o f each loan
Thus the new community lived down its debauch of paper
money and reverted to the dollar of Spanish America When
a national coinage came to be initiated it was based o n a new
silver dollar very nearly equivalent to the old Gold w as also
to be coined at a ratio o f 1 5 to 1 but as the value of gol d
in Europe was rising just then and France adhered to the
ratio o f 1 5 % to 1 this was an under valuation and gold did
not circulate in America
In 1 8 34 the currency having been co mposed exclusively
o f silver ever since the introduction o f the new coinage it was
decided to raise the ratio in order to attract gold It w as not
apparently intended to drive out silver altogether but in fact
the ratio adopted the Spanish and Portuguese ratio o f 1 6 to
1 was as much too high as the o l d ratio had been too low
The result was that gold steadily took the place o f silver and
Fi nanci al H i stor y of th e U ni ted S tates D R D ew e y secti on 1 6
.

'

TH E

G OLD STAN DARD

307

silver was rel egated to a subordinate position just as it had

been in England in the eighteenth century By 1 8 5 3 the loss
o f silver h ad become inconvenient and subsidiary silver coins
o f in ferior neness were coined o n the model o f the English
system
The period from 1 8 4 8 to 1 8 7 1 was o ne O f stri fe and change
in Europe and America Revol ution s and wars left behind
their usual legacy o f forced paper currencies The year 1 8 7 1
found Germany an Empire France a Republic Italy united
the United States saved from secession and slavery Austria
and H ungary reconciled in a Dual Monarchy France Italy
Austria H ungary Russia and the United States had all been
compelled by the stress o f war to resort to issues of i n co nvert
ible paper In France the notes o f the Bank O f France though
inconvertible were no t material ly depreciated I n all the
other countries named the p aper money was at a discount
England had a go ld standard Fran ce and the members o f the
Latin Union had bimetalli sm based o n the ratio o f 1 5 % to I
( though o f course both metal s h ad been driven o ut o f Italy by
the depreciated paper) and Germany Holland Scandinavia
and practically all Asia had a silver standard
In the period since the gold discoveries which w ere made
in about 1 8 5 0 in California and Australia France and her bi
metallic associates O f the Latin Union had be en steadily ah
sorbing gold and exporting silver and in 1 8 6 5 as has already
been mentioned it bec ame necessary to insti tute a subsidiary
silver coinage below the stand ard neness It seemed as if
Franc e would soon be as much a gold using count ry as Eng
land and the United States and the Government of the newly
co nstituted German Em pire feared that the continuance o f the
silver standard would place their people at a disadvantage in
commerce and international nance It was therefore decided
The pay
to adopt a monometallic gold standard in Germany
ment O f the French i ndemnity gave Germany for the moment
the advantages o f a cre d itor nation and the O p portunity was
taken to buy l arge quantities of gold in the world s markets
At rst the change o f standard did not apprecia bly a ffect
the value o f the G erman monetary unit As between the new
.

20

CURRENC Y AND CRE D IT

3 08

gold and the o l d silver coins the same ratio o f 1 5 5 had been
adopted as prevailed in France and till 1 8 7 3 the ratio in the
market d id not di ffer materially from this But in 1 8 7 2 N or
way Sweden and Denmark followed the German example
and adopted a gold standard embodied in the Scandinavian
Convention ( 1 8 th December
On the 2 1 5 t May 1 87 3
Holland suspende d the free coinage o f silver By that time
the increased demand for gold had begun to affect its price in
terms o f silver In 1 8 7 3 the ratio approached 1 6 in 1 8 7 4 it
exceeded that gure The new production of gold from the
mi n es had fallen o ff and the bimetallic countries had hastily
to limit and ultimately to suspend the free coinage o f silver
fo r fear o f being rapidly denuded o f their gold and le ft with a
silver standard There ensued an ever increasing divergence
of the ratio fro m the o l d gure o f
The various countries
which had p assed from a silver or bimetallic to a gold standard
fo r the most p art retained their o ld silver coins in circulation
as unlimited legal tender though except fo r subsidiary coins
they issued no new silver The ve franc and three mark
pieces became tokens of which the intrinsic value was below
and soon far below the nominal value It will be seen that
this very important change o f standard was e ffected without
any d i sconti nu i ty
Moreover unlike the mediaeval debase
ments it was a change from a lower to a higher unit of value
When the d i e rence in value did make its elf felt there fo l
lowed all the consequences o f an app reciation o f the standard,
fal ling prices depressed trade l ow prots unemployment
But the qu estions o f principle involved in a change of
standard were hardly raised in the case of the countries which
substituted gold fo r silver while on a metall ic basis To nd
these questions agitating the minds o f Governments we must
turn to the countries which in 1 8 7 1 were using inconvertible
paper and which were faced with the proble m o f a resu mption
o f specie payments
The United States had issued inconvertible notes (called
Greenbacks during the C ivi l War to an amount approach
ing the authorised maximum o f
I n the last year
o f the war this paper money had depreciated more than 5 0 per
,

TH E G O LD STANDARD

309

cent The restoration o f peace speedily raised its value but

even when peace was an accomplished fact the discount was
still so me 30 per c ent The rst measure taken to correct
this deprec iation was a red uction O f the quantity o f paper in
circulation This had been red uced to $3
by Feb
when pol itica l opposition brought the policy o f
ruary 1 8 6 8
contracti on to an end Various devices were then resorted to
with a view to mak in g resumption possible but none except
the gradual accumulation o f a stock of gol d was really put
into effective operation And s o long as the quantity of paper
in circulation was not reduced even the accumulation O f gold
would be o f l ittle use To restore the paper currency to par
the gold would have to be appl ied to redeeming s o much o f it
as was redundant ; that is to say to redu a ng the amount in
circulation The upshot was that practically no positive step
was taken to facilitate resumption The result seems at rst
sight rather surprising
In the rst months of peace the
gold value of 1 00 paper dollars was about 7 0
The aver
ages for the years 1 8 6 6 1 8 6 7 and 1 8 6 8 were 7 1 7 2 4 and
The contraction in three years from a circulation o f
7 16
to o n e o f 553
had apparently m ade no
visible impression upon the dep reciation B ut in the follow
ing year 1 8 69 an im provement made itsel f felt and by the end
o f the year T
he gold value had risen to 8 2 3 and the average
for 1 8 7 0 was 8 7 and fo r 1 8 7 1 8 9 5
There then succeeded
another pe riod o f stagnation and the average did not rise wel l
above 9 0 till the end of 1 8 7 6 from which time the paper
money rose rapidly to par and specie payments were actually
sresumed o n the I st January 1 8 7 9
What then is the explanation o f these vagaries ? Why
did the greenback remain obstinately depreciated when the
issue was cont racted and take two apparently capricious leaps
forward ( separated by another interval O f reaction ) when no
m ea sures were being taken to suppo rt it ? The answer is to
be found in the variations to which the value o f gold was
being itsel f subjected in consequence o f credit m ovements in
Europe The greenback w as making very satisfactory p ro
6
nd
i
h
8
ress
in
havin
reached
6
6
i
arc
66
M
1
n
n
a
8
7
7
,
g
g
.

CURRE NCY AND C RED IT

310

April when in M ay th e great crisis caused by the failure of

The e ffect o f the
O veren d and Gurney broke o u t i n London
crisis was hard ly felt in May and the greenback was still at
7 5 9 in that month b ut it fell to 6 7 2 in June and 6 6 in July
This illustrates the effect o f an external crisis on the ex
The value of gold in London was abruptly i n
ch an ge s
creased and the value o f pa per in New York in terms of gold
correspondingly d ecreased There followed a period of de
pressed trade and falling prices in E urope and the contraction
o f the paper currency in America did no more than keep the
greenback a p proximately to a xed proportion with gold
By 1 8 6 9 and still more in 1 8 7 0 the revival was beginning in
Europe It was stimulated rather than ret a rded by the
Franco Ger man War since the paper issues in Fr ance released
large quantities of gol d and silver for export The years
1 8 7 1 7 3 saw an unusually vigorous expansion of trade
As
nearly always happens this trade expansion was marked by
large movements of capital and capital owed especially to

wards the United States which was then the greatest o f new
countries In the four years 1 86 9 7 2 the railways o f the
United States were increased by no less than
miles
Since the C ivil War the foreign trade returns had shown an
e x cess of imports over exports which in view o f the heavy
annual l iability of the country for interest on capital previously
obtained from th e Old World impl ied that a very large
amount of fresh ca p ital was being im p orted This excess of
imports amounted for th e four years 1 8 6 9 7 2 to
or
a yea r while a fter this period an excess o f
exports was the al m ost invari a ble rule Here we have an i h
stance o f the stream o f investment from the old countries to
the n ew incre asing i n volume with the revival of trade and
al so o f the consequent fa voura ble tendency o f the foreign ex
ch anges i n the ne w countries The rise in the gold value of
the p ap er dollar from 7 4 at the end of 1 8 6 8 to 8 2 3 at the
end of 1 8 6 9 and 9 0 3 at the end of 1 8 7 0 was d ue to the com
bi ned e ect of the reviv a l of c r edit w hich reduced the value
o f gold in Europe and of the ow of fresh c a pital into the
Fro m the end of 1 8 7 0 ti ll the Cr i s i s of 1 8 7 3
United States
,

'

'

T H E GOLD STAN DARD

31 1

the value O f th e greenback rose but little It touched 9 1 5 at

the end o f 1 8 7 1 but fell a little in 1 8 7 2 and was as l o w as
8 5 in May 1 8 7 3
The explanation is that the credit ex p an
sion in Europe was fol lowed by a credit expansion in the
United States and the greenback fell in value as quickly as
gold Moreover though the importation o f capital tends to
make the exchanges favourable this tendency does not outlast
the actual p rocess o f i m portation The inux o f European
capital might be enough to bring the value o f the greenback
up to 9 9 in 1 8 7 0 in order to keep it at 90 the inux must
continue unabated ; in order to raise it above 9 0 the inux
must grow actual ly greater In 1 8 7 1 aud 1 8 7 2 if the impor
tati on of capital in creased at all the effect was O ffset by the
growing ination in the United States itself and the value o f
1 the greenback be an to decline
g
In 1 8 7 3 a new development occurred In 1 8 7 0 and 1 8 7 1
the expansion of credi t had been stimulated by the release o f
gold from France In 1 8 7 2 and 1 8 7 3 it began to be checked
by the absorption o f gold into Germany The German gold
standard law w as passed in 1 8 7 1 and the coin age of gold
began in 1 8 7 2 The gold coined in 1 8 7 2 amounted to 4 2 1 %
million m arks and in 1 8 7 3 to 5 94 millions The withdrawal
o f about
of gold from other countries necessari ly
started a contraction o f credit Even in N ovember 1 8 7 2
the bank rate i n London rose fo r a time to Z pe r cent Early
in 1 8 7 3 Germany sto p ped buying gold ( the he avy coinage in
that year being largely from gold already bough t) But trade
and prices had already turned the corner The rst danger
point arose in Austria H ungary
Austria H ungary had
emerged in 1 8 6 7 from a disastrous period o f twenty years
marked by a bitter civil war and t wo unsuccessful foreign w ars
The I talian and H ungarian questions had been settled for at
l east a generation and there was at last a prospect o f tranquil
economic development H ere w as an enticing O pportunity
for German speculators just at a time when Germ an cred it
was being abnormally stimulated by the indemnity p ayments
From the point of vie w of railway construction Austria Hun
1 8 0 the whol e
n ew
ary
C ountry
In
w as al most a
7
g
'

C URRE N CY AN D CRED IT

312

mil eage was only 5 8 7 5

In 1 8 7 3 it had risen to
so
that 5 1 8 5 miles had been added in three years Like the
United States Austria H ungary normally ex p ort ed more
goods than she im p orted Yet for the ve years 1 8 7 0 7 4
there w as an aggregate excess of im p o rts o f 6 1 9 million
Speculation in Germany itself
o ri ns o r about
h ad been controlled and the contraction o f credit had less
e ffect than might have been ex pected in Berl in but there was
an acute crisis in Vienna The effect of an exter na l crisis i s
seen in the fal l of the greenback to 8 5 in A p ril 1 8 7 3 Next
the contraction of credit reacted o n the United States them
selves The fal l of values ( S auerbeck s index number measur
ing prices in England fell from 1 1 1 in 1 8 7 3 to 1 02 in 1 8 7 4)
combined with the sudden subsidence of the stream of ca p ital
which had owed from E urope to America led to a violent
crisis in Sep tember and October 1 8 7 3 There were numerous
failures and a general susp ensi o n of payments even i n paper
by the banks Legal tender notes fo r a time commanded a
premium over certied cheques of from i to 3 p er cent In
the rise of the greenback from 8 6 7 in August to 9 1 8 in
October we have an exam ple o f the effect of an i nter na l crisis
on the value o f the monetary unit To meet the urgent
needs of the banks fo r legal tender money the issue of green
backs w as increased by
to
Partly
as a result o f this me asure p a rtly as a result of the p rogressive
contraction o f credit and fall O f gold prices in Europe the
greenback after rem a ining at 9 0 in 1 8 7 4 fell a way in 1 8 7 5
( touching 8 5 4 in June) I n 1 8 7 6 and 1 8 7 7 the issue of
greenbacks was reduced again to about $3
and the
natural economic expansion of a new country ste adily raised
the val ue o f the notes There w a s a good ha rv est in 1 8 7 7
an d a still better i n 1 8 7 8 and a very large ex p o r t of wheat
hel ped on the steady progress to w ards resum ption
The
greenback was at 8 9 2 on the I st J uly 1 8 7 6 9 3 46 on the
I st January 1 8 7 7
9 4 5 on the I s t July 1 8 7 7 and 9 7 2 at
the end of 1 8 7 7
In the course of 1 8 7 8 it reached p ar
The history of the greenback s u pplies an interesting
arallel
in
some res ects to that of the Ban k o f En land note
p
g
p
.

'

'

T H E G O LD STANDARD

3I 3

in the period 1 8 1 5 2 I
In both cases there is an easy but
deceptive appreciation which really only reects a credit ex
pans i on in th e gold using countries ; a reaction caused in the
rst instance by the contagion of the credit expansion and
then intensied by the outbreak o f a crisis abroad a crisis at
home precipitated by the fall o f prices ; and nally a rise of
the note to par facilitated by a relie f o f the stringency abroad
The extreme difculty in restoring the value o f a depreciated
currency at one time and the ease with which this can be
done at anothe r are explained by the changes in the value o f
gold The period s o f depression in 1 8 1 5 an d 1 8 1 8 1 9 in
1 8 6 6 6 8 and 1 8 7 4 7 6 were very unfavourable the periods of
expansion in 1 8 1 6 1 8 1 8 1 9 2 0 1 8 6 9 7 3 were very favourable
to a paper currency It must be admitted that the rise of the
gree nback in the years 1 8 7 7 7 9 when Europe w as still in a
state o f depression calls fo r some further explanation But
the causes mentioned a bo ve the contraction of the currency
the natural growth o f business i n a new country and the ex
cepti o nally productive harvests probably supply a s u i c i e n t
explanation The two periods I 8 6 9 7 2 and 1 8 7 6 7 9 were both
favourable to the appreciation o f the greenback no tw i th
standing that the rst was marked by an exceptio na l excess
o f imports and the second by an exceptional excess of exports
1 8 7 2 the imports everage d 5 3 2 and the exports
of dollars ; from 1 8 7 6 to 1 8 7 9 the imports
and the exports 6 7 8 mill ions N o more striking
d be desired o f the danger o f leapi ng to a co n
the bare fact o f a
favourable
or unfavour
able balance o f trade If the un favourable balance is due to

an inux o f foreign cap i tal it ha s as favourable an e ffect

o u the foreign ex
changes as the favourable balance due to an
exceptionally large volume o f production
In one important respect the position o f the United States
after the Civi l War differed from that o f England after the
Napoleonic wars. The B ritish debt was a sterli ng debt ; th e
liabilities were payable in whatever medium might be legally
recognised fo r the payment o f debts in England whether gold
or pa per
The United S tates deb t was a gol d d ebt and
-

'

CURRENCY AN D C REDIT

314

though this view did not pass unchallenged it was soon

adopted beyond dispute Consequently n o change in the ?
monetary standard would of itsel f have affected the good faith
o f the nation as a debtor
The return to specie payments in 1 8 7 9 did no t nally
settle the standard During the prolonged r gime o f i ncon
vertible paper the Americans had made the very dangerous
discovery that an expanding currency makes fo r active trade
high prots and good employment I t was largely due to the
prevalence o f i n ati o ni s t views that the Government note
issue was not contracted and that the resumption o f cash
payments was no t consummated till the natural growth o f
business had absorbe d the redundant paper And even before
this had actually occurred a new question had been raised by
the i n ati o ni s t party The rapid displacement o f silver by
gold in Germany in 1 8 7 2 and 1 8 7 3 had led all European
countries where silver was in circulation as the metallic
standard either in conjunction with gold o r alone to defend
themselves against the ood o f redundant silver by suspending
the free coinage of silver This general demone tisation of
silver had completely upset the time honoured ratio o f
The ratio was rising rapidly and in 1 8 7 8 had reached 1 8
The American i nati o ni s ts discovered that the United States
had almost by accident participated in the general movement
I n 1 8 7 3 an inconspicuous Coinage Act had quietly dropped the
silv er doll ar out of the list o f standard coins In fact the
transition from a nominally bimetall ic but practically a gold
standard to a legal gold standard had been effected in the
United States j ust as it had in England in 1 8 1 6 at a time
when the general use of paper money made coinage legislation
for the moment o f academ ic interest only
I n the United States the i n ati o ni s ts who favoured a
lowering o f the standard o f value on its merits were soon in
alliance with the silver interests For the production o f silver
is itsel f an important American industry The silver doll ar
w as restored to its po s ition o f unlimited legal tender but
instead of the free coinage o f silver at the ratio o f 1 6 to I a
li mited monthly coina ge o f si lver was provided for Every
.

TH E

month

m of

G O L D STA NDARD

31 5

more th an
and no t less tha n
was to be spen t o n the pu rchas e o f silve r for
coinage into dollars At the then price o f silver
worth would be coined into about
standard dollars
and the minimum a mount o f coinage provided fo r was th u s
abou t
a year
Thi s was a very considerable
annual add ition to th e circulation
The whole currency o f
the coun try consisted o f $3
o f greenbacks and
o f Nati onal B ank notes together with a mode r ate
amount o f gold whi ch had remained in ci rculati on ( in deance
An annual addition
of Gresham s l aw) in the extreme West
to this total might eas ily th reaten the gold
of
standard As it turned o u t however the silver coinage was
for some years ab s orb ed wi t hout di ffi culty
The yea r 1 8 7 9
saw the turning point in trade There was a sharp rise o f
prices in the latter part o f that year which continued in 1 8 8 0
Credit expanded an d the U nited State s n o w on a gold basis
participated in the world movement The importation o f
foreign capital reviv ed and notwithstanding the continuance
the excess o f exports began to diminish
o f good harvests
( though even at the height o f the movement in 1 8 8 2 there
was not an actual excess o f i m ports such as marked th e period
before
The tendency which in 1 8 7 0 had expended
itsel f in raising the value o f the pape r currency no w req uired
a great addition to the metallic currency The statutory silver
!coinage was q uite insu f cient and l arge importations o f gold
became
necessa
ry amounting in th e two years 1 8 7 9 8 0 and
!

although o f course the United States

1 88 0 8 1 to $1 7
lwe s o ne o f the grea t gold producing countries o f the world
In 1 8 8 2 with the French c ri sis in January came the reaction
in Europe and the stream o f gold stopped The next few
years wer e a pe riod o f severe depression C redit con tracted
pr ices fell and unemployment was ri fe The United States
curren cy was saved however from the great strain which this
state o f a ffai rs might have been expected to place upon it by
the steady contraction o f the N ational B ank note circulation
The note issue o f the Nation al Banks had to be secu red by
United States bonds The bonds were being steadily red eeme d
su

no t

CURREN C Y AN D C RED IT

3 16

surpl us revenue and as this process went o n and the

price o f the bonds rose the prots o f issue dim inished and the
note issue was steadily contracted In July 1 8 8 3 it amounted
f
o r several years
to
having
altered
but
little
)
(
In the seven years to 1 8 9 0 it diminished to
w as spread very evenly
The total decrease o f
over the whole period In the same period of seven years the
s o that
coinage of silver dollars amounted to
the net addition to the curren cy under these two heads was
the very moderate amount o f
and even this was
set o ff by an accumulation of a gold reserve o ut of surplus
revenue in the Trea s ury
In fact during the years o f
depression 1 8 8 2 8 6 the uncovered silver and paper money
actually diminished and the currency requirements o f a grow
ing community ( notwithstanding the depression ) necessitated
the retention in the country o f nearly all the output of gold from
the mines the net exports being triing The beginning of
a revival o f trade came in about 1 8 8 7
O n this occasion it
As in the years
w as the New World which led the way
1 8 6 9 7 2 and 1 8 7 9 8 2 there was again a great spurt o f railway
construction in the United States but this began in 1 886
be fore trade in Europe had begun to revive I mports into the
United States practically eq ualled exports in 1 8 8 7 and ex
in 1 8 8 8 while the excess of
ceed e d them by
exports was small in 1 8 8 9 and 1 8 9 0 B ut the great imports
o f gold which marked the years 1 8 7 9 8 2 were n o t repeated
Though the imports in the two years 1 8 8 6 8 7 and 1 8 8 7 8 8
amounted to
nearly all o f this w as exported in
the two following years This lo ss o f gold was a sure sign
that the expansion of credi t in the United States was out
stripping the expansion ln the go l d using world generally
As the United States was importing capital o n a large scale
we may infer that the excess expansion was very considerable
The rst check to the world expansion arose a t the other
end of the New World A perfe ct orgy o f speculative invest
ments had been taking place in the Argentine Republic Here
l ikewise the balance o f foreign trade may be taken as a test
For some years u p to 1 8 8 0 th ere h ad been a moderate excess
ou t o f

'

T H E G O LD STAN DA RD
of

3 17

exports over im ports In the ve years 1 8 8 1 8 5 imports

averaged
and expo rts
In the ve
yea rs 1 8 8 6 9 0 the aver age imports had grown to
and exports to
The annual excess o f imports
amounting to no less than
is clear evidence o f
the large i mportations of capital especially when acco unt is
taken o f the al re ady heavy l iabilities o f the country for
interest o n existing foreign capital and fo r shipping freights
etc I n 1 8 90 the whole structure o f Argentine nance co l
laps ed i n a welter o f corruption and civil disorder
The
catastrophe involved the great British accepting house o f
Bari ng B rothers which had underwritten important Argen
tine issues I n November 1 8 9 0 it was learnt that Earings
I f all the bills drawn upon
was about to suspend payment
Earings bec ame waste paper it was feared that the nancial
system o f the C ity of London would be i nvolved in i rretri ev
able ruin The principal London banks ag reed with the Bank
o f England to guarantee the payment o f B aring Brothers
liabilities and as no o ne bank assumed a greater burden o n
1
account o f the gu arantee than it could certainly bear all dan
ger o f panic was averted But th e magic o f the trade e x p an
sion was gone Notwithstanding that the gold reserve o f the
Bank o f England was n ever subjected to any real strain ( the
precautionary i mpo rtatio n o f
from the Bank o f
France proved to be q uite s up er uo us) it was c l ear that there
was no room fo r fu rther expansion and thenceforward a tight
hand was kept upon c redit
But th e check t o credit did not extend to the United States
The year 1 8 90 saw t wo measures which tended to prolong the
expansion in that country even a fter it had ceased elsewhere
The tari ff was inc reased and made more protective and the
monthly purchases o f silver were increased from
wo rth (o r about
at the then price o f silver) to
oz s
against which there were to be issued a new
oz s
series o f treasury notes A n increased protective tari ff makes
the exchanges favourable It checks imports and leaves a
-

'

In th e
l ost not i ng

end

th e assets

more than

covere

the

liabi li ti es and th e guarantors

CURREN CY AN D CRED IT

318

balance of exports to be paid fo r Where there is a gold

standard gold will be imported till the level o f prices has been
raised to such a point that su fcient additional imports have
bee n attracted o r goods have been diverted from export to
redress the disparity And on the to p o f the tari ff came in
1 89 1
far the greatest wheat ha rvest that the United States
had ever known 6 1 2 millions of bushels being produced as
compared with the previous highest o f 5 1 3 millions in 1 8 8 4
and 5 04 millions in 1 8 8 2 This coincided with a year o f
scarcity and high wheat prices in Europe and in the year to
in to the value o f
was ex
3oth June 1 8 9 2 gra
ported as compared with an average o f
in the
ve preceding years
B ut fo r all that the coincidence o f a credit expansion i n
the Uni ted States articially s ustained by the increased pur
chases o f silver with a contraction in Europe caused a gr owing
ei ux o f gold
The export in the year 1 8 9 0 9 1 was
I n 1 8 9 1 9 2 as a result perhaps o f the harvest and the tari ff
the export stopped but in the fo llowi ng year 1 8 9 2 9 3 it was
no less than
Such a state o f things could not
continue long The addition to the supply o f gold in Europe
helped t o delay the credit contraction and the prices o f co m
mo d i ti e s showed no decline in 1 8 9 1 fo r though materials had
begun to fall most articles o f food rose B ut i n 1 8 9 2 came a
fall o f 5 per cent ( as measured by English prices )
If the
U nited States held aloof and re fused to contract credit, the
export of gold was bound to grow greater with the progressive
divergence between American and European pri ces Matters
came to a head in June 1 8 9 3 when there burst o ut o ne o f the
severest nancial c rises in the history even o f American credit
Even in M arch there had been a pre m onitory stringency and
the interest o n call money had momentarily risen to 5 0 per
cent O n the 2 9 th June it rose to 7 3 per cent o n the I st
1
July to 1 40 per cent
As has happened in other crises in the
United States the N ation al Banks, bound by statute to main
tain reserves equal to a certain proportion o f their deposits
Le a com mi ss i on o f
and g p er cent per di em
pl us i nterest at 5 per
.

cen t per annum

.

