a branch of politics. It may be very important; it may furnish more occupation to the statesman than any other province of human life; it may have to be consulted more frequently, and its suggestions may be very closely connected with the happiness of the whole people, - nevertheless, it is the knowledge of a single department only. They may be overridden, modified, or rejected at the dictation of a yet more universal science, by the order of a still wider and higher knowledge. The function of the Economist is solely to report, on matters within his cognizance, to the statesman; but it is the statesman, and the statesman alone, whose prerogative it is to judge of their application. . . . "So much for the first of the two great difficulties which weigh on the pursuit of Political Economy, the one, namely, which is derived from its own nature, and the subject-matter which it explores. I now come to the second, the one which assails it from without, and which, as far as I am aware, Political Economy alone, of all the sciences, is compelled to endure. It never seems to make a final and permanent lodgement of any of its truths in the public mind. They float on a tide which often carries the vessel backward as fast as it progresses forward. The tendency to backslide seems to be incessant and irresistible, not from any fault of its own, or from want of ability and demonstrating power in its teachers, but from the strength of the adverse forces which every one of its conclusions is ceaselessly obliged to encounter. A centrifugal force is ever acting on some large section of society,- sometimes, even, on a whole population, which makes it forget all that it has learned, and draws it back into the darkness of ignorance. In other sciences, a truth once won is won for ever. No one challenges the principle, or acts in defiance of its law: no one slides back into the belief that the sun revolves round the earth; no one contradicts the truths once established by the chemist or hydraulist. The reason of this difference of fortune does not consist in the certainty attached to the subject-matter of the one, and the inherent uncertainty of the other. Some of the positions reached by Political Economy attain the quality of demonstration; and yet they are denied or ignored as readily as if they were the hypothesis of an empiric. They are not argued against and refuted; no second trial is summoned to retest their value: they are simply passed over; and then the error which they were supposed to have dispelled resumes its possession of the public mind, just as if it were the infallible suggestion of instinct. It seems like lost labor to waste instruction on those who listen and are convinced, and then, under some indescribable impulse, rebel against the light. And what is this impulse? How is a phenomenon apparently so discreditable to the human understanding to be explained? How comes Political Economy to have been born under so unlucky a star as to be doomed to teach and persuade, only to be repudiated? The explanation is to be found in the ceaseless action of selfishness, in the never-dying force of class and personal interests, in the steady and constant effort to promote private gains at the cost of the whole community. The foremost lessons of Political Econ omy are directed against narrow visions of private advantage; and they strive to show how the welfare of each man is most effectually achieved by securing the welfare of all. But it seems otherwise to the natural mind. The immediate gain lies before it, can be seen and handled; and the law which demands its sacrifice, in order to arrive at a wider and more prolific result, appears to contradict the senses, and to bring ruin and not benefit in its train. . . . "And, now, what is the moral to be drawn from these ever-recurring sins against light and knowledge? That Political Economy is in possession of no truth? that the experience of life, and the surer intelligence of the whole people, refute the illusions with which a few subtle thinkers bewilder themselves in the closet? that practice is wiser than theory? Nothing of the kind. Such practice contains no refutation of theory; it puts forward no argument; it makes no appeals to reason; it pretends to no better thought-out opinions. We can trace here only the action of disturbing influences, the power of selfishness in combination with the most limited narrowness of vision. The moral to be drawn is the importance of thoroughly imbuing the mind with accurate principles, before prejudice has had time to build itself up, whilst the mind is impressible by reason, and truths firmly implanted retain their hold for life. The moment you see nations and legislatures carried away by the strength of the tide into narrow empiricism, determine resolutely to be a good Political Economist. ... Here, then, is the mercantile theory. Let us now take up the newspapers of to-day. Read the city articles of every one of them. Look at the cast of thought, at the style of literature, at the principles proceeded upon, at the whole spirit of the language. What is thought most deserving of record? The sums of gold taken to the Bank of England, or taken away from it; the amount of bullion; the vessels laden with gold on their passage to England from California and Australia; the state of the exchanges. The beloved phrase of the mercantile theory, 'favorable exchanges,' is