such possession of that in which he deals as is necessary for the discharge of his particular function. Such credit may be given by bill, or by book account. By its means, merchandise reaches the consumer with no other burden resting upon it than cost, and the necessary charge and compensation for the labor employed in its distribution. When it reaches the consumer, and is paid for, the proceeds return through the same channel through which it was distributed, discharging the obligations incurred in the several stages; to be finally paid over to the producer, or to the Bank, assuming the merchandise to have been sold upon credit and a bill given therefor, and turned into notes. The credit last described exerts a most powerful influence in the reduction of prices. In one sense, it includes the previous one, as it lays the foundation for bankers' credits, to be given in the discount of bills. The two last are the only ones that act to any considerable extent upon prices; and their effect in the end is always to produce a fall when the prices which the consumer pays, as well as those which the producer realizes, are taken into account. Were the effect of credits, in their proper sense, to raise instead of reducing prices, they would be the greatest of evils, instead of being, as they are, most valuable contrivances in the economy of society.

The only effect of the Act of 1844 would be to allow perfect freedom in the form of the currency issued. There might be an increased use of notes, and fewer checks; but this is not probable.

"Inconvertible notes," says Fawcett, "will be as freely accepted as coin, if people have confidence that an inconvertible currency is only a temporary expedient, and that the government will take scrupulous care never to permit the issue of inconvertible notes to exceed an amount which can with certainty be ultimately redeemed.

"It is, therefore, possible to conceive that exceptional circumstances may occur, during which an inconvertible currency may be issued, if kept within proper limits, without disturbing the finances of the country. For instance, there can be little doubt that the American civil war created a demand for a greater amount of money to be circulated in that country. More money was in fact required; because the raising of a large army, and supporting it in the field, would render it necessary to make many more payments in money. If the issue of an inconvertible currency in America

had gone no further than to satisfy this demand for a greater sum of money to be brought into circulation, no one's confidence in the financial credit of the government would have been shaken, and the inconvertible currency would have exerted no effect on prices. But the American government far outstepped their legitimate limits." 1

People accept an inconvertible currency of government notes, as it will discharge their own debts existing at the time, by virtue of its being legal tender, and from a belief that it will speedily be redeemed by an equivalent in some form. If government be competent to issue it, it would have a high value for a time, even if it were believed that it would not be paid. While there are grave objections to such a currency, says Mr. Fawcett, it is possible that if its issue were confined within reasonable limits, it might be issued without disturbing the finances of a country. If, for example, the United States, in the late civil war, had issued notes only in ratio to their increased necessity for money, the issue could have exerted no influence over prices. The yearly average expenditures of that country previous to the war equalled, say, $15,000,000. They went up during the war to $750,000,000 annually, for three years. The demand for money, measured by the price of the notes issued, exceeded sixteen-fold the amount of previous expenditure. To that extent, said Mr. Fawcett, government notes might be issued, and the currency increased in like ratio, without exerting any influence upon prices; for the reason that the money issued would only be in ratio to the increased necessity for its use. But how could the expendi tures of a government be increased sixteen-fold, or even eightfold, without any increase of capital, or fund to draw upon, and prices remain at their old figures? It is the same as to say that a demand multiplied by one per cent equals a demand multiplied by eight or sixteen per cent. If gold could have been supplied wherewith to meet all expenditures growing out of the war, prices would still have increased enormously, from the excess of demand over supply. Gold was not, or could not be, had. Legal-tender could; and prices rose in ratio to its use, and to the necessities of the government. At one time, $281 of paper would purchase only $100 of coin. Prices rose, there

ར

1 Manual of Political Economy, p. 443.

fore, in ratio to the demand; in other words, in ratio to the inflation of the currency. If Mr. Fawcett had paused long enough to ask himself weather or not a sovereign to be received six months hence had the same value to the person who was to receive it as a sovereign in hand; or whether a government note having one year to run, without interest, equalled in value its note having the same time to run, bearing interest, -the answer, properly made, would have unlocked to him all the mysteries of money. Instead of this, he contented himself with a mild restatement of all the old dogmas, every one of which he accepted without reservation, and every one of which is exactly opposed to the principles upon which money is based. It must, however, be said in his favor, that his style is in agreeable contrast to the incoherent extravagance of Macleod and the fantastic nonsense of Bonamy Price.

Mr. W. Stanley Jevons, Professor of Political Economy in the University of London, in a recently published work, entitled "Money and the Mechanism of Exchange," gives the following account of the nature of paper money, and the manner in which it gets into use:

"Metallic money, as we have seen, immensely facilitates, and, so to speak, lubricates the operation of exchange. But nations employing gold and silver money have usually discovered, in the course of time, that tokens of small metallic value, or even pieces of leather and paper of nominal value, might be passed from hand to hand as signs of the ownership of coins. That which replaces gold or silver or copper money is at first of a purely representative character. But, when a community has become thoroughly habituated to the circulation of a currency of this character, it is often found possible to remove the basis of valuable metal which it is supposed to represent, and yet to maintain the valueless bits of leather or paper in circulation as before. Thus arises the abnormal phenomenon known as an inconvertible paper money. . . .

"Although we now distinguish money according as it is metallic or paper money, because paper has in recent times been universally adopted as the material for representative money, yet it is well to remember that various other substances have been used for the purpose. We may pass, in fact, by gradual steps, from the perfect standard coins, whose nominal value is coincident with their metallic value, to worthless bits of paper, which are yet allowed to stand for thousands, or even millions, of pounds sterling. . . .1

"Persons who have long been accustomed to pay away certain pieces of paper without loss will continue to regard them as good 1 Money and the Mechanism of Exchange, pp. 191–194.

currency, until some rude shock is given to their confidence. This may go so far that a dirty bit of paper, containing a promise to pay a sovereign, will be actually preferred to the beautiful gold coin which it promises. The currency of Scotland is a standing proof of this assertion; and the same may be said of Norway, where, until 1874, no gold at all was in circulation, and notes for one, five, or ten dollars formed the principal part of the currency.

"There is one all-important point in which representative differs from metallic money: it will not circulate beyond the boundaries of the district or country where it is legally current or habitually employed. No doubt, Bank of England notes are frequently carried abroad by travellers, and are in most places readily exchanged for the money of the locality; but they never circulate, and are treated as bills upon London, forming a convenient mode of remittance. They do not satisfy a debt from this to another country; but rather create it, an English bank-note in the hands of a Paris banker representing a claim which he has upon the Bank of England. The only money which can really be exported in payment of debts due to foreign merchants is standard metallic money. Hence paper money has exactly the same capacity for driving out standard money that light or depreciated coins possess.

"In the case of inconvertible notes, this has always been most obvious. As the quantity of such notes issued progressively increases, as almost always happens, coin must be exported; otherwise the currency would be excessive. But when most of the coin is gone, need begins to be felt for making foreign payments, and then the value of the paper falls below that of the coin which it is supposed to correspond to."1

As all convertible currencies, as already shown, are regularly retired within periods of, say ninety days from their issue, worthless bits of leather and paper can only "stand for thousands and millions sterling" for such a length of time. If they get into circulation, confidence must therefore be very frequently shocked. It does happen that large amounts of paper money get into circulation, having no more value than worthless bits of leather or paper; but they get into circulation for the reason that it is always believed that a metallic basis of value underlies them. If they have no such basis, those who take them are deceived. Mr. Jevons fortifies his statement by reference to the notes of Scotch Banks; but confidence was never shocked in reference to these, for the reason that it was always known that they rested on a basis of metals, or upon that which would produce metals. He assumed that worthless bits of paper the basis of metal being wholly removed

1 Money and the Mechanism of Exchange, pp. 214, 215.

circulated by the same law as that which controls the circulation of coin, or that which was convertible on demand into coin. Paper money, he continues, has exactly the same capacity for driving out standard money that light or depreciated coins possess. What kind of paper money? Convertible paper money exerts no such tendency: on the contrary, its tendency is to bring metallic money into the country to form the basis of its issue. The two are equal in value, and move harmoniously side by side. Debased coin drives out standard coin, only for the reason that it has the same competency in the payment of debts; and, of two equally competent instruments, the less costly will be preferred. The example of England, in 1694, is strikingly in point. The coin was debased, but not demonetized; and those who had occasion to pay debts would use that which would cost the least. the debased coin was demonetized, it passed at its real—not at its denominational — value. Mr. Jevons holds that all kinds of paper money displace corresponding amounts of coin; or, to speak more to the point, he held to the traditions which he found in the books.

Again:

So soon as

"We may now proceed with advantage to consider the various methods in which the issue of paper money may be conducted. This question is, perhaps, the most vexed and debatable one in the whole sphere of Political Economy; but, by carefully adhering to the analysis of facts, we may, perhaps, get a view of the subject free from the great perplexities in which it is commonly involved. The elementary principles of the subject are not of a complex character; and, if we hold tenaciously to those principles, we may, perhaps, be saved from that dangerous kind of intellectual vertigo which often attacks writers on the currency.

"The State may either take the issue of representative money into its own hands, as it takes the coining of money; or it may allow private individuals, or semi-public companies and corporations, to undertake the work under more or less strict legislative control. We will afterwards briefly consider the relative advantages of government and private issues; but, in either case, we may lay down the following series of methods, according to which the amount of issue may be regulated, and the performance of the promises guaranteed."1

What would the money of a State represent? A beggared treasury and a parcel of ignorant and listless officials. No 1 Money and the Mechanism of Exchange, pp. 217, 218.