TH E

G O LD STAN DARD

319

used to pay o ut legal tende r money They tho ught it safer

to break thei r en gagements with their depo sitors than t o
transgress this legal r eq uirement o r whe re a b reach o f it could
t o increase the amount o f the decien cy
not be avoid ed
There was a general suspe nsion o f cash payments throughout
the country except at Chicago alone I n the sudden dearth
o f legal tend er money so me Eastern factories paid their hands

in ch eq ues The evil to be cured was two fold Credit had

to be contracted to th e Europe an level
the steady inatio n
of the leg al tender currency by the issue o f treasury notes
ag ainst the purchases o f silver had to be stopped The con
traction o f cre d it was effected by the crisis itsel f There we re
mul titudes o f bank fail ures and a violent contraction o f i n l
d ustry and o f all branches o f business
The expo rt o f gol d
was for the moment reversed and in the second hal f o f 1 8 9 3
over
was i mported The Act req uiring the pur
chase oi silver was ha st ily repealed
But nevertheless the gold standard was not even then
bey ond danger
It was threatened both politically and
economical ly The silver party was still active more active
indeed than ever The price o f silver had been raised in 1 8 90
( partly by th e increased purchases o f silver and partly by the
gen eral rise o f gold prices) from 4 2 d an ounce to more than
In 1 89 2 it had fallen belo w 4 0d The crisis o f 1 8 9 3
sod
and the repeal of the Silver Act brought it down to 3 4d In
At the same time there was an intense
1 8 94 it fell to 2 8 d
dep res sion o f trade in both Europe an d America Just when
th e silve r p roducing inter ests were bei ng subjected t o such
l
lheavy losses the i nati o ni sts could point to the dire results
bf a cont racted currency
At the same tim e the greatest di fculty was experienced
in maintaining the gold standard at all The silver purchases
had ce ased but the fal l o f gol d prices in Europe continued
till 1 8 96 and in spite o f the e ffect s o f the c r isis the co ntrac
ti on o f cred it in the United States was soon found to be i n
suf cient to keep pace wi th it The export o f gold reco m
menced and for the two yea r s 1 8 9 4 and 1 8 9 5 amounted to
N o central control o f credit
no less th an

ref

CURRENCY A ND CRED IT

32 0

existed and the only way in which a more rapid contraction of

credit could be enforced was by restricting the supply o f legal
tender money The Government proceeded to r aise gold by
borrowing but the gold w as let o ut as quickly as it was bo r
rowed and the circulation o f paper money was n ot reduced
In 1 8 96 there was a P residential Election The Democratic
candidate Mr Bryan stood fo r the un q ualied free coinage
of silver The price o f silver being then 3 o d the value o f a
silver dollar w as a little over 5 0 cents Had Mr Bryan won
the election and restored the free coinage o f s ilver the change
in the standard o f val ue would have been prodigious even if
every allowance be made for the consequent changes in the
values of gold and silver He and his party were decisively
de feated and the gold standard was secured Trade was
already reviving The vast supplies o f gold ac q uired by the
great E uropean banks o f i ssue since 1 8 9 3 were at last begin E
ning to take effect in a new expansion o f credit and a new
activity o f business In 1 8 96 thc export o f gold stopped and f

notwithstanding a l arge i ncrease in the output of the American

mines the imports of the three years 1 8 9 6 9 7 to 1 89 8 99
amounted to no less than
I n 1 9 00 an Act
w as passed denitely establ ishing the gold standard c
It i s as true of the history of the silv er q uestion as o f the
histo ry o f the greenbacks that it cannot be fully understood
without taking into account the variations in the international
value o f gold The S ilver Act o f 1 8 7 8 came at the beginning
of a period o f trade activity which enabled the country to
absorb the monthly quota of silver without di fculty and re
quired large imports o f gold to supplement it During the
depression which followed the fortuitous contraction o f the
National Bank note circulation made room for the silver It
w as only when the ensuing spell o f good trade culminated in
the belated crisis of 1 8 9 3 that the strain o f the redundant silver
began really to be felt J ust when the loss o f gold was be
ginni ng to be serious t rade turned the co rner In 1 8 96 world
prices began to rise o r in other words gol d became cheaper
and the gold standard was saved just at the moment when
the pol itical opposition to it was decisively de feated
,

C H A P TER

X IX

TH E G O L D S T N D R D

( C onti nued )

EN GL A N D a fter the B ank restriction and the United States

after the Civil War both returned to a gold standard which
had been substantially in operati on before the issue of i rre
d eem ab l e paper had begun
In both co untries there was in a
sense a change o f standard because both gave legislat ive
recognition to th e gold standard during the paper r gime
Those countries o f Europe which were i n 1 8 7 2 and 1 8 7 3 in
the enjoyment o f a metallic currency whether b i metallic or
silver and which followed the l ead o f Germany in suspending
the free coinage of silver and passing to a gold standard pre
served the continuity th ough not the identity o f their unit of
value
But there were some countries which either because they
were using irredeemable paper at the critical period o r for
other reasons delayed m aking the transition from a silver to
a gold standard un til the o ld stability of the ratio between
the two metals had van ished
These were faced with the
problem o f selecting a new metallic standard Many ex
amples might be cited but as it is no part o f my purpose to
write a universa l history o f currency I will conne myself to
describing three only o f the most important namely Austria
H ungary Russia and India
Au s tria H ungary nominally had a silver standard but in
fact had been battling against currency d i i c u l ti es since 1 8 4 8
Her experience o f inconvertible paper dated back to the
Napoleonic wars The war o f 1 8 09 esp ecially exposed her
to a greater nancial strain than she could bear and in 1 8 1 I
an atte mpt was made to restor e order by making a new issue
o f paper to redeem the old at n o more than o ne fth o f its face
valu G overnment obl i gti ons in curred si nc e the beginni ng
.

32,

21

CURREN CY AND C REDIT

32 2

were discharged o n a sliding scale according to the

metallic value of the paper o ri n at the time each debt
was contracted ( as was done with the Continental Currency
and fo r private debts with the
o f the United States in 1
assignats in
But in 1 8 1 3 the country w as again
drawn into the war and new issues became necessary
Heavy depreciation followed In 1 8 1 5 during the Hundred
Days 1 00 ori ms i n silver were worth more than 400 in paper
In 1 8 1 6 the Austrian N ation al Bank w as founded mainly
with a view to the withdrawal of these depreciated notes A
co mpl icated scheme was set o n foot for giving the holders
partly silver and partly interest beari ng securities the whole
But the
t o the value of about 40 per cent of the face value
notes had no t risen in the market to that level and it was
found that the resources of the bank were not su fcient to
carry the scheme through Redemption was suspended in
August 1 8 1 6 after a seven weeks trial
Silver was then obtained by means o f foreign loans and
after an interval of preparation the B ank found itsel f able to
redeem notes regularly at 40 per cent of face val ue though it
w as still unwilling to assume a legal obligation to d o s o
Thus a man with 1 00 o r i n s in 1 8 1 1 would have received
in exchange 2 0 o r i n s o f the new issue o f that year and fo r
his 2 0 o ri n s he would have received in 1 8 2 0 cash to the
value o f about 8 o ri ns A drastic change o f standard i n
deed ! But it had the advantage that a metallic standard
was actually restored and remained in operation till the
revol utionary movement in 1 8 4 8 That movement develop
ing as it did into a war between Austria and H ungary put a
severe strain o n Austrian nance Inconvertible paper was
again resorted to and fo r the next twenty years a succession
o f attempts to get rid of it were brought to nothing by wars or
preparations fo r war In 1 8 5 4 5 5 came the Crimean War in
which A ustria Hungary though not actually a combatant
had important interests at stake and w as bound to stand by
armed The premium on silver rose at one moment to 40
per cent With peace it subsid ed and the c urrency was
actually a t par when there followed the disast rou s war in Italy
o f 1 8 09

'

TH E G O LD STANDARD

323

against N apoleon II I and the premium rose as high as be fore

In 1 8 6 4 came the joint intervention with P russia against
Denmark and in 1 8 6 6 the war against P russia and also
the O veren d
G urney crisis in E ngland The premium
on silver o r i ns which had been reduced in February 1 8 6 6 to
There
5 per cent rose in the same year to 30 per cent
followed a period o f recuperation during which however the
paper money ( like the American gr eenbacks) did n o t at rst
improve very substantially in val ue In the rst year of peace
indee d the premium fell to 2 3 9 5 and in 1 8 6 8 to 1 4 4 3 but
in the th ree years 1 8 6 9 7 1 it averaged 2 1 per cent It was
only in 1 8 7 2 ( much later than in the United States ) that the
recove ry became real ly marked and in 1 8 7 3 the crisis occurred
As in the United States later in the same year the crisis had
little effect o n the value o f th e currency Th e extreme
stringency characteristic o f a crisis which might have raised
the paper o ri n to par w as staved o ff by a relaxation of the
The National Bank had
reg ulations governing the note issue
been subjected since 1 8 6 3 to the same system o f a xed
duciary i ss ue as had been applied to the Bank o f England
by the Act o f 1 8 44 the xed issue being
o ri ns
and any excess over this sum having to be covered by silver
( or gold ) The extension of th e note issue combined with
the interruption o f the importation o f foreign capita l prevented
any considerable appreciation o f the currency and for two or
three years the exchange o n London remained at about 1 1 1
I n 1 87 6
o ri n s to 1 0 as compared with a par o f 1 02 1 5
and 1 87 7 however the growing depression o f gold prices co m
bi ned with the threat o f war in the B alkan P eninsula caused
a renewed depreciation and in the latter year the exchange
averaged 1 2 2 1 7
Fo r Austria Hungary as fo r the United
States the revival o f trade in 1 8 7 9 brought an appreciation o f
the cu rrency and the exchange fel l to 1
This was still
But the excha nge o n London
far from th e former par value
measured the val ue of th e ori n in g ol d whereas the ori n still
nominally meant 3% of a kilogramme of pure s i l ver In 1 8 7 9
the ave rage price of silver was 5 1 1d an ounce and at this price
o r i ns
the silver in a fl o rin was worth 1 9 7 9d s o that
.

'

21

CU RR E N CY AN D C REDIT

32 4

would be equal to 1 0 In fact the o ri n as a monetary unit

was already worth more than the silver it c ontai ned and the
metallic value of the currency was resto red If the coi nage
la ws remained unchan ged and silver cou ld be co ined without
limit into or i ns on application at the Mint silver would
i mmediately become the standa rd o f value in fadt as wel l as
in theory a s it had been from 1 8 20 to 1 8 4 8 But the l i nk
which had formerly connected the values o f silver and gold
had been broken To restore the silver standard would have
been to abandon all stability in the exchanges with the gold
using countries which included nearly all the most i mportant
trading nations o f the world outside Asia It was decided to
close the Mints to silver with a view to the eventual ad o ption
of a gold standard Even before the introduction o f the gold
standard into Germany and the consequent collapse of bi metal
l i s m the intention had been formed o f adoptin g a gold standard
in Austria Hungary Gold pieces of 8 and 4 o ri ns equi va
lent to 2 0 and I O francs were coined in 1 8 7 0 and at the
same time the National Bank began to accumulate a reserve
of gold and foreig n bills It was natural therefore that in
the Mints were
1 8 7 9 when the decision had to be taken
closed to silver
The result was that fo r thir teen years
the monetary unit w as a paper o ri n with no denite metal
value It had been cut adrift from the o ld silver unit and
the corresponding gold unit at the o l d ratio of 1 5 } (which
would have made the o r i n exactly equal to tw o German
marks) had never been expressly adopted The period of good
trade and relatively h i gh gold prices which began in 1 8 7 9
lasted till 1 8 8 2
In that year a nancial crisis in P aris
heralded the reaction and the V ienna ex cha nge o n London
which for three years had averaged between 1 1 7 and 1 1 8 rose
to 1 1 9 6
It rose steadily till the depreciation o f the ori n
reached a maximum in 1 8 8 7 when
o ri ns were equal
to 1 0 and still followi ng the course o f trade and o f gold
prices the exchange then fell again to 1 2 4 2 2 in 1 8 8 8 1 1 9 5 5
in 1 8 8 9 1 1 6 0 5 in 1 8 9 0 and 1 1 6 8 0 in 1 89 1
S o steady an
appreciation of the o r i n seemed to p ro mi se an oppor tunity for
x i ng its gold Value and introdu ci ng a gold st and ard as a
.

'

'

'

TH E G OL D S TAN DAR D

32 5

pe rmanency I t was too m uch to hope that the old par o f

exchange o f 1 02 1 5 wo uld be reached within any reason able
time but it seemed sa fe to adopt a value correspon d ing to the
average exch ange over a series o f years A value which
worked ou t at 1 2 0 0 8 7 was decided on The new gold unit
was to be the crown which w as to pa ss fo r hal f a ori n and
a kilogr am me o f ne gold w a s to be coined into 3 2 8 0 o f these
crowns This made th e par o f exchange o n London
c rowns to 1 and o n Berlin 8 5 0 06 1 mark s to 1 00 crowns
The legislation providing fo r the new coinage was passed i n
The date xed fo r the denitive introduction of the
1 8 92
gold standard was the I st January 1 9 00 and in the interval
steps were to be taken to withdraw all the Governme n t legal
tender notes and to replace them so far as req uired with silver
subsidia ry coin and fo r the rest with notes o f the Austro
Hungarian Bank b ased o n gold The Government took steps
to obta in gold by means o f foreign loans
B ut the rst few
years of the preparatory period were disappointing Indeed
The ex
th e year 1 8 9 2 was an un fortunate o ne to choose
pan s i ve movement which had been the true cause o f the
steady appreciation o f the ori n between 1 8 8 7 and 1 8 9 0 had
al ready passed its z eni th in Europe although it had gained a
fu rther lease o f li fe fo r a year o r tw o in the United Sta tes
owing to the combi na tion o f an increase o f the tari ff a
sp lend i d harves t and an ination o f the currency through the
silver purchases G old prices as measured by S auerbeck s
index number were ve per cent lower in 1 8 9 2 than in 1 8 9 1
U nemployment in the English t rade unions rose from
per
in 1 8 9 2 V ienna ex
cent in 1 8 9 0 to 3 5 in 1 8 9 1 and
chan ge o n London rose om inously from 1 1 6 8 0 in 1 8 9 1 to
I 1 9 2 9 in 1 8 9 2 and by the end o f the year was slightly above
In 1 8 93 the exchange grew more un favourable
the new par
and a fter the crisis in the United States rose to a premium of
more th an 5 per cent F or the year 1 8 9 3 the premium on
ster ling averaged
per cent and fo r the following year o ne
o f extreme depression and very lo w prices it averaged 3 8 per
cen t Th ere was a recove ry in 1 8 9 5 but it was no t ti ll 1 8 96
the same y e ar that saw the end o f the currency di fc ulti es i n
.

3 26

CURRENC Y AN D CREDIT

the United States that the premium w as wiped out Thence

forward thanks to the period of prosperity and rising prices
which prevailed in the gold using world the establ ishment o f
the gold standard w as pl ain sailing Gold prices rose in the
four years 1 8 9 6 1 9 00 by about 2 5 per cent The same
causes which had brought down the exchange from 1 2 6 6 1
in 1 8 8 7 to 1 1 6 0 5 in 1 8 90 were again at work but as
the Austro H ungarian Bank was no w prepared to buy sterling
at a xed price the exchange could not drop far below its new
gold par o f 2 4 0 1 7 4 crowns to 1 ( corresponding to 1 2 0 0 8 7
o ri n s to
There resulted a great strengthening o f the
gold resources of the Bank which rose from 4 8 8 millions of
crowns in 1 8 9 5 to 9 2 0 in 1 9 00 ( inclusive o f foreign bills pay
able i n gold ) The country then reaped the benet o f i ts
struggle against adverse currency conditions in the years of
depression 1 8 9 3 9 6 It w as ready to face the next trade
reaction with ample resources to maintain the parity of its new
gold unit And in fact the gold standard weathered all storms
till the outbreak o f war in 1 9 1 4 when it w as swallowed up
along with many more important human institutions and pos
sessions i n the maelstrom
The course o f events in Russia w as in some respects similar
to that in Austria H unga ry
Russia had her experience o f
an escape from a hopelessly depreciated paper currency by
cutting the knot in 1 8 3 9 when the existing notes were re
deemed by means o f a new i ssue at the rate 0 1 2 roubles
fo r every 7 o f the o l d
Russia to o had her troubles in the
m iddle of the nineteenth century ; not only the disastrous
Crimean War but the P olish rebellion contributed to her cur
re n c
The paper rouble had nearly touched
y embarrassments
i t s silver par ( 4 francs or 3 8 d ) in 1 86 3 but therea fter fell
away and osc illated between 3 0d and 3 3d (with occasional
falls below 3 0d under the stress o f political o r nancial crises)
until the recrudescence of war over the Eastern q uestion in
187 6 7 8
In the autumn of 1 8 7 7 it fell to 2 2 % d and though
early in 1 8 7 8 the expectation o f peace prod uced a momentary
rise to 2 6 d it fell again to z z i d and did no t revive till the
general rise o f gold prices at the end o f 1 8 7 9 b rought it up to
.

THE GO LD STA N DA RD

%d and early in

1 8 80

32 7

to 2 6 3d With the agging o f trade

after 1 8 8 2 the rouble declined and after a slight recovery in
1 8 8 4 8 5 due perhap s to a contraction o f the note issue from
(
roubles in 1 8 8 3 to
in 1 8 8 5 ) it was
at a little more than 2 3 d in 1 8 8 6 and fell to z 1 d in 1 88 7 and
momentarily even below z o d early i n 1 8 8 8 In the latter
h al f o f 1 8 8 8 began that revival o f trade which tempted
Austria H ungary to embark upo n a gold standard Its effect
was eve n more str ik ing o n the rouble than o n the ori n B y
September the rouble had rea ched 2 6 d By the autu mn o f
and for 1 8 9 0 it
1 8 90 it had risen fo r a short time to 3 0d
averaged 2 8 d The Russian Government was already ac
cumulating a stock o f gold and o f gold balances abroad But
though the preparations continued the new standard was not
immediately xed and the rouble remained with o ut any de
ned par v al ue In 1 8 9 1 there was a rapid fall and by Janu
ary 1 8 9 2 the rouble was barely worth 2 3d From this point
however there was a recovery This recovery at a time when
gold prices were falling calamitously and other paper cur
renci es were depreciating in proportion calls fo r some explana
tion This is to be found in part in the failure o f the crops
in 1 89 1 which exaggerated the collapse o f the exchange in
that year and le ft room fo r some recovery in spite o f the ad
verse conditions abroad An important factor was probably
the increase o f the Russian ta ri ff ( already highly protective)
by 2 0 per cent in 1 8 9 1 By 1 8 9 3 the rouble was settling
down to a rate o f approximately 2 5 d and the Russian Govern
ment deter m ined to take measures to stea dy its value Li ke
the florin in 1 8 7 9 the rouble was no w close to its nominal
silver parity and the free coinage o f silver was suspended in
January 1 8 9 3 I n the following year the Government re
sort ed to what i s now call ed an exchange standard They
drew bills payable in three months on their various agents in
roubles
foreig n countries xing the rate o f exchange at
1
marks
They then announced that the State Bank
for 1 00

25

S ee

Re ort of

(M emorandum by M r
As

l C om mi ttee
ld
Th
H o h le )

Fo w
.

er

1 00 francs are equ a t o

e o

8 1 m ark s,

25

I n di an C urrency Appendix No 5 9
s
o bl e h d b e n al mos t exac tly 4 f anc
r 81
of th e ol d roub l es were worth at pa
on

r u

32 8

CUR RENCY AND CRED IT

was prepared to sell the se bills at this rate or to buy others at

the same rate and that they were obtainable at the Chancel
l er i e de Cr dit ( O f ce of the Minist ry of Finance in St P eters
burg) and at the o fces o f the bank in a certain number o f
towns In this manner a l imit w as xed beyond which the
market value of the rouble co uld no t fal l The Bourse news
had an announcement every day on the outside sheets of the
rate at which the Government sold o r bought bills Like
Austria H ungary and th e United States Russia found the
preservation of her standard facilitated by the trade revival
which began in 1 8 9 6 The new gold un it was xed in
December 1 8 9 5 the gold coin of 5 roubles ( the half imperial)
being declared equivalent to 7 3 paper roubles and the B ank
undertook to pay for notes at this rate till further notice
The existing gold coins were based on the old ratio o f
which made the rouble worth 4 francs o r 3 8 d The new
rouble was two thirds o f the old and was therefore worth
francs or 2 5 % d An uk ase of January 1 8 9 7 authorised
a coinage of the old weight an d neness o f the imperials
and half imperials stamped with the new denominations of
I 5 and 7 1} roubles and 5 rouble pieces followed in November
,

897

Thus Russia and Austria H ungary oated easily into the

gold standard on the rising tide of gold prices Both had
started with their pap er depreciated in relation to its nominal
value in silver Both had seen silver fall till a return to an
e ffective silver stand ard would have been easy Both had re
j ected the silver standard and had passed through a period
when their paper exceeded in value the only metallic unit to
which it had ever been bound but still fell short o f the gold
value corresponding to that unit in fo reign monetary systems
The o ri n was worth more than 935 o f a kilogram me o f ne
silver but was worth less than 2 marks The rouble was
worth more than 3% o f a kilogramme o f silver 9 00 per mille
-

and

bl

m ark s w ere wort 3 0 8 6 ; rou es

Th e n e w rate was 5 0 per
i g er ( s u j ect t o a very s m a m argi n )
It w as e qui va en t t o
cent
01 , i n
th e form i n w i c th e exc ange on L on on i s now usua ly quote , 9 4'5 8 rou es

m ark s ,
.

to

h h

10

1 00

b
h h

ll

bl

TH E GO L D STAN D AR D

3 29

ne but was worth less than 4 francs Both countries xed

new gold values for their monetary units approx imating to
their market val ues N either debtors no r creditors could
com plai n o f such a decision ; debtors m ight have had to pay
in gold at the o ld ratio ; cred itors might have had to accept
payment in silver
The case o f India di ffers from those of Russia and Austria
Hungary in that th ere was no peri od o f irredeemable paper
intervening between the silver and the gold standard I n
China and the other neighbouring co un tr i es o f Asia the silver
standard persisted despite the depreciation and the consequent
con fusion o f the exchanges with gold standard countries The
relations between India and England however are so intimate
that this state o f things began to cause serious inconvenience
At the ratio o f I 5 *to I the rupee weighing =
3 o f an ounce of
silver ne had been worth about I s 1 1 d As silver fel l
1
the value o f the rupee fell and in the nancial year 1 8 7 8 7 9
the average rate realised by the bills sold by the India O fce
was onl y I s 7 8 d F o r a year or two the fall was arrested
and in 1 8 8 4 8 5 the rate was still as high as I s 7 3d but then
it fell again rapidly and in 1 8 8 8 8 9 averaged only I s 4 4d
A recovery to I s 6 d in 1 8 90 9 1 ( the year of the Sherman Act
for the purchase o f silver in the United State s) proved to be
transitory and by 1 8 9 2 9 3 the rupee had dropped to I s 3d
Nor di d there seem to be any prospect o f i ts stopping there
Silver had fallen to 3 8 d per o z not w ithstanding the silver
purchases in the United States and it seemed likely that these
silver purchases would not be continued much longer The
It destroyed
fall in the rupee was embarr assing in t wo ways
the eq uilibrium o f the budget since an i mportant part of the
revenue o f India was absol utely xed in rupees while the
Government had heavy l iabilities reg ularly payable in sterl ing
in London But what was ultimately mo re important the i n
stability o f the exchanges i ntroduced an element o f unce rtainty
into all Anglo Indian trade The Govern m ent acting o n the
advice o f a Com mittee o f which Lord Herschell was chairman
decided to stop the free coinage o f silver and with a vi ew to
1 Th e
s M arch
y ear from rs t Apri l to 3 1 t
,

'

'

'

CU R RE N CY AND C R ED I T

33o

arriving ulti mately at a gold standard announced that B ritish

sovereigns would be exchanged on appl ication into rupees at
that i s to say I s 4 d a rupee
th e rate of 1 5 rupees to
This undertaking o f course could not in itsel f prevent the
rupee from falling though it would prevent it from rising above
The suspension of the free coinage however would
I S 4d
sooner o r late r tend to rai se the rupee and therefore there w as
reason to anticipate that eventually the rate o f I S 4d would
become operative From June 1 8 9 3 when the Mints were
closed the value of the rupee was determined j ust as if it were
an inconvertible legal tender note The total quantity of
currency in the country was xed and so l ong as the Mints
remained closed there was no way of increasing it except the
importation of sovereigns and so long as th e exchange re
mained below 1 s 4 d sovereigns would no t be imported
Neve rtheless the exchange continued at rst to fall In 1 8 9 3
9 4 it averaged I s 2 5 d in 1 8 9 4 9 5 I s 1 1 d in 1 8 9 5 96 I s
But in 1 8 96 9 7 it rose to I s 2 4d in 1 8 9 7 9 8 to I s
1 6d
Thus after ve years
3 3 d and at last in 1 8 9 8 w as at I s 4d
the system foreshadowed in 1 8 9 3 was within reach Another
Committee w a s then appointed presided over by the late Lord
Wolverhampton ( then Sir Henry Fowler) This Committee
recomme nded that the sovereign should be made legal tender
in India and suggested measures fo r the purpose o f encourag
ing the circulation o f gold in the country They co ntemplated
a system under which the rupee would become a mere s ub
but they recognised that fo r the time being it
s i d i ary coin
w as impracticable to limit the amount fo r which rupees were
to be legal tender They must continue to be coined so far as
their place in the currency could not be lled by gold but
the Committee suggested that the prot on the co inage o f
rupees ( which were by that time worth considerably more than
the silver which they conta ined) should be accumulated in a
separate reserve in gold to be drawn upon as an alternative
form of Government remittance from India to England when
ever the exchange should fall below specie point
The I n dian Government accepted these recommendations
B riti sh sovereigns and hal f sovereigns were made legal tender
,

