calamities similar to those which overtook Law's bank, is due to the fact that it has not been made the basis of vast speculative operations, its orderly retirement being still within our reach.

But France, as well as England, had an illustrious citizen, Turgot, capable of demonstrating, and who did demonstrate most conclusively, the laws and nature of money, whether metallic or paper. Law's assumption that

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These two metals - gold and silver are only the signs that represent real wealth, that is to say, commodities. A crown is a note conceived in these terms: Any seller shall give to the bearer the article or merchandise of which he may have need, to the amount of three livres, for as much of another merchandise which has been delivered to me; " and the effigy of the prince stands for the signature. Now what does it signify whether the sign be of silver or of paper? Is it not better to choose a material that costs nothing and which we are not obliged to withdraw from commerce where it is employed as merchandise, one, in fine, that is fabricated in the kingdom and does not subject us to a necessary dependence on foreigners and owners of mines, who greedily profit by the seduction into which, by the glamour of gold and of silver, other nations have fallen, a material which we can increase according to our needs, without fear of its ever being deficient? Paper has all these advantages which render it preferable to hard money.1

Turgot replied:

Here would be a benefit as grand as the philosopher's stone if all these reasonings were just. We should have need of neither gold nor silver to buy all kinds of commodities. But has it been left to Law to remain ignorant that gold falls in value like everything else by becoming more plentiful? If he had read and studied Locke, who wrote twenty years before him, he would have known that all commodities of a country are balanced between themselves, and with gold and silver according to the proportion of their quantity and the demand for them; he would have learned that gold has not a value which corresponds always to a certain quantity of merchandise, but that when there is more gold it is cheaper, and gives more of it for a determinate quantity of merchandise; that thus gold, when it circulates freely, suffices always to the need of the State, and that it becomes a matter indifferent to have one hundred millions of marks, or one million, if we are to buy all commodities dearer in the same proportion. It is ridiculous to say that metallic money is only a sign of value, the credit of which is founded on the stamp of the king. This stamp is only to certify the weight and the title. Even in its relation to commodities the metal uncoined is of the same price as that coined. The marked value is simply a denomination. This is what

Law seems to have been ignorant of in establishing his bank.

It is then as merchandise that coined money is, not the sign, but the common measure, of other merchandise, and that not by an arbitrary convention,

1 Stephens' "Life of Turgot," page 206.

founded on the glamour of that metal, but because, being fit to be employed in different shapes as merchandise, and having on account of this property a salable value, a little increased by the use made of it as money, and being besides suitable of reduction to a given standard and of being equally divided, we always know the value of it. Gold obtains its price from its rarity, and so far from its being an evil that it is employed at the same time as merchandise and as money, these two employments maintain its price.

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Supposing that the king could establish paper money, which, with all his authority, would not be easy, let us examine what he would gain by it. First, if he increased the quantity he would lower the value by the same act; and as he reserves the power to increase it, it is impossible for people to consent to give their commodities, at the same nominal price, for a bill, when by a stroke of the pen that could be made to lose its real value. But," says Law, "the king, to preserve his credit, is interested in restricting the paper within just limits, and this interest of the king is sufficient to establish public confidence." What should the just limits be, and how are they to be determined? Let us follow out the system into the different suppositions that may be made, and let us see in each case what would be its solidity in respect to the utility it proposes.

I observe, first of all, that it is absolutely impossible for the king to substitute the use of paper for that of gold and silver. Gold and silver themselves, regarding them only as signs, are, by the fact of their circulation, actually distributed among the public according to the proportion of the commodities, of the industry, lands, and real wealth of every kind existing. Now, this proportion can never be primarily known, because it is hidden, and because it varies continually by a new circulation. The king will not proceed to distribute his paper money to each person in the proportion that he holds gold and silver money, forbidding him at the same time to employ the metal in commerce; it would be necessary for the king to take to himself the gold and silver of his subjects, giving them his paper in their place. . . But it is a point, equally of theory and of experience, that the people would never receive the paper except as representing real money, and consequently convertible into it.

One of the ways in which the king could draw to himself metallic money in exchange, and perhaps the only way, would be for him to take back his notes, conjointly with the coin, but to give out only his notes, while keeping the coin. Then he would choose between these two expedients: either to melt the coin in order to use it as merchandise, reducing his subjects to the use of paper, or to leave the coin and to circulate conjointly with it the paper as representatives of each other. I commence by examining this last supposition.

I assume, then, that the king puts into circulation a quantity of paper money equal to that of coin (Law would have put ten times more). Now, as the total quantity of signs (instruments of exchange) always balances itself with the total of commodities, it is plain that the sign will be worth the half less, or, what is the same thing, commodities will be worth as much again more. But independently of their function as signs of value, gold and silver possess their real value as articles of merchandise, a value which also balances itself against the commodities proportionately to the quantities of these metals, and which they do not lose by their function as money, but on the contrary; that is to say, their value will

be balanced with more merchandise as metal than the paper can be with which it was balanced as money, and, as I shall afterwards show, the king being always obliged to increase the number of his notes if he would not have them rendered useless, this disproportion will go on increasing to the point when specie and paper will be no longer reciprocally convertible, and the paper must become discredited from day to day, while the value of metallic money will be always sustained.1

If more than forty years afterward (said Dupont in his "Works of Turgot") the majority of the Constituent Assembly had had as much enlightenment upon this question as Turgot already had shown while almost a youth, France would have been saved from the assignats. In the United States, after the experience of nearly two hundred years, Law instead of Turgot, upon the subject of money, is still our mentor and guide.

