Chapter XIII: Front Matter (13)

That, considered _a priori_, representative government is fitted for establishing just laws, is implied by the unanimity with which Spanish, English, and French availed themselves of it to this end; as well as by the endeavours latterly made by other European nations to do the like. The _rationale_ of the matter is simple enough. Manifestly, on the average of cases, a man will protect his own interests more solicitously than others will protect them for him. Manifestly, where regulations have to be made affecting the interests of several men, they are most likely to be equitably made when all those concerned are present, and have equal shares in the making of them. And manifestly, where those concerned are so numerous and so dispersed, that it is physically impossible for them all to take part in the framing of such regulations, the next best thing is for the citizens in each locality to appoint one of their number to speak for them, to care for their claims, to be their representative. The general principle is that the welfare of all will be most secure when each looks after his own welfare; and the principle is carried out as directly as the circumstances permit. It is inferable, alike from human nature and from history, that a single man cannot be trusted with the interests of a nation of men, where his real or imagined interests clash with theirs. It is similarly inferable from human nature and from history, that no small section of a nation, as the nobles, can be expected to consult the welfare of the people at large in preference to their own. And it is further inferable that only in a general diffusion of political power, is there a safeguard for the general welfare. This has all along been the conviction under which representative government has been advocated, {320} maintained, and extended. From the early writs summoning the members of the House of Commons—writs which declared it to be a most equitable rule that the laws which concerned all should be approved of by all—down to the reasons now urged by the unenfranchised for a participation in political power, this is the implied theory. Observe, nothing is said about wisdom or administrative ability. From the beginning, the end in view has been _justice_. Whether we consider the question in the abstract, or whether we examine the opinions men have entertained upon it from old times down to the present day, we equally see the theory of representative government to be, that it is the best means of insuring equitable social relations.

And do not the results justify the theory? Did not our early Parliaments, after long-continued struggles, succeed in curbing the licentious exercise of royal power, and in establishing the rights of the subject? Are not the comparative security and justice enjoyed under our form of government, indicated by the envy with which other nations regard it? Was not the election of the French Constituent Assembly followed by the sweeping away of the grievous burdens that weighed down the people—by the abolition of tithes, seignorial dues, gabelle, excessive preservation of game—by the withdrawal of numerous feudal privileges and immunities—by the manumission of the slaves in the French colonies?—And has not that extension of our own electoral system embodied in the Reform-Bill, brought about more equitable arrangements?—as witness the repeal of the Corn-Laws, and the equalization of probate and legacy duties. The proofs are undeniable. It is clear, both _a priori_ and _a posteriori_, that representative government is especially adapted for the establishment and maintenance of just laws.

And now mark that the objections to representative government awhile since urged, scarcely tell against it at all, so long as it does not exceed this comparatively limited {321} function. Though its mediocrity of intellect makes it incompetent to oversee and regulate the countless involved processes which make up the national life; it nevertheless has quite enough intellect to enact and enforce those simple principles of equity which underlie the right conduct of citizens to one another. These are such that the commonest minds can understand their chief applications. Stupid as may be the average elector, he can see the propriety of such regulations as shall prevent men from murdering and robbing; he can understand the fitness of laws which enforce the payment of debts; he can perceive the need of measures to prevent the strong from tyrannizing over the weak; and he can feel the rectitude of a judicial system that is the same for rich and poor. The average representative may be but of small capacity, but he is competent, under the leadership of his wiser fellows, to devise appliances for carrying out these necessary restraints; or rather—he is competent to uphold the set of appliances slowly elaborated by the many generations of his predecessors, and to do something towards improving and extending them in those directions where the need is most manifest. It is true that even these small demands upon electoral and senatorial wisdom are but imperfectly met. But though constituencies are blind to the palpable truth that if they would escape laws which favour the nobility at the expense of the commonalty, they must cease to choose representatives from among the nobility; yet when the injustice of this class-legislation is glaring—as in the case of the Corn-Laws—they have sense enough to use means for getting it abolished. And though most legislators have not sufficient penetration to perceive that the greater part of the evils which they attempt to cure by official inspection and regulation, would disappear were there a certain, prompt, and cheap administration of justice; yet the County-Courts-Act and other recent law-reforms, show that they do eventually recognize the importance of more efficient {322} judicial arrangements. While, therefore, the lower average of intelligence which necessarily characterizes representative government, unfits it for discharging the complex business of regulating the entire national life; it does not unfit it for discharging the comparatively simple duties of protector. Again, in respect of this all-essential function of a government, there is a much clearer identity of interest between representative and citizen, than in respect of the multitudinous other functions which governments undertake. Though it is generally of but little consequence to the member of Parliament whether state-teachers, state-preachers, state-officers of health, state-dispensers of charity, etc., do their work well, it is of great consequence to him that life and property should be secure; and hence he is more likely to care for the efficient administration of justice than for the efficient administration of anything else. Moreover, the complexity, incongruity of parts, and general cumbrousness which deprive a representative government of that activity and decision required for paternally-superintending the affairs of thirty millions of citizens; do not deprive it of the ability to establish and maintain the regulations by which these citizens are prevented from trespassing against one another. For the principles of equity are permanent as well as simple; and once having been legally embodied in their chief outlines, all that devolves on a government is to develop them more perfectly, and improve the appliances for enforcing them: an undertaking for which the slow and involved action of a representative government does not unfit it. So that while by its origin, theory, and results, representative government is shown to be the best for securing justice between class and class, as well as between man and man, the objections which so strongly tell against it in all its other relations to society, do not tell against it in this fundamental relation.