'

'

'

'

TH E GO L D S TANDARD

33 1

in 1 899 and an attempt was made to put these coins i nto cir
culation by redeeming notes and mak ing other Government
payments in gold unless the payees expressly asked for silver
B ut it soon became clear that the gold was not wanted The
Indian Go ve rnment was stil l bound by its undertaking to pay
o ut rupees in exchange for gol d and as fast as the gold was
paid out it was presented fo r exchange into rupees The
effect was to substitute gol d fo r rupees in the reserve held by
the Govern ment against the note i ssue and the depletion of
the rupees i n that reserve soon became embarrassing I f in
default o f rupee s it became n ecessary to insi st o n redeeming
the notes in gold the credit o f the notes might be ruined
Indeed a momenta ry fai lu re o f the supply o f rupees at Calcutta
7
in Ap ril 1 9 00 actually drove the notes to a d iscount o f T,; per
cent and gold itsel f to a d iscount of 1 per cent The re medy
In
o f course was t o coin more ru pees and this w as done
the nancial year 1 8 99 1 9 00 rupees were coined to the amount
1
making the large
o f 1 32 lakhs and in 1 9 00 1 1 6 94 lakhs
total o f 1 8 2 6 l akhs o r
This raised the q ues
tion of the accumulation o f the reserve o f gold as reco m
mended by the Fowler Committee o ut o f the prots o f coin
age The failure o f the attempt to force gold into circulation
had enhanced the im portance of this recommendation and the
recommencement o f the coinage o f rupees called for an i m
mediate decision o n the point It was settled that the reserve
should be created The reupon it was real ised that i f this
reserve was ever to be used it would be wanted in L ondon
To accum ulate gold in India would there fore be an unnece s
sarily cumbrous proceed ing as the gol d would probably in the
rst instance have to be attracted o r at an y rate diverted from
the London market and would then have to be sent back to
London whenever needed I t was decided to accumulate the
reserve in London and to hold it in the form o f interest yield
ing securities This reserve the gold standard reserve as it
came to be call ed was only to be used i f the rupee began to
,

lakh

S o l ong as t he r up e e
pees and 3 crore
W i t h th e
was about 2 s a crore m eant ab out 1 oo o ooo a d a l akh
1 3 s 4d and 666 6 1 3 s 4d res p ec ti vely
rupee at rs 4d
th ey are
1

is

ru

C U RRE N C Y AND CR E D IT

3 32
fall

below the prescrib ed value of 1 5 4d (o r rather a slightly

lower value say I s 3 % d corresponding to the export specie
point )
F o r the next few years there w as a continual demand for
rupees moderate at rst and steadily g rowing greater The
Government received i ts revenue in rupees in India and had
to spend a considerable part o f it in sterling in London and
for many years the practice had been to sell bills or tele
graphic transfers o n India in London In f act the Govern
ment came into the foreign exchange market to offer rupees
in India in exchange fo r pounds sterling in London So long
as I ndi a had a system of free coinage the Governm ent merely
sold j ust so many rupees in the year as would supply it with
the money needed in London B ut no w it was not the sum
sold that had to be xed but the rate o f exchange If there
was a demand fo r rupees and the exchange was tending up
wards the Government had to sel l more rupees than were
suf cient to supply its London requirements Its balances of
rupees became depleted and it had to replenish them This
could be done by buying silver and sending it to India to be
coined The silver w as bought in London and was paid for
from the London balances already swollen as much as the
rupee balances were depleted The rupees coined were added
to the Indian balances and the London balances were reduced
by the sum paid fo r the silver and a l s o by the di fference between
this s u m and the value o f the rupees the prot o n coinage
which had to be paid over to the gold standard reserve Thus
the London balance ( apart from the gold standard reserve)
was diminished by exactly the amount by which the Indian
balances were increased I f the demand fo r rupees was so
insistent that the Indian balances could no t meet it a reserve
of rupees existed in the currency rese rve held against the
note issue The purchase and transmission o f silver and the
process o f coinage took time and in case o f an un foreseen
demand for rupees in the form o f applications fo r bills in
London there might no t be time to replenish the Indian
balances with freshly co in ed rupees B ut the rupees in the
currency reserve could only be d rawn upon just as they
.

TH E

G OLD STANDA R D

333

were drawn upon in 1 9 00 i f gold was d eposited in their place

The note issue was based on the English xed duciary issue
system There was a holding o f securities to the value o f
10 crores ( rais ed in 1 9 06 to 1 2 and in 1 9 1 2 to
and all
notes in excess o f that amount had to be covered by rupees
or gold
The gold mi ght be either in India or in Lo ndon but
wherever it was situated it had to be actual metal s et apart
a b ank credit payable in gold did n o t comp ly with the l aw
As it was sometimes awkward to have to withdraw gold from
the B ank o f England for this purpose it w a s decided in 1 90 5
and 1 9 06 to hold part o f the gold standard reserve i n the
form o f s i lver the amount being xed at 6 crores or
Throughout the period 1 9 0 1 7 ru pees were
being coined in moderate amounts at rst and then in very
large amounts and the gold standard reserve which w as
the prots o f coin age m tead i ly i ncrea si ng
Notwithstanding that in 1 9 07 half the prots were diverted d
to other purposes the reserve had reached a total by the end
Q
of 1 907 o f 1 7 } m illions
Then the re occurred a sudden and complete change The
apparently i nsatiable demand fo r rupees ceased and there
s
began an equally insistent demand to reconvert redundant a
rupees either into gold o r into gold credits in London It
became impossible to sel l th e usual bills o n I n dia in London
within the prescribed minimum limit o f the rate o f exchange
l he rupee s which would in a normal year have been paid o u t
in I ndia on presentation o f the bills accumulated in the Indian
Treasuries and in order to provide funds in London to meet
the English l iabilities o f the Government these rupees were
paid i nto the currency reserve and an equival ent amount of
gold standing to the credit o f that reserve in Lo ndon was
released The metal lic portion o f the currency reserve w as
thereby maintained accordi ng to law unchanged ; but gold w a s
replaced by rupees The gold held in I ndia to the c redit o f
the currency reserve w as likewise paid o u t At rst the I ndi an
Government hesi tated to part with it fo r it had the option o f
B ut the exchange fell to a slight discount
paying in r upees
and it was d ecid ed to pay o ut th e g old fre ely
,

C URRENCY AN D CRE DI T

3 34

At last however in March 1 9 08 it became clear that the

suspension o f the sale o f bills and the releas e o f gold in India
were not sufcient by themselves to support exchange It
was decided to sell bills on London in I ndia The bills
would be paid o u t of th e sums held in London to th e credit
of the gold standard reserve securities being realised fo r
the purpose and the rupees rec ei ved fo r the bills in India
would be held in India as part o f that reserve This measure
accomplished its purpose In th e next six mon ths bills to
the amount o f
were sold reduc i ng th e Lo ndon
assets of th e gold standard reserv e from
to
and increasing th e Indian portion from
(6 crores) to
( 1 8 crores) in rupees By that time
the exchange was restored and the d emand fo r the bills ceased
and soon the n ormal demand in London for th e Secretary o f
State s bills on India revived A very large quantity o f
ru pee s had been withd rawn from circulation The paper
currency reserve which held 1 9 crores of silver and 1 6 of
gold on the 3 l s t March 1 9 07 held 3 1 crores of silver and 2
of gold o n the 3 I st March 1 9 09 Therea fter the re followed a
steady outow of rupees into circul ation and by 1 9 1 2 the
tw o reserves together held only 1 8 crores and coinage w as
resumed
The Indian experience from 1 8 9 3 may be summa rised as
follows : From 1 8 9 3 to 1 8 9 8 th e supply o f currency was a
xed qua ntity and the rate o f ex change varied fallin g steadily
to I s 1 d in 1 8 9 4 9 5 and rising steadily to I s 4d in 1 8 9 8 99
Then th e rate o f exchange beca me xed and the supply o f
currency variable The ac tual increase o r decreas e in the
amount o f currency ( rupees and notes but not sovereigns) in
th e hands o f the public can be accurately measured year by
year since the rupees once issued may be assumed not to be
melted The i ncrease in th e rupee s in circulation is obtained
by adding the new rupees coined to those in the currency
reserve and the gold standard reserve at the beginning of
th e year and deducting therefrom those in the reserves at
the end o f th e year The notes in the hands o f the public
are eq ual to the tota l note issue [a s the notes in the Gove rn
,

TH E G O L D S TAN DARD

33 5

ment bal ances and the P residency Bank reserves

sul ts o f these calcul ations are as follows

A B S O RP TIO N

Rup ees

1 8 98

99
1 8 99 1 9 00
1 900 1
1 9 01 2
1 9 02 3
I 9 03 4
I 9 04 5
1 905 6
1 9 06 7
1 90 7 8
1 9 08 9
1 9 09 1 0
1 91 0 1 1
1 91 1 1 2
1 91 2 1 3

( L A KH S )

O F C U RREN C Y

N o tes

25 1

1 1 23

17 2

127 5

18

211

31
25 9
32 8

3 45
1 05 9
7 94
1 46 6
1 7 26
42 5
I SS7
1 4 03
39 2
1 066

'

1 049

re

To tal

The

2 24
1 2 95

1 25

2 42

6 04
1 38 7
830
1 88 3

41 7
38 3
38s
23 5
5 03
19
4 44

2 1 09

40

1 3 2 2
1 9 06

41 1
15 10
1 3 20

27 1

The inquirer without Indian experience naturally hesitates

to interpret these gures India is in area and popul ation
and in variety o f races and languages a continent and one
in many respects profoundly di fferent from E urope and the
Americas We must no t hastily attribute to the Indians
habits and poi nts o f vie w in currency matters which are appro
prlate to Europeans Fortunately we have available the r e
ports evidence and other documents o f three important
inquiries into Indian currency and nance the Herschell
Committee o f 1 8 9 3 the Fowler Committee o f 1 8 9 8 99 and
the Chamberl ai n Commission o f 1 9 1 3 1 4 Here we nd the
fruits o f the experience of the foremost experts in Indian cur
reney and banking
O n reading the off i cial correspondence between the Indian
Go vernment and the Secretary o f State relating to the various
administrative measures which were taken i n the years 1 8 9 9
to the
1 9 1 2 fo r regulating Indian c urrency ( Appendix V
Report o f the Chamberlain Commi ssion ) we nd three suc
The rst arose in
cess i ve emergencies which had to be met
the years 1 8 9 9 and 1 900 owing to the unexpe ctedly great
absorption o f rupees into circulation 2 3 9 8 lakhs in two years
.

CUR REN CY AND CRE DIT

3 36

The second arose in the years 1 9 0 5 7 wh en a fter a sl ack i n

terval the same cond itions recurred 3 I 92 lakhs b ein g ab sorbed
in two years The third arose at the end o f 1 907 from an
equally marked return o f r u pees from ci rculation 1 5 5 7 lakhs
being returned in one year Explanations o f each in turn
are off ered Writing on the 2 8 th June 1 9 00 at the height
of the demand fo r rupees Sir Edward Law one o f the V ice
roy s Council attributed this phenomenon in part at any rate
to the severe fam ine which had occurred in the season o f

1 8 9 9 1 9 00
The great bulk o f the population is purely
agricultural The agriculturist in ordin ary times has little
requirement fo r money in the shape o f sil ver coin he is him
sel f the producer o f a large p ro portion of the food be con
sumes and h i s other wants which must be satised by purchase
are triing In seasons o f fam ine however the situation is
changed The food consumed by the su ffering ag i i cul turi st
must be p urchased and paid for with coin and as credit dries
up in times o f distress all his other require ments must equally
be paid fo r in cash

I think that we have only to consider the vast numbers

who under ordinary circu mstances produce their own food
and enjoy credit fo r their small purchases and whose wants
can now only be supplied by cash purchases to real ise the
enormous increase in the circulating medium required to meet

this unusual situation

If we pass to the next period o f strain we n d quite a
di fferent diagnosis o f the great de mand for rupees Writing
se mi o ffi cially o n the 1 8 th O ctober 1 9 06 an of cial of the

Finance Department in India says : Thej ute crop h as been

an excellent one and the prices have risen beyond all ex pec
tati o n they were all but double those of last year at the same
season
There i s reason to believe that the drain on the reserve
will continue The cotton harvest promises well and it would
not be sa fe to an ticipate a smaller trade demand for rupees
during the winter mont hs than we h ad to fac e l ast year
The great activity o f trade and th e s udd e nnss and mag
ni tud e of the dema nd for ru pee s wh ich it fdrCes ou u s h ave
,

'

THE

G OLD

STA N D ARD

3 37

led us to consider care fully where to turn for assistance in

case o f need
Finally a fter the third crisis that o f 1 9 0 8 when the d i f
culty was not to provide rupees fo r ci rculation but to with
draw th e hundreds o f lakhs o f redundant rupees from circulation
fast enough to save the exc hange from depreciation below
the gold point the I ndian G overnment wrote a despatch to
the Secretary of State dated the I s t April 1 9 09 reviewing

the situation
During the period from November 1 90 7
when exchange rst fell substantially below I s 4 d until the
end of J anuary last we lost 1 5 m illions o f our gold
This is the result o f a l ittle m ore than a single year o f adverse
conditions and o f a famine which was more restricted in i ts
area than is frequently the case with similar calamities
Confronted with these three O pinions the conscientious
inquirer may be forgiven if he feel s dissatised I f s o severe
a famine as that of 1 8 9 9 1 9 00 caused the great demand fo r
rupees which marked those years why did a famine which
was more restricted in i ts area than is frequently the case with
similar calamities have precisely the contrary result and pro
duce an inux o f redundant rupees and a dema n d for ex
change ? And why did a famine in 1 8 9 9 1 9 00 have the same
effect as the good j ute and cotton crops and the activity o f
trade in 1 9 06 7 1
The Sec retary o f State replying o n the 2 nd July 1 909 to
the Indian Go vern ment s despatch of the I s t Apri l pointed

it occurred at a
out that even if the famine was restricted
time when conditions were exceptionally adverse to the main
The e ffect o f the famine in reducing
tenance of exchange
India s power o f exporting certain articles was felt at a time
when the foreign demand for the articles India was able to ex
port was seriously restricted by com mercial depression through
o ut a large part of the world intensied i f not largely brought

about by the nancial crisis in the United States of America

In fact the year 1 9 07 had seen the culmination throughout
the world o f a period o f very prosperous and active trade
The prices o f com modities ( incl uding those j ute and cotton
cro ps the s uccess o f which promised a demand fo r rupees i n
.

"

22

CURR E N CY AND CR ED IT

338

the autumn o f 1 9 06 ) had risen steadily since the beginnin g o f

1 9 0 5 the average increase as measured by index numbers ex
at the maximum From about June
ceed i ng I 5 per cent
1 9 07 there began a decline in prices and s et back in trade
under the inuence o f which the credit position in the Un ited
States began to crumble
The crash came in O ctober
Sometimes the ebb o f trade is a gradual process extendi ng
over four o r ve years marked at considerable intervals by a
series o f more or le s s grave crises in di fferent parts o f the
world O ccasionally the reaction comes with the force o f an
explosion and the whole com mercia l wo rld passes in an i n
stant from prosperity to extreme depression This is what
h appened in the autumn o f 1 9 07
Early in 1 9 08 the prices
o f commodities were already 1 0 per cent below the maximum
of 1 907
Ban k ruptcy unempl oyment and distress were ri fe
every where in a few months The I nd ian currency system
was saved fo r a sho rt time from the full force o f the storm
because it broke in the Indian busy season when there ought
to have been a strong demand for rupees It com pletely killed
the usual demand and did i n fact fo r a m oment send the rupee
to a discount In March 1 9 08 t he busy season being over
it became necessary to s ell bi lls o n London in India in order
t o maintain the exchan ge
Thus the reason why it was neces
sary to withdraw 1 5 crores o f rupees from circulation in 1 9 08
w as simply that the value o f go ld in commodities had risen
and but fo r this reduction in the q uantity o f rupees in circula
tion the value o f the rupee i n g ol d would have fallen
The famine was relatively o f secondary importance but
undoubtedly the Secretary o f State was right about the nature
and d irection of its effects A famine tends to make the foreign
exchanges u nf a vour abl e Russia had a somewhat similar ex
p er i ence i n 1 8 9 1 9 2 when a bad harvest happened to coincide
with a decl ine in trade and the rouble fell in a few months
from 2 8 d to under 2 3 d
Sir Edward Law s explanation of
the de mand for r upees in 1 8 9 9 1 9 00 w as no more than an
ingen ious conjecture That demand occurred at j ust such a
time o f good trade a s was to occur again i n 1 9 06 7 with the
same c onseq uences As we saw in the ca ses o f Rus sia
-

THE

GO L D

ST AN DARD

3 39

Austria Hungary and the United States the upwa rd tendency

o f gold prices in other words the depreciation o f gold which
jprevai l ed from 1 8 9 6 to 1 9 00 greatly facilitated the maintenance
o f a paper o r token silver curre ncy at a prescribed gold value
The experience o f India w as very similar to that of those
countr ies D uring the year s o f falling prices which followed
the prosperity o f 1 8 8 8 9 1 the I n dian exchange fell reachi ng
a minimum in
Thereuponit began to rise till in 1 8 9 8
it reached the level o f I s 4d at which the Indian Government
undertoo k to pay o u t rupees in exchange fo r gold Beyond
that point it could no t rise and th e same inuence which had

been raising the exchange thence forward spent itself in i n

creasing the d emand fo r ru p ees It is a most striking fact
l that the period o f rising exchange from 1 8 96 to 1 9 00 was
marked by two severe famines one in 1 8 96 9 7 and the other in
1 8 99 1 9 00 and there w as th erefore some excuse fo r the theory
put forward by Sir Edward Law B ut the theory will not
stand criticism for a moment
There may be more cash tr a m
a ctzom in a t i me o f fa m i ne than in a time o f plenty but that
does not mean that people will hold larger cash ba l a nces I t
is evid ent tha t the peasants w h o are unable to feed thems elves
from the produce o f their own holdings will tend to pay away
their mon ey and to deplete thei r hoards The lucky dealers
who have food to sell may increase their balances but taking
all classes togeth er th e hungry population will o n balance have
parted with money in exchange fo r food But from the ex
peri ence since 1 8 9 3 it may be quite safely in ferred that fam ines
are not among the most decisive factors in determining the
course o f the Indian exchange The e ffects of the famines o f
1 8 96 9 7 and 1 8 9 9 1 9 00 at any rate must have been slight since
the upward ten dency o f the exchange was no t in terrupted by
th e rst no r the demand fo r rupees by the second
In India as elsewhere the state of the harvest must be
arded as one o f the inuences a ffecting the exchange But
pred ominant i nuence is the wo rld movement o f credit
n t alternation o f the depreciati on and app re
The I n di an po pu l ation it is true is more
d
Banking
is
little
develope
ri m itive than tha t o f Europe
p
-

'

22

CUR RENCY A N D CR EDIT

3 4o

Hoarding is prevalent Economic motives sometimes work in

obscure and unexpected ways B ut it remains true that the
people can absorb rupees when they can sell at high prices
and they can sell at high prices when gold prices generally are
high The j ute and cotton crops of 1 906 sold at good prices
because credit w as expanding in Europe The Indian growers
o f those crops wanted to be paid in rupees while the proceeds
of sale were paid in sterl ing in London There w as a de mand
fo r bills by which the sterling could be transformed into rupees
The American crisis and the consequent shrinkage o f demand
in the gold using countries spoilt the market for Ind i an ex
po rts The disappointed traders had to draw upon their hoards
o f rupees to meet their expenses
and pay their taxes A
proclivity fo r b o ard i ng and a s lowness in reacting to changes
o f price would make India n o t less but more sensitive to cur
re n cy movements elsewhere
If Indian traders d o n ot raise
prices they will sell al l the more to Europe i f they hoard the
rupees that they receive and d o not spen d them they will buy
all the less ; their capacity fo r absorbing rupees will be aug
m en te d in both ways
Even before the shutting o f the Indian Mints the currency
systems o f the East reected the credit m ovements o f the
West But the e ffect took the form not o f a change in the
volume of currency of either India or China but of a change
in the price o f silver Silver l ike gold derived its value partly
When an ex pan
from the fact that it would purchase goo ds
sion of credit raised the money prices of goods in Europe it
raised the money prices o f O riental goods along with the rest
O riental goods could be purchased with silver and the deman d
fo r them w as reected in an increase in the price of silver
Credit in silver countries had not the same power of expansion
as in gold countries and therefore silver prices could not rise
in the same proportion as g old prices unless the quantity o f
silver currency w as increased From 1 8 7 3 when the silver
market became independent o f the gold market the price of
silver regularly rose w hen trade was good and fell when trade
was bad though there was superimposed upon these uctua
tion s a gener al tendency to fall till about 1 902 so that the rise
.

T H E GOLD ST AN DAR D

34 !

was sligh t and the fall great This merely mean s that th e
price o f silver mani fes ts the same tendencies as the prices o f
other commodities and it has continued to do so quite as
clearly since 1 8 9 3 as be fore
The essential feature o f the gold exchange standard as
established in India is the adoption o f the rate o f exchange
as the ind ex o f the d eman d fo r rupees and the issue and with
d rawal o f rupees accordingly
It does not really matter
whether the rupees are issued or withdrawn in the process o f
selling exchange by whatever means they are issued or with
drawn the value o f the rupee will be determined by the quan
ti ty in circulation A fter the experience o f 1 9 08 some people
argued that the gol d held in India in the currency reserve
as when paid o ut in exchang e fo r rupees it was not exported
but remained in the country was less efcacious in maintain
ing the rupee than th e gold hel d in London which came
directly into the exchange market But the gold in India
performed the essential function o f redeeming rupees Even
i f it was not exported it w as n o t wanted as currency but as
a commodity fo r the demand fo r gold ornaments was by no
means completely interrupted by the adverse trade conditions
In proportion as rupees were locked up in the vaults o f the
Govern ment the power o f the public to o ff er rupees in ex
change for E uropean goods w a s impaired and the un favour
able exchange was redressed I t is a mistake to lay too much
stress o n the actual means o f discharging the trade balance
An adverse trade balance m ay be crea ted by a redundant
currency and can be corrected by a contraction o f the
currency
The Indian currency system like all others has been p ro
At the outb reak o f w ar the
fo u ndly a ffected by the war
sudden trans formation o f England from a lending to a borrow
ing country turned the exchanges against all the countries
which had been nanced by her and in particular against
India the exchange falling to I s
To restore equ i l i
Not only
bri u m a contraction o f the currency was neces sary
could no t Council Bills be sold in London but as in 1 9 08
bills on Lon don (co mmo nl y c alled Reverse Councils h ad
.

CURR ENC Y AND CRED IT

342

be sold in India in order to reduce the redundancy o f

rupees The sale o f these latter bills began o n 3r d Augu st
to the amount o f
a week and they were
1 914
the re
sold in the year 1 9 1 4 1 5 to the amount o f
serves held in L ondon bein g depleted to an approximately
equal extent On the sth August 1 9 1 4 the undertaking to
pay sovereigns fo r rupees had been suspended
v i
Soon however an entirely di fferent tendency supervened
The ination o f the currencies o f all the belligerents occasi o ned
a depreciation o f gg ld in comparison with commodities India
w as not exposed to the direct strain o f war nance and had
no inated paper currency If the rupee was to continue on
a gold basis it would have to depreciate along with sterling
The supply o f rupees had there fore to be increased This
phase took some time to develop It w as not till September
1 9 1 5 that the last bills o n L ondon were sold in India
But
by the beginning o f 1 9 1 6 the sales o f Council Bills had reached
a high level In 1 9 1 4 1 5 the circulation o f rupees and notes
had diminished by 1 0 1 3 l akhs In 1 9 1 5 1 6 it had increased
again by 1 8 2 7 lakhs In 1 9 1 6 1 7 the demand fo r currency far
surpassed all previous records rising to 5 1 99 lakhs As
against this there m ust be set it i s true a diminution in the
absorption o f gold but the gold formerly imported was not for
the most part used as currency
O f the additional currency 7 8 7 lakhs in 1 9 1 5 1 6 and 1 8 1 3
in 1 9 1 6 1 7 were notes Yet to maintain the supply o f rupees
enormous purchases o f silver were required But the price o f
sil ver after having remained low began to rise in November
In May 1 9 1 6 it rose
1 9 1 5 when it reached 2 7 d per ounce
to 3 7 d reacted fall ing as l o w as 2 8 3d in July and recovered
in December to 3 7 d In the course o f 1 9 1 7 the price rose above
4 3 d ( which is the melting point o f th e rupee) and indeed leapt
up with another unstable spurt to ssd Though this high
gure did n o t last it became impo ssible to maintain the ex
change at so l o w a gure as I S 4 d ; devices fo r keeping it
down by agreement among the banks and fo r controlling the
supply o f silver proved ine ffective At last i t was decided to
rais e the ra te of exchan ge fo r Co unc i l Bills to I s 5 d and in
to

TH E GOLD STAN DARD

191 8

6d

34 3

At this gure it remained thanks to suppl ies

from the United States silver reserves and to the limitation o f
price to 1 0 1 } cents per ounce ne till in May 1 9 1 9 a free
market was restored and the rupee had to be raised to 1 8 8 d
n ge standard broke down
the
excha
The cause was
Thus
simply th e rise in the wo rld price o f silver along with the prices
3
o f other commodities o r rather the f a l l in the silver price o f
gold
Meanwhile measures were taken to give greater elasticity
to the note issue
I n 1 9 1 6 the xed duciary issue was raised
from 1 400 to 2 000 lakhs
I n 1 9 1 7 the system o f a xed
duciary issue was practically abandoned the securities being
increased by the purchase o f British Treasury Bills to 4 849
lakhs In 1 9 1 8 the minimum denomination o f the notes was
reduced from 5 rupees to 1 rupeea measure which might
have saved the exchange standard had it been adopted at an
earlier stage and had the conservatism o f the population ad
m i tted o f a wholesale substitution o f paper fo r coin as the
accepted means o f payment
to

1 8.

