Political Economy: the greater includes the less. All the writers upon the Bank since Lord Overstone's Essays, in 1837, have simply repeated one far greater, in statement at least, than themselves. The lesser lights, therefore, need not be dwelt upon. To do this would swell into a dozen volumes what is intended to be embraced in one. The curious may, if they will, enter the boundless field; from which they will be likely to return, if ever, far less wise than when they started upon their perilous and weary way. What the public require is an outline which shall be measurably brief, and still shall present all that is really necessary to be known.1

A prominent figure before the Committees of Parliament, upon the subject of money and the Bank, as well as a great authority with modern Economists, was Mr. Thomas Tooke, who dedicated a life-time to the work of proving that a rise in prices always precedes, and causes an increase of money, in whatever form; in other words, that a rise of water in rivers. always precedes and is the cause of rainfall. The following are among the questions put to him by the House Committee of 1840. The Italics are his own:

Question 3292, by Mr. Hume. "Will you state what part of the currency or circulating medium affects prices, under the definitions which you have now given?". "No one part of them affects the prices of commodities more than any of the other parts."

Question 3293, by Mr. Grote. "Do you mean, not more in degree, or not in any different way?" "Not more in degree."

Question 3295, by Mr. Hume. "Do you mean, that every transaction of purchase or sale, by any of the means which you have mentioned as included in the circulating medium, equally affects prices?" "Yes, and that was my reason for caring so little about making a distinction among them. I doubt whether they operate upon prices at all.”

Question 3296, by Mr. Grote. "You mean, that none of those items which you have enumerated under the general term 'circulating medium' have, in your opinion, any effect upon prices?". "Yes. I mean that they are not operative causes of prices."

Question 3297, by Mr. Hume. "What is it, then, which does

1 The crises, similar to those of 1847, which the Bank went through in 1857 and 1866, are not referred to here, for the reason that an examination of them would add nothing to our knowledge of the laws of money. That of 1847 has been dwelt upon chiefly for the purpose of illustrating the principles laid down in the first part of this work. Any further illustration of them, by reference to the operations of the Bank, would be in great measure superfluous.

affect prices?"-"The cost of production limiting the supply on the one hand, and the pecuniary means of the consumer limiting the demand on the other."

Question 3298. "Will not the variations in the quantity of the circulating medium affect prices?"-"No."

Question 3299. "Will it not, if abundant, be more at the disposal of individuals for purchasers than when it is scarce?" "It will be more easily disposable; but it will not be necessarily so disposed of. I believe that the amount of the circulating medium is the effect, and not the cause, of variations in prices."

Question 3301, by Mr. Warburton. "Supposing the quantity of the precious metals in the world to remain constant, and that in any country you go on increasing the quantity of the notes payable on demand, will the prices of commodities estimated in those notes undergo a variation proportionate to the increase of the notes?". "Not if the notes are payable in gold, on demand, unless in the degree in which it may be supposed that the value of gold is affected in the commercial world by an extensive substitution of paper for gold: I consider that those points were distinctly understood as the only conditions by which the money prices of commodities were likely to be affected, independently of the circumstances affecting the articles themselves."

Question 3303. "Suppose, as before, the quantity of precious metals in the world to remain constant, and that the number of deposits in banker's hands available to the purchase and sale of commodities is doubled, trebled, and so on, will the prices of commodities vary in proportion to that increase of deposits in banker's hands?"-"Not in the slightest degree."1

The following extracts from Mr. James Wilson's "Essay on Capital, Currency, and Banking," are quoted by Mr. Tooke approvingly, as fully expressing his own views:

"The assumption before us involves two questions: first, expansion and contraction of the currency at pleasure; and, second, as the consequence, a corresponding action on prices. Many authors, in treating of the latter as a consequence, and even combating its truth, have labored under great difficulties, by proceeding upon the admission of the former; but, if the former be admitted, we confess we cannot understand how the latter can be denied as the legitimate consequence. If, in the language of Mr. Horner, there be any means by which the quantity of circulating medium (being convertible paper and coin) can be permanently augmented, without a corresponding augmentation of internal trade, a rise will unavoidably take place in the price of exchangeable commodities.' Such means, as we have already seen, do exist in the case of an inconvertible currency; but the rise in price in consequence is only nominal in that case, being immediately compensated to other

1 History of Prices, vol. iv. p. 461 et seq.

countries by a fall in the exchange. But with a convertible currency, if such means exist at all, the rise in price would not be nominal, but real; as it would be expressed either in coin, or notes convertible into coin, and, therefore, would not, as in the other case, be compensated by any fall in the exchange. But this fact shows at once the impossibility of the 'augmentation' alluded to in the premises, when the currency is convertible. A currency augmented without any corresponding augmentation of the internal trade,' implies a quantity of notes retained in circulation, at the will of the issuers, which the public do not require. Now, the public do not receive notes from a banker without paying interest for their use; and, however low that may be, they will take no more than they absolutely require; nor do they retain notes in their possession beyond what the convenience of trade requires; and, therefore, if issued in excess of that quantity, and if convertible, a portion would be instantly returned upon the issuers. Nor can we conceive any means whatever by which the circulation could be so augmented; and we have deeply to regret that, although such a power on the part of Banks has been taken for granted by most of the writers during the last twelve years, no one has yet attempted to explain by what process it could be accomplished; and we are compelled to think that impressions which gained ground many years since as applica ble to an inconvertible currency have been inadvertently associated also with a convertible currency.