dwelt upon with satisfaction; unfavorable exchanges, and the departure of gold to foreign countries, are bemoaned with anxiety as a loss; prognosti cations are made of a languishing or flourishing trade, according to the influx or reflux of bullion; and weekly returns are proclaimed of ingots buried out of sight in the cellars of the Bank. The doctrine that gold is wealth-the doctrine which Mr. Mill paints as an absurdity so palpable that the present age regards it as incredible, as a crude fancy of childhood-breathes in every line of the city articles of all our daily newspapers. . What is this, I ask, but the mercantile theory, pure and fresh, as you heard Mr. Mill describe it? What is it but the resurrection of the Practical Man, the reassertion of himself, of his experience, his appeal to outward form, to what may be touched and handled? The world fondly imagined that he was vanquished and gone; that Adam Smith had finally disposed of him; that boys and students had learned to pity him, and to pride themselves on having been born after the great Scotch genius: never was there a greater mistake. It takes many Adam Smiths in Political Economy to kill off for ever genuine mercantile superstitions. The great authority, the man of millions, who is supposed to understand the theory of business precisely because he has made millions, revives in every age. Uno avulso, non deficit alter, aureus. The mercantile theory may be consigned by philosophers to the limbo of nursery toys; but it lives on all the same, is master of the mind of the city, is supreme over city articles, and regulates the barometer of commercial weather, and, above all, is held to know the great secret of trade, and to be able to show men the way to get rich.. ... "The mercantile theory lives, and one of two inferences from this fact must be accepted. Either it is the true theory of trade, and Adam Smith is not the great benefactor of mankind which he is supposed to have been; or else, in the department of science which has for its object the wealth of the community, error possesses a vitality which is more than a match for the keenest logic and the strongest common sense. - "The mercantile theory has given birth to a child to which the whole literature of the world affords no parallel, the doctrine of currency as exhibited in the nineteenth century. I fear, almost, to utter its name; and yet it will form the subject of the following lectures. The very sound of the word 'currency' makes every man turn his back or shut his ears. His immediate instinct is to fly from a subject with which he associates every kind of jargon and unendurable phraseology. Yet it was the very repulsiveness of currency which induced me first to embark upon its study. It seemed to me a marvellous phenomenon, well worth investigation, that there should be at this period of the world's history an article of the most universal use in daily life which seemed to defy explanation in plain and intelligible language. Other subjects of the most recondite abstruseness had been mastered. Hieroglyphics had been read, mysterious inscriptions cleared up, the profoundest depths of physics sounded, and the most subtle problems in mathematics conquered. Few, indeed, might be the bearers that these successful investigators could attract; but those hearers listened with delight, and could feel that they had made an acquisition of real knowledge. What, then, was this so-called science, from which all men seemed to turn away in disgust, even those whose lives were spent in handling the objects of which it treats? How was so astonishing an event to be explained? What causes had rendered currency the reproach of our age? What was there in sovereigns and bank-notes so inscrutable as to baffle the sharpest intellect, and to be incapable of clear and simple exposition? The cause of this strange spectacle presently became evident. The philosophic spirit had been absent; the right method of investigation had been, I will not say neglected, but absolutely despised; the method of Bacon, to which modern science owes its strength, — patient and accurate analysis, - had been scorned, as if fit only for physical subjects, but too mechanical for such subtle substances as the instrument of finance. A priori assumptions prevail on every side, in the discussion of currency. Every one starts with some arbitrary hypothesis. Can we wonder, after that, to find universal con - fusion and obscurity? Currency has been the jumble that it is, authority contradicts authority, no first principles are recognized as the common basis from which reasoning may take its origin, and, when some practical measure has been discussed, the cry of salvation for commerce is met by the counter shriek of ruin, - simply because no one will condescend to analyze facts, and to explore their meaning. The world has chosen to refer to great bankers and merchants, to men who have conducted vast businesses, and have realized gigantic fortunes. These men, the world said, have spent their lives in dealing with money. Must they not know the nature of money and its laws? Must we not take our theory at their hands? And so mankind did take the theory of money from commercial authority, and the result has been currency in the state in which we now find it.1 "We have learned what coin is; we have become acquainted with a metallic currency and its nature: but what