XX

CHAPTER

AFTE R

TH E

WA R

A S the nancial pressure and commercial restraints o f war co n

d i ti o ns are relaxed the question o f a change o r restoration o f
the monetary standard will become one o f great practical mo
ment all over the world
In the year 1 9 1 4 the world had reached a remarkably com
A fter many d i f
p le te and sel f consistent currency system
c u lt i es and vicissitudes gold had been adopted as the sole
standard o f value in nearly all the countries o f any commercial
importance China stil l retained a silver currency Some
countries o f Latin America had no t succeeded in tying down
their paper to a xed gold value Mexico in the midst o f
revolution had lapsed from a scienti c gold standard which
had been in e ffective operation a few years be fore Spanish
paper money w as at a moderate discount subject to slight
uctuations With a fe w other exceptions of triing import
ance the gold standard which in 1 8 7 0 was almost conned to
England was universally established and there seemed every
prospect that business would continue untroubled by currency
complications
Then came the war
The war has injured the gold stan
dard in three distinct ways First it h as driven those co m
b ata nt s who have been least able to stand the nancial strain
to inconvertible paper which h as depreciated Secondly it
has displaced an enormous quantity o f gold from circulation
which with the new gold from the mines has had to be ab
sorbed in a comparatively restricted area where gold is still
used fo r currency purposes This second process has made
,

344

A FTER TH E W AR

345

i tsel f fel t in a remarkable deprec iation o f gol d as compared

with com m o d iti es and has led a few neutral countries ( Sweden
and her associates Norway and Denmark in the Scandinavian
system and also for a time Spain) to suspend the free coinage
o f gold and the free grant o f credits in exchang e fo r gol d
:
Thirdly the war has interposed the greatest di f culti es in the
way o f the free movement o f gold N o t only does the cost o f
insuring ag ainst war risks ( i f insurance is possible at all ) add
directly to the cost o f transit and the li mit o n the amount
that can be insured by o ne voyage reduce the rapidity o f gold
movements but there are m any i ndirect discouragements
Belligerents have all been anxious to retain their stocks o f gold
and i f possi ble to acquire fresh stocks from abroad Apart
from its direct power o f purchasing commodities a supply o f
gold may in an emergency be the one sa feguard against an
Neutrals even those who have not re fused
act o f bank ruptcy
to sell any further cre d its fo r gold have been unwilling to
receive further supplie s o f a metal o f which they have a super
abundant stock And while belligerents have been unwill ing
to part with gol d and neutrals have been unwilling to receive
it the exporter o f gold from the former to the latter ( even i f
the traf c is no t d enitely prohibited) has fo und himsel f re
quired to prove that the gold will no t nd its way by any
means into the hands o f an enemy
There results a curious situation Whereas in time o f
peace a rise in the price o f foreign currencies Q per cent
above par is usually enough to cause an efux o f gold during
the war a rise o f 5 o r even I 0 per cent has had little or no e ffect
Even when legal ly the market fo r gold has been perfectly free
dealers have not cared to expose themselves to the ill will o f
their compatriot s and to the suspicion o f the Customs autho ri
ties i a ord er to sell gold at a prot to neutral banks o f issue
which have been themselves reluctant to buy it For the time
bei ng gol d has ceased to be an im portant means o f remittance
and there are no pars o f exchan ge except where Governments
have agreed so to regulate the crea tion o f credits as to estab
lish a purely conventional par such as that o f $4 7 6 to the
f
h
un
betw
en
or
w
ich
and Lon don
N
w
d
Y
k
, a ter bein g
o
e
e
p
,

'

Tr

346

CURR ENC Y A N D CR ED IT

maintai ned s i nce 1 91 5 , has recently been rel inqu is hed i n favour
-

c ondi ti ons

of free

1
.

This regulati on o f the exch a nge s is an a pplication o f the

exchange standard which has thus acqu ired a new i m portance
and is likely t o play a great part in the future If under the
press ure of war nance the ex ch ang es became un favo urable to
the reme dy was to borrow
o ne of the bell igerent count ri es
abroad and to offer the foreign credits so acquired to thos e
Pri ces o f c o mmodi ties were rai sed by
who d esir ed to remi t
the ination o f the c ur ren cy and if the ex changes were
articially maintained at a prescribed level prices in terms of
foreign currencies were equally rais ed
I mports from ab ro ad
were thus attracted and in orde r to preserve th e assumed par
o f exchange the amount borrowed abroa d had to be equal to
the excess o f i mports which had to be counteracted The
applicati o n o f the system is very m uch facilitated by the fact
that the borr o wing abr oad re li eves the nan cial tension at
home and thus enables the war expe ndi ture to be nanced
with a s ma ller d egree of ination At the same time the con
stant raising o f credits tends to induce some degree of ination
abro ad and so sti ll further eases the exchange position
What is to be the future international stan dar d o f value
Is there to be a general retu rn to
an d medium o f payment ?
the gold sta ndard
If s o wi ll those countries whose pa per
money has depr eciated restore thei r former monetary un it s or
wi l l th ey establish new units repres enting more nearly the
equivalents o f their de preciated paper in gold ? We can not
lay down the law as to what will be done or what ought to be
done but without pre tending to make an exhaustive investiga
ti on we can explo re some o f the m etho d s o f restoring o r alter
ing the standard and some o f th e consequences
First as to the r estorati on of the stand ard This may mean
The value o f the paper money may be
o ne o f t wo things
gradually raise d by a contraction o f cre d it or other means
till it equal s its face value in gold o r d ebts may be mad e pay
ab le i n gold at the old r ate and the paper money be made to
,

Freedom

i n th e

E xchange on N ew Yo rk has necessi tated a prohi bi ti on on

th e a port o f go l d from the Uni ted Kingdom ,

exce t

p y

l i cence,

AFTER T H E WA R

34 7

pass at i ts de p rec ia ted value on ly A ft er the N ap oleonic

wars the former method was adopted by England the lat ter
by Austri a H ungary
To enact that notes which have been paid o ut for a certain
value in the unit o f account by the Government or by the
Central Bank o n behal f o f the Government shall pass at a
lower v alue is very like a breach 0f faith The only de fence
fo r it is that n o o n e is likely to keep a bal ance o f paper m o n ey
la rge in pro portion to his total means and consequently a
scaling down o f the value of the pap er money itsel f will be less
inequitable and cause less loss to individuals than the ado p
tion o r continuance o f a l ower uni t o f account The unit o f
account determ ines the values o f debts and the total volume
o f debts is far l arger than the total volume o f legal tender
paper
If th e monetary un it is to be restore d without a crying
down o f the paper m o ney the natural procedure i s to contract
credit I n normal times this would be done by raising the
rate o f interest But the ination which grows o u t o f war
nance di ff ers from an ordinary credit expa nsion in that it is
caused not by an extension o f advances to traders but by ex
The assets o f the banks are
ces si ve Government borrowing
swollen n ot by commercial bills and loans but by Govern
ment securities o f short o r long date An increase in the rate
o f interest would deter traders from bo rrowing but probab ly
their ind ebtedness is already much below its usu al level What
is really wanted i s a reduction o f the indebtedness o f the
Go vernment to the banks or in the case where the Govern
ment has paid its way by itsel f issuing notes a re demption o f
a suf cien t proport i on o f these notes W hile the process o f
ination is going on the Go v ernment has th e advantage o f
spending m aney without the trouble o f raising it ; w hen the
process is reversed the Gove rnment has the trou ble o f raising
the money without the advantage o f spending it Like the

Red Queen in Through the Lookin g Glass it h as to run

even to stay where it is It must raise th is money either by
tax ation or by borrowing and the borrowing m ust be g enu i n e
s
v
n
s
f
i
o r i f it i s
f
a
o
t
h
k
t
o
u
t
r
w
upon
av
labl
s
c
t
s
a
i
a
e
i m
d
e
g
.

CURRE NCY AND CRED IT

34 8

nanced by the creation of bank credits it de feats its own o b

j ect
These form a gloomy array o f alternatives A nation has
devoted all i ts economic resources to the prosecution o f a war
Stocks o f merchan
o f li fe and death protracted over years
dise are reduced the construction renewal and maintenance
every where there is a pressi ng
o f xed capital are in arrear
need fo r production I s credit to be contracted ? I s the
burden o f taxation to be increased ? I s the fund o f money
seeking investment to be waylaid and dissipated into nothing ?
The country it may be contended is su ffering from a scarcity
o f capital ; is it n o t madness to encroach on the too meagre
supply o f credit and money ?
It is quite true
N o w the word capi ta l is a dangerous one
that a fter an exhausting war the country will be su ffering from
scarcity o f capital but scarcity o f capital means two d i fferent
things On the one hand it means the shortage o f stocks o f
goods the deterioration o f xed plant etc and the arrears o f
production o n the other it means an insufciency o f purchas
ing power available to be spent on the m eans o f production
as distinct from consumption If it be taken in the former
sense the disease and the remedy are alike evident The pro
d uct i ve resources o f the community too long devoted to war
must be applied to overtak ing the arrears P roduction must
exceed consumption the surplus taking the form o f the restora
tion o f the nation s equipment o f xed capi tal and o f its stocks
But when it is asked h o w this i s to be ac
o f commodities
co mplished we are at once brought round to th e other mean
i ng o f the expression scarcity o f capital The employment
o f the country s productive resources is governed by e ffective
demand in the form o f purchasing power and the accumulation
o f the desired surplus o f production over consumption can only
be accomplished in so far as the holders o f purchasing power
choose so to apply it N o w the purchasing power applicable
to accumulation as d istinguished fro m consumption comes
from two sources from savings and fro m bankers loans
There need not necessarily be an absolute scarcity o f savings
a fter a war While the war goes o n savin gs are d rawn into
.

A FTER T H E WAR

349

loans and other capital requirements are le ft o ut in the

cold Once it is over the annual supply o f savings becomes
available again The scarcity arises from the fact that
mor e than the normal supply o f savings is needed to overtake
the arrears o f construction and maintenance o f xed capital
And in all probability the amount o f savings will be above the
normal since people will put back money o u t o f prots into
their ow n businesses in order to restore the ef c iency of their
capital and where this is not enough the urgent need o f capital
renewals o r extensions will present protable opportunities to
the outside investor
But besides the arrears o f expenditure o n xed capital

there is also the shortage o f circ u lating capital o r stocks o f

commodities to be remedied Broadly it may be said that
while xed capital is bought with savings c irculating capital
is nanced with temporary loans But this is only very
roughly true A trader does not carry the whole o f his sto ck
in trade wi th borrowed money A portion is supplied from
his permanent capital representing his o w n savings or those
When prots
o f other people denitely invested with him
are h igh he may supplement his permanent capital by ac
cumulating a reserve and so diminish his short term indebted
ness When he inc urs a loss o n his business he may borrow
to meet it and may s o encroach on his reserve o r even on h i s
capital Moreover not only are stocks o f merchandise largely
held with permanent capital but investments are frequently
held with borrowed money which is thus indirectly used to
nance xed capita l Thus the line o f demarcation between
investment and temporary borrowing never corresponds exactly
with that between xed and circulating capital and the one
limit is subject to variations having little or no relation to the
other Consequently the supply o f savings and the supply o f
bank accommodation must fo r some purposes be regarded as
constituting a single market I f the supply o f savings i s i n
suf ci ent to make such rapid progress with th e reconstitution
o f the country s capital equipment as traders desire then the
traders will tend to supplement savings with temporary bo r
rowings At the same time the merchants whose stocks are

war

CURRENC Y AN D CRED IT

350

will want to borrow to replenish the m so that the brunt

o f the demand fo r funds fo r both xed and circulating capital
will fall on the bankers
These conditions will make fo r active trade and high
prices They will make fo r active trade because owing to the
shortage o f both xed capital and merchandise lavish orders
will be given to the producers even apart from any great de
mand from the consumers Prices will be h igh because the
depleted stocks of goods will be exposed to a large e ffective
demand the quantity o f purcha sing power in the hands o f the
public having been swollen under war condit i ons and the con
sumers i ncome being maintained at a high le vel corresponding
to the activity o f prod u ction
In some deg ree the banks can k e ep the activity o f business
within bounds by restricting the accommodation that they
grant But i f under the s train o f war nance loans and dis
counts to traders have already been reduced to a very lo w
level the traders have to a great extent emancipated themselves
from the banks
Selli ng such go ods as they have in hand
easily at h igh prices they are constantly s upplied with ready
money ( bank credit s) with which to nance the new ord ers
whi ch they give to the pro duce rs
Now active trade with its accomp an i ment o f great pro
d uction and good employment 1 is in m any ways a most
desirable condition but in the special circumstances we are
considering it has certain drawbacks If expenditure is directed
too much to consumption and too little to investment the
process o f economic recovery is retarded and the scarcity o f
commodities is intensied and pro long ed The conti nuance
high prices means the continued dep reciation of the
of
monetary unit
And here we see the j ustica tion for the
Government rai s ing money to pay o ff its temporary ind ebted
ness Whatever money it takes from the consumer es pecially
i f it be taken by way o f tax ation wi ll di minish the consumers
The intense d em and which abso rbs the already
o
ygay
meagre stocks o f commodities is thereby checked The re
lo w,

Unde

th e co ndi ti ons

d eepi te th e m i l l i ons

of

w or

d escri bed th ere m ay even be

men set free by d emobi l i sati on

a sh orta ge of

labour

W AR

A FTER TH E
pay men t

35

Go vernme nt i nde btedness di m i ni sh es the assets

and the re fore also the l iabi litie s of the banks and en ables the
banks to grant cred it s to trade rs to an equal amount without
increasin g the am ount o f ination Alternati vely it enables
the banks to di mi ni sh the amount o f inati o n without curtail
ing their acco mmo d ation to trad ers In fact so far as it goes
it restores to the bank s the com ma n d o f the situation and
they can use their power eztlz er to provi d e funds for capital
purpo ses or to red uce the ination o f cre d it o r partly in o ne
way and partly in the other
If the Go vern ment ra ises fun ds to pay o its indebt edness
by tax ati on the e ffec t will be gre ater th an i f it raises them
by loan s Taxati o n by reducing peo ple s res ources gi ves
them an i nduceme nt to red uce th ei r consumption o f co m
mod i ti es
Hav i n g le ss money in hand they may not be able
to save so mu ch but their motives for savi ng at any r ate
remai n undiminished If o n the other hand the money is
r aised by loan the st ock o f s avi ngs in the inve st ment market
i s draw n u pon ; the m oti ve fo r sav ing is to that extent
satised and the sa vin gs available fo r other invest ments are t o
that extent cut s hort A mere funding operation the tran s
form ation o f sh or t term into long term i ndebted ness m ay help
to red uce ina tion but wi ll d o no thing to nance the re stora
ti on of capital
Indee d i n so far as it i s applied to red uce
inat ion pu rch asing power dest ined by i ts pos sessors to be
spent on capita l is de e cted to the red uction o f credi ts an d
It is only by
th e expe n d iture o n capi t al is actu all y retard ed
n anci al metho d s such as dra stic t axation which ten d to
curtail the ex pend i tu re o f the i n di vidual upon consumable
commod ities that d eatio n a nd capital expenditure can both
be encour aged
The stimulus to capital expenditu re is
8665 1137 gi venwhether the Government debt paid off is held
by the banks or by the publ ic Deation on the other hand
requires that the indebtedness o f the Govern ment to the banks
should be r ed uced
But even i f it is in the rst instance
hol d ings ou tsi d e th e banks that are paid off the ad dition al
resources o f the investment market are likely soon to affect
The loan s to stockbrokers may be
th e asset s o f the b ank s
of

'

'

CURREN CY AND CRED IT

352

reduced or the banks may sell some o f their securities o r the

same e ff ect may be produ ced in other ways
Once the banks holdings o f Govern ment securities are
reduced the creation o f bank credits must be kept in check
by a high rate o f interest or other restrictive i nuence Other
wise the gap i n the bank s assets will be lled by an increase o f
loa n s and discounts and the ination will continue unabated
Deation and capital restoration notwithstanding that
taxation and other severe nancial methods favour both must
be regarded as in some degree rivals Purchasing power
which is applied to the one is diverted from the oth er The
problems o f the nance o f recuperation are largely the con
sequence o f this rival ry A s we have already seen more than
once these problems cannot be dealt with in isolation with
o u t regard to conditions in other countries
Deation in
particular is largely ( though not entirely) a matter o f the
maintenance o f the foreign exchanges
Every country will seek to keep pace with its nei ghbours
If o ne does not deate its currency as q uickly as the others
the exchanges will turn against it It must be remembered
that the di r ect cause o f an adverse exchange i s too much buy

ing ( I t would be equally true to s ay too little selling

but where ination is t he cause the excess o f buying i s the
i m portant aspect o f the matter ) For this purpose the buying
in question is mainly that o f the dealers But the buyi ng of
the dealers ten ds t o follow the buying o f the consumers ; it
rises and falls with the cons umers outlay excep t in so far as
the commodities in stock are allo wed to vary If for the sake
o f simplicity all re ference to international borrowings and
c apital transactions be omitted the maintenance o f the ex
cha nges reduces itsel f to the regulation o f the consumers out
lay subject to such modication as is occasioned by variations
in stock s Taxation directly di minishes the consumers o ut
lay A contraction o f credit discourages the accumulation o r
retention o f stocks The country whose currency is d ep reci
ated must either apply these remedies more drastically than
the others o r must acquiesce fo r the time being in the con
ti nuance o f the depreciation
,

AFTER TH E WAR
To o rapid a

353

estoration o f th e currenc y may provoke a

crisis But it is a necessary condition o f a crisis o f any
gravity that a serious proportion o f the country s trade should
be nanced with temporary borrowing Otherwise the shrink
age o f the money value o f the traders stocks o f goods though
it would make them apparently poorer would not threaten
them with bank rupcy It m ay happen there fore that a
country is le ft by a great war proo f against crises it has been
as it were ino culated ; the Government is the only debtor o f
any importance and there are practically no trade debts fo r
the crisis bacillus to feed o n
This was the condition o f
France both a fter 1 8 1 4 and a fter 1 8 7 1 On each occasion the
terrors o f invasion had reduced credit operations almost to
vanishing point and France in fact was practically untouched
by the severe crisis o f 1 8 7 3 England o n the other hand was
the scene o f a disastrous crisis in 1 8 1 4 Great as were the
commercial disturbances in the last years o f the N apoleon ic
era trade and trade borro w ing were maintained at high
pressure When rst the Continent and then the United
States were shut agai nst British tra de outlets were sought
in South America
The bank restriction permitted credit
operations to continue in full swing without regard to
European conditions and with the peace and th e readj ustment
o f value s came the collapse
It i s possib le that after the most
exhausting war the world has ever known the whole world
will be cri sis proo f But as the wo rk o f reconstruction pro
gres s es and normal bank ing business revives it may be that
traders indebtedness will reach an appreciable amount while
the process o f deation is still taking place In that case crises
may break out E specially is it possible that the indebted
ness o f the investment market may revive very rapidly Vast
To some extent the
funding operations wil l be undertaken
Government securities in the hands o f the banks will be re
placed by Governm ent securities in the hands o f the i n
vestment market carried nevertheles s with temporary bank
r

'

suddenly accelerated

Apart from crises the rate o f progress

,

23

CURREN CY AN D CRED IT

354

i s more or less within the control o f Governments and bank s

But what is the rate o f progress to be ? This brings us back
to the point from which we started Is gold to remain the
standard o f v al ue ? If i t i s then there will be some countries
enjoying an e ff ective gold standard side by side with others
endeavou ring to regain it World movements in the value
o f currency will be wo r ld movements in the value o f gold and
lo cal currency movements will only diverge from th e world
movements in s o far as they are detached from their no minal
gold basis The governing condition will there fore be the
world value o f gold and this will depe nd not so much o n the
nu mber o f countries that have a gold standard in operation
as on the actual absorption o f gold fo r currency purposes A
country which is s triving to contract credit in order to restore
its monetary unit to i ts nominal gold value will probably
absorb but little gold Indeed though in such circumstances
it ha s usually been the practice to make great e fforts to pur
chase a reserve o f gold even at a heavy sacrice yet these
efforts really only increase the di fculty o f restoring the sta n
dard Now that the possibility o f maintaining a gold stan
dard o n an exchange basis without the internal us e o f any
curren cy ex cept paper is wel l understood it may be expected
that a Government which i s faced with the problem o f t e
storing the standard will pre fer to devote all its surplus
nancial resources to the repayment o f indebtedness or the
redemptio n o f redundant paper money But o f course i t is
wholly uncertain what action all the di fferent Governments
that will be in this situation will take It i s quite possible
that some at any rate o f them will begin strenuously buying
up gold while their paper money is still at a heavy discount
Moreover as we have already seen there is a short cut to
a restoration o f the standard B y a stroke o f the pen the ol d

monetary unit o f account may be restore d s o far as debtors

obligations are concerned and the d epreciated paper money
may be made legal tender fo r something below its face value
The ordeal o f contracting issues by restricting credit is thereby
completely avoided But this method is not so sa fe and easy
as it looks If at the mo ment at w hi ch it i s d one the entire
.

A F TER TH E W AR
l egal tender currency in circul ation is paper and i f it is made
to pass at a value approximately equal to t hat which it then
has in the market th ere is n o reason why there should be
any immediate i mportation o f gold If a favourable time is
chosen when the world value o f gold is falling the exchanges
will become favourable and the stock o f currency will have
to be supplemented by the importation o f gold
But i f the
world value o f gold i s rising no gold will be imported and the
paper money wi l l be depreciated even below its new value It
is such a mishap as this which sometimes leads to the comp lete
d iscred it o f pa per mone y when a general contempt o f the
legal tender laws makes it useless and i t no longer has any
value except fo r speculators w ho buy it at an extravagant
d iscount in the hope that the Government may ultimately
As is shown by the experience a fter
pay s omething fo r it
the collapse o f the assignats this sudden abandonment o f
paper money as the medium o f payment occasions a prodigious
d emand fo r coin and may cause innite embarrassment to
oth er nations
And in o ne way this cutting o f the knot intensies rather
than mitigates the evils o f a gradual contraction o f the cur
The root cause o f those evils is the increase i n the
rency
burd en of debts as com pared with the value o f commodities
From the point o f view o f equity it is an advantage that the
standard is restore d wi th out delay fo r purposes o f account
even i f the paper money issued under Government auspices
is partially repudiated But this means that the increase in
the debto r s burden is m ade at a single stroke instead o f being
spread over a period o f years Therefore the method in ques
tion is very d angerous except when traders in d ebted ness has
been red uce d to a negli gi ble amount If thi s condition is not
A fter
fullled there is al most certain to be a severe crisis
to face
i
the
collapse
the
assignats
was
simply
impossible
t
o
f
1
i this su d den increase in d ebtors burdens and legisl ation was
passed to adj us t pas t c ontracts according to the value o f the
assignats at the time each contract was made
The burd en o f an increase in the purchasing power o f the
mone tary unit wheth er i t be sud den o r gradual is n o t
,

23

35 6

CURRENCY AN D CRED IT

onned t o the case o f the debtor Fal ling prices d eter trad ers
from holding stocks o f goods ; new orders are checked and
production and employment fall o ff But in the case o f an
arbitrary readj ustment o f the unit there is likely to be less de
pres sion than in the case o f a gradual contraction o f credit
I n the former alternative wages prices and other money
values would almost inevitably be translated forthwith fr om
the o l d unit into the new If this is done th ecosts o f p ro
duction adapt themselves immediately to the new level o f
values ; producers quote prices correspondingly reduced ; mer
chants having no reas on to expect a f u r th er fall o f values
are ready to buy ; they may have suffered losses but that is
past and done with and their position can only be retrieved
by protable trading If there is a crisis accompanied by
many failures there may be disorganisation and a temporary
depression o f output and em ployment But this is quite
di ffe rent from the depression o f a prolonged credit contraction
when prices go on falling and the merchant repeatedly nds
hi s prot turned into a loss when the manu facturer cannot
reduce q uotations till he h as reduced wages whe n the work
m an dare no t accept a reduction o f wages which interrupted
as they are by periods o f unemployment seem already i n
su fcient
But there i s another short cut to the establis hment o f a
gold standard A new gold unit may be introduced repre
senting approximately the existing gold value o f the paper
unit This w as the method adopted by Austria Hungary
Russia and India between 1 8 9 0 and 1 9 00 It was the ac
ce p te d remedy fo r currency troubles in the Middle Ages and
later until the time o f Locke It has the advantage o f recog
? a ccompl z
n i s i ng the f a n
The monetary unit has deprecia ted ;
that may be deplorable but it is no u s e trying to ignore it
To st ereotype the depreciated value m ay be an injustice to
the cred itor but to restore the o l d standard would be an i n
j ustice at any rate to some debtors And the debtors s uffer
more from a rise in the val ue o f the m on etary unit than the
creditors from a fall S o far as short term indebtedn ess goes
the credi to rs are mainly bankers whose as sets and liabilities
c

'

AFT E R TH E WAR
are both expresse d in the m oney o f account The purchasing
1 po wer o f their prots and the real value o f their capital and
reserves may be dim inished i f the monetary unit is d epreciated
At the worst they su ffer some loss B ut o n the other hand
whe n the val ue o f the monetary unit i s raised traders are
threatened n o t merely with loss but with ruin and incident
ally this may d o serious injury to their creditors And in
fact on the whole both debtors and creditors are inclined to
favour ination and depreciation
The real loss falls o n the
lo ng ter m cred itors the hol ders o f debentures and other xed
interest yielding secu r ities A grea t part of these securities
will have been created be fore the depreciation occurred To
perpetuate the depreciation is to revi se the contract in favour
o f the debtor
The temporary loss o f real income due to the
d epreciation which lasts during the nancial strain o f a war
i s a minor evil which th e i nvestor can put up with
A per
manent reduction o f the purchasing power o f his income is a
much more serious matter
So long as society depends o n
voluntary investment fo r its supply o f capital an attack upon
the purchasing power o f interest is dangerous It must be
remembered that what the .debenture holder loses is gained
not by labour but by the s na r e/
whose dividends are
told
swollen by the residual prots A revision o f the stan da rd
o f value introduces a capricious element into the investment
o f capital and especia lly threatens the class o f n o n spec ula
tive investors wh o play s o considerable a part as the
How
sleeping partn ers o f the modern capitalist system
far this is contrary to the mater ial interests o f society is a
subject o n which much m ight be said ; that it is an inj ustice
s o lon
g as the capital ist system continues seems unquesti on
able
B ut there i s o ne class o f investor which is in an altogether
spec ial position mor e particularly in post war nance Tha t
is the holder o f the natio nal debt
The re is no need to enlarge upon the invidious posi tion
o f a S tate which has to decree in what unit o f value its o w n
O f course debts may be made
d ebts are to be calcul ated
In that
exp res sl y pa yable i n gol d or i n a foreign currency
.

