The Sun.
London, England, 1858-01-20 00:00:00

THE CURRENCY,

Comments on the Currency—Fallacies of Lord
Overstone, avowed by him in his Evidence before
the Bank Committee of the House of Commons
of 1857, as the Principles upon which the Bank
Charter Act of 1844 was founded.
(Continued.)
The great wheel for circulating the capital of the
world, money, is constructed of two materials, coin
and paper, the first constituting as it were, the axis
and the last the circumference of the wheel. The
Taper money is of two kinds, both of which come
under the class of credit money, namely, cash paper
money, possessing no intrinsic value, such as
Bank-notes and cheques, and bill paper money and
other paper securities to pay money at distant
dates. Both circulate on confidence; which is the
foundation of credit ; but as Bank-notes and
cheques are payable on demand there is little or
no credit compared to bills, which form the largest
and most influential portion of the great wheel of
circulation. Ifagreat shock comes to confidence,
a collapse takes place, bills become comparatively
useless as a medium of exchange, the great wheel of
circulation is broken and stopped. What would Lord
Overstone prescribe as a remedy? He would say reduce
' the power and size of the remnant of the wheel
still more by diminishing the quantity of the ready
money portion—the bank-notes, the cash. He
would say, perish commerce, crumple up those
who procure the ready money in exchange for bills
(the great London discount houses), but don't sac-
rifice my great principle until the last extremity
and general confusion - has become imminent.
What would common' sense'say ? Repair the wheel
as soon as'possible to keep trade in motion—take
away the rotten material and put in sound—in-
crease your issue of bank-notes to supply the place
of bad bills, and rescue the commerce of the world
from being paralysed by the ruinous action of a false
principle.
We have called attention to two of Lord Over-
stone's fallacies—viz., that bank-notes alone con-
stitute paper money, and, that a paper currency
should fluctuate as a metallic currency. We now
proceed to
FALLACY Na. 3.
That a Bank of England note is nothing more
than a certificate of gold.
In answer to 3,899, he says :—" The opinion
which I hold is perfectly plain and distinct, that
bank-notes are nothing more than certificates of
gold in deposit." This definition did not appear
to the committee so perfectly plain and distinct, and
tliey renew the interrogation later on, thug-4: 024.
" Your lordship in another part of your evidence
has stated that the tank-note is nothing more
than a certificate that so much bullion is deposited,
which biallien is to pay that note when demanded
Ans.—"l stated that a bank-note is a certificate
issued against bullion ; of course we cannot say that
26,000,0001. of bank-noteS are the certificates of
bullion actually deposited, when there is only
10,000,0001. or 12,000,0001. of bullion deposited."
4,025. "You have frequently made use of the ex-
pression that the bank-note is nothing more
than a certificate of so much bullion ?" Ans.—
" It is a certificate of that amount of bullion which
would be in circulation as money if there was no
paper notes. That 14,750,000 of Bank of England
notes issued against securities are certificates of
bullion is by no means so clear and distinct to
others as to himself. In another part of his evi-
dence (3,648) he illustrates his deOnition thus—
' That practical and sagacious statesman, Sir Robt.
Peel, applied his mind to the subject. He at once
grasped the true character of the paper bank-note
(derived from his own opinion giVen before the com-
mittee of 1840, and for which he says he felt com-
plimented.' " 4,124.)—" He saw that if it was
at all times to be, converted into gold, it must be
treated as the direct representative, or I may say,
as the shadow of the gold." Had Sir Robert Peel
grasped in his hand the bank-note of some 'country
bank that had stopped paymant, we could have un-
derstood its similitude to a shadow of gold. Buts a
Bank of England note is neither the shadow of
gold nor of money—it is itself money, and of the
best quality, being a perfect security for obtaining
its equivalent specified value in capital in every
civilised country in the world. We would ask, Are
not Bank of England notes and all bank-notes
merely securities upon which the public advance
their capital—the bankers who issue them lending
their credit only, upon the strength of which the
public lend'their capital ? The bullion and other
cash reserves held by the bankers are a security to
them to enable them to discharge their promises to
pay on demand, but do not- the notes themselves
circulate with the public rnerely.as personal secu-
rities, and not as certificates of bullion
f FALLACY Ito. 4.
That all gieat.fluctuations in the rate of interest
may be distinctly traced to alteration in the value
of capital—never once to alteration in the quality
of money.