Thus, then, we reach the solution of the paradox. Here is the reconciliation between the two seemingly-contradictory {323} positions awhile since taken. To the question—What is representative government good for? our reply is—It is good, especially good, good above all others, for doing the thing which a government should do. It is bad, especially bad, bad above all others, for doing the things which a government should not do.

* * * * *

One point remains. We said, some distance back, that not only may representative government be the best, notwithstanding its many conspicuous deficiencies; but that it is even possible to discern in these very deficiencies further proofs of its superiority. The conclusion just arrived at, implying, as it does, that these deficiencies tend to hinder it from doing the things which no government should do, has already furnished a key to this strange-looking assertion. But it will be well here to make a more specific justification of it. This brings us to the pure science of the matter.

The ever-increasing complexity which characterizes advancing societies, is a complexity that results from the multiplication of different parts performing different duties. The doctrine of the division of labour is now-a-days understood by most to some extent; and most know that by this division of labour each operative, each manufacturer, each town, each district, is constantly more and more restricted to one kind of work. Those who study the organization of living bodies find the uniform process of development to be, that each organ gradually acquires a definite and limited function: there arises, step by step, a more perfect “physiological division of labour.” And in an article on “Progress: its Law and Cause,” published in our April number, we pointed out that this increasing specialization of functions which goes on in all organized bodies, social as well as individual, is one of the manifestations of a still more general process pervading creation, inorganic as well as organic.

Now this specialization of functions, which is the law of {324} all organization, has a twofold implication. At the same time that each part grows adapted to the particular duty it has to discharge, it grows unadapted to all other duties. The becoming especially fit for one thing, is a becoming less fit than before for everything else. We have not space here to exemplify this truth. Any modern work on physiology, however, will furnish the reader with abundant illustrations of it, as exhibited in the evolution of living creatures; and as exhibited in the evolution of societies, it may be studied in the writings of political economists. All which we wish here to point out is, that the governmental part of the body politic exemplifies this truth equally with its other parts. In virtue of this universal law, a government cannot gain ability to perform its special work without losing such ability as it had to perform other work.

This then is, as we say, the pure science of the matter. The original and essential office of a government is that of protecting its subjects against aggression external and internal. In low, undeveloped forms of society, where yet there is but little differentiation of parts, and little specialization of functions, this essential work, discharged with extreme imperfection, is joined with endless other work: the government has a controlling action over all conduct, individual and social—regulates dress, food, ablutions, prices, trade, religion—exercises unbounded power. In becoming so constituted as to discharge better its essential function, the government becomes more limited alike in the power and the habit of doing other things. Increasing ability to perform its true duty, involves decreasing ability to perform all other kinds of actions. And this conclusion, deducible from the universal law of organization, is the conclusion to which inductive reasoning has already led us. We have seen that, whether considered in theory or practice, representative government is the best for securing justice. We have also seen that, whether {325} considered in theory or practice, it is the worst for all other purposes. And here we find that this last characteristic is a necessary accompaniment of the first. These various incapacities, which seem to tell so seriously against the goodness of representative government, are but the inevitable consequences of its more complete adaptation to its proper work; and, so understood, are themselves indications that it is the form of government natural to a more highly-organized and advanced social state.

