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THEORY AND PRACTICE
FROM THE RENEWAL OF THE BANK CHARTER IN 1800 TO THE ACT FOR THE RESUMPTION OF CASH PAYMENTS IN 1819.
1. Soon after the year 1800, a remarkable phenomenon began to attract the notice of persons who had paid attention to the currency. We have just seen how lamentably deficient the harvest of 1799 had been, and the enormous quantities of grain it became necessary to purchase. The autumn of 1799, and the ensuing winter, were equally unfavourable as the preceding had been to all descriptions of farming operations. The spring of 1800 was exceedingly wet, and in the middle of the harvest heavy and continuous rains set in. In consequence, the harvest time was even more calamitous than the preceding one. In the north part of the island, the crops were a total failure. Notwithstanding that the unprecedented quantity of 1,242,507 quarters of wheat were imported, prices continued to rise to a famine scale. The public peace was with difficulty preserved, and in November, when Parliament met, the country was in a very alarming condition. Parliament pursued the usual course, recommended the most stringent economy in the consumption of
provisions, and offered to guarantee 100s. a quarter to all who imported wheat. In spite of all these measures, wheat rose in March, 1801, to 156s., barley to 90s., and oats to 47s. In the autumn of 1799, failures of great magnitude took place in Hamburg; 82 houses came down with liabilities amounting to £2,500,000. In consequence of these, discount rose to 15 per cent. Under the influence of the enormous sums of money that had to be sent abroad in purchase of grain, the attraction of this high rate of discount, and other causes, the exchange on Hamburg, which had stood so high for some years, fell in January, 1801, to 29.8., being upwards of 14 per cent. against England.
2. We have already seen that, in the great monetary crisis of 1696-97, it was universally acknowledged by Parliament and the most eminent merchants, that it was the bad state of the coinage which produced the great rise in the market price of bullion, and the heavy fall in the foreign exchanges; and we have seen that the restoration of the coinage immediately rectified the exchange. At that time bank notes were not a legal tender, and the language invariably applied to them, when their current value differed from their nominal value, was that they were at a discount. When the men of that day saw that the bank notes were a promise to pay so many "pounds" on demand, and when they saw that the persons who issued them were unable to pay that number of pounds, and that no one would give that number of pounds for them, they never used any other expression regarding these facts, than that the notes were at a discount. There is no trace of any one having thought of saying that it was the notes that denoted the pound sterling, and that bullion had risen. When the reform of the coinage took place, and the exchanges were simultaneously rectified, it was said that the reform of the coinage caused the restoration of the exchange, and numerous merchants had written pamphlets to combat a delusion which was rather prevalent among some persons, that bullion as a commodity could have a different value to bullion as coin, except on account of the depreciation of the coinage.
3. Adam Smith had laid it down as a principle, that any permanent difference between the market and the Mint price of bullion must be necessarily caused by the condition of the coinage
itself; and Hume had observed that the exchange never could vary but little beyond the cost of the transmission of specie. All these fundamental truths, which are as pure matters of demonstration as any proposition in Euclid, had been discovered and established long before the period we are now speaking of.
4. Such were the truths established, when a metallic currency was the only one thought of, in estimating value. But at this time a new principle was introduced-there was what was substantially an inconvertible paper currency. At this period most men's ideas were transferred from the metallic currency to the paper currency. Ever since the issue of £1 notes, people thought of them, when they spoke of prices, as being so many pounds. When the suspension of cash payments first took place there was a general expectation that the Bank notes would be depreciated, but the general resolution of bankers and merchants to support the credit of the Bank, the determination of the Government to receive Bank notes in payment of taxes at their par value, and the great caution exercised by the directors during the first few years after the restriction, had removed all these apprehensions, and for some years Bank notes circulated at par.
5. At this time, however, phenomena occurred which directed the attention of many persons to the state of the paper currency. The market price of standard gold up to September, 1799, had continued at £3 17s. 6d. per ounce, and the price of foreign gold in coin had been somewhat higher, on account of its greater use as coin than as bullion. But in June, 1800, the price of foreign gold experienced a sudden and extraordinary rise; it rose to £4 58. per ounce; silver rose 5s. 7d. per ounce; and the foreign exchanges fell below par. In January, 1801, gold and silver had each risen Is. per ounce, and the exchange at Hamburg was at 29s. 8d., being a depression of 14 per cent. below par. But the expense of transmitting specie to Hamburg was estimated not to exceed 7 per cent., and, consequently, there remained a difference of 7 per cent. to be accounted for.