are checks and bills, which make up the banking trade? Many would say they are papers which represent money; but I cannot accept the word 'represent' in currency, for I can never understand its meaning. It has no definite meaning for me; nor, as far as I can perceive, for any one else. Anyhow, checks and bills are not money. They may, in their respective spheres, do the same work as money; but in this place, where we are speaking of a purely metallic currency, they are not money. What are they, then? Orders to pay money, which can be legally enforced; title-deeds to money which lead directly to the obtaining of money. They are all warrants or evidences of debt. . . . A check on a banker implies a debt due by the banker as its basis: a bill is an admission of the acceptor that he owes money, and an undertaking to pay it on a particular day. Here, then, we have the things a banker deals in, the resources of which he disposes. Bankers deal in debts, and a Bank is an institution for the transfer of debt. Bankers deal in orders to pay money in discharge of debts. . . . So far a banker's business is identical with that of a clerk sent around by a great shop to collect its bills. . . . So much for a banker's receipts: he does not obtain them in money; they come to him as checks and bills. These are his resources. . . . The all-important question is, how these checks and bills are born into the world, what is it that makes a banker have few or many of them at different times. People are ever saying that Banks have much or little money; that money is abundant or scarce. This is very erroneous and very misleading language. Money, cash, sovereigns, and bank-notes vary very little indeed. . . . The language should be, bills and checks, or, if an abstract word is preferred, deposits are scarce or abundant: many checks have arrived at the Bank to-day: it will lend freely, and charge a low rate for its loans.' How, then, do these checks and bills come into existence? Omitting accommodation bills, which are foreign to this discussion, they denote goods bought and paid for, either by a transfer of debt or by a promise to pay later. Every man who 1 Principles of Currency, Inaugural Lecture. gives a check has previously sold something, and charged his banker to get the payment for him. . . . If the customer buys more than he sells, if he makes losses in business, or lives beyond his income, the balance now falls the other way. The banker's power to lend to others, his resources, his means, depend entirely on his customer buying less than he sold. The banker finds that more checks are drawn upon him than are sent to him to collect payment for, his means are reduced; he is less able to lend: he makes difficulties about loans; the rate of discount rises, and the city, which has never investigated the matter, screams in astonishment or indignation. Money, coin and bank-notes have no part in this matter, except as small change. All the buying and selling, all the borrowing and lending, takes place by exchanging debts: actual payment is so rare as not to be worth considering. 'Give me your oil-cake,' says the farmer, and I will tell my banker to pay you.' Does he make an actual payment? No: the cake-merchant gives the check to his own banker, and forthwith proceeds to buy linseed, and tells the Russian in turn, I will tell my banker to pay you.' And so it goes on in every trade.1 "The check has furnished us with a very natural introduction to the discussion of paper money. . . . The bill and the check in time generated the bank-note. . . . And now let us watch the process by which the bank-notes issue forth into circulation. It is full of instruction on the fundamental points of a paper currency. We all know how an ordinary check makes its appearance in the world: goods are bought, a check is signed for the cash, and so it commences its short-lived existence. The birth of the bank-note takes place in a different manner. It is signed and made ready at the Bank; but how does it come forth? Through payments, few though they be, which the Bank makes in cash. It is the office of the banker to lend; and he lends the more freely in proportion as his borrowers carry away the loans in notes. I am speaking of the first establishment of its notes in public circulation at its origin. Observe the fact well: it is the root of most of the strange delusions afloat in the world about paper currency. It indissolubly associates in the commercial mind the issue of notes with perpetual ability to lend. The banker,' cries the world, most of all, the Bank of England, in the hour of panic, can issue notes which will do the work of money, and he can lend all the more to traders accordingly.' And then this fact is insisted on, that, by issuing notes the banker acquires additional means for lending. This fact is perfectly true; but there is an enormous fallacy lurking beneath it... "And now we reach the most important question of all-in what numbers will these bank-notes circulate? It is the crucial question wherewith to test the soundness of every theory of currency. It is a question which every merchant, every banker, every chamber of commerce, every member of Parliament who speaks on currency, ought to push home to his mind, and not be content till he has attained to a clear, precise, and intelligible answer. It is the 1 Principles of Currency, Lec. iii.: "What is a Bank?" |