35 8

CURRENCY AND CRED IT

case the di f culty does not arise It did not arise in the
United States a fter the C ivil War or at any rate a ft er it was
agreed once and for all that the Civil War debt was a gold
debt But what is to be done in a case where the national
debt is payable in the national currency and the basis o f the
national currency is to b e altere d ? It may be said that
whatever i s done in the case o f private debts the national debt
ought to be made payable in whatever metal lic standard was
in operation when it was incurred If the gold unit o f cur
re nc
y is reduced the interest and principal o f the debt must
be paid in the old unit But this i s to give the stockholders
more than they bargained fo r When they invested it was
with no idea o f claiming a pre ference over other investors and
to give t h em an uncovenanted ben et is an injustice to these
latter who have to pay ta xes towards meeting the cost of it
If the national debt holders possess this right it ought to have
been made clear at the time when they subscribed to the
loans ; fo r then the State could have had the advantage o f
getting favourable terms fo r what would have been a gold
loan It would be dishonourable to alter the standard fo r the
purpose o f lightening the burden o f the national debt But
i f the standard i s to be altered on gener al economic ground s
i s it not irrational to give the national cred itor a privileged
position merely in order to save the appearance o f arbitrari
ness ? And i f as is very probable the greater part o f the debt
has been incurred during the war when ination was in pro
gress i s it not a departure from al l reason and justice to select
the national creditors o f al l others to be repaid in the o ld
standard ? The pre war debenture holder in a trading con
cern who lent money o f the old standard is to receive interest
and principal in money of the new H is neighbour who lent
the Government depreciated paper is to be sing led o ut to re
cei ve pay ment in the o l d standard
The principle o f repaying debt in currency o f equal value
t o that in which it was origina l ly incurred was adopted in the
American War o f In d ependence and by Austria H ungary in
It w as not applicable
181 1
( S ee above p 306 and p
in Englan d a fter 1 8 1 5 i f only because d ebts of di fferent dates
.

A FT E R TH E WAR

359

had bee n consol idated and th e holdings were not disti n guish
able from one another
But a fter all the most powerful argument t o be urged in
support o f the inclusion o f the national debt w i thin the opera
tion o f a new and d e preciated monetary standar d is that other
wise the strai n may be greater than the country can bear If
the Government nances can only be carried on by means o f
fresh ination the attempt to restore the metallic standard
even by a cutting o f the k not will fail and in the end the
public creditor will o n ly be paid in paper
And yet this i s itsel f the strongest argument fo r restori ng
the old standard if i t ca n be don e If the real reason for
abandoning the standard under whatever plausibl e pretext is
believed to be necessity the national credit will suffer The
nation can only escape condemnation fo r a breach o f faith at
the price o f a con fession o f nanc ial impotence
We s ee then that a fter the orgy o f ination which seems
to be almost a necessary accom paniment o f modern war co n
d ucted o n the grand scale variou s currency policies are possible
and eve n when the pol icy o f any particular country is selected
its absorption o f gold may vary within wide limits Gold may
enter into actual circulation immediately ei ther because the
issue o f paper money has never been su f cient to depreciate
th e stan d ard at all or because the paper is made to pass at its
depreciated value or because a n e w gol d standard has been
adopted In such cases i f the currency require ments grow
and no new uncovered paper money is issued to meet them
gold will be brought to be coined or to support an increased
note issue And whatever the standard may b ei f it be an
or to be regained o r never lost o r i f
o ld standard regained
it be a new stan d ard establ ished or hoped fo ra gold r eserve
large or small may be aimed at o r the gold exchange system
can be adapted to dispense with a reserve altogether Thus
o f almost u n
the
absorption
gold
is
everywhere
capable
f
o
l
lim i ted variation And the world val ue o f gold depends o n
the absorption of gold If there i s a general tendency to ac
cumulate gold reserves and to restrict issues w ith a Vi ew to
increasing the circulation o f gol d coin the value o f gold i n
,

'

36 0

CURRENCY A N D CRE D IT

com modities will rise If the tendency is to be content with

a paper circulation without gold backing the val ue o f g old
may fal l even bel o w the low level characteristic o f war condi
tions Which tendency will predominate it i s impossible to
foresee
On the o ne hand the experience o f war conditions
has increased rather than diminished the importance attached
by Governments to the possession o f an ample stock o f gold
On the other hand it must be remembered that a stock o f
gold whether in circulation o r in reserve can only be accu mu
lated by a sacrice o f other forms o f wealth a sacrice which
nations exhausted with war are ill situat ed to make The

more they bid against one another fo r gold the greater the
o f gold in
Moreover
the
greater
the
value
s acr i ce involved
E
commodities the more d ifcult will it be to establish or to
maintain a given gold standard Thus a scramble fo r gold i f
it occurs at a ll will probably check itsel f be fore it has gone far
Seeing that the interests o f every country in regard to the
gold standard depend upon the action o f all the rest and their
action may vary quite capric iously within such wide limits
some sort o f international co operation seems to be required
But international c o operation at once raises the delicate q ues
tion o f national obligations If all the co operating states are
burdened with heavy war debts it will be to the interest o f
all to keep down the value o f gold by restricting the demand
fo r it
Are they going to combine openly or under a pretext
to depreciate the medium in which their debts are payable ?
This is not quite the same thing as to inate a paper curre ncy
fo r the purpose o f lightening the burden o f the national debt
fo r gold in any case has an intrinsic val ue as a raw material o f
indust ry But the limits o f its variation are incalculably wide
and a general understanding to economise the use o f it as
currency would have a prodigious e ffect But i f States
generally agree to moderate thei r e fforts in this direction the
picture o f the plenipotentiaries deliberating h o w great an
articial demand fo r gold must be set o n foot in order that
the burden o f their debts may be made su fciently heavy and
honour may be satised is no t altogether convincing And
the problem i s stil l further co mplicated by the in terest of
.

'

A F TE R THE WAR

36 1

cre di t or n ations in enhancing th e value of the medium i n

which the debtor nations have to make payment
Every
where the State is saddled with the responsibility fo r d ete rm i n
ing the u nit o f value a responsibility which it cannot d isavow
Yet as soo n as it b egins knowingly and o f set purpose to
exercise that responsibility it is faced wi th these perplexing
problems The upshot seems to be that the gold market i f
every country is l e ft to its o w n devices m ust be irremediably
erratic o r alternatively i f all agree to regulate it must become
too palpably articial
The question is not merely that o f j u stice between debtor
and creditor The prolonged depression a fter 1 8 7 3 i n su f
c i entl
y relieved by th e short trade revivals o f 1 8 8 0 and 1 8 9 0
showed h o w much d istress can be caused by an appreciati on
o f the common monetary un it o f the civilised world
This
depression was no t entirely the cons equence o f the war i n
ati o ns o f the preceding twenty years but was still more
traceable to th e general transition from a silver or bimetallic
to a gold standar d The terrible depression which followed
was directly traceable to the deati o n a fter the war
The gleam o f good trade in 1 8 1 8 and the speculative blaze o f
1 8 2 5 were an inadequate set o ff to the general gloom
There
is a danger that the present war may be followed by a similar
per iod o f excessive currency contraction Financial co rrec ti
tude i f pres s ed to the point o f pedantry may lead to a vice o f
d eati o ni s m as b ad in its way as i n ati o n i s m
Indeed o ne o f
the evils o f i n ati o ni s m is that when the monetary standard
has lost stabi lity condence can only be restored at the cost o f
a drastic currency contraction with all its attendant tribulation
Ination means i n a tion o f the consumers income and more
es pecially o f pro ts and wages the tw o principal va r i a bl e co n
s ti tue nts o f the consumers income
Deati on there fore means
a reduction o f pro ts and wages I f wages resist the proc ess
and it falls undul y o n prots the result is unemployment
When the count ry is tied to the gold standard and an abandon
ment o f that stand ard means loss o f touch with the world s
currency there i s a plain motive to induce the com mercial
community to undergo the ordeal
But when the gold
.

36 2

CURRENCY AN D CRED IT

standard has once been rel inquished it becomes very di f cult

to resist the traders desire to have just so much credit created as
is necessary to nance thei r b usiness at the existing level o f
wages and prices Trade unions do not usually accept a r e
duction o f wages unless a fall o f prices or loss o f prot has
actually materialised If labour and capital are banded together
to resist deation their opposition may bring it to nothing as
happened in the Un ited States in 1 8 6 8 The consumers
income m ay become stereotyped at its inated amount
But a country cannot acq uire increased purchasing power in
the world s markets merely by increasing the number o f units
in which the consumers income is reckoned The ination
will be reected in the val ue o f foreign monetary units that is
to say in the foreign exchanges Incidentally this shows the
futility o f attempting to gain a larger share o f wealth fo r the
working classes by raising money wages without taking any
other measures to e ffect a redistribution Either the high
wages will encroach on prots and di m ini sh employment o r
they will be accompanied by proportionately high prots and
prices The former condition can hardly be a permanency ;
the latter can provided the monetary unit be allowed to be
permanently depreciated
During the war wages have everywhere been increased in
a very high proportion It seems not unlikely that the d i f
culty o f reducing the m again will be the determining factor in
the settlement o f the future monetary units Except where
depreciation has gone pal pably too far as in Eastern and
Central Europe there is a tendency to revert to the pre
war
gol d parities B ut this does not mean a restoration o f the
pre war p urchasing power o f the several monetary un its
Any country which nds its currency appreciated above those
o f its neighbours will think itsel f free to indulge in further i n
ati o n till the appreciation is reduced
Any country which
nds its currency depreciated will wait events till this further
ination has done i ts work By the time they are all in step
the greater part o f the world will again have a gold standard
but o f course the purchasing power o f gold will still be very
lo w perh aps even lower than ever
,

AFTER TH E

WA R

36 3

There never was a time at which the currency systems o f

the world were s o exposed to danger as they are likely to be
in the im mediate future The portentous pro fusion o f paper
money a ffords unparalleled oppo rtunities fo r deation while
3the development o f credit and the elaboration o f such devices
as the exchange standard have opened the way to an almost
i nd nite further ination cloaked under the disguise o f an
e
economy o f gold Between these two contrary dangers there
seems to be no clear principle to keep mankind in the middle
way and it is even possible that one may succeed by way o f
reaction to the other
.

C H APTER XX I
C

O N C L U S IO N

WHAT I have called the classical theory of currency starts with

the postulate that any two things exchange d must both have
If goods o r services are sold fo r money the money
va l u e
m ust have value as well as the g o ods or services If they are
sold fo r credit th e cred it must have val ue A debt o r credit

is the debtor s obligation to pay a nd i f the debt o r credit is

to have value that which he i s obliged to pay must have value
Credits can be used as a substitute fo r money bec ause and
only because they give a title to money The right to receive
money on demand is for many purposes equivalent to money
A piece o f paper which purports to con fer this right but does
not in fact do so has in reality no value ; it is a promise to
pay which is not kept Paper money which i s no t convertible
into coin is a sham a fraud H e who sells goods fo r paper
money sells something fo r nothing ; likewise he who sells them
fo r a credit payable only in paper money
Coin only differs
from bullion in that its weight and neness are certied
If it
does n o t contain the prescribed amount o f ne metal the
certicate is an imposture
This severe and uncompromising doctrine has owed its
success rather to its practical utility than to its theoretical
per fectio n I t has grown up o u t o f the political contests which
have raged from time to time about currency questions
Attacked and defended by a thousand pol iticians and pam
ph l eteers it has held the eld as the o n e theory which p ro
vides an intelligible sel f consistent workable system The
economists at any rate fo r the past hal f century have not
paid such unreserved homage to i t as the practical men
They have seen that the precious metals themselves cannot
,

3 64

C O N CLU S I O N

36 5

prices and si milar devices But o n the whole for most people
sound currency stil l means as it has long meant a metallic
c urrency
It is the only bulwark against i nati o ni s m that
insidious nancial vic e which seem s so attractive but over
indulgen ce in which may en feeble o r wreck the sys tem
But to recommend a dog m a o n account no t of its i n
herent validity but o f its good practical consequences is a
dangerous method
When people discover i ts theoretical
weaknesses they may n o t only reject the dogma but neglect the
practical consequences It is best t o know the weaknesses of
a friend other wise o ur friendship is precarious and may be sur
prised and broken by a bel ated discovery
Ination means a t o o free c reation o f cred it The classical
t heory o f cu rr ency teaches us t o guard a gainst this by tying
down cre d it rigidly to a metal lic basis It rightly holds paper
money
and
debased
or
over
val
ued
metallic
money
to be
2
'
d angerous expedients
But in treating them no t merely as
d angerous but as the negation o f truth it goes too far
One consequence is that the true nature o f a money o f
account has been obscured I f a credit has no other meaning
than an obligation to pay so much gold there is no room for
the conception o f a unit for the mea surement o f debts as dis
ti ngui s hed from a unit fo r the measurement o f gold
8 0 long
as debts are in fact payable in gold the neglect o f the di s
tinction is innocuous But it is j ust when the monetary system
becomes deranged an d debts are no longer payable in gold
that cu rrency theories which may usually be le ft to the care
o f economists gain practical and pol itical importa nce
In the H ouse o f Commons debates o f 1 8 1 I on the Rep o rt
o f the Bullion C ommittee the supporters o f the Committee
merciles sly ri d icul ed their opponents fo r suggesting that the
monetary unit could be anything except gold o r silver
Canning in what was perhaps the most brill iant speech o f the
whole long d ebate ( 8 th May 1 8 1 I ) taunted Castlereagh with
dening the standard to be a sen se o f value in re ference to
com mod ities
The Bullion Committee had been accused o f
.

36 6

CURRENCY AND CRED IT

putting fo rward abstract theories

The admonition to b eware

o f abstract theories
said Canning
comes from whom ?
From the inventors and champions o f abstract currency
fro m those w ho a fter exhausting every attempt to nd an
earthly substitute fo r the legal and ancient standard o f our
money have divested the pound sterling o f all the properties

o f matter and pursued it under the name o f

ideal unit into
the regions o f non entity and nonsense
I contend he
said that a certain specied weight o f gold o r silver o f a
certain neness i s the only denition o f a pound sterling
which an Englishman desirous o f con form ing to the laws o f

his country is bound to regard o r understand

The debaters o n the other side had really no intelligible
1
theory to put in opposition to this
They were only concerned
to explain away the fact that gold bullion was worth some 2 5
per cent more than the coinage price To press the argu
ments they used to their logical conclusion would only have
been to make them look less pl ausibl e and more dangerous
Thus the argumentative battle went by de fault in favour o f
the classical theory and in 1 8 1 9 when the country was re
l i eve d from the overpowering necessities o f war nance the
fruits o f victory were quietly reaped by the stalwarts o f the
Bull ion Committee In ati o ni s m found a last re fuge in the
eccentric radicalism o f Birm ingha m and it w a s only against
the unimportant opposition o f such men as Muntz and Att
wood that Peel was speaking when on introducing the Bank

Charter Bill o f 1 8 44 he put the question

What is the real
nature and character o f the measure o f val ue i n th i s country ?

What i s the signicance he said o f that word a

Pound with which we are all familiar ? What is the e n

to
pay
a
Pound
Un less we are agreed as to the
g ag e me nt
answer to these questions it is in vain we attempt to l eg islate
on the subject If a Pound is a mere visionary abstraction a
.

'

S mi th

Thi s i s
,

not tru e

w i th out

w h o gave evi d ence

q ui te appr ec i ated th e

a n ac cou n tant ,

w ro t e tw o pam p hl e ts ,
t h o u gh i n o th er r es p e c ts h e
n o n s e ns e

v ers i es .

w h i ch

M r Thomas
pam ph l et eers
befor e th e C om m i ttee of 1 8 1 9 and
con ce pti on o f a
o ney o f
ccou nt ,

excep ti o n o f

in

h i s fu l l sh are to th e ge neral o utp u t of

co m mon w i th m os t oth er currency contro

co ntribu ted

ch aract eri s ed thi s

th e

C O N CLU S I O N

36 7

o mething which d oes not exi st either in law o r in practice i n

that case o ne class o f measures relating to paper currency

may be a d opted ; but i f the word P ound , the common de

nomination o f value s ignies some thing more than a mere
fi ction i f a Poun d mean s a quantity o f the prec ious me tals
o f certain weight and certain nen e ssii that be the d e

n i ti o n o f a
P ound in that case another class o f measures
relati ng t o pa per currency will be requisite
Now the whole
foundation o f the proposal I am about to make rests upon the
assumption that according to practice accord ing to law
according to the ancient monetary policy o f this country that

which is impl ied by the word Pound is a certain denite

quantity o f gold with a mark u pon it to determine its weight
and neness and that the engagement to pay a Pound means
nothing else than th e promise to pay to the holder when he

demands it that d enite quantity o f gold

The general acceptance in this country then and a fterwards
o f this doctrine has contributed greatly to our freedom from
currency troubles and to o u r pre eminent international credit
position But un d oubtedly Peel and the supporters o f the
classical theory missed a part o f the truth They missed the
concep tio n o f a money o f account as something distinct from
the l egal ten d er money To arrive at that conception it is
necessa ry to un d erstand that an undischarged debt due fro m
a solvent d ebtor i s from the standpoint o f the creditor pur
chasing po wer There being a demand for purchasing pow er
purchasing power commands a price like any other
a: s u ch
right over wealth The money o f account provides the unit
in which debts are legal ly e x p res se d and the same unit being
used to express prices provides a com mo n d enominato r fo r
the measurement o f the relative values o f purchasing power
o n the o ne han d an d commoditi es or services on the other
So long as the quantity o f purchasing power ( which we have
called the uns pe nt margin ) is n o t un d uly increased o r de
creased pri ce s are not d isturbed and the value o f the monetary
unit o f account remains steady But owing to the natural i n
stability o f credit this cannot be re lied on Th ere fore the
expedi en t has been adopted o f x i ng tkep r zce of one com mod i ty

'

C U RR E N C Y AN D CRED IT

36 8

Gold is given its coinage price and to m ake this pri ce a real ity
it is decreed that every debtor may be req uired i f his creditor
s o desires to pay in gold at that price
The result is that the
dealers in debts have to keep a part o f their assets in gold in
order to be in a po sition to comply with their legal obligations
But this plan o f making debts payable in gold is merely a de
vice fo r keeping the variations in the value o f the monetary
unit within bounds The value o f one commodity in terms of
another i s regulated by the conditions o f supply and dema nd
and so long as those conditions do not vary greatly o ne com
m o d i ty is as good a standard o f val ue as another
In practice
conditions o f both supply and demand are apt to v ary a good
deal and the precious metals being less subject to wide and
rapid uctuation s than almost any other commodities as wel l
as being well adapted fo r coinage have been generally selected
as the basis o f the moneta ry system But convenience alone
has been the ground o f this cho ice To say that the monetary
unit o f account has no m ea ni ng but the precise weight o f gold
or silver which it represents at the coinage price is agrantly
untrue When Castlereagh dened the pound sterling to be

a sense o f value in re ference to commodities he can have

had no very clear idea o f the nature o f a money o f account or
But to re ply as Cann ing did that
o f its relation to credit

a certain specied weight o f gold o r silver o f a cert ain ne

ness i s the only denition that an Englishman need regard
is completely to misconceive the true theory
o r understand
At that very moment debts and prices were
o f the subject
actually reckoned in a poun d sterling which Canning and his
They
friends clearly proved to be depreciated 2 0 per cent
may have reasoned q uite rightly that ,5 I oug ht to have meant
I
grains o f pure gold In point o f fact it d i d mean in
terms o f gold about 9 1 grains This was only possible be
c ause the law which dened ,6 I in terms o f gol d o r silver was
in abeyance It remained merely the un it for t he calculation
Its v alue no long er bound to any specied com
o f debts
m od i ty w as determ ined by the exceedingly complex process
analysed in Chapter I I I Peel too w hen he declared that a
pound meant a certain denite quantity o f gold with a mark
,

CON CLUS I O N

36 9

upo n it to d eter m ine its weight and neness claimed that this
was so according to practice according to law accord ing to
th e ancient moneta ry policy o f this country
The argument
was n o t th at n o other monetary system was possible b ut that
as this mo netary system actually ex isted an engagement to
pay a pound must be interpreted in the l ight o f it and to dis
charge it otherwise than by the payment o f the stipulated
quantity o f gold would be a breach o f faith This is the real
foundation o f the classical theory
To secure a sound cur
re ney against all attacks it is not enough merely to prove that
it is invariably expedient to maintain a metallic standard ; a
d eparture from that standard must be shown to be actually
dishonest the system must be securely founded o n a categor
ical imperative
But this categori cal imperative d i d no t necessa rily preclude
any change o f standard whatever Just as loyalty to the d e
f acto monarch even though a usurper w as recognised a s inno
cent by the law o f trea son so with lapse o f time a monetary
standard in its ori gin an immoral debasement might become
entitled to recognition
Queen El izabeth whose boast
moneta i n j us tu m va l or em r eda eta P eel held up to approbation
in the debates o f 1 8 1 9 did no t go back to the standard that
existed in I 5 4 3 but coined a Troy pound into 6 05 instead o f
And the coinage price o f silver 6 2 3 to the poun d
45 5
which survived till 1 8 1 6 was the result o f a further debase
ment by Elizabeth hersel f which though slight did not d i er
The classical
i n pri n ciple from the mediaeval debasements
theory o f currency could not but condemn any debasement
but a change o f standard fro m silver to gold or vi ce vers a
might be per fectly legiti mate There was nothing contrary
to the categori cal imperative in the change from a silver to a
gold standard in Germany in 1 8 7 3 A promise to pay 9 30
thalers meant be fore the change 1 5 % k ilogr ammes o f silver
But there was
and after the change a kilogram me o f gold
no b reac h o f faith because a k ilogramme o f gol d was equal
I f Mr Brya n and th e
i n value t o I 5 % k ilogramm es o f silver
s ilver party had wo n the presidential election in the United
S tates i n 1 8 9 6 a d ebt of $1 00 would have becom e pay able
,

'

24

C U RR E N C Y AND CRED IT

37 o

in
5 0 grains o f silve r ( nine tenths ne) instead o f 2 5 8 0
grains o f gold This would have been a reversion to the
pristine standard o f the country but it would none the less
have been unj ust to creditors because the silver was at that
time worth no more than hal f as much as the gold
B ut to admit value as the test is really to abandon the
categorical imperative If a bull ion dealer contracts to deliver
o f gol d it is not a fullment o f the contract to
oz s
deliver an exactly equival ent value o f silver If a purchaser
contracts to pay money neither party to the agreement con
siders in what medi u m the debt will be payable The medium
o f payment and consequently the value o f the debt will be
settled by the law o f the land The medium o f payment in
fact is not part o f the contract
And this is true as much of
a promise to pay as o f an obligation to pay If payment were
desired in any particular medium this would be expressly s ti pu
lated ( as it o ften is in countries where the currency system
does no t command condence)
Along with the categorical imperative the moral o bj ec
tions o f the classical school to inconvertible paper money fall
There remain the objections on the score o f
to the ground
expediency These arise chiey from the ri sk o f abuse If
a paper issue is s o regulated that the foreign exchanges are
kept near par and that the purchasing power o f the monetary
unit in terms o f commodities does not vary unduly the n the
advantages o f a sound currency system have been obtained
But unless there is some generally recognised international
standard o f value these conditions may be unattainable and
may not even be consistent with one another Till 1 8 7 3
the international standard was provided by gold and silver
linked together by the bimetallic system Since the break
down o f bimeta llism it has been provided by gold The test
o f every paper currency has there fore been parity with the
precious metals If the metallic stand ard is supported either
by a metall ic circulation or by a substantial metallic reserve
early warning o f inatio n is given by withdrawals for export
The actual depreciation o f the monetary unit does not begin
till the metalli c currency and reserve are exhausted But to
-

CO N CLU SION

37

g a i n th e full

ad vantage o f this res pi te there must be a real

reluctance to depart from the metallic standard Prim itive
man clung to his reli gious rites fo r fear he should n eglect the
progress o f the seasons and the annual round o f agricultural
operations The cu rrency experts o f the nineteenth century
wi th similar pru d ence sanctied metallic money with an
almost religious taboo
But it is hardly necessary to insist at this stage that
metal lic money is by no means a complete solution o f the
problem Supporters o f the classical doct rine have never
shut their eyes to this They have always recognised that
prices are raised by the opening up o f new gold and silver
mines and depressed by the failure o f existing sources o f
supply But it has been held to be one o f the greatest merits
o f the precious metal s as the measure o f value that owing to
their indestructibility the ann ual supply is always small in
proportion to the accumulated stock in the world
This is true but the variations in demand are more potent
than the variations in supply If the stock o f gold is large
in proportion to the annual product o f the mines it is larger
still in propo rt ion to the ann u al absorption into i ndustry
This large stock and a part o f the annual supply are withheld
from the industrial demand only because they are needed fo r
currency purposes I t follows that the demand fo r gold and
therefore the value o f gold arise very largely fro m i ts use as
currency in other words from its interchangeabil ity with
credit Credit possesses value and it is more correct to say
that the value o f gold i s due to its convertibility into credit
th an that the value o f credit i s due to its convertibility into
gold C onvertibility i nto gold certai n ly sustains the value
But
of credit because it fac ilitates the regulation o f credit
were the union between the t wo disso lved cred i t might still
be j udi ciously regulated in relation fo r example to silver or to
an i ndex number o r as under the Bank Restriction to nothing
in particular ; the gold market on the other hand wo uld be
swamped by the release o f stocks far in excess o f the amount
which it could absorb and by the prospect o f an annual supply
several ti mes greater than its previous industrial requi rem e
nts
.