6. It was at this time that the great and palpable truth was discovered, that if a deterioration of the coinage produced a rise of the market price of bullion above the Mint price, and a fall in the
foreign exchanges under a metallic currency, then that the opposite proposition was also necessarily true. That under a paper currency which was only the representative of a metallic currency, if the market price of bullion (i. e., the paper price) exceeded the Mint price, and the foreign exchanges fell beyond the cost of the transmission of specie, that excess could only arise from the depreciation of the representative of the metallic currency, and, therefore, that when these circumstances occurred THEY INFALLIBLY INDICATED THAT THE PAPER CURRENCY WAS DEPRECIATED.
7. We are not certain to whom the merit of the discovery of this great and important truth is due. If he had not the actual merit of discovering it, Mr. Walter Boyd was certainly one of the first to proclaim it, and call public attention to it. It was enforced with much greater ability and clearness, by Lord King, and with not so much distinctness by Mr. Henry Thornton, in his Inquiry into the effects of Paper Credit. To these three writers, however, as far as we have been able to ascertain, the merit is due of establishing this principle, which is as important in the subject of currency as the Newtonian law of gravity is in astronomy.
8. The preliminaries of peace with France were signed in October, 1801, at London, and the definitive treaty at Amiens, on the 27th March, 1802. The restriction on cash payments expired of itself six months after that event; but, though the Bank declared that its coffers were well supplied with specie, and that it was anxious and ready to resume payments in cash, the Chancellor of the Exchequer, Mr. Addington, brought in a bill on the 9th April, 1802, to continue the restriction till the 1st of March, 1803, which was passed. The arguments alleged in favour of this measure shew a wonderful decline in financial knowledge in the Government of 1802 compared to 1696. At the latter period the great reason alleged for the reformation of the coinage was the adverse condition of foreign exchanges, and the rise of the market above the Mint price, caused by the depreciation of the currency. Notwithstanding the vehement opposition of the enemies of the Government, we have seen the triumphant success of the re-coinage, which restored the public credit and the exchange. The sagacity of a Montague would at once have seen that the adverse state of the exchange, and the high price of
bullion, were entirely owing to the depreciated state of the currency, and that the only method of restoring them to par was the immediate resumption of cash payments. So great, however, was the ignorance upon the subject, that the fact of the exchange being adverse was the very reason alleged why cash payments should not be resumed! Sir R. Peel said the course of exchange was, at this moment, against us all over Europe. Mr. Addington, in bringing in the bill, said
"It cannot be necessary for me to inform the House that the rate of exchange between this country and foreign parts is disadvantageous to ourselves-that the export trade has been for some months at a stand, that while the rate of exchange is disadvantageous to us, an augmentation of the circulating cash would create a trade highly injurious to the commerce of this country. For several months past, there has been a trade carried on for purchase of guineas with a view to exportation. It is on these grounds that I submit to the House the expediency of continuing the restriction with regard to the cash payments of the Bank."
Why, these were the very reasons why a return to cash payments should have been made without delay! The reason why the trade of buying up guineas was going on was just because of the redundant quantity of paper; the paper "promises to pay" were falling in value as compared to the guineas, and, as a necessary consequence, guineas were exported, and, so far from a return to cash payments augmenting the circulating medium, it would infallibly have considerably diminished it by making the Bank reduce its paper issues. It was because the prices of articles were so high in this country that the export trade was unprofitable, and a reduction of the Bank notes would infallibly have compelled such a reduction in prices as would have facilitated the export.
9. The result of this extraordinary amount of financial error could have been easily predicted. The circumstances of the country did not improve, as the Ministry had taken the most effectual measures to prevent them doing so. In February, 1803, Mr. Addington had to come forward again to prolong the restriction. He said that the reasons which suggested it were too strong, and the necessity too urgent, to be resisted. The restriction was continued last Session because the exchanges were