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The great father of political economy has well explained Chap. the principles of this subject, and was himself more than x'
any other man alive to their importance. "Gold and sil- 1®19ver," says Adam Smith, "like every other commodity, vary Mr smith's in their value, are sometimes cheaper, sometimes dearer, Subject sometimes of easier, and sometimes of more difficult purchase. The quantity of labour which any particular quantity of these can purchase or command, or the quantity of other goods it will exchange for, depends always upon the fertility or barrenness of the mines which happen to be, known about the time when such exchanges are made. The discovery of the abundant mines of America reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had formerly been. As it cost less labour to bring those metals from the mine to the market, so when they were brought there, they could purchase or command less labour; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account. But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the value of other commodities; so a commodity which is itself continually varying in its own value,1 Wealth of can never be an accurate measure of the value of other bookTc. 5. commodities."1
If debts, taxes, and other encumbrances, could be made at once to rise or fall in their amount, according to the Great'cffluctuation of the medium in which they are to be dis- y^fatio"ui charged, any changes which might occur in the exchange- 0ftheast'awdable value of that medium itself would be a matter of little «d of value, practical importance. But the experience of all ages has demonstrated that this is impossible. The transactions of men, when they become at all extensive or complicated, absolutely require some fixed known standard by which they are to be measured, and their discharge regulated, without anything else than a reference to that standard
Chap, itself. It never could be tolerated that every debtor,
x' after having paid his debt in the current coin of the
1819, realm, should be involved in a dispute with his creditor as to 'what the present value of that current coin was. Hence the necessity of a fixed standard; but hence also the immense effects of any material alteration in the value of that standard, and the paramount necessity, so far as practicable, of preventing any considerable fluctuations in it. If the standard falls in value, the weight of all debts and encumbrances is proportionally lessened, because a lesser quantity of the produce of labour is required for their discharge; if it rises, their weight is proportionally augmented, because a larger quantity is required for that purpose. So great is the effect of any considerable change in this respect, that it has occasioned, and can alone explain, the greatest events in the intercourse of nations of which history has preserved a record.
The great contest between Rome and Carthage, which Eiam'piM Hannibal and Scipio conducted, and Livy has immorfora«from talised, was determined by a decree of the Senate, intimes. (juceci by necessity, which postponed the payment of all obligations of the public treasury in specie to the conclusion of the war, and thereby created an inconvertible paper currency for the Roman empire.* More even than the slaughter on the Metaurus, the triumph of Zama, this decree determined the fate of the ancient world, for it alone equipped the legions by whom those victories were gained. Rome itself, saved in its utmost need by an expansion, sunk in the end under a still
* " Hortati censores, ut omnia perindo agorent, locarent ac si pccunia in arario tiset: neminem nui bello confecto, pecuniam ab arariopetiturum else."—Liv. lib. xxiv. cap. 18.—On one occasion, when in a party in London, composed chiefly of Whigs, opponents of Mr Pitt's Currency Act of 1797, the dangerous effects of this measure were under discussion, the late Lord Melbourne, whoso sagacity of mind was equal to his charm of manner, quoted this passage from memory. "The censors," says Arnold, "found the treasury unable to supply the public service. Upon this, trust monies belonging to widows and minors, or to widows and unmarried women, were deposited in the treasury; and whatever sums the trustees had to draw for were paid by the quarter in bills greater contraction of the national currency. The sup- Chap.