We do not expect this consideration to weigh much with those whom it most concerns. Truths of so abstract a character find no favour with senates. The metamorphosis we have described is not mentioned in Ovid. History, as at present written, makes no comments on it. There is nothing about it to be found in blue-books and committee-reports. Neither is it proved by statistics. Evidently, then, it has but small chance of recognition by the “practical” legislator. But to the select few who study the Social Science, properly so called, we commend this general fact as one of the highest significance. Those who know something of the general laws of life, and who perceive that these general laws of life underlie all social phenomena, will see that this dual change in the character of advanced governments, involves an answer to the first of all political questions. They will see that this specialization in virtue of which an advanced government gains power to perform one function, while it loses power to perform others, clearly indicates the true limitations of State-duty. They will see that, even leaving out all other evidence, this fact alone shows conclusively what is the proper sphere of legislation.

{326}

STATE-TAMPERINGS WITH MONEY AND BANKS.

[_First published in_ The Westminster Review _for January 1858_.]

Among unmitigated rogues, mutual trust is impossible. Among people of absolute integrity, mutual trust would be unlimited. These are truisms. Given a nation made up of liars and thieves, and all trade among its members must be carried on either by barter or by a currency of intrinsic value: nothing in the shape of _promises_-to-pay can pass in place of _actual_ payments; for, by the hypothesis, such promises being never fulfilled, will not be taken. On the other hand, given a nation of perfectly honest men—men as careful of others’ rights as of their own—and nearly all trade among its members may be carried on by memoranda of debts and claims, eventually written off against one another in the books of bankers; seeing that as, by the hypothesis, no man will ever issue more memoranda of debts than his goods and his claims will liquidate, his paper will pass current for whatever it represents. Coin will be needed only as a measure of value, and to facilitate those small transactions for which it is physically the most convenient. These we take to be self-evident truths.

From them follows the corollary that in a nation neither wholly honest nor wholly dishonest, there may, and eventually will, be established a mixed currency—a currency {327} partly of intrinsic value and partly of credit-value. The ratio between the quantities of these two kinds of currency, will be determined by a combination of several causes.

Supposing that there is no legislative meddling to disturb the natural balance, it is clear from what has already been said, that, fundamentally, the proportion of coin to paper will depend on the average conscientiousness of the people. Daily experience must ever be teaching each citizen, which other citizens he can put confidence in, and which not. Daily experience must also ever be teaching him how far this confidence may be carried. From personal experiment, and from current opinion, which results from the experiments of others, every one must learn, more or less truly, what credit may safely be given. If all find that their neighbours are little to be trusted, but few promises-to-pay will circulate. And the circulation of promises-to-pay will be great, if all find that the fulfilment of trading engagements is tolerably certain. The degree of _honesty_ characterizing a community, being the first regulator of a credit-currency; the second is the degree of _prudence_. Other things equal, it is manifest that among a sanguine, speculative people, promissory payments will be taken more readily, and will therefore circulate more largely, than among a cautious people. Two men having exactly the same experiences of mercantile risks will, under the same circumstances, respectively give credit and refuse it, if they are respectively rash and circumspect. And two nations thus contrasted in prudence, will be similarly contrasted in the relative quantities of notes and bills in circulation among them. Nay, they will be more than similarly contrasted in this respect; seeing that the prevailing incautiousness, besides making each citizen unduly ready to give credit, will also produce in him an undue readiness to risk his own capital in speculations, and a consequent undue demand for credit from other citizens. There will be both an increased pressure for credit and a diminished resistance; and therefore a more {328} than proportionate excess of paper-currency. Of this national characteristic and its consequences, we have a conspicuous example in the United States.

