more money must be brought into circulation, or general prices must decline. The influence, however, which is exerted upon prices by bills of exchange is not due to any thing peculiar in the nature or form of a bill of exchange: it is not the bill which produces the influence, but the influence is produced by the credit which is given. The bill is not this credit; but is simply a testimony or record of its existence. The truth of this assertion is illustrated by the fact, that buying and selling may be carried on by book credits, instead of by bills of exchange. . . . In this case (the illustration given), although the buying and selling are nominally made for money, yet the resort to book credits enables money to be as completely dispensed with as if bills of exchange had been used. It is therefore credit, and not the particular form which credit may assume, that enables money to be dispensed with, and consequently produces an influence on prices."1

Experience when appealed to in the case of the issue of the £60,000 of notes, as assumed in the first of the preceding paragraphs, would have shown that all issued would return to the banker for redemption regularly, and within periods of from sixty to ninety days from their issue, to be discharged by an equal amount of coin, or the equivalent of coin. How were these to be met? If the banker.discounted bills representing merchandise, his notes would be returned to him by their makers in their payment. If he discounted those that would not be paid, then the notes issued would have to be presently taken in by him, by paying out a corresponding amount of his reserve. The debts created by their issue are to be discharged by their use, or by that of coin. Every note issued, therefore, must have a provision of an equal amount of capital for its discharge, and must be discharged by such provision. Its value depends upon its capacity of being discharged, of being retired from circulation. If it could never be discharged, it could have no value. Such is the law of all convertible currencies. Notes get into circulation upon the credit of the issuer; but it is always upon the assumption that means, their equivalent in value, are first provided for their redemption. Without such confidence, no one would take them. The basis of their circulation is not credit, but capital. Credit is but another word for confidence that such capital exists, and can always be had when wanted. It may as well be in the hands of the public or of the merchant, and on its way to the con

1 Manual of Political Economy, pp. 427–433.

sumer, as in the hands of the issuer. If it be in the hands of the public or the merchant, then £3,000 is all that the issuer need hold against an issue of £60,000, as the return of the notes would be insured by the capital for the distribution of which they were the instruments. The reserve is not held to meet such notes as occasionally return, such as are assumed to be issued in excess; for the reason that all will return within their appointed periods. Mr. Fawcett wholly misconceived the law or nature of paper money. A similar answer may be given to his statement that notes can be substituted, as currency, for a corresponding amount of gold; the saving to the country being in the amount of the substitution, "because notes, which are simply pieces of paper of no intrinsic value, perform with equal efficiency all the purposes which were previously fulfilled by the gold which is now supposed to be dispensed with." Notes which are constantly being retired from circulation cannot take the place of gold which remains, as currency, unchanged and permanently in circulation. Whether convertible or not, they cannot perform, with equal efficiency, all the purposes which are fulfilled by gold. Their value is representative, not intrinsic; that of gold is intrinsic, not representative. Notes become valueless if their constituent become valueless; the value of gold depends upon nothing but itself. Gold is legal tender in the discharge of contracts; paper, such as that of which Mr. Fawcett was speaking, is not. Gold can be used in the arts; notes cannot. Gold can discharge indebtedness to foreign countries; notes cannot. Gold can discharge balances arising in the domestic trade of a country; notes cannot. Gold can be held as reserves by the issuers of paper money, and by society, and for all time; notes cannot in either case, as they are necessarily speedily retired by the use, or disappearance from any cause, of their constituent. Notes are accepted within the country in which they are issued, by reason of their representative character. They can perform only one function of gold, that of effecting domestic exchanges. Mr. Fawcett should have been logician enough to have seen that the less cannot include the greater. Paper discharges gold from use in one particular; but can no more be substituted for it in all the functions which the latter has to perform in the economy of society than a mere promise can be substituted for the performance, or sugar for iron.

As the substitution is impossible, the advantage resulting therefrom is impossible. Great advantages result from the use of paper money, and in ratio to its use, in the same way that great advantages result from the use of ships and railroads. In ratio to its use, will the gold of a country, or the power to command and consume it, be increased. But paper can no more be substituted for gold than can ships and railroads.

Mr. Fawcett's theory of the effect upon prices of credit in the form of paper money is singularly unphilosophic and inadequate. With him, the whole thing is a mere piece of mechanism: so much money, so much price; and the reverse. His conclusions are based upon assumptions wholly impossible in themselves. "If," he says, "the amount of money be reduced one-half, that of merchandise remaining the same, prices will fall one-half; if it be increased, prices will rise in like ratio. So, if the production of all kinds of wealth in a country be doubled, and every one doubles his purchase of commodities, the amount of money in it remaining the same, prices will fall one-half." But production and consumption cannot be doubled, the amount of money remaining the same; both must, as a rule, proceed in ratio to the amount of money in circulation. Paper money is the symbol of merchandise: the one must be in ratio to the other, as the necessary condition of production and consumption. He might as well have assumed the commerce of a country to be doubled for the reason that the ships employed carried twice as much as they have the ability to carry. His statements and illustrations are nothing less than contradictions in terms. Credit in the form of money has an effect entirely different from that due to its quantity. "If," says Fawcett, in effect, "one would lift two pounds of merchandise with a one pound weight, he must double, or reduce one-half, the length of one arm of the scale." The true object of paper money is to raise the two pounds of merchandise without the employment of any weight whatever. So far as this can be done, can the cost of the operations of weighing be saved, and prices reduced in like ratio; and so far can the coin of a country be employed in the discharge of functions peculiar to itself, and which neither symbols nor paper money of any kind can discharge. Such a relation of currency to prices wholly escaped him.

He

assumed an increase of currency to be followed by an increase of prices. The whole question turns upon the nature of the currency. If it be neither capital nor the representative of capital (merchandise); if it be that kind of currency which can be substituted for gold, like legal tender, then he was quite right; for an increase of such currency always tends to advance prices in being in excess of the means of consumption. If it be capital or the representative of capital, then he was wholly wrong; for prices must be in ratio to the amount of merchandise fitted for consumption, or in ratio to the perfection of the instruments for its distribution.

The same remarks apply with equal force to bills as currency as to bank-notes. Bills are, equally with bank-notes, the representatives of values, of merchandise; and would have no value but for their capacity of being discharged by it. As they must always speedily disappear if they possess any value, they can no more be substituted for coin than can notes. Mr. Fawcett predicates the same results of them as of bank-notes, and assumes that their use may discharge that of gold altogether. An increase in their amount puts up prices; a decrease in it puts them down. Suppose, he says, "that all the commodities which are now bought and sold by means of bills of exchange were paid for by money, a largely increased amount of money would be required to be brought into circulation." But if bills of exchange, that is, symbolic money, were not used, "all the commodities now bought and sold " would not be bought and sold, — probably not one-quarter the present amount. They would not exist. They are bought and sold, that is, they do exist, by reason of the use of symbolic money. With a return to a metallic currency, the amount of commodities would not only be greatly reduced, but the cost to consumers would be greatly increased.

Such is the confusion which prevails as to the nature and effect upon prices, of credits in the forms in which they are chiefly used, that it may be well, at the risk of some repetition, to restate the whole subject. The lending of his name by a party possessed of means in real estate or securities, to another of integrity and enterprise, is one of the usual illustrations of the beneficent results that may flow from the use of credits. The capitalist, as he is termed, will make a profit in the form of

interest upon the amount of the credit he extends. The borrower gets that upon which he can profitably exercise his industry and skill. But such credit, as a rule, is valueless until it is turned by a Bank into money. This done, the borrower contracts to pay the amount of the loan in money, within a comparatively brief period. This is to be provided out of the proceeds of the enterprise or industry in which he may engage. If he cannot turn this to account within the time within which the loan of the Bank is to be repaid, then the credit will prove to him a source of loss far greater than its amount. It was the means of anticipating — of putting into the form of money -that which perhaps existed only in idea, or which, if well based, might require years for its proper development. If the borrower cannot pay, then the capitalist, at the last moment, will be called upon. He may not be able to take in his credit immediately, although possessed of large means; and, consequently, becomes involved and discredited by the operation. If he cannot seasonably pay, the Bank must take in its notes, by paying out a corresponding amount of coin. Its ability to discount, and with it the amount of the currency, will be reduced in like degree. The currency, which was inflated by the amount of the discount above the ordinary range, is now reduced as far below it; and prices fall in like, or in still greater, ratio. All credits, therefore, of the kind described produce, as a rule, two effects: a rise, from an issue of instruments in excess of the means of consumption; and then a fall, far greater and of longer continuance than the rise, from a reduction of the currency as far below as it had exceeded its ordinary range, and from the improvident expenditure of capital equal to the amount of the credit given. Such credits, therefore, should never be made the basis of industrial enterprises. Another form of credit, the process of which has already been fully detailed, is that by which bills given in the purchase of merchandise, for its distribution, are converted by Banks into paper money, by means of which producers can anticipate the sale of their products and collection of the proceeds. By this process they are enabled to continue their industries on their wonted scale. The effect is greatly to reduce prices to the consumer, while usually increasing the profits of the producer. A third form that out of which bills which form the basis of paper money chiefly arise is the intrusting to the merchant