94

C U RR E N CY AN D CRED IT

37 2

We have already had some experience o f the effects o f the

displacement o f stocks o f the precious m etals from use as cur
ren ey When bimetallism broke down silver lost the privilege
which it had shared with gold o f buying credit everywhere
at o r near a xed price The gold price o f silver fell as the
change worked itsel f o u t from 6 0d to 2 2 d This fall was
doubtless due in part but only in part to a rise in the value
o f gold and to an increase in the annual supply o f silver and
it was prolonged over thirty years But the displacement o f
gold by paper during the war has been more rapid and more
sensational
S o long as gold remains the standard o f value any change
which would greatly dim inish the quantity used as currency
and currency reserves should be adopted only with the great
est caution A great extension o f the gold exchange standard
i s sometimes recommended with the avowed object o f eco no
m i s i ng or eve n o f entirely eliminating the use o f gold
Inter
nal circulation can be adequately provided fo r with paper
which can then be maintained at par with foreign currencies
by convertibility into foreign credits In stead o f gold reserves
every central bank o f issue would hol d credit balance s at
foreign centres
In all such schemes it is essential to consider
the e ffect on the world s standard o f value and P ro fessor
I rving Fisher who has made a proposa l o f this kind 1 includes
as a prominent part o f it an international unit o f value based
o n an index number o f prices
These large changes in the world value o f the precious
metals are abnormal And though they are sometimes un
avoidable they tend in some degree to correct themselves
A country with a large reserve o f gold or silver refrains from
selling it in a very un favourable market The silver reserves
which existed in 1 8 7 3 were fo r the most retained until they
were gradually used up in the manu facture o f subsidiary cur
re ncy and the United States under pressure from the silver
interests actually continued to accumulate increased silver
reserves till 1 8 9 3
.

S ee hi s

Purchas i n g P ower of M on ey

C O N C LU S I O N
I

37 3

The peri od ic cr ed i t expansions and cred it contractions on

th e other hand and the changes in the value o f gol d which
acc ompany them must be regarded as normal They are due
t o the i neffecti veness o f a metallic standard as an a utoma ti c
regulator o f th e currency unit A chan ge in the quantity o f
money in circulation is an e 22ot no t a ca us e o f a change i n the
quanti ty o f c redit created
The in c rease or d ec rease o f cash reserves gives the banks
the signal to accelerate or to retard the creation o f credit but
i s in itsel f n o more than a symptom
The actual variations in
the value o f the monetary unit are the result o f the regulation
The
o f c redit whic h rests in the discretion o f the bankers
use o f gold as an international currency tends to prevent credit
:'
conditions in any o ne country from deviating from those in the
others in more than a certain limited degree but though it
partially unies the currencies o f the world it does not prevent
them from appreciating and depreciating in unison The
world value o f gol d is tied to the m onetary units of the world
When they rise it rises ; when they fall it falls Thus the
use o f gol d as currency whether as coin o r as bank reserves
mak es it l ess satis factory as a standard o f val ue When credit
starts expan d ing ot her com modities respond by rising in price
But gold cannot I f credit runs away it carries gold with it
Apart from the almost negligible effect o f trade prosperity in
increas ing the u se o f gold i n industry the gold market does
not respond to the inuence which has raised the prices o f
other com modities except by the absorption o f gold fo r cur
This absorption only takes e ffect gradually
r ency purposes
and gives a very t ardy warning o f the need to contract credit
If gold were no t use d as currency nor even as the means o f
settling internati onal balances any expansion o f credit would
quickly rai se i ts market price and if the regulation o f credit
were always so d irected as to keep the pri ce o f gold as nearly
as possible constant action would be taken at an early stage
And since silver has ceased to be the standard currency o f any
o f the great credit using countries it has regularly risen and
fallen in price like other commodities in correspondence with
the ex pansion s and co ntracti on s of cre d i t thou gh u pon these
,

_ _

'

'

C U RR E N C Y AND CRED IT

37 4

periodic uctuations there was fo r many years superim po se d

a general tendency to depreciate
Criticism o f any theory o f curren cy leads up to the ques
tion What i s the real aim o f a currency system ? What qualities
should we look fo r in o u r standard o f val ue ? In some sense
the answer must be that we look fo r x i ty o f value But
x i ty o f value i s a conception which itsel f c alls fo r explana
tion Value is no t a quality but a relation and x i ty o f
value must be x i ty o f value in terms o f some other thing or
things No o ne commodity can supply a satis factory measure
and the economist has recourse to an index number fo r a test
The index number ought to be based o n a l l commodities
weighted in proportion to their consumption and it ought even
to embrace services but only cons u m a bl e commodities or
services fo r otherwise raw materials and intermediate services
would be counted twice over So composed the index number
is si mply a sample taken out o f the consumers outlay And
prices so measured will tend to rise or fall with the consumers
outlay But n o t in exact proportion fo r when credit is
expanding and the consumers outlay swollen consumption is
partly fed from stocks
But then what allowance is to be made fo r a general
scarcity or a general abundance o f commodities ? If the con
sumers outlay be co n sta n t the index number will be raised
by scarcity and depressed by abundance I f the index number
be constant the consumers outlay will be raised by abundance
and depressed by scarcity
The better alternative seems to be to aim at making the
consumers outlay constant But o f course it must not be
absolutely constant ; it must vary with the population and
must also vary in some way with the quality o f the wo rk they
do If that ideal could be attained the value o f the monetary
unit in terms o f l mm a n e or t would be kept xed
But this is not the only possible solution The monetary
unit is employed fo r the measurement o f debts The purpose
o f xing its value is to preserve j ustice as betwe en debtor and
creditor We are not here concerned with the fundamental
usti
e
in
the di st ribution of
econo mic conce tion o f ustice
c
j
p
j
.

'

C ON CLU SI O N

37 5

wealth but with th e strictly limite d con cepti on of securin g

the fu llment o f legiti mate expectations S o long as we base
the economic m anagement o f society o n bargains which relate
to the future the stability o f the unit in which those bar ains
g
are calculated must be o f paramo unt importance What th e
o f money consents to de fer i s hi s consumption o f co m
lender
{
i mo d i ti es and it would seem t o follow logically that what he
should receive back is the s ame command over consumable
commodities as he surrendered If the same quantity o f com
mo d i ti e s represents either a greater o r a smaller amount o f
human effort that is the concern o f the borrower
Either view see ms to be per fectly te nable and neither
seems nece ssarily to represent the last word o f justice
Justice in t his sense means no more than a code o f rules dic
tated by exped iency and rival solutions are to be tested solely
by their practical conseq uences
When it comes to practical consequences all that debtor
and creditor ask is that they may know h ow they stand that
they m ay be secured against arbitra ry o r incalculable varia
tions in the val ue o f the monetary unit If it approximates
to a xed amount o f human e ffo rt or to a xed amount o f
weal
th
or
to
something
intermediate
between
the
w
o this is
t
l
in all probability su f ciently accomplished
The danger is that the unit m ay wander far bey ond these
limits Beset by the tendency o f cre dit towards ination it
is alw ays liable to fall away from whatever standard may be
adopted Unless a return to the standard is regarded as an
unequivocal obl igation there is no limit to th e possible de
preciation The unit may follow in the well trodden path o f
the assignats the continental curr ency the Austrian paper
A return to a standard once lost is a pain
o ri n the rouble
And i f a xed standard is to be
fu l and labori ous journey
preserved this pain ful and laborious journey must be travelled
after every indulgence in ination As Cobden once said o f
the greenbacks a fter the debauch comes the headache
It is the i nherent instabil ity o f credit that is perpetually
involving the world in credit expansions each of which would
threaten th e colla pse o f th e gol d stan dard i f i t were no t
,

CURRENCY AN D CREDIT

37 6

succeed ed by a contraction in time The alternation o f ex

pansions and contractions would be comparatively har mless
but fo r the dislocation and d istress which accompany the con
traction N o r i s there any su fcient compensation fo r this in
the prosperity which marks an expansion This prosperity is
largely a matter o f high prots Employment is good and
output being corresponding ly great there is no d oubt more
wealth to go round
But notoriously wages do not rise as
quickly as prices and on balance the great mass o f the people
The working classes have the
m ay be little i f at all beneted
greatest interest in a stable currency and s o long a s the
monetary unit does n ot break away from all bounds like the
assignats the question o f justice between debtor and creditor
is less important than the effect o f currency movements o n
employment and real wages
We have traced the instabil ity o f credit to i t s source in o ur
earlier chapters We found that the in itiative in production
rests with the merchant and the promoter the dealer in com
It is they who give
mo d i ti es and the dealer in capital issues
the order to produce The process o f production which
The m anu facturer or
follows gives rise to a chain o f d ebts
contractor becomes indebted day by day to h i s employees
The m erchant becomes indebted to the manu facturer But
whereas the merchant s indebtedness is due at some future
date when the goods are to be delivered the manu facturer s
obligations are immediate ; his employees want to u se these
obligations as p urchasing power Here intervene s the banker
who takes the immediate obl igations upon his o w n shoulders
in exchange fo r a future obl igation which the manu facturer as
the creditor o f the merchant i s in a position to give him

The banker s debts unlike those o f the manu facturer can be

conveniently used as the means o f payment ; o r where legal
tender money i s needed fo r the purpose the banker makes it
his business to supply money o n demand
Thus by giving the order to produce the merchant i n
directly creates i n this new accession o f purcha s ing power an
eff ective demand fo r things equal in val ue to those produced
Prod uctio n feeds demand and de mand sti mulates producti on
.

C O NCLUSION

37 7

Th e

only li m it to th e process is set by the slow absorption o i

legal tender money into circulation
W hen the supply o f
legal tender money runs short the brake is put o n with a jolt
The banker tries t o stop the merchant borrowing
The
Production ags and checks
merchant curtails his orders
demand ; demand ags and checks production
Depression
re i gns till at last a su f cient supply o f legal tender money is
wrung out o f circulation t o enable the banks to start on the
career o f expanding credit again
It is o ne o f the advantages o f the standpoint which we
have adopted treating credit as the primary means o f pay
ment and money as subsidiary that it brings out the causes
and the nature o f these cyclical movements with special clear
ness And I think it enables us to trace the instability o f
credit n o t s o much to the banker as to the merchant and the
promoter The banker may not be free from responsibility ;
it may be that he ought to take earl ier steps to contract o r
expand credit as the case may be and that he ought no t to
pay a mechanical allegiance to the proportion o f h i s cash
reserves to his demand liabil ities An all wise banker might
d o much to remedy the evil
but it is doubtful i f he could do
more than shorten the period and the extent o f the cyclical
changes without avoiding these altogether so long as pro
ducti on depends upon the j udgment al most upon the caprice
o f the merchant
I t i s an easy thing fo r a merchant to give
lavish orders when demand see m s brisk or to let his stocks
run down when the market conditions are un favourable But
when he and his legion o f colleagues al l act on the same
re adi ng O f the market the one decision may tax the produc
tive en
ergi es o f the people fo r years the other may cast them
into the desolation o f idleness
The merchant has a legitimate and a very important and
responsible function ; he has to foresee what future demands
have to be met and to d irect the productive resources o f man
kind accordingly
The capital promoter whether he be him
sel f a manu facturer or merely an intermediary exercises the
same function over a longer period N ot only must they look
forwa rd to the vary ing de mand for co mmoditi es of ex isting
.

/
/

C U RR E N C Y AN D CR ED IT

37 8

kinds but they mu s t anticipate the demand for new products

and must see what the consumer wil l wa nt lon g be fore he has
himsel f considered the matter In making their forecasts they
measure demand by money o ffered
N ow anything which
a ffects the consumers outlay as a whole a ffects the money
'
demand fo r a l l commodities P r o ta nto it vitiates the dealers
calculations Each dealer is intere sted in his own commodity
and learns to read the signs o f the market This would be
quite di fcult enough i f the consumers outlay were stable
and only the r el a ti ve demand for commodities varied The
variation in the consumers outlay itsel f introduces a further
and most bafing complication
Practical men can hardly
be expected to enter into the highly technical theory which
underlies this variation They have to approach it as an
empirical problem And very many never really appreciate
it at all The result i s that dealing in goods and in capital
issues is a much more specu l a ti ve business than it would other
wise be
It might be thought that the merchant s activities would
be innocuous but fo r the fatal facil ities he receives from the
banker It i s his power o f b o rro w mg that enables him to
increase h i s stock s as he pleases and it i s the banke r s power
o f restricting credit that impels the merchant to reduce his
stock s in spite o f a favourable market This is a question
which we could only decide by picturing to ourselves a com
munity without banks Banking as we saw in Chapter X II
comprises two distinct functionstemporary lending and the
provision o f trans ferable cred its as a means o f payment Their
union is a matter o f convenience and no t o f necessity Were
they separated the supply o f purchasing power would lose
its elasticity But it is not at all certain that the consumers
outlay would become less elastic
Even i f the stock o f
purchasing power were absolutely xed traders would always
endeavour to economise balances either by borrowing o r by
lending I f they borro wed and lent a l ittle too freely the
consumers income would be increased and the consumers
portion o f the unspent margin wou ld grow at the expense of
The absence o f bank s, wi th their con
the t raders por tion
,

C ON C LU S I ON

37 9

ven i e nt

powe r o f cre ating purchasing pow er would only make

the inevitable contr action o f credit operations the more v i o
le nt Under such a system the slow passage o f money into
c irculation when trade i s active and its slow return when
trade reacts would occasion the same period icity as has been
found to exist under a bank ing system
Consequently the credit cycle is no t traceable to the asso
ci ati o n o f the creation o f purchasing power with short term
lending N or is it even traceable to the existence o f short
term lending itsel f Suppo se that there were no short term
lending so that traders could not economi se balances in this
way If markets were favourable they would reduce their
idle balances by buy ing good s Orders to producers would
be thereby increased production stimulated and the con
sumers income would expand A fter an interval the co n
sumers portion o f the unspent margin would e ncroach as in
the pre vious hypothesis upon the traders portion traders
would be unable to give orders production would contract
again and so the cycle would set in
Far from causing the cyclical uctuations a banking
system diminishes their violence and facil itates their control
Nevertheless though credit institutions are n o t the mselves
the cause o f this phenomenon yet where such institutions
exist it is through them th at the uctuations take effect
It is th ese cred it movements which dete rm i ne the rapidity
There is no need to
o f money and o f credit
o f circulation
dwell o n the futility o f any theory o f currency which accepts

the rapidity o f circulation o r the needs o f trade as some

thing given something determined from outside independently

By the needs o f trade in

o f the currency system itsel f
regard to purchasing power we mean simply the unspent
margin Our analysis in the earlie r chapters has shown how
the unspent margin is determ ined The earlier devotees o f
the q uantity theory found it necessary to quali fy that theory
to the extent that a change in the quantity o f currency would
no t necessarily produce an exactly proportional change in
prices i f in the interval the needs o f trade had changed More
i t ca me to be lai d down that , i f the ra pid ity o f
i
rec
sel
p
y
,

C U RR E N C Y AND CRE D IT

33 0

circulation i ncreased a smaller stock o f cu rr ency woul d support

a given level o f prices and vice versa In reality an increased
rapidity o f circu lati on is merely one o f the symp to ms o f a
cr ed i t ex p ans i o n and a re
duced rapidity o ne o f the symp toms
o f a credit contraction
We have treated money as subsid iary to credit I n a
highly developed system o f deposit banking such as that o f
England o r the United States th e j ustication fo r this is
obvious Purchasing power is c re ated and exting ui shed in
the form o f credit Even gold fresh from the mines is in the
rst instance sold to a bank in exchange fo r a credit ; it is only
coined and passed into circulation when the customers of the
bank ask for it
In recent years development has every where been in the
direction o f this system But even where it has gained little
or no footing the alternative is nowadays the use o f notes of
a central bank o f issue which though they may be legal
ten d er are no ne the less obligations o f the bank As we
saw in Chapter I I I the line o f demarcation between credit
and money though clear enough in principle becomes indis
t inct in the case o f the legal tender bank note Though the
legal tender bank note is itsel f more properly money than
credit it appears i n the balance sheet o f the bank of issue
along with the deposits an d it is brought into being by the
same process The borrower i s given the option o f taking
the sum lent either i n notes or in credit and if it is the pre
valent custom to choose notes , th at makes little di fference to
the principles o f control Control o f currency nowadays rests
o n that association o f the c reation o f purchasing power with
short term lending which forms the found ation o f modern
banking
,

"

I N DE X
AB SO RP TI O N

Argenti na

of

gol d
as curre ncy after th e W ar , 35 8 9
by
erm any i n 1 8 7 2 3 . 3 1 1
cceptance , a cceptor, s ee
i ll s of E x
ch an ge
ccepti n g h ou s es , 1 05 , 2 1 3 ; at a nan
ci al centr e , 1 5 5
c co mm o d ati o n bi ll s , 1 95
-

by ,

35 5

3 65 7
u ni t o f, s ee
dvances , ban

So

1 8 2 ! 2 95

7 4:

4:

me n t ,

Advances

M onetary un t
k 7 98 9 1 94 ; to Govern A
,

2 08 , 2 1 9- 2 2 .

B k

by Cen tral
an
i a a cri si s , 1 5 2 3 , 1 5 8
i n war ti m e , 22 0
dvances by an of En gl and
apol eoni c
to
overnm e n t d uri n g th e
ars , 2 7 2 , 2 7 7 8
to
ov er nm ent d uri n g t h e W ar o f
-

B k

W
G

1 9 1 4 1 9 , 2 20.
-

to

P i tt's G overn m ent

6 7,

25

25

8 9
-

A
A

B k

l Argm t d e P ari s , 2 46
e ff ect of , on
rench co i nage , 300 1
s p ecul at i on i n , 24 6 , 2 5 4
total i s sue o f, 25 2
s si gn m ent of debts , 4 , 99 , 1 00 , 1 8 6 ,
37 6
us tr al i an gold di scover i es , I 7 5 , 30 7
u n gary
u str i a
cri si s of 1 8 7 3 , 3 1 2 , 3 2 3
curre n cy , effect of war s of 1 8 5 9 , 1 86 4 ,
an d 1 8 6 6 on , 3 2 2 3
d evel o m ent o f, after 1 86 7 , 3 1 1
tardard L aw , 1 8 9 2 , 3 2 5
ol d
loan to , i n 1 7 95 , 25 6 , 2 5 9
pap er i s su e of 1 8 1 1 , 32 1 2
s i l v er, s uspensi on of free co i n age of,
3 23 4
s p ecl e
payments
a ttem pted , 1 8 1 6 , 2 7 4 , 3 2 2
re su m ed , 3 22
us e o f gol d exchan ge s tan d ard by ,

1 2 0.

France 1 7 92 2 3 6
us tr i an N ati onal B ank 3 2 2
H un gari an Bank ad ances
u st o
to Dual G ov ernm e ts 2 2 0
W ar

w i th

Autom ati c sy s tems of note i ssue

96

by ,

7 5 81 ,
-

A
A
A

26 1

5 4,

d uri ng cr i s i s of 1 7 93 , 2 5 6
d uri n g cri s i s of 1 8 1 1 , 2 7 2
g ad i r cr i s i s , 1 9 1 1 , 2 1 9
gri cul tur al prod ucts
cred i t r equ i rem en ts of d e al ers i n , 1 2 3
effec t of a cri s i s o n , 1 3 8 (s ee a l s o
arves t ,
am i ne)
m eri ca, s ee ni ted tates
m eri ca, ati n
paper m o n ey current i n , 344
s i lver pro d ucti o n o f, 3 05
S pecu l ati ve trad e w i th , i n 1 8 1 0 , 2 7 1 ,
35 3
meri can s , pap er money i nvented by ,
3 05
mi ens , Tr eaty of, 2 7 0
m s ter dam
an
o f, 1 7 8 , 1 92 , 20 1 , 2 88
exchan ges o n , befo re an d after recoi n
a ge o f 1 69 6 , 2 9 2 , 2 98
as nanc i al centr e, 2 6 7 , 2 9 1 (s ee a l so
o l l and )
ntw er
p
exch an ges on , duri ng Tudo r d ebase
m ent , 2 8 4, 2 8 7
as nanci al centre, 2 84

Advances of exc hequer bi l l s

A
A

23 3

1 7 6,

A ssi gnats French

call ed

0 f, 3

money

1 20

As si gnats French

A
Accoun t

i n , l ead s up to
ari n g
c r i s i s , 1 8 90, 3 1 6 1 7
u ti li s ati o n o f gold exchan ge s tand ard

s p ecu l ati o n

B AL AN C E

of

i m ports , go,
2 2 5 9 2 7 9: 3 1 0i 3 1 2 )
i n de b tedness , 5 9 . 6 0, 7 0
p aym ents , 86
exports and

1 1 4,

1 38

3 1 64

41 ,
7

Bal ances

and rapi di ty o f ci r cula ti on ,

ave rage ,

47 8
-

ch an ges

i n,

rel ati on of

i ncome , 41

co n s um ers , 41
d i sch arge of, 5 3

to ch an ge i n

C U RR E N C Y A N D CREDI T

38 2

Banking sy stem of
Balancescont
economised by temporary borrowing
England 7 9 8 1 1 9 7 2 20
Europe 8 3 1 99 2 2 0
3 7 40 1 8 7 207 2 9 1 2 3 7 8 3 7 9
U nited S tates 7 8 9 8 5 1 89 1 98 9
e ffect f war on 2 7
6
Government 2 7
2 04 5 3 1 5
loss o f interest on 3 7 4 1 1 1 8 7 Bank
f Amsterdam 1 7 8
2 7
9 2 2 01 2 8 8
A ustrian N ational 3 2 2
B alk n W ars of 9 2 1 3 2 1 5
Aus tro H ungar ian 3 2 3
Bank
advances e A dvances
Bank f England
advances by to Government 220
assets 7 9 3 8
1 92 5 ;
local distribution o f ( e l o
25 6 7 2 5 8 9 2 7 2 2 7 7 8
and I ndian reserves 2 2
Gold exchange standard) 1 6
as the Bankers Bank 8 1 1 97 220
1 16 17
15 5 6 16
229
capital 3 8 1 3 2 1 8 7 1 93
Bank Charter A ct o f 1 844 7 8 81
credit d i e t from money 5
95 6 1 6
3 66
failures 1 3 3
Banking D epartment 7 8 9
9 6 7 2 0 2 02 2 2 3
investments 1 8 7 93 4 2 1 9
Baring crisis measures during 3 1 7
borrowing from 1 98 2 2
notes 4 3
96
distinction of from paper money
Conti nental credits in favour of in
.

0,

0,

a s

0,

'

0,

not payable on demand issued in

the eighteenth century 1 9 1
premium on in China 1 7 8
small disadvantages of 1 9
S tate regulation f 5 0 202 3
prots derived f rom unspent m argin
,

90
n
81 , 1 1 7 ,
, 5 1 , 1 2 8, 1 98 ;
,
1 25 , 1 49 5 0 , 1 9 8
8 , 48 , 5 0 , 1 5 8 ,
, 2 2 , 2 8 , 30 , 3 7
1 6 8 , 18 7 , 1 9 7
of, 8 1 , 1 9 7 , 22 0
of, 2 7 , 48 ,
49 9 1 96 37 7
of f
, 1 18 19
n
a
(see al so
)
,
5 0, 5 2 , 7 8 , 1 5 6 , 1 7 8 ,
.

Lo don

30

rate

1 8 6 , 1 89

0 1

er n

se

se

1 8 39 , 1

5 8,

161.

di scount of bill s by at outbreak of

W ar in 1 9 1 4 2 2 1
xed duciary issue of 7 8 9
foundation of 2 9 1
gold reserve of held partly abroad
,

1 60, 2 29

I ssue D epartment

O tes v

13v

78 9
-

25 5

7 3!

reserv es

restriction

1 81 9. I

English system
xed proportion system
inclusion

oreign bills in
Gold excha ge stand rd
-

Bank Central
,

27 4

1 7 97

9 . 2 3 3 4. 2 5 5 7 8 .
-

cash p ayments by in

of

1 6 96 , 2 9 7

1 26 . 1 5

3.

suspension
B ank of
France

cash payments

of

7 8 . 82 .

157

(m)

233

2 7 3.