Lord Overstone, in reply to question 3,653, says,
" I have already stated, and perhaps it is better to
re-state, for really the difficulty of hammering
truth into the public on this subject is some-
thing very disheartening, that the fluctuations
in the rate of interest arise from one of two causes,
"an alteration in the value of capital, or an alte-
ration in the amount of money in the country. All
great fluctuations of interest, great either in their
duration or the extent of their fluctuation, may be
distinctly traced to alteration in the value of
capital : two more striking illustrations of that fact
cannot be furnished than the rise in the rate of
interest in 1847 and during the last two years." It
is certainly very difficult to hammer the truth into
the public on 'the subject of the currency, and
much more so, fallacies. The first difficulty we
have to encounter in the explanation of this fallacy
is the confusion arising from confounding money
and capital, and confusion is made worse con-
founded by Lord Overstone's evidence.. He says,
in answer to 3,720, "It is a very common fallacy
to consider money and capital as the same thing ; '
and yet, in answer to 3,243, he says, "If France
to-morrow put out a notice that she wishes to bor-
row a very large loan, there is no doubt that it
would cause a , very great alteration in the value
of money ;- that is to say, in the value of capital m
this country." He is asked (3,744), " Would you
be so good as to describe what you actually mean
by the term capital ?" This he declines to do. He
replies " I am afraid that this is going into a ques-
tion which is a little beyond such a body as this
fully to enter into—(not very complimentary to
the Committee, of which James Wilson was a
member, nor creditable to himself as the
founder of a monetary system)—" if you want me to
define capital I shall beg leave to decline entering
into scientific definitions." Again, (3,746) "your
lordship now uses the term money ; I understand
your paper to say it was a loss of capital ?" In
reply to 4,023 he admits there was a " curious
jumble of words" in a previous answer he had
given—wa should say of ideas likewise, and cannot
acknowledge him to be a great authority on the
currency when ,he declines to define capital, and
takes shelter in the declaration "that the use of the
word capital is very dangerous." 6,140. In the
definition of money he and the Bank Committee,
after some disputing, come to the conclusion " that
Money is means by which capital is obtained."
The confusion between money and capital is in-
creased by the general ideas that the value of
money depends upon the abundance or scarcity of
capital ; this is true to a certain extent, and arises
from the magical influence of the connecting link
between them, credit. When capital is abundant,
be it from good harvests or any other cause, credit
is also abundant; and credit money (which is
unlimited in amount compared to that of coin
moneh and has the same influence in price) is
plentiful and money is cheaper. On the other
hand, when capital is scarce, be it from bad
harvests or great losses, or any other cause, credit
and credit money are scarce and money is dearer.
Money and capital are also intimately connected,
being .demand and supply to each other. The
owner of money seeks to exchange it for capital to
gratify his wants and desires ; and the owner of
capital seeks to exchange it for money to obtain other
capital more suitable to his wants and desires. They
are, nevertheless, distinct, and must be kept so in
the mind's eye in considering this vexed question of
the currency. As Adam Smith says—" The great
wheel of circulation (money) is altogether different
from the goods (capital) which are circulated by
means of it." We will, therefore, assume the ordi-
nary definition of capital to be correct ; that it is
service and commodities used in production ; and
that"money is the means of obtaining and exchang-
ing these by virtue of its cardinal property, as a
security for obtaining its equivalent value on
capital.
Having endeavoured to remove the confusion
between capital and money, we proceed to the con-
sideration of the fallacy, that all great fluctuations
in. the rate of interest (discount) may be distinctly
traced to alterations in the value of capital. This
question, then, presents itself, Did the recent
alteration in the value of capital in this country, to
the extent of some 20 to 50 per cent. on raw mate-
rials, precede or succeed the alteration in the value
of money ? The late panic gives us an excellent
oppdrtueity of answering. All admit that the panic
originated in a suspicion that railway property in
America had been over estimated in public opinion,
that thedividends paid had not been honestly,earned.
This' suspicion proving to be well founded, gave a
g -eai blow to confidence in them, and almost annihi-
late 4 the credit worry which had been created and
kept afloat on the credit of their imaginary value.
This' collapse of credit extended to Europe, and
produced similar effects, the necessity of liquida-
ting:credit money, and the consequent diminution
in the quantity of money. - All had to run for specie,