"The impossibility of increasing the quantity of paper in circulation (when convertible), except as the effect of a corresponding increase of an internal trade, or of any depreciation in its value taking place, will be more evident when it is considered by what process an inconvertible currency becomes depreciated. On all hands it is admitted, that, as long as inconvertible paper is not issued in excess, as long as coin continues freely to circulate with it, the paper will not become depreciated; but as soon as the paper is issued in excess, and the coin is pressed out of circulation, it becomes depreciated, and the prices of commodities rise in consequence; though it is only a nominal rise, which would be better expressed by depreciation of the circulation. Now, how does this depreciation and rise of price take place? During the early issue of the French assignats, no depreciation or rise in price of commodities took place until the coin. was pressed out of circulation; because, as the paper was issued, the tendency to a redundant currency was constantly corrected by the withdrawal of silver, which, being a commodity having a general value in the markets of the world, could be exported or taken for the general uses of the cambist or the silversmith. But as soon as silver was exhausted from the circulation, the issue of assignats still continuing, and the same quantity of internal exchanges only remaining, the currency became redundant; there being no means of absorption except in the existing quantities of commodities.1

"Money" (says Tooke, on a preceding page) "has two functions: the one, that of serving as an instrument of exchange; the other,

1 History of Prices, vol. iv. pp. 194–196.

that of being the subject of contracts for future payment. It is in the latter capacity that the fixity of a standard is the most essential. As a mere instrument or medium of exchange, at the same time and in the same place, invariableness of value, though desirable, is not of so much importance; the immediate purpose of money in this capacity being to serve as a point, or rather a scale, of comparison more convenient than actual barter between any two commodities or sets of commodities. It is in the latter capacity, that is to say, as the subject of engagements or obligations for future payment, that, in every view of justice and policy, the specific thing promised, in quantity and quality, should be paid at the expiration of the term."

The sum of all this is, that convertible paper money cannot affect prices under any conditions. So far Tooke simply follows Adam Smith, that "the amount of paper money of every kind that can circulate in a nation can only equal the amount of coin which would otherwise have been in circulation. All excess of issue would immediately return upon the Bank for coin. As its holders can make no use of such excess, they will immediately convert it into a form in which, by its exportation, they can use it." Such was Tooke's argument. If there could be no excess, then a convertible paper money could not affect prices. Neither could a government inconvertible paper currency affect prices, so long as it was not in excess of the wants of those using it in their exchanges. It became depreciated only for the reason that it was in excess of a currency of coin. Value was no necessary attribute of it. It might be a convenient attribute: that is, if a person parted with merchandise, to be paid for in six months, it would be well that that in which he was to be paid should have a uniform value; but where the transaction was to be immediately closed, that is, where a person sold a barrel of flour for the purpose of purchasing with the proceeds a hat or a coat, the value of the medium to such person, says Tooke, would be unimportant. But would it be unimportant to the seller of the coat or hat? He might wish to hold the proceeds in reserve for future use; or suppose he wished immediately to purchase something, must he not be prepared to offer that which could be held in reserve for any length of time, its value remaining unchanged. Whatever is to serve as money, in the last resort, must always possess uniformity of value, not only for months and years, but for ages.

1 History of Prices, vol. iv. pp. 145-146.

The fallacy of Tooke's distinction ought to be palpable to the dullest apprehension. Yet he drags the reader through six volumes, one of them containing nearly a thousand pages, the greater portion of them all devoted to the task of proving this, and propositions, if possible still more absurd. So with prices these with him depend upon cost, and the ability, not the will, of the public to consume. The public are able to consume a thousand things they will not. At one time they will not purchase a particular style of goods, which is all the rage at another, although it would be twice as valuable, as far as its wear is concerned, as that which they will purchase. Had Tooke understood the laws and effects of paper money, he would have seen that it is possible for prices to fall enormously, even when it is greatly inflated. The effect of an inflation is to advance prices, from an increase of the instruments of expenditure, and from its tendency to excite speculation, which may be carried to such a pitch as to seize and attempt to hold all the food, for example, upon the market. In such case, it not unfrequently happens that the public can be supplied from other sources, or that, from the excessive rates charged by holders, consumption will be so much reduced that those who attempted to control prices find themselves unable to carry their purchases, and are forced to throw them upon the market; in consequence of which, prices may for a time be far below what they would have been under a metallic currency. Such fluctuations, which are constantly occurring, or were occurring during the suspension of the Bank, -a period from which he drew the greater part of his illustrations,- have been assumed by Mr. Tooke to prove prices to be wholly independent of the quantity of the circulating medium. He might as well have attempted to prove that indulgence in liquor had no tendency to elevate one, from the exhaustion or syncope resulting from its excessive use. So, under an inflation of the currency, prices may fall in much greater ratio than the inflation, from the decreased cost of production, or from the falling off, from any cause, of the demand. None of these causes or influences were properly considered by him. He sought to erect a science from an observation of certain phenomena, without sufficient reference to their cause or law. It is as useless, however, to attempt to reason with him as it was with the philosopher in the tale of "Rasselas." It was, probably, from