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ever will furnish him with the desired means. If, by depositing securities with his banker, he can get a loan at an advanced rate of interest, well. If not, by offering an adequate temptation, he may mortgage his property to some one having good credit; who either gives bills, or draws on his banker for the sum agreed on. In either case, extra promises to pay are issued; or, if the difficulty is met by accommodation-bills, the same result follows. And in proportion to the number of citizens obliged to resort to one or other of these expedients, must be the increase of promissory payments in circulation. Reduce the proposition to its most general terms, and it becomes selfevident. Thus:-All bank-notes, cheques, bills of exchange, etc., are so many memoranda of claims; no matter what may be the technical distinctions among them, on which upholders of the “currency principle” seek to establish their dogma, they all come within this definition.

Under the ordinary state of things, the amount of available wealth in the hands, or at the command, of those concerned, suffices to meet these claims as they are severally presented for payment; and they are paid either by equivalents of intrinsic value, as coin, or by giving in place of them other memoranda of claims on somebody of undoubted solvency. But now let the amount of available wealth in the hands of the community be greatly diminished. Suppose a large portion of the necessaries of life, or coin, which is the most exchangeable equivalent of such necessaries, has been sent abroad to support an army, or to subsidize foreign states; or, suppose that there has been a failure in the crops of grain or potatoes. Suppose, in short, that, for the time being, the nation is impoverished. What follows? It follows that a proportion of the claims cannot be liquidated. And what must happen from their non-liquidation ? It must happen that those unable to liquidate them will either fail, or they will



redeem them by directly or indirectly giving in exchange certain memoranda of claims on their stock-in-trade, houses, or land. That is, such of these claims as the deficient floating capital does not suffice to meet, are replaced by claims on fixed capital. The memoranda of claims which should have disappeared by liquidation, reappear in a new form; and the quantity of paper-currency is increased. If the war, famine, or other cause of impoverishment continues, the process is repeated. Those who have no further fixed capital to mortgage, become bankrupt; while those whose fixed capital admits, mortgage still further, and still further increase the promissory payments in circulation. Manifestly, if the members of a community whose annual returns but little more than suffice to meet their annual debts, suddenly lose part of their annual returns, they must become proportionately in debt to each other; and the documents expressive of debt must be proportionately multiplied.

This à priori conclusion is in perfect harmony with mercantile experience. The last hundred years have furnished repeated illustrations of its truth. After the enormous export of gold in 1795-'6 for war-loans to Germany, and to meet bills drawn on the Treasury by British agents abroad; and after large advances made under a moral compulsion by the Bank of England to the Government, there followed an excessive issue of bank-notes. In 1796–7, there were failures of the provincial banks; a panic in London; a run on the nearly-exhausted Bank of England, and a suspension of cash-payments—a Stateauthorized refusal to redeem promises to pay. In 1800, the further impoverishment consequent on a bad harvest, joined with the legalized inconvertibility of bank-notes, entailed so great a multiplication of them as to cause their depreciation. During the temporary peace of 1802, the country partly recovered itself, and the Bank of England

would have liquidated the claims on it, had the Govern: ment allowed. On the subsequent resumption of war, the phenomenon was repeated: as in later times it has been on each occasion when the community, carried away by irrational hopes, has locked up an undue proportion of its capital in permanent works.

Moreover, we have still more conclusive illustrationsillustrations of the sudden cessation of commercial distress and bankruptcy, resulting from a sudden increase of credit-circulation. When, in 1793, there came a general crash, mainly due to an unsafe banking-system which had grown up in the provinces in consequence of the Bank of England monopoly-when the pressure, extending to London, became so great as to alarm: the Bank-directors and to cause them suddenly to restrict their issues, thereby producing a frightful multiplication of bankruptcies; the Government (to mitigate an evil indirectly produced by legislation) determined to issue Exchequer-Bills to such as could give adequate security. That is, they allowed hard-pressed citizens to mortgage their fixed capitals for equivalents of State-promises to pay, with which to liquidate the demands on them. The effect was magical. £2,202,000 only of Exchequer-Bills were required. The consciousness that loans could be had, in many

cases prevented them from being needed. The panic quickly subsided. And all the loans were very soon repaid.

In 1825, again, when the Bank of England, after having intensified a panic by extreme restriction of its issues, suddenly changed its policy, and in four days advanced £5,000,000 notes on all sorts of securities, the panic at once ceased.

And now, mark two important truths. As just im. plied, those expansions of paper-circulation which naturally take place in times of impoverishment or commercial difficulty, are highly salutary. This issuing of securities



for future payment when there does not exist the wherewith for immediate payment, is a means of mitigating national disasters. The process amounts to a postponement of trading-engagements that cannot at once be met. And · the alternative questions to be asked respecting it areShall all the merchants, manufacturers, shopkeepers, etc., who, by unwise investments, or war, or famine, or great losses abroad, have been in part deprived of the means of meeting the claims upon them, be allowed to mortgage their fixed capital ? or, by being debarred from issuing memoranda of claims on their fixed capital, shall they be made bankrupts ? On the one hand, if they are permitted to avail themselves of that credit which their fellow-citizens willingly give them on the strength of the proffered securities, most of them will tide over their difficulties: in virtue of that accumulation of surplus capital ever going on, they will be able, by-and-by, to liquidate their debts in full. On the other hand, if, as they must else be, they are forthwith bankrupted, carrying with them others, and these again others, there follows a disastrous loss to all the creditors : property to an immense amount being peremptorily sold at a time when there can be comparatively few able to buy, must go at a great sacrifice; and those who in a year or two would have been paid in full, must be content with 108. in the porind. Added to which evil comes the still greater one—an extensive damage to the organization of society. Numerous importing, producing, and distributing establishments are swept away; tens of thousands of their dependents are left without work; and before the industrial fabric can be repaired, a long time must elapse, much labour must lie idle, and great distress be borne. Between these alternatives, who, then, can pause ? Let this spontaneous remedial process follow its own course, and the evil will either be in great measure eventually escaped, or will be spread little by little over a

considerable period. Stop this remedial process, and the whole evil, falling at once on society, will bring widespread ruin and misery.

The second of these important truths, is, that an expanded circulation of promises to pay, caused by absolute or relative impoverishment, contracts to its normal limits as fast as the need for expansion disappears. For the conditions of the case imply, that all who have mortgaged their fixed capitals to obtain the means of meeting their engagements, have done so on very unfavourable terms; and are therefore under a strong stimulus to pay off their mortgages as quickly as possible. Every one who, at a time of commercial pressure, gets a loan from a bank, has to give high interest. Hence, as fast as prosperity returns, and his profits accumulate, he gladly escapes this heavy tax by repaying the loan: in doing which he takes back to the bank as large a number of its promises to pay as he originally received; and so diminishes the notecirculation as much as his original transaction had increased it. Considered apart from technical distinctions, a banker performs, in such case, the function of an agent in whose name traders issue negotiable memoranda of claims on their estates. The agent is already known to the public as one who issues memoranda of claims on capital that is partly floating and partly fixed-memoranda of claims that have an established character, and are convenient in their amounts. What the agent does under the circumstances specified, is to issue more such memoranda of claims, on the security of more fixed, and partially-fixed, capital put in his possession. His clients hypothecate their estates through the banker, instead of doing it in their own names, simply because of the facilities which he has and which they have not. And as the banker requires to be paid for his agency and his risk, his clients redeem their estates, and close these special trans

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