plies of specie for the Old World became inadequate to —
the increasing wants of its population, when the power 1819, of the emperors had given lasting internal peace to its hundred and twenty millions of inhabitants. The mines of Spain and Greece, from which the chief supplies were obtained at that period, were worked out, or became unworkable, from the exactions of the emperors; and so great was the dearth of the precious metals which thence ensued, that the treasure in circulation in the Empire, which in the time of Augustus amounted to £380,000,000, had sunk in that of Justinian to £80,000,000 sterling; and the golden aureus, which in the days of the Antonines weighed 118 grains, had come, in the fifth century, to weigh only 68,1 though it was'Gram* only taken in discharge of debts and taxes at its original coins.T" and standard value. As a necessary consequence of so 329'33u prodigious a contraction of the currency, without any proportional diminution in the numbers or transactions of mankind, debts and taxes, which were all measured in the old standard, became so overwhelming that the national industry was ruined; agriculture disappeared, and was succeeded by pasturage in the fields; the great cities were all fed from Egypt and Libya; the revenue became .(jibbon., irrecoverable; the legions dwindled into cohorts, the P°TM*^ cohorts into companies; and the six hundred thousand JJi1TM*^' men, who guarded the frontiers of the Empire in the time lon'a Esof Augustus, had sunk to one hundred and fifty thousand in T$! that of Justinian—a force wholly inadequate to itsdefence.2
on the banking commissioners, or triumvirs mensarii. It is probable that these bills were actually a paper currency, and that they circulated as money, on the security of the public faith. In the same way, the government contracts were also paid in paper; for the contractors came forward in a body to the censors, and begged them to make their contracts as usual, promising not to demand payment till the end of the irar. This must, I conceive, mean that they wcro to be paid in orders upon the treasury, which orders were to be converted into cash when the present difficulties of the government should be at an end." —Arnold, ii. 207. This was just an inconvertible paper currency, and its issue, after the battlo of Cannae, saved the Roman empire.
Chap. What rendered this great contraction of the circulating _ medium so crushing in the ancient world was, that they 1819- were wholly unacquainted, except for a brief period during Discovery the necessities of the second Punic War, with that marf°i effect vellous substitute for it-—a paper currency. It was the currency" Jews who first discovered this admirable system, to facilitate the transmission of their wealth amidst the violence and extortions of the middle ages; and it is, perhaps, not going too far to assert that, if it had been found out, and brought into general use, at an earlier period, it might have averted the fall of the Roman Empire. The effects of a scarcity of the precious metals, therefore, were immediately felt in the diminished wages of labour and price of produce, and increasing weight of debts and taxes. A paper currency, adequately secured and duly limited, obviates all these evils, because it provides a Repbesentative of the metallic currency, which, when the latter becomes scarce, may, without risk, be rendered a Substitute for them. Thus the ruinous effects of a contraction of the circulating medium, even when most violent, may be entirely prevented, and the industry, revenue, and prosperity of a country completely sustained during the utmost scarcity, or even entire absence, of the precious metals. It was thus that the alarming crisis of 1797, which threatened to induce a national bankruptcy, was surmounted with ease, by the simple device of declaring the Bank of England notes, like the treasury bonds in the second Punic War, a legal tender, not convertible into cash till the close of the war; and that the year 1810, when, from the demand for gold on the Continent, there was scarcely a guinea left in this country, was one of general prosperity and the greatest national efforts recorded in its annals.
As paper may with ease be issued to any extent, either by Government or private establishments authorised to circulate it, it becomes an engine of as great danger, and attended with as destructive effects, when it is unduly multiplied as when it is unduly contracted. It Chap. is like the blood in the human body, whose circulation _ sustains and is essential to animal life: drained away, or 1819not adequately fed, it leads to death by atrophy; unduly Advantages increased, it proves fatal by inducing apoplexy. To cLcukSTon, preserve a proper medium, and promote the circulation limit" equally and healthfully through all parts of the system, is the great object of regimen alike in the natural frame and the body politic. Issued in overwhelming quantities, as it was in France during the Revolution, it induces such a rise of prices as destroys all realised capital, by permitting it to be discharged by a mere fraction of its real amount; contracted to an excessive degree, either by the mutations of commerce or the policy of Government, it proves equally fatal to industry, by lowering the money price of its produce, and augmenting the weight of the debts and taxes with which it is oppressed.
A paper currency, when perfectly secure, and hindered by the regulations under which it is issued from becoming redundant, may not only, in the absence of gold and silver, supply its place, but in its presence almost supersede its use. "If," says Adam Smith, "the gold and silver in a country should at any time fall short, in a country which has wherewithal to purchase them, there are more expedients for supplying their place than almost any other commodity. If provisions are wanted, the people must starve; if the materials for manufacture are awanting, industry must stop; but if money is wanted, barter will supply its place, though with a good deal of inconvenience. Buying and selling upon credit, and the different dealers compensating one another once a month or year, will supply it with less inconveniency. A wellregulated paper money will supply it, not only without inconveniency, but in some cases with some advantage."1 of Experience may soon convince any one that this latter b. 4, c . L observation of Mr Smith is well founded, and that a duly regulated paper is often more convenient and serviceable