To these comparatively permanent moral causes, on which the ordinary ratio of hypothetical to real money in a community depends, have to be added certain temporary moral and physical causes, which produce temporary variations in the ratio. The prudence of any people is liable to more or less fluctuation. In railway-manias and the like, we see that irrational expectations may spread through a whole nation, and lead its members to give and take credit almost recklessly. But the chief causes of temporary variations are those which directly affect the quantity of available capital. Wars, deficient harvests, or losses consequent on the misfortunes of other nations, will, by impoverishing the community, inevitably lead to an increase in the ratio of _promissory payments to actual payments_. For what must be done by the citizen disabled by such causes from meeting his engagements?—the shopkeeper whose custom has fallen off in consequence of the high price of bread; or the manufacturer whose goods lie in his ware-rooms unsaleable; or the merchant whose foreign correspondents fail him? As the proceeds of his business do not suffice to liquidate the claims on him that are falling due, he is compelled either to find other means of liquidating them, or to stop payment. Rather than stop payment, he will, of course, make temporary sacrifices—will give high terms to whoever 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 to. 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 {329} or other of these expedients, must be the increase of promissory payments in circulation.

Reduce this proposition to its most general terms, and it becomes self-evident. 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 some body 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 of 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. What follows? It follows that part 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 _dis_appeared by liquidation, _re_-appear 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 of it, mortgage still further, and still further increase the promissory {330} payments in circulation. Manifestly, if the members of a community whose annual returns but little more than suffice to meet their annual payments suddenly lose part of their annual returns, they must become proportionately in debt to one another; and the documents expressive of debt must be proportionately multiplied.

This _a 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 State-authorized 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 Government 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 illustrations—illustrations 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 {331} 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 implied, 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 which cannot at once be met. And the alternative questions to be asked respecting it are—Shall 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; and in virtue of that accumulation of surplus capital ever going on, they will be {332} able, by-and-by, to liquidate their debts in full. On the other hand, if 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 10_s._ in the pound. 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 wide-spread 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 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, directly or indirectly, takes back to the bank as large a number of its credit documents as he originally received, and so diminishes the {333} credit-circulation 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 transactions with him, as quickly as they can: thereby diminishing the amount of credit-currency.

Thus we see that the balance of a mixed currency of voluntary origin is, under all circumstances, self-adjusting. Supposing considerations of physical convenience out of the question, the average ratio of paper to coin is primarily dependent on the average trustworthiness of the people, and secondarily dependent on their average prudence. When, in consequence of unusual prosperity, there is an unusual increase in the number of mercantile transactions, there is a corresponding increase in the quantity of currency, both metallic and paper, to meet the requirement. And when from war, famine, or over-investment, the available wealth in the hands of citizens is insufficient to pay their debts to one another, the memoranda of debts in circulation acquire an increased ratio to the quantity of gold: to decrease again as fast as the excess of debts can be liquidated.

That these self-regulating processes act but imperfectly, is doubtless true. With an imperfect humanity, they cannot {334} act otherwise than imperfectly. People who are dishonest, or rash, or stupid, will inevitably suffer the penalties of dishonesty, or rashness, or stupidity. If any think that by some patent legislative mechanism, a society of bad citizens can be made to work together as well as a society of good ones, we shall not take pains to show them the contrary. If any think that the dealings of men deficient in uprightness and foresight, may be so regulated by cunningly-devised Acts of Parliament as to secure the effects of uprightness and foresight, we have nothing to say to them. Or if there are any (and we fear there are numbers) who think that in times of commercial difficulty, resulting from impoverishment or other natural causes, the evil can be staved-off by some ministerial sleight of hand, we despair of convincing them that the thing is impossible. See it or not, the truth is that the State can do none of these things. As we shall show, the State can, and sometimes does, _produce_ commercial disasters. As we shall also show, it can, and sometimes does, _exacerbate_ the commercial disasters otherwise produced. But while it can create and can make worse, it cannot prevent.

All which the State has to do in the matter is to discharge its ordinary office—to administer justice. The enforcement of contracts is one of the functions included in its general function of maintaining the rights of citizens. And among other contracts which it is called on to enforce, are the contracts expressed in credit-documents—bills of exchange, cheques, bank-notes. If any one issues a promise-to-pay, either on demand or at specified date, and does not fulfil that promise, the State, when appealed to by the creditor, is bound in its protective capacity to obtain fulfilment of the promise, at whatever cost to the debtor, or such partial fulfilment of it as his effects suffice for. The State’s duty in the case of the currency, as in other cases, is sternly to threaten the penalty of bankruptcy on all who make engagements which they cannot meet, and sternly to inflict the {335} penalty when called on by those aggrieved. If it falls short of this, mischief ensues. If it exceeds this, mischief ensues. Let us glance at the facts.