H amburg 1 7 8 1 92 2 1 2 5 7 2 88
advances by 1 5 3 1 5 8 220
Pru s sia 8 1
borrowing by 5 1
V enice 2 88
reserve of foreign bills held by Banks
118 9
1
bills drawn on 1 00
1 03
r esponsibility of for a credit expan
condence in 1 03 4 1 96 26 c
sion 1 30 2 02
country
in En gland in eighteenth
Banker
century 2 5 5 2 7 3 3 00
creates purchasing power 1 7 1 9 1
1 17
Exchange 5 8 98
2 1 9 37 6
of issue European 8 1
d e ned as a dealer in debts 4 6 1 4
payment of cash into 20 3 7 1 90 1
1 85 6
runs on 1 92
demand obligation s of 2 2 48 99
s a i n gS 2 2 3 5
3 7 I 93 4
1 86 7
1 91 2
solvency of 4 1 5 1 3 3 1 93 7
functions o f in tr ade 4 1 9 7 3 7 6
S tate 5 0
Baring crisis of 1 890 1 41 1 5 0 1 5 8
37 8 9
obligation of to supply gold at a
317
xed price 1 7 1 6 7 z oo 1 3 6 8 Baring Si r Francis 2 60
relation of to customers 9 1 8 2 3 4 Barter 1
1 95 6
B i ens na ti onaux during French R evo
99
as underwr iter or company promoter
l ut i o
2 3 4 2 45 2 5 4
Bill brokers 1 97
I 95

1 97

'

n,

I N D EX

38 3

Bills of Exchange 9 8 1 06 1 5 2
Capit alcon t
acceptance of 1 00 1 5 2
o f merchants
88
35
acceptor of the principal debtor 1 05
scar city of 1 9 3 48
acceptor of dif culties of in a crisis Carrying trade 6 1 7 0
15 2
Cash
l o Money
discounted by Bank of England at distribution of stock of 2 1 3 7 8
outbreak o f W ar in 1 9 4 2 2
in hands of the p ublic cannot be
di scounting o f 1
1 03 1 04 1 1 2 3
arbitrarily altered 3 8 49 1 7 8
15 2 15 5 6
85
interchangeability o f with credit
domestic 9 8
through the banks 3 8 48 1 6 8 9
drawer o f 1 5
17 2
drawn on banks 1 1 1 03 ; on a latent demand fo 2 3 2 8 8 9
nan cial centre 1 2 3 1 5 5 ; on payment of into bank s
37
90
L ondon 1 6 2 1 2
payments suspension f
S us pen
endorsers o f 1 00 1 5 1 5 2 1 92
sion o f payments
traders needs fo 2
foreign 1 01
I ndian 2 2 3 32 3 3 4 3 41 2
Castlere agh 2 7 8 3 6 5 3 68
origin f 1 2
Central Bank
Bank
place o f payment of 1 01 2 1 5 5 6
ti
t
gold 7 5 6 97
rediscount of 8 3 1 93 1 96 99 2 4 Chamberlayne S ir Thomas 2 84 5
use of as currency 1 92
Charles II 2 9 1
Bimetallism 7 4 3 4 3 7 2 ; in France Che q ues
little used on European Continent 5
I74 5
I 7 9 2 7 4 2 99 3 3 3 07
B irmingham and i n ati o ni m 3 6 6
not drawn on time deposit s 1 9 2
Blockade N apoleon s Continenta l 26 7
used to paywages in crisis f 1 8 93 3 9
China 7 2 7 8 7 9 8 2 2 3 44
27 1 35 3
B orrowing
Loan s A dvances
Circula tion
Borrowi ng country crisis in 45
drain of money into 2 2 2 2 3 2 8
07
Bourse 91 ; Paris during the Revolu
38 89 96
5 6 3
37 7
rapidity o f 46 8 3 7 9 8
tion 2 47 8 2 5 2 6 2
British
return of money from 3 8 6 2 3 1 2 6
Credit functions o f i n War 2 2
37 7
Classical doctrine of currency
2 95
22 4 2 2 8 9 2 9
7 18
Currency notes 3 1 8 0 1 6 0 2 9 2 32
3 6 4 36 6 3 6 9
Emp ire gold production 2 2 4
Clearing H ouse 5 6 6 5 2 9 6 204
international
6
Bryan W
5 4 6 ; 0f
36 9 7 0
32
Bullion
N ew Y ork 7 9
Clipping f coins 1 7 3 2 8 2 8 9 9
Committee o f 1 8 224 5 2 7 6
dealings of the L ondon Goldsmiths Coinage A ct
-

see a s

01

1.

00

r,

r,

er

0,

0,

12

0,

0,

10

ia,

289

prices of during the Bank R estri ction

,

1 7 97

1 8 1 9 , 269

181 6, 1 7

9 0.

1 8 7 0,

1 87

10

0,

1 0,

0.

0,

1.

s ec

see

see

ca es ,

1.

0.

'

2 0,

7 , 302 4
3 03
-

( U nited

S tates)

3 14

pri ce o f in 7 95 2 6 3
Coinage
R evolu tionary laws as to dealings in
debasement 1 7 3 8 8 3 2 8 3 2 88
during French R evolution 2 44
2 44
20
173
free 7
7
79
C ALIF O RNIAN gold discoveries 1 7 5 307
fr ee o f gold suspended i n certa i n
countries durin g the War 23 0
Call money 1 46 1 9 7 8 3 1 8
Calonne 2 5 7 3
3 4 5 ; free o f i lver suspended :
Cambon 2 4 2 4 2
in En gland 3 1 ; i n France 7 5
314 ;
Canning 3 6 5 6 3 6 8
3 3 ; i n U n i ted S tates
in A ustr i a H ungary, 3 2 3 4 ; n
Capital
Russi a 3 2 7 ; i n I nd i a 3 9 3 0
8 7 1 93
o f Banks 3 8
32
imper fections i n 7 3 8 2 2 8
demand f 9 94
double meaning f 9 3 48
in Middle A ges 2 8
nature and purpose of 1 7 1 7 1
expenditure by Government 2 07 8
price of gold 7 4 8 8 1 7 4
expenditure nancing of 9 9 09
A
ustr
i
a
H
ungary
25
3
:
0
2
9
94 5 3 4
9
4
{
i n England 3 02
x ed 9 9 1 5 9 2 2 8 348 9
market see I n v estment market
in France 7 4 1 7 4
1

0,

1,

0.

or ,

1,

10

1, 1

0.

0.

1,

00 .

C U RR E N C Y A N D C R EDI T

33 4

Coinagecont
reform attempted in 1 5 5 2 2 84
o f Eli abeth in 1 5 6 0 2 8 7 8

Continuity of prices 1 0 ; of money of

account 1 0 1 82 3
Contraction of credit se Credit
Convertibility o f
credit into money 1 7 38 48 7 4

o f 1 6 96 , 2 9 6 - 7

369

7 7 4 , 3 00
o f 1 8 1 6 , 1 7 7 , 3 02 4
of
, 1 2 1 , 1 7 2 , 3 3 0, 33 1 3
1
1 7 1 2, 1 7 5 ,
,
, 7 2, 1 2 ,
I 7 7 . 2 8 6 7 . ao r s. 3 0 8
1 33 , 1 5 2 3 , 1 9 4
, 99 ,
5 . I 97
of
, 2 2 8 , 2 95
, 131 5
1 7 93 4,
of
f
,
2 3 8 , 2 40, 2 6 1
di
f
6 8 , 6 9 , 9 0, 1 0 7 , 1 39
n t
,
9,

1 68

rupees
Coins overvalued

1 19

s ee

I 67

in Banks 9 6
in currency 7 8

C on dence

1 03

17

2,

e ect
e ect
e ect
e ect
relation

10

relation

o f,

2 07

surplus

available
e S avings
Consumers outlay
se

for

e ect

41

investment

6 6 . 87 . 95 .
o f w ar

22,

43 ,

relation

of,

5_ 9 1 6 4 5
o f,
-

relati on

'

2 07

to Foreign Exchanges
1

to Government nance

represents demand fo goods 4 2

sample of used as index number
3 7 45

0.

3 47 8 . 3 5 0 2
fo r
of th e
7 4 5 . 88 . 8 9 . 9 6 .
of a
1 07 2 6

remedy
tion

tendency
crisis
,

3 5 3'

27

45,
-

48 5 2 ,
-

creation of

1 07 2 6 . :
-

30

credit system to

to cause nanci al

of,
1 3o

a un versal
control of (
creation

in ation or deprecia
monetary unit 2 3

1 35

1,

1 62,

1 48 ,

8 9 , 9 7 , 1 3 0,
see a l so
8 8, 1 7 8 , 1 82
,

1 36 .

I nterest rate
,

of

30 .
I 9 1 . 3 7 6 . 3 80
o f, i n

45

16 9

war time
-

21 1

21 5

and debt di fferent names for same

thing 3 4
expansi on
cou nteracted by a nancial crisis
,

361 2

2 1 8 1 9, 2 2 1 2

7 0.

66

1 1 0 1 8,

sensitiveness

1 08

n,

41

s ee

effect
nance o 2 2 2 3 2 2 7
and new issues 95 1 42
reckoned by each count y in i ts own
currency 5 9
relation f to consumers income 9
o

s ee

credit expansion on

of

10

88 ,

credit contraction on

1 0, 1 1 4

so:

21 2 ,

1 0 , 1 1 4.

e ff ect

of,

9 , 2 9 1 , 295
ff
of, on

, 1 08

35 2

d e n it i on
ff
of

to Government nance

o f,

prices
Prices
production 8 9 1 1 1 4
prot s
Prots
traders balances 1 1
wages Wages
contraction
after the War in ation 347
at nancial centre 1 2 1 4
methods f 2 3 4 1 7 2 6 25 8

contraction o f credit on 9
ailure f harvest on 6 2
oreign loan on 6 4 5
war nance on 2 2 3 2 2 7
o f to creation o f credit 9

41 4

1 30 ,

contraction e ect
consumers outlay
employment 1 0 1 25
f oreign exchanges 7 5

Consumers income
41

2 2 4, 2 2 8

o f,

d e n i t i o n
ff
of
ff
of f
ff
of f
ff
of

37 1
7 3 85 ,

British functions o f in war time

37 6

4, 2 60 ;
1 1
1 49 5 0 , 1 5 6 ,
,
,
1 5 9 . 2 8 3 4 . s 8 s. 2 86 7 . 3 5 5 . 3 7 0
,

367

223 .
o

1 06 , 1 1 6

1 8 2 , 2 00- 1

paper money into credit 1 7 2

Copernicus Gresham s L aw anti ci
pated by 28 5
Copper tokens 1 7 6
Country Banks in England in eighteenth
century 2 5 5 2 7 3 3 0
Credit
bank di fferent from money 5
banker a dealer in 4 6 1 4 1 85

2 23

non transportable 6 9
prices f
Prices
sensitive 3 8 40
tran s portable 69
Commodity use of as money

5 7 , 6 3 , 7 4,

Commo ties
oreig rade

gold into credit 6 3 1 7 2 1 8 1

paper money into gold 3 2 7 2

Command the sea

Commercial crises
Committee
Public S a ety

1 67

7,

Collateral security

1 7 2 , 1 92 2 0 1

9,

credit into gold

"

01 1

15 1 2.
-

Continental Congr ess iss ue

money by 305
,

of

paper

drain of money into circulation

1 30 3 7 7
caus ed by
.

I N DE X
Credi t

Cri se s nanci al
cont
mea s ure s to be taken in 1 5 1 6 2
at outbreak of W 2 1 1
policy of Bank Char ter A ct reg ard

c ont.

exp ansion e ffec t of o u

commodi ti es 90 1
consumers outlay 2 2
,

95

ar ,

43 , 66 , 8 7 ,

I I4"

employment 2 1 1 26
fore n exchange s 66
,

ig7

7 4 5 , 90, 95
-

37 3

1 95

i n,

after th e W ar 35 0 36 2
at outbreak o f W ar 209 2 1 1
responsibility of Centr al B ank for
,

6,

of

suspension o f Bank Charter Act

during 7 9 80 6 0
tran s mi s sion of from country to
country 1 37 48
Cr i sis of

1 5 2, 1 5

see

1.

s ee

produced by exces siv e elast i c i ty

currency 85
relation o f to speculation 1 45 8
responsibiliti es o f Central Bank

i nves tm ent 9 1 5
p rices
Prices
prots
Prot s
value of gold 1 6 7

"1 g!

38 5

93 i 1 2 6 ! 23 7 9 2 5 5 '2 6 4
1 7 9 7 , 1 26 , 2 5 8 6 5 , 3 0 1
1 7 99 , 26 6 , 2 7 0

1 3 0, 2 0 2 .

I7

tendencies to
3 62
transmission of fr om country to
country 8 6 97 1 30
in ation o f ee I n ation
,

1 24 . 1 2 7

1 7 0.

37 5
i
of,
w
, 3 8 , 48 , 1 6 8 9 ,
for , 2 7 , 8 9 , 1 07

1 s5

2 29

3 7 s: 4 8 1 8 9
, 2 1 6 , 33 ,

9 1 , 1 47 , 1 5 0,
33 8
1 9 1 4 , 80, 1 60, 2 1 2 1 4,
urr e n cy , see M
,

15

3,

6 , 1 5 8 9 , 1 96 7
-

34 1 .

1 60.

8 0,

z oo 1 ,

2 2 4,

204 ,

oney Paper money

Ca s h Legal tender Gold
Credi t Paym ent etc
1 91 4
urrency and B ank N otes A ct

2 21

poli cy n d import s of gold 95 7

problem o f stabili si n g 1 6 30 3 7 5 9
q uality of 1 5 1 03 4 1 06 1 1 7 33
,

1 95

8,

15

1 907 ,

1 7 0.

8, 31 7
204, 3 1 8 1 9

1 8 9 3 , 1 5 0,

2 04

1 8 90 , 1 4 1 , 1 5 0, 1 5

nature of 7 2 2 40 1 69
ori gi nates in producti on and i s
ti ngui s h d i n consump ti on

new ,

1 88 4 , 1 47

1 3 0.

15 2

48 ,

18

159

5 0,
.

5 6:

ithout money
22 3
movements periodici o f 1 2 5 6 3 7 3
37 6 9 ; world w i e cha racter

uses

of

35 3'

60
1 8 3 6 9 , 1 48 9 , 1 5 8 , 1 6 1
1 8 47 , 8 0
1 8 5 7 , 8 0, 1 5 0
1 8 6 6 , 8 0, 1 49, 1 95 , 3 1 0
1 8 4 , 2 04 , 3 1 2 , 3 5 3
1 87 3 , 1 6 1

1 7 2.

3 9 9

money deli mitat ion

and

1 82 5

27 1 .

1 8 1 8 , 2 7 4.

ith cash
-

1 8 1 4 1 2 7 31

86 ! 8 9 1 96 s

1 3 1 4!

i nterchangeabil ty
t hrough banks
laten t demand
8 m ean
0f paymen t
'

1 81 1

0ft

Currency notes Bri tish

,

2 29 ,

3 1 , 8 0,

1 6 0,

2 3 2.

Custom ary tender 3 2

2 02
elation of to wealth 1 86 22 7 8
r el ati v e dependence on of merchants
D EA LE RS see M erchants R etaile rs
man uf acturers and farmer s
in agricultur al produce 1 23
of sma ll tr ader s 99 1 97
i n in v es tments 2 6 9 1 2 1 41
s up ly of 3 8 1 69 7 0
in Forei gn Exchange ( ee l o Bank s
wor d wi de 1 4 6 1 1 7 1 5 5
Exchange) 5 8 4
Cri ses nancial 28 1 3 1 62 1 84 1 89
eath penalty for currency offence s
1 9 1 25 5
imposed in 1 7 93 2 39
causes of 2 8 1 3 0 6 35 1 35 5 6
D eba s ement of coinage 7 3 1 8 1 1 83
e ects of o n
2 8 0 3 2 88 3 6 9
foreign exchange s 1 3 1 1 33 1 45
D ebt and cred i t d i li en t names for the
2 3 7 2 65 6 2 7 1 2 7 3 5 3 1
3 2
s ame thing 3 4
pri ces 1 3 1 1 36 1 3 7 1 40 1 5 1
D ebts
s ecuri ties 1 41 7
adj ustment of on a change of stand
s olv ency 1 3 1 3 1 35 6
ard 1 8 3 2 5 1 2
i mmunity from of a count ry ex
assi gn ment of 4 99 1 00 1 8 6
haust ed by War 35 3 3 5 5
r

10

a s

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C U R RE N C Y AN D C R E D I T

38 6

D ebtsont
Englandont
cancellation of against one another
rela tive freedom of from coinage de
SS
basements 2 8 0
4
conti nuity o f 8 2 3
English
dealer in 4 6 4 1 8 5 6
177
25 5
coinage
26 1
2 80 8
29
economic S ignicance f 4 5 1 8 2
2 92 8
3 00 4
paper money ( e l o Currency notes
3 85
i n d i fferent places not homogeneous
Bank of England) 7 3
system o f bank reserves 8
57
97
e ffect of change of standard on 8 3
2 20
Exchange bills of e Bills of exchange
3 5 425
means f d ischarg ing e Payment
medium o f 1 5
means of
rate of proport i onal to purchasing
origin f in production 4 8 6 3 7 6
power or monetary unit 5 9 6 7
relation f to prices 5 8 2 2 5 0
rate of favourable and un favourable
un i t f measurement of 2 3 5 8 2
59
Exchanges foreign e Foreign ex
3 35 5
D e at i on (
c h anges
l o Cred i t contract i on
Exche quer stop of the by Charles II
O f)
D emand obl igat ions of Bankers 22 48
2 91
Exche q uer bills advanced to embar
99 1 86 7
91 2
D enmar k 2 3 1 3 8 3 45
s d traders
25 6
27 2
D enominations of coin and paper Expansion of credit
C redit
I76
Expenditure
Consumers O utlay
money
96
59 6
Export specie point 6 3 6 6 7 4
2 65
25 5
D eposi ts
B anker D emand obliga
tions I nterest
D epreciation of the monetary unit 1 3 FA M IN E e ff ect of on currency in I ndia
1 7
66 7 5
29
33 6 7
33 8 9 ; on currency in
R ussia 3 2 7
1 83 4
2 23
2 80
33 8
3 47 6 3
Dep es sw o f trade 1
1 47
Farmers cre d it re q uirements of 1 23
2
26
Favourable and unfavourable exchanges
35 6 35
D irectoi re 2 3 9 2 47 5 25 2 3
59
D iscount H ouses 05 5 5 6 8 7 2 8 Federal R eserv e A ct 1 9 1 3 ( U nited
S tates) 7 8 9 8 5 98 9 2 4 5
D iscount rate of in London Market
Final expendi ture 4
1 98
D iscoun ing o f Bills 1
Fi nan ce meaning of 2 7 2 2 7 8
04
3
2 3
8 5 ; at a Finance bills 1 95
52
55 6
Finance companies 42 1 87
nancial centre 4 5 5 6
1 10 14
1 4 6
D ollar American origi n of 3 5 3 6 Financial centres
1 20 1 5 4 6
D omestic Bills 98
1 7 18
21 2
Crises
D rain of money into circulation 2 2 2 Financial cr i ses
Financing o f
23
28
3 8 8 9 96 1 7
capital expenditure 9 9 1 09 1 42
3
37 7
19
1 9 425
D rawer of a B i ll 05
1 3 49
i mports in war t i me 2 2 7 22 8 9 2 3 1
D utch Eas t I ndies 1 2 0
1
14
international trade
6
mobilisation 1 6 0 209 2 1 4
EDWA RD V I debasement of the coinage
86 3 7 6
production 7
28 3
Fisher Prof I rving 47
E gypt 1 23
37 2
Capital
Eli abeth ecom ag of 1 5 6 2 8 7 8 Fixed cap ital
Fixed interest bearing securities 93
369
I 43 3 5
Employment e ffect of credit contrae
7
tion on
1 25 6 ;
ti ct o f Fixed duc i ary i ssue of paper money
C redit expansion on 2 1
25 6
Fi xed d uc y i ssue
Endorsement of a bill 5 1 1
1 05
i n A ustria H ungary 3 2 3
15 2
1 92
in England 7 8 8 1
England
in Germany 8 1 2
as a nancial cent e 1 03 2 1 2 3 6 7
in I ndia 333 343
potential gold reserves of in 9 1 4 2 2 4
c

s ea s

1,

se

se

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I N DEX

38 7

i xed proporti on system of note i s sue France

cont
8 3 5 ; of bank reserves 2 7 48
d bas i i en ts of coinage in 1 83 2 80
2g
g
49 I 9 6 3 7 7
F orced loans in France
denominati ons f coin and paper
7 93 and 1 7 9 5
2 3 9 2 48 and 2 5 2
money i n 7 3
Forced sales i n a cri i s 1 3 1 33 1 3 5
exchanges fa vourable to at outbre ak
1 41
159
f W ar in 1 9 1 4 2 4
5
Foreign Exchanges 5 6 7 1
issues o f pa p er money by during th e
the channel through which a credit
W ar 7
expansion spreads 89 90
proof against crises a fter 18 1 4 and
dealers in 5 8
1 87
35 3
deman d and sup p ly 5 8
S i lver unlimited legal tender i n
73
15 7
di sadvantage of sustaining by loans
1 45
Franco German W ar 3 1 ; indemnity
effect on
3 7 3
Free comage e Co nage
o f a cri sis 1 3
33 1 45 2 3 7 2 6 5

1,

21

1.

1 1.

1, 1

6.

of

27 1 . 27

3 5 . 3 1 0. 3 1 2
of
, 66 , 7 4 5 ,

9 0. 95
of

credit

a ailure the harvest 6 1 4

f
or ign lo n 6 4 6 94 5 2 09
of in ation
1 6 362
of a protective tari ff 7
27 1 317
of
o

an expansion
87
f
f

se

0,

0.

G E M AN East Africa 1 2
Germany
accumulates gold reserve after A gadir
crisis 2 9
adoption o f gold standard by 1 7 9
3 07 8 . 3 1 1
-

3 69

exchanges favourable to at outbreak

of W ar in
o f rate of interest 1 5 1 6
9 4 214
note issue f 8 1 2
of w
2 9 2 2 2 3 2 9 223 5
q uarterly settlement in 8 2
favourable and un favourable 5 9
use f legal tender p aper in 82 3
at nancial centre 1 1 1 7
War nan e f 2 3 1 2
with gold st ndard 6 3 6 5 1 8
with inconvertible p aper currency 62 i Gilt edged securities 93 4 94
Girondins 2 3 8 2 3 9
6s
market commanded by England in Gold
banker as dealer i n 1 6 7 2 0 1
1 914 21 2
3 224
certicates 7 5 6 97
mechani sm f 9 8 6
coinage price o f 7 4 87 88 1 7 4
and p rices of foreign commodities 8 7
regulation of without transmission of coined in England in fourteenth
century 7 2 3
l
gold (
Gold exchange
cost o f transporting 6 3 1 80
standard) 1 1 8 2 2
cost o f transporting in war time
re gu lation o f during the war 3 46
z 1 3 2 2 4 3 45
relation of consumers outlay to 5 9
demand fo as currency 33 1 6 7 1 7 2
64 5 66 68 9
relation of to payments 5 8 7 0 1
35 4 368 9 3 7 1 3
demand f fo export 7 5 2
Foreign investments
I nvestment s
demand f f industry 7 6 7
Foreign loans
L oan s
Foreign trade commodities
Com
d i scoveries f 1 8 49 and 1 85 1 7 5
m d i ti es
Forg ery of p a p er money 30
3 07
exchange standard
Fowler Committee on I ndian Currency
ado
p
ted
by
nancially
weak
coun
o
33
tries 1 1 8 1 9
Franc or li vre 1 83 2 34 2 8 8
appropriate to dependencies 2
Franc
in a crisis 1 6 1
accumu l ates gold reserve after A gadi r
in I ndia 1 2 33 2 5 341 2
crisis 2 1 9
in Russia 3 2 7 8
assi gnats s e A ssignats
use o f durin g the W ar 345 6
Bank o f 7 8 8 2 1 5 7 2 2 2 33
2
use
a
er
the
W
ar
f
f
t
5
9
37
3
5
4
3
27 3
export o f 6 3 6 6 7 3 7 5
bim etallism i n 7 4 5 1 7 9 2 7 4 299
2 29
1 16 15 4 2
0
0
3 3 3 7;
necessary at a
free market fo
coinage o f i n e i ghteenth century
1 06 1 5 5
nancial
centre
0
2 44 3
327

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C U RR EN C Y AN D C R E D I T

38 8

Goldcont
as intern ational currency

Greece 1 2 0
Greenbacks in the A merican Ci vi l War

2 , 1 80,

37 0
63

1 1 6,

1 5 4,

3 08 9 . 3 7 5

232 .