ADAM SMITH.

The theory of money which now obtains in the United States was formulated by Adam Smith, who was a follower of Law in assuming that it circulated from the necessity of a medium of exchange, and that without any other support it would continue to circulate and perform all the functions of metallic money provided it was not in excess; that is, provided that the amount did not exceed that of the metallic money which had circulated in its place. Costing nothing in itself, it was a very proper substitute for metallic money, the value of which was intrinsic. In his great treatise, "Wealth of Nations," he said:

The substitution of paper in the room of gold and silver money replaces a very expensive instrument of commerce with one much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which it costs less both to erect and maintain than the old one. But in what manner this operation is performed, and in what manner it tends to increase either the gross or the neat revenue of the society, is not altogether so obvious, and may, therefore, require some further explication.

There are several sorts of paper money, but the circulating notes of banks and bankers are the species which is best known, and which seems best adapted for this purpose. When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him, these notes come to have the same

1 Stephens' "Life of Turgot," page 206.

currency as gold and silver money, from the confidence that such money can at any time be had for them.

A particular banker lends among his customers his own promissory notes, to the extent, we shall suppose, of a hundred thousand pounds. As those notes serve all the purposes of money, his debtors pay the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of these notes are continually coming back upon him for payment, part of them circulate for months and years together; though he has generally in circulation, therefore, notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may frequently be sufficient provision for answering occasional demands.

Let us suppose, for example, that the whole circulating money of some particular country amounted at a particular time to £1,000,000, that sum then being sufficient for circulating the whole annual produce of their land and labor. Let us suppose, too, that some time thereafter different banks and bankers issued promissory notes payable to the bearer, to the extent of £1,000,ooo, reserving in their different coffers £200,000 for answering occasional demands. There would remain, therefore, in circulation, £800,000 in gold and silver and £1,000,000 of bank notes, or £1,800,000 of paper and money together. But the annual produce of the land and labor of the country had before required only £1,000,000 to circulate and distribute it to its proper consumers, and that annual produce cannot be immediately augmented by the operations of banking; £1,000,000, therefore, will be sufficient to circulate it after them. The goods to be bought and sold being precisely the same as before, the same quantity of money will be sufficient for buying and selling them. The channel of circulation, if I may be allowed such an expression, will remain precisely the same as before. One million pounds we have supposed sufficient to all that channel. Whatever, therefore, is poured into it beyond that sum cannot run in it, but must overflow: £1,800,000 are poured into it; £800,000, therefore, must overflow, that sum being over and above what can be employed in the circulation of the country. But though this sum cannot be employed at home, it is too valuable to be allowed to lie idle. It will, therefore, be sent abroad, in order to seek that profitable employment which it cannot find at home. But the paper cannot go abroad, because at a distance from the banks which issue it, and from the country in which payment of it can be exacted by law, it will not be received in common payments. Gold and silver, therefore, to the amount of £800,000 will be sent abroad and the channel of home circulation will remain filled with £1,000,000 of paper instead of the £1,000,000 of those metals which filled it before.

When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance which the whole circulating capital can supply may be increased by the whole value of gold and silver which used to be employed in circulating them. The whole value of the great wheel of circulation and distribution is added to the goods which are circulated and distributed by means of it.

What is the proportion which the circulating money of any country bears to the whole value of the annual produce circulated by means of it, it is, perhaps,

impossible to determine. It has been computed by different authors at a fifth, at a tenth, at a twentieth, and at a thirtieth part of that value. But how small soever the proportion which the circulating money may bear to the whole value of the annual produce, as but a part, and frequently but a small part, of that produce is ever destined for the maintenance of industry, it must always bear a very considerable proportion to that part.

The whole paper money of every kind which can easily circulate in any country can never exceed the value of the gold and silver of which it supplies the place, or which (the commerce being supposed the same) would circulate there if there were no paper money. If twenty-shilling notes, for example, are the lowest paper money current in Scotland, the whole of that currency that could easily circulate there cannot exceed the sum of gold and silver which would be necessary for transacting the annual exchanges of twenty shillings' value and upwards usually transacted in that country. Should the circulating paper at any time exceed that sum, as the excess could neither be sent abroad nor employed in the circulation of the country, it must return immediately upon the banks to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home; and, as they could not send it abroad, they would immediately demand payment for it at the banks. When this superfluous paper was converted into gold and silver, they could easily find a use for it by sending it abroad; but they could find none while it remained in the shape of paper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper; and, if they showed any difficulty or backwardness in payment, to much greater extent, the alarm which this would occasion necessarily increasing the

run.

What a bank can with propriety advance to a merchant or undertaker of any kind is not either the whole capital with which he trades, or even any considerable portion of that capital, but that part of it only which he would otherwise be obliged to keep by him unemployed, and in ready money for answering occasional demands. If the paper money which the bank advances never exceeds this value, it can never exceed the value of the gold and silver which would necessarily circulate in the country if there were no paper money. It can never exceed the quantity which the circulation of the country can easily absorb and empty.

When it was observed that, within moderate periods of time, the repayments of a particular customer were upon most occasions fully equal to the advances which a bank had made him, it might be assumed that the paper money which had been advanced to him had not at any time exceeded the quantity of gold and silver which he would otherwise have been obliged to keep by him for answering occasional demands; and that, consequently, the paper money which had been circulated by his means had not at any time exceeded the quantity of gold and silver which would have circulated in the country had there been no paper money. The frequency, regularity, and amount of his repayments would sufficiently demonstrate that the amount of the advances made had at no time exceeded that part of this capital which he would otherwise have been obliged