* * * * *

Had we space to trace in detail the history of the Bank of England—to show how the privileges contained in its first charter were bribes given by a distressed Government in want of a large loan—how, soon afterwards, the law which forbad a partnership of more than six persons from becoming bankers, was passed to prevent the issue of notes by the South-Sea Company, and so to preserve the Bank-monopoly—how the continuance of State-favours to the Bank, corresponded with the continuance of the Bank’s claims on the State; we should see that, from the first, banking-legislation has been an organized injustice. But passing over earlier periods, let us begin with the events that closed the last century. Our rulers of that day had entered into a war—whether with adequate reason needs not here be discussed. They had lent vast sums in gold to their allies. They had demanded large advances from the Bank of England, which the Bank durst not refuse. They had thus necessitated an excessive issue of notes by the Bank. That is, they had so greatly diminished the floating capital of the community, that engagements could not be met; and an immense number of promises-to-pay took the place of actual payments. Soon after, the fulfilment of these promises became so difficult that it was forbidden by law; that is, cash-payments were suspended. Now for these results—for the national impoverishment and consequent abnormal condition of the currency, the State was responsible. How much of the blame lay with the governing classes and how much with the nation at large, we do not pretend to say. What it concerns us here to note is, that the calamity arose from the acts of the ruling power. When, again, in 1802, after a short peace, the available capital of the community had so far increased that the redemption of promises-to-pay became {336} possible, and the Bank of England was anxious to begin redeeming them, the legislature interposed its veto; and so continued the evils of an inconvertible paper-currency after they would naturally have ceased. Still more disastrous, however, were the results that by-and-by ensued from State-meddlings. Cash-payments having been suspended—the Government, instead of enforcing all contracts, having temporarily cancelled a great part of them, by saying to every banker, “You shall not be called on to liquidate in coin the promises-to-pay which you issue;” the natural checks to the multiplication of promises-to-pay, disappeared. What followed? Banks being no longer required to cash their notes in coin; and easily obtaining from the Bank of England, supplies of its notes in exchange for fixed securities; were ready to make advances to almost any extent. Not being obliged to raise their rate of discount in consequence of the diminution of their available capital; and reaping a profit by every loan (of notes) made on fixed capital; there arose both an abnormal facility of borrowing, and an abnormal desire to lend. Thus were fostered the wild speculations of 1809—speculations that were not only thus fostered, but were in great measure _caused_ by the previous over-issue of notes; which, by further exaggerating the natural rise of prices, increased the apparent profitableness of investments. And all this, be it remembered, took place at a time when there should have been rigid economy—at a time of impoverishment consequent on continued war—at a time when, but for law-produced illusions, there would have been commercial straitness and a corresponding carefulness. Just when its indebtedness was unusually great, the community was induced still further to increase its indebtedness. Clearly, then, the progressive accumulation and depreciation of promises-to-pay, and the commercial disasters which finally resulted from it in 1814–15–16, when ninety provincial banks were broken and more dissolved, were State-produced evils: partly due to {337} a war which, whether necessary or not, was carried on by the Government, and greatly exacerbated by the currency-regulations which that Government had made.

Before passing to more recent facts, let us parenthetically notice the similarly-caused degradation of the currency which had previously arisen in Ireland. When examined by a parliamentary committee in 1804, Mr. Colville, one of the directors of the Bank of Ireland, stated that before the passing of the Irish Bank-Restriction-Bill (the bill by which cash-payments were suspended) the directors habitually met any unusual demand for gold by diminishing their issues. That is to say, in the ordinary course of business, they raised their rate of discount whenever the demand enabled them; and so, both increased their profits and warded-off the danger of bankruptcy. During this unregulated period their note-circulation was between £600,000 and £700,000. But as soon as they were guaranteed by law against the danger of bankruptcy, their circulation began rapidly to increase; and very soon reached £3,000,000. The results, as proved before the committee, were these:—The exchange with England became greatly depressed; nearly all the good specie was exported to England; it was replaced in Dublin (where small notes could not be issued) by a base coinage, adulterated to the extent of fifty per cent.; and elsewhere it was replaced by notes payable at twenty-one days’ date, issued by all sorts of persons, for sums down even as low as sixpence. And this excessive multiplication of small notes was _necessitated_ by the impossibility of otherwise carrying on retail trade, after the disappearance of the silver coinage. For these disastrous effects, then, legislation was responsible. The swarms of “silver-notes” resulted from the exportation of silver; the exportation of silver was due to the great depression of the exchange with England; this great depression arose from the excessive issue of notes by the Bank of Ireland; and this {338} excessive issue followed from their legalized inconvertibility. Yet, though these facts were long ago established by a committee of the House of Commons, the defenders of the “currency-principle” are actually blind enough to cite this multiplication of sixpenny promises-to-pay, _as proving the evils of an unregulated currency_!