Gresham S ir Thomas 2 8 5 6
movements
movements and control of credit 8 7 Gresham s Law 1 7 3 6 2 8 2 8 5 3 5
8
I O7
Guineas
movem ents
end f 3 3
during cri es 3 1 1 3 3 4 3 6 7
rst issue o f 2 9
re quired for payments below 5 5 till
15 9
39
and foreign loans 6 5
I 7 97
25 5
n d rate
f interest
value of 7 6 1 7 8 2 92 2 97 2 98
6 154
in war time 2 23 4
price of becomes variable when gold H AM B U G
annexed by N apoleon 2 7
payments are suspended 7 4 5
88 1 5 4 1 5 6
Bank of 7 8 9 2 1 2 5 7 2 88
ratio of t silver
R atio
exchange on 5 7 2 6 4 2 6 6 7 2 69
reserves 7 2 8 5
27 3
27
114
reserves
H arvest and foreign exchanges 6 1 9 0
after th War 3 5 9
; of U nited S tates
4
4
e ffect f internal and external
3 2 13 3 8
drain on 7
H enry V III 2 8 2
e ffect o f international gold move H erschell Committee on I ndian Cur
ments on 8 7 8
reney 3 29
H oarding 7 6 7 3 4 7 5 294 34
exist to be used 8
I ndian 2 2 33 1 4 3 41
H olland (
l
A msterdam ) a an
i l centre in seventeenth and
large needed by a country which
is not a nancial centre 8
eighteenth centuries 3 29
annexed by N a p oleon 7
use o f in crisis 1 3 6 39
in war ti m e 2 2 3
H orner Francis Chairman f the Bul
lion Committee 8 2 7 6
standard
H ungary
A ustria H ungary
adoption o f 7 9 2 99 343
conditions o f maintenance of 7 4
I N C O M E s Consumers income
t f W ar on 3 4 4 6
I nconverti ble paper money 3 1 3 62
future f 3 5 4 3 5 9 6 5
and foreign exchange 6 3 6 6 8 6 9 I ndex numbers f prices 6 7 8 2 6 7 8
general prevalence f 7 2 8 9 1 7 2
2 7 6 365 3 7
37 4 5
I nd ia
179 8
3 44 3 7
coinage of 7 3 1 2 1 1 7 2 33 33 1 3
loyalty f London market t 1 5 6
effect upon f demand for j ute in
3 67
na ure f 1 7 3
67 8
17
1 9 6 7 91
3
employment of gold exchange stand
8
2
1 367 8
d by 20 2 3 3 2 5 34 2
supply 2 9 1 7 5 2 2 4 2 2 9 3 7 s 3 7 1
peasant nation 2 3
value or purchasi g power f 33 35
67
remittances 1 1 2 3 2 9 33 2 334
15 1
I72
27 6
35 4 3 5 9
reserves 2 1 1 2 2 33 1 4 3 41
37 3
Goldsmiths London in seventeenth I n d i n currency c ondi tions 3 35 41
currency and the W 3 4 3
century 2 89 9 2 2 97
Governme t
I ndustrial shar es 93
assistance i n a c isis 1 5 3 2 1 2 2 2 I n ation 7 1 84 5 1 1 4 1 1 6 1 1 8 1 27 9
-

0,

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0.

11

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0 1
-

2,

1 1 0,

1.

10

12

11

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-

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2.

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3 1 4 ! 3 47

2 04 1

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27 2

0,

6,
i

ar

25

s,

ee

'

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1 0,

ec

10

c a

s ee a s o

0.

0 1

borrow ng 9 93 7 8
3 65
nance 2 7 relation of to de ation I nstabi lity f credit e Credit
I nsurance f bu lli on and sp ecie 1 80
35 2
guarantee f bills discounted by B ank
3 1 3 2 6 7 3 45
o f England at outbr eak
f War I nter es t
in 1 9 1 4 22 1
l oss of on i dle balan ces 37 40 n
note issue 49 2 3 2
1 88 2 1 7
regulation f b nki ng 5 2 02 5
payment of on curr ent accounts 6
regulation of subsidi ary coinage 1 7 7
90
,

20

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o,

I ND E X

I nteres tont
r ate o f 2 6 43 5 0 1 8 1
deterrent 30 1 0 7 8
c

215

1 1 4- 1 6 , 1 9 7

1 2 0, 1 2 8 , 1 5

alls when credit contracts

5

3,

1 1 , 1 1 0,

li mi ted by usury laws 2 5 5 6

local variations in 7 1 8
rises when credi t expan ds 1 3
-

1 1

2 4- 6 ,

6,

1 07 1 8 ,

1 26 , 1 9 2 ,

93,

5 . I 95

I nte nati onal

co operati on in a crisis 1 5 7 8
determination of the monetary unit
-

36 0

1 -2

35

94 5
3 46

32

5 30.
-

to manufacturers

2 07

347 8 ,

9,

1 15

7,

25

16,

21 4 1 5
-

1 09 ,

1 23 ,

1 31

1 35

376

to merchants

7 , 25 ,
21 6 . 37 6 . 37 8

1 09 ,

unicipal 9 2
N ecker s in 7 8 9 2 34 2 5 3
short period 3 7 1 87 8 ; as banking
as sets 5 1 8 7 8 1 92 3 7 8 3 8 0
tempo rar y f capi ta l enterprises 9
.

Exchange ec Foreign Exchange

nancial centre
Financial centre
markets 5 9 1 02 3
1 4 1 38 2 7 9
92
9
4 2 1 94 s 3 49
secur iti es 1 4 1 1 43
W ar 2 9 1 4 2 1 8 3 2 Pitt s 25 6 6 0
I nv estment 9 3 6 4 9 5 1 9 0
Locke John on the coinage 2 94 5 298
a form o f expenditure 9 4 1 9 1 2 2 8
3 04
market 9 1 1 4 1 1 9 4 2 9 2 1 0 3 5 3 L ondon
m rket effect of War on 2 09
Bank r t e 8 1 1 1 7 25 1 49 5 1 98
rela ti on of to temporary loans 1 94
Bills on 6 1 2 ; I ndi an 2 2 3 34
s

1 1 0-

orei gn

21 2,

2 09 ,

94 5 , 1 44 5 ,
for (s ee
-

demand

31 0 ;

10

as

0,

1 03 , 1 06 ,

0,

2 1 2, 22 1

2 45

25

J ohanno t

2 42 - 3 .

Jute demand

i n 1 9 06 7

for

91

Luxuri es

297
,

6,

London Goldsmith s see Goldsmiths

Louis X IV 29
Louis XVI execution of 2 3 7
Lowndes W illiam on th coin age

KAF F IR boom , 1 47
Kemmerer Prof 47
Keyn es , Mr J M , 1 1 9
King , Lord 2 65

King s exchanger , 2 89
,

15

36

2 2 9.

in ei ghte n th century 25 5
loyalty o f to gold standard

3 4

36

J AC OB IN S 23 8 243
Jap an 2 2 1 5
Jevons 2 6 8

nanci al centr e

S avi ngs) 9 2 5 1 42
L ondon arket
I ss ue D epartment o f B ank of England
an d Baring crisis 3 1 7
eff ect o f outbreak o f War on in 1 91 4
78
a l so

3 41

Inves trn en ts , f

3 49

10

or

0,

s ee

92 , 93 ,

I nternational

1.

Government

1 93

24

2 3 9 , 2 48 , 2 5 2 .

regulation of credit by
17
1 1 97
I nterest bear i ng assets 3 8

1 2 4- 5

'

1 24

Li q uid assets 95 1 98
Lisbon 2 5 7
Li verpool Lord 2 97 300 30 3
Loans
at call 1 46 1 9 7 8 3 1 8
forced during French R evoluti on
,

33 9

1 37

91 ,

2 1 0, 240.

M ACL EO D H

285

D , 3 , 1 5 0,
Terr i tor i a ux i
i , 2 49 5 2

s sued under th e
L AND S public during French Revo l M nd a
D irecto re
ion : B i m m ti on x
Manu facturers loans to 7 2 5 09 1 23
L ate nt dem and s c Credi t Cas h
L ati n U nion 307
37 6
Law S ir E on the demand for rupees M gi n uns pent e U nspent margin
Ma k German depreciation o f 23 2
Market
L aw John 2 3 5 2 88
Forei gn Exchange 5 8
L egal t ender 3 4 1 7 3 1 1 7 1 1 85
I nvestment
I n v e stment
2
2 2 5 3 26 5
prices and wages 9
coin
M oney Coinage
rate o f interest 5 1 1 28 1 97 8
do not exi st in China 1 80 2 02
Markets I nternational 5 9
laws sometimes inoperative 1 7 6
M aximum R evolutionary L aw o f th e
l i mited 1 7 2 1 7 7 3 3 1 2
26 1
2 38 2 4
notes
Paper money
u

01

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es

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.

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C U RR E N C Y A N D C R E D I T

39 0

Merchants
capital o f 35 88
effect of rate of interest on
1

8,

25

25

1 08 ,

Metalli c stand d
ar

7 9, 1 8 3 ,
3 s4 i
, 3 44

1 35

21 6,

17

31

2 , 1 67

2 01

7 2 3,
3 46 7 ,

2 80 ,

Mexi co
Middle A ges currency problems in
M i nt pr i ce
Coi nage pri ce
Mobilisation nancing o f 6 0 209
Monetary unit
adopti on f depreciated 2 8 0
s ee

21 4

2 84,

6 7i
3 47 6 3

49

I 83

1 17

2 80 1

2 23 1

49

1 29 ,

determination o f by quan tity theory

,

determined by locality in which a

debt is payable
2
duplication f 8 3 4 25 0 2 97 8
mea urement ol by foreign exchanges
,

1 01

measures debts 2 3 5 1 8 2 3
measures prices and val ues
-

33 4,
-

not to be dened in terms f the

meta llic standard 1 8 3 3 6 5 9
relation of t coinage price f gold
o

1 8 1 -2

after depreciation

of,

'

35 9

under system f bimetal li sm 7 4

val ue of 5 6 1 3 1 2 9 1 5 2 25
M oney
1 4 31 7 4
o f account 2 5
8 2 2 95
o

1,

49 . 5 2 .
of a
( S ee a ls o

7 8 . 1 8 5 . 3 7 3 . 3 7 7 . 3 80
, 2 , 1 7 , 1 6 7 , 367

commodity as
Cash Paper money Gold
Circulation )
Moratorium legislation
Mortgages unsuitable as Bank A ssets
use

2 1 0.

1 94.

I 9&

23 2

9:

N ecker failure of loans in 1 7 8 9 2 34

25 3
N egotiable instrumen t 1 00
N ew countries 94 1 44 5 3 1 0 3 1 6 7
N ew credit 7 2 2 4 0 1 6 9
N ew issues 6 4 92 1 4 2 5
N ew York call money in 1 46 7
N ewton eport on coinage by in 1 7 1 7
29g
N igeria 1 2 0
N orthumberland D uke of coinage
policy 2 8 3 4
N orway suspension of free coinage of
gold in 2 30 1 345 ; adoption of
gold coinage by 308
N otes
bank s e Bank
British currency 3 1 80 1 6 0 2 2 9
,

23 2

365 7

N AP O L EO N 2 5 3 2 7 1 2 7 2 2 7 3
N ation al creditor e ff ect of change of
stan dard on 2 95 3 04 3 1 3 1 4
35 7 9
N ational Banks of U nited S tates 1 89

3 46 s :

2 9 6 ' s:

1 82 - 3 .

2 7 3 's,

stan dard o f val ue 5

a substitute fo credit 5
supply of 3 8 6 9 7 0 7 8
treatment of as subordinate to credit
,

3 4 5 . 39 . 5 2 : 7 5

r es toration

commodity

7 4. I 7 3 .

73

1 68

cont inu i ty
dependence of upon credit
depreciation o f 1 3 6 6 7 5

58

17

6 . 3 04 . 3 5 6 9
o f, 1 0, 1 8 2 3

293

I5

7 2,

28

80 35 6
3

37 7

0.

1 88 ,

1 26 .

37 6 . 37 8
_

sometimes held to be

37 7 8
1 09 , 1 3 1 ,

25

1 1 4, 1 2 3 .

initiative of
loans to 7

oneyont
rapidity f circulation f 46 8 3 7 9 8
return of from circulation 3 8 6 2 3

legal tend r
e

s ee

Paper money

customary 2 02
dened
7
demand fo 2 1
.

O RES M E
2 85
O
,

anticipates Gresham s Law

ttawa gold held by Bank f England

at 2 29
5 2 96
59
2 2
Consumers
O utlay consumers
denominations of e D enominat i ons
outlay
di f erent from bank credit 5
O verdrafts 9 8
functions f 3
8 20
O e end
Gurney failure of in
5
income and expenditure 40
8
3m
market 7 46
O vert i me ea n i ngs 2
2 2 36
market London 1 25 1 5 6 2 1 2 2 2 1 O ver valued coins
Coins
paper
Paper money
pocket 0 2 3 7 1 6 8
PAP E money
q uantity theo y of s Quantity comparison of wi th other ent itlin g
theory
documents 1 68
r,

30, 3 7 8 , 48 , 49 ,
I 6 8 . I 7 0. I 7 8 . I 8 9 .

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,

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1,

see

ee

I ND EX

Paper money o t
concurrent circulation
c n

7 7,

of,

er

32 , 7 2 , 7 4
2 45 , 2 49 , 2 5 3

ll

fa

159

3,

60,

235

1 1 0, 1 2 4

1 2 9,

6 7

15

223

6 , 35 6

6,

365

o f,

all of during a crisis

index numbers f 6 7
f

,
-

Crises

s ee

8,

26 7

3 7 2 . 37 4 5
of, 5
o f to
, 5 ,

27 6,

8,

measurement
relation
debts 1 8 2 25
rise f during a credit expansion

4,

during a credit contraction

11

depreciat i on

3 4 5 . 43 4
o f,
-

0.

25

75

25

Prices
cont
wit h coin
det mined by the Quantity Theory

convert ible i nto gold

convertible into land
denition f 3
denomination s of 7 2
.

39 I

35 4

0.

distinction of from bank notes 3

an d Foreign Exchanges 6 2 6 5
12
2
86
3
4
43
Gove nment issue of 49 2 3 2
24 6
invented by the A mericans 3 05
ri s e of
owin g to issues f pape
issue f by Central Bank 5 1 7 8
money during the W ar 2 2 7
legal limitati on of 7 2 8 5 96
o f securities 9
4 1 1 43
necessity of in war time 2 3
wholesale 43 7
parity of with money f account 3
world 5 9 6 95
predominance of in Europe 8 2 3
Producers loans to 7 8 4 ; effect of
premium on in U S crises 1 8 4
high interest on 1 1
prots of issue on 1 88 8 9 9
Production
S
regulation of 49 5 2 7 2 8 5 96 1 20
e ct f credit contraction on 1 1 1 1
8
e ffect o f credit expansion on 1 2 2 1
x
relation of to Gold Exchange stand
I
I
43
4
ard 2
eff ect f increase or decrease i n 9
exp enses o f 7 8 9 4o
rela tion of to a metal lic standard
speculative character of 1 97
32
P o t s
speculati on in
S peculation
application f to reduce indebted
nlimited issues of needed in a crisis
ness 09 48 2 16 349
15 8
value f not dependent on ult i mate o f issue 88 9
reduced when prices are falling o
convertibility 3 2
credit contracting 1 1 0 2 4 6
Paris
rise f during a credit expan sion 1 3
Bourse during the R evolution 2 47 8
,

2, 1

0.

0,

11

0,

'

0.

0.

0.

2.

1.

0.

s ee

0.

0, 1

3 1 5 , 324
2 5 7 , 2 69

24

37 6 8
of

1 42 ,

1 2 4- 6 . 1 43

6 . 93 .

Promissory notes 99
Promoter of capital enterprises

21

cr isis of 882
Exchange on
Payment
means of 3

2 5 0, 2 6 2

0.

9, 9 1 ,

Promoter capital enterprises Bank

acting as 8 7 1 94
5 6 2 1 2 2 7 37 6
mean s o f demand fo 33 3 8 1 6 8 Protective tari ff 7 2 7 3 1 7 3 2 7
Pru ssia Bank f 8 1
17
172
means of relative dem and fo diff er Purchase or sale analysis of 5 85
Purchasing power supply of 1 3 8
ent 1 8 9 7 8 8
6 9 7 ; demand f r
Peasan ts nancial arrangements of
38
48
1

15

7,

1 8 2 0,
-

1,

33 ,

r,

33 9 4
8 0, 2 7 8, 3 04 , 3 66 7 , 3 6 8 9

1 68,

367

1 7 2,

7 0,

0,

0.

1 23 4

0,

30

0,

Peel S ir R
Penin sular W ar 2 7 5 2 7 7
QU A N TITY theO Y 3 5 3 8 44 45 s 5 2
8
6S 7
37 9
Percev l 2 7 7
73
7 5 12
Periodicity of credit movements
Quarterly settlement in German m oney
market 8 2
Cr ed it
Philippine I slands 2 0
RAFFRO N 2 43
Pitt 25 6 2 5 8 9 2 6 3
Railway development in U nited S tates
Pocket money 2 2 1 3 7 1 6 8
Pound sterling 1 83 3 3 4 3 65 7 368 9
3 1 0 3 6 ; in Austria H ungary
Prices
31 1 12
adj ustment f to a change of stand R apidity of circul ation 46 48 37 9 80
R ate o f interest
I nterest
ard 2 8 2 88 2 9 5 2 96 3 5 6
R ate f exchange ee Fore i gn Ex
of commodities which cannot be m
changes
ported 6 9
-

1. I

o,

0,

0. 1

'

s ee

see

C U RR E N C Y AN D C R ED I T

39 2

Ratio of gold to silver

1

17

S ecurity

4 , 2 6 7 9 , 3 00
-

3I 4

R ecoinage

S eignorage

of

6 0, 2 8 7 8 , 3 6 9
1 6 9 6 , 2 96 7
15

collateral

97
181 ,

2 86 ,

2 8 4,

2 82 ,

3,

300,

S hares
I 46 3 5 7
S hipbuilding
S hi pping
S hort term loan s s e L oans
S ilver
cost o f transporting 1 8 0
displacement o f by gold after 1 8 5 0
-

3 01 3
. 9 I 2 . 93 . I 43 .
, 1 09
, 61 , 7 o

15 2

1 33 ,

9 9,

1816, 1

7 7 , 3 02 4
of
-

R ediscount
2 04

Bills

83 ,

1 9 6 , 1 9 9,

1 93 ,

R eichsbank German 8 2
R eign f Terror 2 3 7 4 2 5 4 2 6
R eserve Cities and Central R eserve
Cities in U nited S tates 9 8
Reserves
Gold reserves Bank
serves
Restriction f cash payments in 7 9 7
Bank o f England
Resumption f cash payments i
A ustria H ungary in 8 2 0 32 2
England in 8 9 3 4
U nited S tates in 8 7 9 3 2 3 4
Retail dealer 8 2 3 7 6 9 1 8 7
R evolution effect of on currency
systems 2 06
2 33 5 4
Robespierre 2 4
Rubber boom f 9 1 47
Rupee 7 3 2 7 2 3 2 9 43
R ussia
advances by the I mperial ( State ) Bank
t
the Government 2
attempted return to specie payments
in 8 1 8 7 4
e ffect f war o f 8 7 6 8 on cu rency
1

0,

s ee

re

s ee

0,

0, 1

2 0.

of,

3 26

effect f abandonment of bi metallism

on pric e f 3 7 2
e ffect Of the W ar on price of 34 2
inconvenience o f fo large paym ents
Q

7 8,

17 6, 1

179

made limited legal tender in England

overvalued

unlimited legal tender

of

7 2 . 1 5 7 . I 7 2 . 3 08
. 7 3 . I 7 9 . 28 1
of

enny
policy
P

U nited S tates

3 1 42
o f,

3697

0.

1 87 8

96 ,

37 2

0.

pr i ces
duri ng the Bank R st c
tion 2 6 9
relation f p rice o f to world credit
movements 3 4 1
standard in the Middle Ages 7 2 1 7 9
e

ri

280 1

standard no difculty about sub

i d i y coinage with 1 7 6
subsidiary 7 3 1 7 2 1 7 5 7 6 7 3 1 3
,

ar

3 07

supply of 7 9 2 8 2 88 3 5
employmen t f gold exchange stand
ard by
use f as money 7 1 7 6 8 37 0
32 7 8
use of as money in China 7 2 1 7 9
exchanges unfavourable to at out
br ak o f W ar in 1 9 4 4
3 44
introduction f gold standard into S mall traders credit o f 99 1 9 7
S mith Adam 3
32 8
loans ra i sed abroad by fo war with S omerset D uke f debasement of th e
coinage by 2 8 2 3
Japan 4 5
new issue o f paper money in 1 8 3 9 S overeign the 3 3 4 3 3 1
S pain
3 26
3 44 3 4s
suspension of free coinage o f silver S p c p omt 6 3 6 6 7 4 1 1 5 1 2 1 2
8 1 22 4 2 5 7 3 45
in 3 2 7
S peculation 45 8 1 5 3 2 00 1
in A rgentine securities 3 1 6 1 7
S AV I N s
9 36
93 94 1 9 I 42
in p aper money 3 3 7 3 3 5 5
1 87
214
25 3
95
3 49
9
i n the assig ats 2 46 2 5 4
35
S avi ngs Banks 2 2 3 6 3 7 93 4
S peculative assets 9 4 1 5 2
S ecurities
S tate Bank 5
dealer in 2 6
S tandard f value
ef ect f high interest on 1 1 4
change of 8 3 2 7 9 343 3 46 5 9 36 9
effect of war on 2
requirements o f 1 3 3 7 4 5
xed interest bearing 9 3 43 3 5 7
the future 3 46 35 4
gilt edged 94 9 4
S tock Exchange I nvestment market
prices f 9 2 4 43
S tock manufacturing f 1 2 3
sales of in a crisis 1 42 5
S tock f money (
l o U nspent
l o I nvestments )
margin) 2 1 2 3 7 8 1 6 8 9
(S
o

1 20,

21

s,

01

ee a s

.
,

0.

or ,

see

s ee

0,

1, 1

0,

1 0.

0-

e re

s.

01 .

21

0,

a s

IN DE X

S tock of commod i ti e s

cont
S tates

U ni ted

8 , 42 3 , 7 0, 1 09 ,
2 1 5 1 6 , 2 2 3 , 3 49
-

39 3
.

premium on paper money in 1 84

S tra i ts S ett l ement s 1 2 0
prevalence of paper money in 7 3
R a i l way de elopment 3 1
S uspen s on of paym nts 22 3 1 6 6
3 6
S il ver Act 3 1 4 2 0 37 2
7 6 88 1 29 1 3 7 1 5 4 2 00 2 02
203 4 2 1 9 2 2 3 2 3 1 3 1 8 1 9
W ar in ation i n 2 3 0
S u spen s ion of l e gal li mitation of paper
W ar of I nd p ndenc 3 5
money 7 3 4 7 6 7 7 8 80 8 2 8 4 U n sa l eabl e a ss t s 93 I 48 1 5 2 1 94
1 29 1 5 2 2 1 8 3 2 3
21 0
Sweden 2 3 0 1 308 a4s
U n s pent mar gin 6 34 35 3 7
r37

1 4 8 , 2 1 0,

s,

e,

0,

1 89

86 ,
w

9 0, 3 6 7
E
-

T AXATIO N 207 2 1 4 2 3 2 3 47
U s ury l a s in n gland 25 5 6
Tel e graphic tran s fers 9 8 1 05
Temporary borrowi n g
S hort peri od
loans
VAL M Y b at tle of 2 3 6
Tooke Thoma s 268 g
V alue
Torres V edras 2 7 7
oi gold s e G old
Trade
of monetary unit see M on tary uni t
after the W ar 348 5 3 5 6 3 6 1 2
of paper mon y see Paper money
b alanc of g 1 1 4 1 3 8 4 1
re l ativity of 5 3 3 3 7 4
cycle s 1 2 4 6 37 3 3 7 6 9
s tandard of
e S tandard
H om and F oreign 1 1 1 1
V an si tta rt 2 7 7
International nancin g of (see a l s o V en i ce as a nanci a l centre 1 03 ; B ank
F inancial centr ) 1 3 6
of 2 88
Trad r
bal anc s 4 1 1 1 0 2 1 7
classes of 8 1 1 0 1 1
WAG E earner 2 1 36 36 1 2
n eds of for ca s h 2
Wa g s
12
tu rno r 3 7 4 1 47
e ect of cr dit contraction on
Tran saction vol um of 47
1 25
Trea ury B ills B ri ti h 2 1 7
effect of cr dit expans i on on 2 1 3 2 8
Tre aty P orts of C hina premium on
1 25 6
bank notes at 1 7 8
e ect of in ation on 2 5 0 3 6 1 2
medi eval 7 2
U uns aw nrm as 93 1 6 1 09 1 42 1 5 2
payment of 2 0 37 5 6 7 2 I 5 9 203
I 8 7 1 94 5
U nemployment 3 6 1 6 3 5 6 3 62 3 7 7 W ar
U nfavourable exchan g 5 9
Amer i can C ivi l 2 32 309 1 0 3 1 3 1 4
of American In depend nce 3 5
U n i ted S tates
bank in g ys tem of 7 8 9 8 5 1 89
C r i mean 3 2 2
2 1 222 5
effects of 1 2 6
1 9 8 9 2 04 5 3 1 5 1 6
B r i ti h purch as e s in duri n g th e W ar
nanc e 1 2 7 2 06 3 2
in ati on 2 1 8 3 2 347
228 9
B ri ti h W ar L oan s in 2 29
L oan s s L oan s
2 1 4 15
cr i i s of
Rus s o J apan
1 87 3 1 61
Ru s s o Turkish 3 2 6
1 8 4 2 04 3 1 2
taxation 1 4
1 89 3 1 5 0 204 3 1 8 9
,

see

o,

0,

se

e s

s,

0.

'

ve

s,

'

e,

ee

1 5 0,

9 1 , I 47 ,

ivil War nance 2 3

curr ncy 7 3 3 5
F ederal Res erve Act

2,

15

1 95

2 04,

of r 6 8 9

97 , 2 9 1
1 9 1 4 1 9 , 8 0,
-

1 26 1 6 0 2 1 2 1 4 2 1 7
of
2 2 4 22 8 3 2 2 33 3 4 1 3
22
:
W ar s of Fr nch Revolution and Empi re
0 1

309- ro, 3

7 8 9, 8 5 ,

1 91 3 ,

1 2 6 . 2 33

7 8.

9.

20

35 3

W ater l oo 2 7 3
W eal th rel ation of credi t to
G ol d S tand
Act of 1 900 3 20
harves ts effect s of 1 4 1 3 1 2 13 3 1 8 Wh oles al e pri ces 43 7 0 ; deal er
M erchant
i mportation of gold into durin g the
W orn coin 1 7 3 1 7 7 280
War 229
1 98

8,

es e ,

'

so: