The Free-banking School.

What the currency theorists want, then, is not more gold, but more promises to pay gold. The Free-banking School especially argue that it is among the elementary rights of an individual to make promises, and that each banker should be allowed to issue as many notes as he can get his customers to take, keeping such a reserve of metallic money, as he thinks, in his own private discretion, sufficient to enable him to redeem his promises. But this free issue of paper representative money does not at all meet the difficulty of the money market, which is a want of gold, not of paper; on the contrary, an unlimited issue of paper would tend to reduce the already narrow margin of gold upon which we erect an enormous system of trade. Here we reach the critical point of the whole theory of currency. There is also a school of currency writers, formerly represented in England by Ricardo and Tooke, who hold that it is impossible to over-issue convertible paper money. Arguments to this effect have been recently urged with great ability by Mr. R. H. Inglis Palgrave, in his work entitled "Notes on Banking," and his wide acquaintance with the subject should lend much force to his opinions. But there is, to my mind, an evident flaw in their position.

Possibility of Over-issue.

When prices are at a certain level, and trade in a quiescent state, a single banker is, no doubt, unable to put

into circulation more than a certain quantity of banknotes. He cannot produce a greater effect upon the whole currency than a single purchaser can by his sales or purchases produce upon the market for corn or cotton. But a number of bankers, all trying to issue additional notes, resemble a number of merchants offering to sell corn for future delivery, and the value of gold will be affected as the price of corn certainly is. We are too much accustomed to look upon the value of gold as a fixed datum line in commerce; but, in reality, it is a very variable thing. The tables of prices analysed by me in the Statistical Journal for June, 1865, show that between 1822 and 1825 there was an average rise of prices to the amount of 17 per cent.; and between 1844 and 1847, and 1852 and 1857, the average rises were respectively 13 and 31 per cent. Such variations of prices mean that the value of gold is itself altered in the inverse ratio; and these variations are produced mainly by extensions of credit. Every one who promises to pay gold on a future day, thereby increases the anticipated supply of gold, and there is no limit to the amount of gold which can thus be thrown upon the market. Every one who draws a bill or issues a note, unconsciously acts as a "bear" upon the gold market. Everything goes well, and apparent prosperity falls upon the whole community, so long as these promises to pay gold can be redeemed or replaced by new promises. But the rise of prices thus produced turns the foreign exchanges against the country, and creates a balance of indebtedness which must be paid in gold.

The basis of the whole fabric of credit slips away, and produces that sudden collapse known as a commercial crisis.

Now, what is true of credit generally, is still more true of the special form of credit involved in bank promissory notes. These purport to be payable in gold coin on demand, so that they are taken by every one as equivalent to the coin. Even bills of exchange can be paid in notes, and as regards internal trade, no difficulty would be felt in maintaining credit so long as promises to pay gold circulate instead of gold. But foreigners will not hold such promises on the same footing; and, if the exchanges are against us, the metallic, not the paper, part of the currency will go abroad. It is at this moment that bankers will find no difficulty in expanding their issues, because many persons have claims to meet in gold, and the notes are regarded as gold. The notes will thus conveniently fill up the void occasioned by the exportation of specie; prices will be kept up, prosperity will continue, the balance of foreign trade will be still against us, and the game of replacing gold by promises will go on to an unlimited extent, until it becomes actually impossible to find more gold to make necessary payments abroad.

Professor Cliffe Leslie, writing in Macmillan's Magazine for August, 1864, correctly pointed out, as I think, that speculative credit often raises prices for a time above their natural range. Representative credit, on the other hand, by which I suppose he means notes issued against the actual deposit of metal, obviously forms no augmentation of the currency, and can have

no effect in raising prices above the level which would exist under a purely metallic system.

The actual exhaustion of the bullion of a country is no mere ideal event, for it is what occurred in this country in 1839, under the free system of note issue. The Bank of England had parted with almost the whole of its bullion and was only saved from bankruptcy by the ignominious expedient of a large loan from the Bank of France. The narrow limits of this book evidently restrict me from entering into historical and statistical illustrations, but it may be said, that the collapse which followed the crisis of 1839 induced severer distress and depression of trade than has ever since been known in this country. We now carry on industry and commerce many times greater than in 1839, and there is nothing to indicate that either the bank directors or the commercial classes are more cautious or farseeing than they then were. On the contrary, competition, speculation, and the bold erection of the widest affairs upon the narrowest basis of real capital is more common than ever. Knowing as we do the very narrow margin of real metal upon which our many great banks conduct their business, it is impossible to entertain for a moment the notion of allowing the paper currency of the country to rest upon the discretionary reserves of such competing bankers.

The Right of Coining Bank Notes.

According to the view which I adopt, the issue of notes is more analogous to the royal function of coinage

than to the ordinary commercial operation of drawing bills. We ought to talk of coining notes, as John Law did; for though the design is impressed on paper instead of metal, the function of the note is exactly the same as that of a representative token. As to the right to issue promises, it no more exists than the right to establish private mints. For our present purposes that alone is right which the legislature declares to be expedient to the community at large. As almost every one has long agreed to place the coinage of money in the hands of the executive government, so I believe that the issue of paper representative money should continue to be practically in the hands of the government, or its agents acting under the strictest legislative control. M. Wolowski, in his admirable works on banking, has maintained that the issue, of notes is a function distinct from the ordinary operations of a banker; and Mr. Gladstone has allowed that the distinction is a wholesome and vital one. Bankers enjoy the utmost degree of freedom in this country at present, in every other point, so that it is wholly a confusion of ideas to speak of the unrestricted emission of paper representative money as a question of free banking.

Professor Sumner and others have objected to the Bank Charter Act, that it cannot be regarded as a scientific settlement of the currency question, inasmuch as no other nation had adopted the same principles. Quite lately, however, the German Imperial government has adopted the main principle of a partial deposit, adding to it the liberty of increasing the issues under a