Returning now to the case of the Bank of England, let us pass at once to the Act of 1844. While still a protectionist—while still a believer in the beneficence of law as a controller of commerce—Sir Robert Peel undertook to stop the recurrence of monetary crises, like those of 1825, 1836, and 1839. Overlooking the truth that, when not _caused_ by the meddlings of legislators, a monetary crisis is due, either to an absolute impoverishment, or to a relative impoverishment consequent on speculative over-investment; and that for the bad season, or the imprudence, causing this, there is no remedy; he boldly proclaimed that “_it is better to prevent the paroxysm than to excite it_:” and he brought forward the Bank-Act of 1844 as the means of prevention. How merciless has been Nature’s criticism on this remnant of Protectionism, we all know. The monetary sliding-scale has been as great a failure as its prototype. Within three years arose one of these crises which were to have been prevented. Within another ten years has arisen a second of these crises. And on both occasions this intended safeguard has so intensified the evil, that a temporary repeal of it has been imperative.

We should have thought that, even without facts, every one might have seen that it is impossible, by Act of Parliament, to prevent imprudent people from doing imprudent things; and, if facts were needed, we should have thought that our commercial history up to 1844 supplied a sufficiency. But a superstitious faith in State-ordinances disregards such facts. And we doubt not that even now, though there have been two glaring failures of this professed check on over-speculation—though the evidence conclusively {339} shows that the late commercial catastrophes have had nothing whatever to do with the issue of bank-notes, but, as in the case of the Western Bank of Scotland, occurred along with diminished issues—and though in Hamburg, where the “currency principle” has been rigidly carried out to the very letter, there has been a worse crisis than anywhere else; yet there will remain plenty of believers in the efficiency of Sir R. Peel’s prophylactic.

But, as already said, the measure has not only failed; it has made worse the panics it was to have warded-off. And it was sure to do this. As shown at the outset, the multiplication of promises-to-pay that occurs at a period of impoverishment caused by war, famine, over-investment, or losses abroad, is a salutary process of mitigation—is a mode of postponing actual payments till actual payments are possible—is a preventive of wholesale bankruptcy—is a spontaneous act of self-preservation. We pointed out, not only that this is an _a priori_ conclusion, but that facts in our own mercantile history illustrate at once the naturalness, the benefits, the necessity of it. And if this conclusion needs enforcing by further evidence, we have it in the recent events at Hamburg. In that city, there are no notes in circulation but such as are represented by actual equivalents of bullion or jewels in the bank: no one is allowed, as with us, to obtain bank-promises-to-pay in return for securities. Hence it resulted that when the Hamburg merchants, lacking their remittances from abroad, were suddenly deprived of the wherewith to meet their engagements; and were prevented by law from getting bank-promises-to-pay by pawning their estates; bankruptcy swept them away wholesale. And what finally happened? To prevent universal ruin, the Government was obliged to decree that all bills of exchange coming due, should have a month’s grace; and that there should be immediately formed a State-Discount-Bank—an office for issuing State-promises-to-pay in return for securities. That is, having first by its {340} restrictive law ruined a host of merchants, the Government was obliged to legalize that postponement of payments which, but for its law, would have spontaneously taken place. With such further confirmation of an _a priori_ conclusion, can it be doubted that our late commercial difficulties were intensified by the measure of 1844? Is it not, indeed, notorious in the City, that the progressively-increasing demand for accommodation, was in great part due to the conviction that, in consequence of the Bank-Act, there would shortly be no accommodation at all? Does not every London merchant know that his neighbours who had bills coming due, and who saw that by the time they were due the Bank would discount only at still higher rates, or not at all, decided to lay in beforehand the means of meeting those bills? Is it not an established fact that the hoarding thus induced, not only rendered the pressure on the Bank greater than it would otherwise have been, but, by taking both gold and notes out of circulation, made the Bank’s issues temporarily useless to the general public? Did it not happen in this case, as in 1793 and 1825, that when at last restriction was removed, the mere consciousness that loans could be had, itself prevented them from being required? And, indeed, is not the simple fact that the panic quickly subsided when the Act was suspended, sufficient proof that the Act had, in great measure, produced it.

