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facts, than any other proposition relating to interchange. From the time of the resumption of cash payments by the Act of 1819, and especially since the commercial crisis of 1825, the favourite explanation of every rise or fall of prices has been "the currency;" and like most popular theories, the doctrine has been applied with little regard to the conditions necessary for making it correct.
For example, it is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existence, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices, which goes into the market of commodities, and is there actually exchanged against goods. Whatever increases the amount of this portion of the money in the country, tends to raise prices. But money hoarded does not act on prices. Money kept in reserve by individuals to meet contingencies which do not occur, does not act on prices. The money in the coffers of the Bank, or retained as a reserve by private bankers, does not act on prices until drawn out, nor even then unless drawn out to be expended in commodities.
It frequently happens that money, to a considerable amount, is brought into the country, is there actually invested as capital, and again flows out, without having ever once acted upon the markets of commodities, but only upon the market of securities, or, as it is commonly though improperly called, the money market. Let us return to the case already put for illustration, that of a foreigner landing in the country with a treasure. We supposed him to employ his treasure in the purchase of goods for his own use, or in setting up a manufactory and employing labourers; and in either case he would, cæteris paribus, raise prices. But instead of doing either of these things, he might very probably prefer to invest his fortune at interest; which we shall suppose him to do in
the most obvious way, by becoming a competitor for a portion of the stock, exchequer bills, railway debentures, mercantile bills, mortgages, &c., which are at all times in the hands of the public. By doing this he would raise the prices of those different securities, or in other words would lower the rate of interest; and since this would disturb the relation previously existing between the rate of interest on capital in the country itself, and that in foreign countries, it would probably induce some of those who had floating capital seeking employment, to send it abroad for foreign investment, rather than buy securities at home at the advance of price. As much money might thus go out as had previously come in, while the prices of commodities would have shown no trace of its temporary presence. This is a case highly deserving of attention: and it is a fact now beginning to be recognised, that the passage of the precious metals from country to country is determined much more than was formerly supposed, by the state of the loan market in different countries, and much less by the state of prices.
Another point must be adverted to, in order to avoid serious error in the interpretation of mercantile phenomena. If there be, at any time, an increase in the number of money transactions, a thing continually liable to happen from differences in the activity of speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons); an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices. At the quarterly periods when the public dividends are paid at the Bank, a sudden increase takes place of the money in the hands of the public; an increase estimated at from a fifth to two-fifths of the whole issues of the Bank of England. Yet this never has any effect on prices; and in a very few weeks, the currency has again shrunk into its usual dimensions, by a mere reduction in the demands of the public (after so copious a supply of ready money) for accommodation from the Bank
in the of discount or loan. In like manner the currency of the agricultural districts fluctuates in amount at different seasons of the year. It is always lowest in August: "it rises generally towards Christmas, and obtains its greatest elevation about Lady-day, when the farmer commonly lays in his stock, and has to pay his rent and summer taxes,” and when he therefore makes his principal applications to country bankers for loans. "Those variations occur with the same regularity as the season, and with just as little disturbance of the markets as the quarterly fluctuations of the notes of the Bank of England. As soon as the extra payments have been completed, the superfluous" currency, which is estimated at half a million, "as certainly and immediately is reabsorbed and disappears."*
If extra currency were not forthcoming to make these extra payments, one of three things must happen. Either the payments must be made without money, by a resort to some of those contrivances by which its use is dispensed with; or there must be an increase in the rapidity of circulation, the same sum of money being made to perform more payments; or if neither of these things took place, money to make the extra payments must be withdrawn from the market for commodities, and prices, consequently, must fall. An increase of the circulating medium, conformable in extent and duration to the temporary stress of business, does not raise prices, but merely prevents this fall.
The sequel of our investigation will point out many other qualifications with which the proposition must be received, that the value of the circulating medium depends on the demand and supply, and is in the inverse ratio of the quantity: qualifications which, under a complex system of credit like that existing in England, render the proposition a totally incorrect expression of the fact.
*Fullarton on the Regulation of Currencies, 2nd edit. pp. 87-9.
OF THE VALUE OF MONEY, AS DEPENDENT ON COST OF PRODUCTION.
§ 1. BUT money, no more than commodities in general, has its value definitively determined by demand and supply. The ultimate regulator of its value is Cost of Production.
We are supposing, of course, that things are left to themselves. Governments have not always left things to themselves. They have undertaken to prevent the quantity of money from adjusting itself according to spontaneous laws, and have endeavoured to regulate it at their pleasure; generally with a view of keeping a greater quantity of money in the country, than would otherwise have remained there. It was, until lately, the policy of all governments to interdict the exportation and the melting of money; while, by encouraging the exportation and impeding the importation of other things, they endeavoured to have a stream of money constantly flowing in. By this course they gratified two prejudices: they drew, or thought that they drew, more money into the country, which they believed to be tantamount to more wealth; and they gave, or thought that they gave, to all producers and dealers, high prices, which, though no real advantage, people are always inclined to suppose to be one.
In this attempt to regulate the value of money artificially by means of the supply, governments have never succeeded in the degree, or even in the manner, which they intended. Their prohibitions against exporting or melting the coin have never been effectual. A commodity of such small bulk in proportion to its value is so easily smuggled, and still more easily melted, that it has been impossible by the most stringent measures to prevent these operations. All the risk
which it was in the power of governments to attach to them, was outweighed by a very moderate profit.* In the more indirect mode of aiming at the same purpose, by throwing difficulties in the way of making the returns for exported goods in any other commodity than money, they have not been quite so unsuccessful. They have not, indeed, succeeded in making money flow continuously into the country; but they have to a certain extent been able to keep it at a higher than its natural level; and have, thus far, removed the value of money from exclusive dependence on the causes which fix the values of things not artificially interfered with.
We are however to suppose a state, not of artificial regulation, but of freedom. In that state, and assuming no charge to be made for coinage, the value of money will conform to the value of the bullion of which it is made. A pound weight of gold or silver in coin, and the same weight in an ingot, will precisely exchange for one another. On the supposition of freedom, the metal cannot be worth more in the state of bullion than of coin; for as it can be melted without any loss of time, and with hardly any expense, this would of course be done until the quantity in circulation was so much diminished as to equalize its value with that of the same weight in bullion. It may be thought however that the coin, though it cannot be of less, may be, and being a manufactured article will naturally be, of greater value than the bullion contained in it, on the same principle on which linen cloth is of more value than an equal weight of linen yarn. This would be true, were it not that Government, in this country and in some others, coins money gratis for any one who furnishes the metal. The labour and ex
The effect of the prohibition cannot, however, have been so entirely insignificant as it has been supposed to be by writers on the subject. The facts adduced by Mr. Fullarton, in the note to page 7 of his work on the Regulation of Currencies, show that it required a greater percentage of difference in value between coin and bullion than has commonly been imagined, to bring the coin to the melting-pot.