II. Force of habit method.-An issue once redeemable may circulate by force of custom after the government has been absolved from the obligation of redemption.

116. IRREDEEMABLE PAPER ALWAYS BAD1

BY JOHN WITHERSPOON

Irredeemable paper money such as was issued by the Continental Congress and the various state legislatures during the Revolution, that is, paper bills stating that the person holding them is entitled to receive a certain sum specified in them, is not, properly speaking, money at all. It is barely a sign without being a pledge or standard of value, and therefore is essentially defective as a medium of universal commerce. To arm such bills with the authority of the state, and make them a legal tender in all payments, is an absurdity so great that it is not easy to speak with propriety upon it. Perhaps it would give offense if I should say it is an absurdity reserved for American legislatures, no such thing having even been attempted in the old countries. It has been found, by the experience of ages, that money must have a standard of value, and if any prince or state debase the metal below the standard, it is utterly impossible to make it succeed. How can it be possible to make that succeed which has no value at all? In all such instances there may be great injuries done to particular persons by wiping off debts; but to give such money general currency is wholly impossible. The measure carries absurdity in its very face. Why will you make a law to oblige men to take money when it is offered them? Are there any who refuse it when it is good? If it is necessary to force them, does this not demonstrate that it is not good? We have seen indeed this system produce a most ludicrous inversion of the nature of things. For two or three years we constantly saw and were informed of creditors running away from their debtors and the debtors pursuing them in triumph, and paying them without mercy.

117. PAPER MONEY SOUND IN THEORY

BY DAVID RICARDO

By limiting the quantity of money it can be raised to any conceivable value. It is on this principle that paper money circulates;

I

1802.)

Adapted from Works, IV, 222-23. (Philadelphia: William W. Woodward,

Adapted from Principles of Political Economy and Taxation, 1818 (Gonner's edition), pp. 341–44.

the whole charge for paper money may be considered as seignorage. Though it has no intrinsic value, yet by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin. There is no point more important in issuing paper money than to be fully impressed with the effects which follow from the principle of limitation of quantity. It is not necessary that paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard.

Experience, however, shows that neither a State nor a Bank ever has had the unrestricted power of issuing paper money, without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes, either in gold coin or in bullion.

118. GUIDES FOR THE CONTROL OF PAPER MONEY1 BY CHARLES GIDE

It may be asserted that in the present state of economic science there is no excuse for a government overstepping the limit and issuing irredeemable paper money in excess. There are several signs, familiar to the economist and the financier, which should warn us of the danger, even when it is far off, and which are surer indications than the pilot obtains from sounding-lead and landmarks.

1. The first of these signs is the premium for gold. As soon as paper money has been issued in quantities too great for the needs of a community, it begins (by virtue of the universal law of value) to be depreciated; the first effect of this depreciation, the first sign that that is coming, although the general public may not be aware of it, is that metallic money begins to command a premium.

2. The second sign is a rise in the rate of exchange. Bills payable abroad, i.e., foreign bills of exchange, are sold in all the great commercial centers of the world. Like any other commodity, they have a market price that is quoted at the stock exchange; this is called the rate of exchange. These bills, or claims on foreign countries, are always payable in gold or silver, generally in gold, because gold is the international money. If, for example, the United States is under a paper-money system and its paper begins to be depreciated, Adapted from Principles of Political Economy, 1888 (Veditz translation), pp. 270-73. (By permission of D. C. Heath & Co., who hold the copyright.)

bills on London or Paris will rise in price just like gold itself, since they are in fact equivalent to gold.

3. The third sign is the flight of metallic money. However slight the depreciation of paper money may be (and unless this defect is immediately remedied by the withdrawal of the excessive paper), all metallic money will speedily disappear from a country. This phenomenon is invariable and therefore characteristic; it occurs in all countries where paper money has been issued in excess.

4. The fourth sign is a rise in prices. This appears later on, and shows that the evil has already become a grave one, and that the permissible limit has been greatly exceeded. While the depreciation is still slight, say 2 or 3 per cent, prices (except those of the precious metals) are not affected. Retail dealers, and even wholesale dealers, will not alter prices for so trifling a difference as this; and even if they did so, the public would not worry about it. But whenever the depreciation of paper money reaches 10, 15, or 20 per cent, then all tradesmen and all producers raise their prices correspondingly. The evil, which until then has been latent, suddenly bursts forth and is revealed to all.

5. Finally, we must note that the old prices continue the same for those persons who can pay in metallic money, if there is any of it left. For metallic money has lost none of its former value; on the contrary, compared with paper money it has gained. Hence we observe the curious phenomenon of two different sets of prices for commodities. Every article now has two prices, one payable in metallic money, the other in paper money. The difference between the two prices exactly measures the depreciation of the paper money.

As soon, therefore, as a government perceives the premonitory signs, namely, a premium for gold and a rise in the rate of exchange, its first duty is absolutely to forbid the emission of any more paper money, since the extreme limit has already been reached. If this limit has unfortunately been overstepped, and we discover the ominous symptom of double prices, it must endeavor to retrace its steps and destroy the paper money that returns to the public treasury until there is the right amount in circulation. Such a heroic remedy as this, however, involving the partial suppression of the national revenue, is not within the power of all governments. They cannot resort to it unless they can afford to sacrifice a part of their revenue; in other words, the public revenue must be in excess of public expenditures.

119. PAPER MONEY AND THE FOREIGN EXCHANGES

BY FRANCIS A. WALKER

One of the most important phases of the subject of paper money is its relation to the International Exchanges. By the mere fact of the adoption of this kind of money, a country loses all the advantages of an automatic regulation of the money supply through the normal movements of trade. Paper money finds no outlet in international commerce. It cannot be exported and retain its value. Hence its regulation becomes purely mechanical. Having no natural cost of production, it will not, if in excess in any country, flow away in obedience to the law which governs the distribution of a money having acceptance abroad equally as at home; but, if issued in excess, it can only be removed by being pumped out by the same force which originally issued it, at least until the stage of utter popular repudiation is reached.

Even where the excess of such paper money over what would have been that country's distributive share of the world's money be not enough to produce grave disturbances of domestic industry, the effect on foreign trade will yet be momentous. The immediate result of any excess must be to establish a premium upon that metallic money in which alone foreign balances can be paid.

To one who is not familiar with the largest operations of commerce this may seem a small matter; yet if we may trust those who are best qualified to decide such questions, the money of a commercial state cannot depart, even by the narrowest interval, from the money in which international balances are discharged, without creating obstructions, exciting apprehensions, and even occasioning losses, to which modern trade, with its highly developed and acutely sensitive organization, will not submit, or will do so only upon the payment of heavy fines by the offending community.

During the German War, and for some years after, viz., from 1871 to 1877, the notes of the Bank of France were inconvertible; yet such was the sagacity and prudence of the directors of that institution that at no time was there any considerable discount on that money, the premium on gold often being but a small fraction of 1 per cent. Yet, slight as was the disturbance of the domestic circulation thereby produced, Mr. Bagehot, in his standard work,

'Adapted from Political Economy, pp. 173–74. (Henry Holt & Co., 1883.)

Lombard Street, written during the period of suspension, attributes to it the most momentous consequences.

"The note of the Bank of France," he says, "has not, indeed, been depreciated enough to disorder ordinary transactions. But any depreciation, however small, even the liability to depreciation, without its reality, is enough to disorder exchange transactions. They are calculated to such an extremity of fineness, that the change of a decimal may be fatal, may turn a profit into a loss. Accordingly London has become the sole great settling house of exchange transactions in Europe, instead of being, as formerly, one of two."