See, then, for what we have to thank legislative meddling. During ordinary times Sir R. Peel’s Act, by obliging the Bank of England, and occasionally provincial banks, to keep more gold than they would otherwise have kept (and if it has not done this it has done nothing), has inflicted a tax on the nation to the extent of the interest on such portion of the gold-currency as was in excess of the need: a tax which, in the course of the last thirteen years, has probably amounted to some millions. And then, on the two occasions when there have arisen the crises that were to {341} have been prevented, the Act, after having intensified the pressure, made bankrupt a great number of respectable firms which would else have stood, and increased the distress not only of the trading but of the working population, has been twice abandoned at the moment when its beneficence was to have been conspicuous. It has been a cost, a mischief, and a failure. Yet such is the prevailing delusion that, judging from appearances, it will be maintained!

“But,” ask our opponents, “shall the Bank be allowed to let gold drain out of the country without check? Shall it have permission to let its reserve of gold diminish so greatly as to risk the convertibility of its notes? Shall it be enabled recklessly to increase its issues, and so produce a depreciated paper-currency?”

Really, in these Free-trade days, it seems strange to have to answer questions like these; and, were it not for the confusion of facts and ideas which legislation has produced, it would be inexcusable to ask them.

In the first place, the common notion that the draining of gold out of the country is intrinsically, and in all cases, an evil, is nothing but a political superstition—a superstition in part descended from the antique fallacy that money is the only wealth, and in part from the maxims of an artificial, law-produced state of things, under which the exportation of gold really _was_ a sign of a corrupted currency: we mean, during the suspension of cash-payments. Law having cancelled millions of contracts which it was its duty to enforce—law having absolved bankers from liquidating their promises-to-pay in coin, having rendered it needless to keep a stock of coin with which to liquidate them, and having thus taken away that natural check which prevents the over-issue and depreciation of notes—law having partly suspended that _home_ demand for gold which ordinarily competes with and balances the _foreign_ demand; there resulted an abnormal exportation of gold. By-and-by it {342} was seen that this efflux of gold was a consequence of the over-issue of notes; and that the accompanying high price of gold, as paid for in notes, proved the depreciation of notes. And then it became an established doctrine that an adverse state of the foreign exchanges, indicating a drain of gold, was significant of an excessive circulation of notes; and that the issue of notes should be regulated by the state of the exchanges.

This unnatural condition of the currency having continued for a quarter of a century, the concomitant doctrine rooted itself in the general mind. And now mark one of the multitudinous evils of legislative meddling. This artificial test, good only for an artificial state, has survived the return to a natural state; and men’s ideas about currency have been reduced by it to chronic confusion.

The truth is that while, during a legalized inconvertibility of bank-notes, an efflux of gold may, and often does, indicate an excessive issue of bank-notes; under ordinary circumstances an efflux of gold has little or nothing to do with the issue of bank-notes, but is determined by merely mercantile causes. And the truth is that far from being an evil, an efflux of gold thus brought about by mercantile causes, is a good. Leaving out of the question, as of course we must, such exportations of gold as take place for the support of armies abroad; the cause of efflux is either an actual plethora of all commodities, gold included, which results in gold being sent out of the country for the purpose of foreign investment; or else an abundance of gold as compared with other leading commodities. And while, in this last case, the efflux of gold indicates some absolute or relative impoverishment of the nation, it is a means of mitigating the bad consequences of that impoverishment. Consider the question as one of political economy, and this truth becomes obvious. Thus:—The nation habitually requires for use and consumption certain quantities of commodities, of which gold is one. These commodities {343} are severally and collectively liable to fall short; either from deficient harvests, from waste in war, from losses abroad, or from too great a diversion of labour or capital in some special direction. When a scarcity of some chief commodity or necessary occurs, what is the remedy? The commodity of which there is an excess (or if none is in excess, then that which can best be spared) is exported in exchange for an additional supply of the deficient commodity. And, indeed, the whole of our foreign trade, alike in ordinary and extraordinary times, consists in this process. But when it happens either that the commodity which we can best spare is not wanted abroad; or (as recently) that a chief foreign customer is temporarily disabled from buying; or that the commodity which we can best spare is gold; then gold itself is exported in exchange for the thing which we most want. Whatever form the transaction takes, it is nothing but bringing the supplies of various commodities into harmony with the demands for them. The fact that gold is exported, is simply a proof that the need for gold is less than the need for other things. Under such circumstances an efflux of gold will continue, and _ought_ to continue, until other things have become relatively so abundant, and gold relatively so scarce, that the demand for gold is equal to other demands. And he who would prevent this process, is about as wise as the miser who, finding his house without food, chooses to starve rather than draw upon his purse.

