CHAPTER XXVI.

THE QUANTITY OF MONEY NEEDED BY A NATION.

Ir might seem natural that one most important point for discussion in an Essay on Money would be the quantity of money required by a nation. Nothing would seem more desirable than to decide how much each person needs of paper, gold, silver, or bronze currency, so that the government might take care to provide sufficient for every one. In almost every country great complaints have from time to time been made as to the scarcity of the circulating medium, and the urgent need of more. the evils of the day, the slackness of trade, falling prices, declining revenue, poverty of the people, want of employment, political discontent, bankruptcy, and panic, have been attributed to the want of money, the remedy suggested being in former days the setting of the mint to work, and in later times the issue of paper money.

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The true answer to all such complaints is that no one can tell how much currency a nation requires, and that to attempt to regulate its quantity is the last thing which a statesman should do. In almost every case the apparent scarcity of currency arises from unskilful management of the metallic currency, bad regulation of

paper representative money, illegitimate speculation, or some unsoundness in commerce which would be aggravated by a further increase of the paper currency. We shall find that to ascertain how much money is needed by a nation is a problem involving many unknown quantities, so that a sure solution can never be obtained.

Quantity of Work to be done by Money.

To decide how much money is needed by a nation, we must, firstly, determine the quantity of work which money has to do. This will be proportional, ceteris paribus, to the number of the population; twice the number of people, if equally active in trade and performing it in the same way, will clearly want twice as much money. It will be proportional, again, to the activity of industry, and to the complexity of its organization. The more goods are bought and sold, and the more often they pass from hand to hand, the more currency will be needed to move them. It will be proportional, again, to the prices of goods; and if gold falls in value, and prices are raised, more money will be needed to pay the debts increased in nominal amount.

Few of the quantities concerned in such considerations are known. We know the number of the population approximately, and the amount of foreign trade, but the quantities of goods bought and sold in inland trade are almost entirely unknown. It is needless to dwell on this side of the question, as our knowledge is still more defective in other respects.

Efficiency of the Currency.

By the efficiency of the currency we mean the average number of exchanges effected by each piece of money in a unit of time, such as a year. The aggregate work done by money will be measured by its quantity multiplied into the average number of times which each coin or note passes from hand to hand during the year. Now we know very imperfectly what is the quantity of currency in most countries, and we know nothing at all as to the average rapidity of circulation. Some coins, especially small silver or bronze coins, may pass several times in the course of a day. Other coins or notes may be kept in the pocket for weeks, or may be laid by for months and years. I have never met with any attempt to determine in any country the average rapidity of circulation, nor have I been able to think of any means whatever of approaching the investigation of the question, except in the inverse way. If we knew the amount of exchanges effected, and the quantity of currency used, we might get by division. the average number of times the currency is turned over; but the data, as already stated, are quite wanting.

There is no doubt that the rapidity of circulation varies very much between one country and another. A thrifty people with slight banking facilities, like the French, Swiss, Belgians, and Dutch, hoard coin much more than an improvident people like the English, or even a careful people with a perfect banking system like the Scotch. Many circumstances, too, affect the rapidity

of circulation. Railways and rapid steamboats enable coin and bullion to be more swiftly remitted than of old; telegraphs prevent its needless removal, and the acceleration of the mails has a like effect. A decrease in the circulation of country bank-notes in England, in 1842, was attributed to the effect of the penny postal reform in facilitating presentation of notes by post.

Effects of the Cheque and Clearing System.

Far more important than these considerations is the fact that, where an extensive banking system exists, only a portion of the exchanges are actually effected by money. I do not lay much stress upon the use of bills of exchange as replacing money, because the degree in which they are so used must be comparatively limited, and they are rather articles bought and sold with money than money itself. But we have traced out step by step the way in which the cheque and clearing system enables debts to be balanced off against each other, so that the money is never touched at all, and only intervenes as the unit of value in which sums are expressed. Almost all large exchanges are now effected by a complicated and perfected system of barter. In the London Clearing House, transactions to the amount of, at least, £6,000,000,000 in the year are thus effected, without the use of any cash at all, and, as I have before explained, this amount gives no adequate idea of the exchanges arranged by cheques, because so many transactions are

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really cleared in provincial banks, between branches, agents, or correspondents of the same bank, or between banks having the same London agents.

If our knowledge of the amount of transactions in England is highly imperfect, we know still less of the way in which payments are effected in other countries. The New York Clearing House transactions are very extensive, as we have seen, and there is an elaborate banking system extending over all the States of the Union; but it would require much investigation on the spot to enable any one to form a notion whether the correspondence between these banks enables them to economize currency as much as the English system of London agencies. In France and most continental countries the cheque and clearing system can hardly be said to exist except in some of the large towns. Paris has an incipient clearing house, and the Bank of France, moreover, makes transfers between clients to the extent of two or three millions daily. All banks will to a certain extent economize currency, and those of Amsterdam and Hamburg have for some centuries carried on a system of transfers, the true prototype of our system.

Considerable changes, it is true, are taking place in the mode of conducting business in some parts of the Continent. Professor Cliffe Leslie, who is well known to be intimately acquainted with the economical systems of the continental countries, attributes the rise of prices in Germany in a great degree to the quicker circulation of the money, and the freer use of instruments of credit. In the Fortnightly Review for