The second question—“Shall the Bank have permission to let its reserve of gold diminish so greatly as to risk the convertibility of its notes?” is not more profound than the first. It may fitly be answered by the more general question—“Shall the merchant, the manufacturer, or the shopkeeper, be allowed so to invest his capital as to risk the fulfilment of his engagements?” If the answer to the first be “No,” it must be “No” to the second. If to the {344} second it be “Yes,” it must be “Yes” to the first. Any one who proposed that the State should oversee the transactions of every trader, so as to insure his ability to cash all demands as they fell due, might with consistency argue that bankers should be under like control. But while no one has the folly to contend for the one, nearly all contend for the other. One would think that the banker acquired, in virtue of his occupation, some abnormal desire to ruin himself—that while traders in other things are restrained by a wholesome dread of bankruptcy, traders in capital have a longing to appear in the _Gazette_, which law alone can prevent them from gratifying! Surely the moral checks which act on other men will act on bankers. And if these moral checks do not suffice to produce perfect security, we have ample proof that no cunning legislative checks will supply their place. The current notion that bankers can, and will, if allowed, issue notes to any extent, is one of the absurdest illusions—an illusion, however, which would never have arisen but for the vicious over-issues induced by law. The truth is that, in the first place, a banker _cannot_ increase his issue of notes at will. It has been proved by the unanimous testimony of all bankers who have been examined before successive parliamentary committees, that “the amount of their issues is exclusively regulated by the extent of local dealings and expenditure in their respective districts;” and that any notes issued in excess of the demand are “immediately returned to them.” And the truth is, in the second place, that a banker _will not_, on the average of cases, issue more notes than in his judgment it is safe to issue; seeing that if his promises-to-pay in circulation, are much in excess of his available means of paying them, he runs a great risk of having to stop payment—a result of which he has no less a horror than other men. If facts are needed in proof of this, they are furnished by the history of both the Bank of England and the Bank of Ireland; which, {345} before they were debauched by the State, habitually regulated their issues according to their stock of bullion, and would probably always have been still more careful but for the consciousness that there was the State-credit to fall back upon.

The third question—“Shall the Bank be allowed to issue notes in such numbers as to cause their depreciation?” has, in effect, been answered in answering the first two. There can be no depreciation of notes so long as they are exchangeable for gold on demand. And so long as the State, in discharge of its duty, insists on the fulfilment of contracts, the alternative of bankruptcy must ever be a restraint on such over-issue of notes as endangers that exchangeability. The bugbear of depreciation is one that would have been unknown but for the sins of governments. In the case of America, where there have been occasional depreciations, the sin has been a sin of omission: the State has not enforced the fulfilment of contracts—has not forthwith bankrupted those who failed to cash their notes; and, if accounts are true, has allowed those to be mobbed who brought back far-wandering notes for payment.[35] In all other cases the sin has been a sin of commission. The depreciated paper-currency in France, during the revolution, was a State-currency. The depreciated paper-currencies of Austria and Russia have been State-currencies. And the only depreciated paper-currency we have known, has been to all intents and purposes a State-currency. It was the State which, in 1795–6, _forced_ upon the Bank of England that excessive issue of notes which led to the suspension of cash-payments. It was the State which, in 1802, _forbad_ the resumption of cash-payments, when the Bank of England wished to resume them. It was the State which, during a quarter of a century, _maintained_ that suspension of cash-payments from which the excessive multiplication and depreciation of notes resulted. The entire corruption {346} was entailed by State-expenditure, and established by State-warrant. Yet now the State affects a virtuous horror of the crime committed at its instigation! Having contrived to shuffle-off the odium on to the shoulders of its tools, the State gravely lectures the banking-community upon its guilt; and with sternest face passes measures to prevent it from sinning!

[35] This was written in 1858; when “greenbacks” were unknown.