Studies in the Theory of International Trade

Chapter IV

THE BULLIONIST CONTROVERSIES:

II. THE DEFLATION PHASE

I. THE RESUMPTION OF CASH PAYMENTS

The Bullion Report, which advocated resumption of cash payments at the old par within two years, was presented to Parliament on June 8, 1810, but was not taken up for discussion until July of the following year. In the latter part of 1810 there began a marked depression, the result largely of a collapse of the boom in the export trade which had followed the opening of Latin America to British trade. This depression continued into 1811, and was accompanied by the suspension of many country banks and by credit stringency. To relieve the situation the government, in March, 1811, issued £6,000,000 in exchequer bills to merchants on the security of commodities, in order to provide the merchants with acceptable paper for discount at the Bank of England or at other banks.
*1 In the meantime the premium on bullion had been rising, and was not to reach its peak until 1813 for gold and 1814 for silver. These circumstances tended to strengthen the opposition to an early resumption of cash payments, and in the parliamentary session of 1811 the Horner resolutions embodying the conclusions of the Bullion Report were defeated by large majorities.

In 1813 and 1814 commerce and industry were in a prosperous state, and as the termination of hostilities impended the price of bullion began to fall. Napoleon’s return from Elba and the resumption of hostilities in 1815 resulted in a rise of the premium
on bullion, but a financial crisis, and a fall in prices and in the premiums on gold and silver, followed the definitive defeat of Napoleon at Waterloo.

Promises having been made on five different occasions of eventual resumption of cash payments, the House of Commons finally, in 1819, appointed a committee, under the chairmanship of Robert Peel the younger, to inquire into the expediency of the resumption of cash payments: A similar committee was appointed by the House of Lords. The House Committee, after hearing testimony of witnesses who, with one exception, were all favorable to resumption, recommended resumption with only one dissenting vote. In its report it took the desirability of resumption at the old par for granted, and confined itself to recommendations as to the time and manner of resumption. It recommended a
gradual return to cash payments at the old standard, along lines which Ricardo had proposed. The government left the decision to the House, which, after but little debate, passed the Act of July 2, 1819, repealing the ancient restrictions on the export of coin and bullion and requiring the Bank to pay its notes in gold bars of a minimum weight of 60 oz. each, at rates per standard ounce which were to attain, by graduated stages, the old rate of £3. 17 s. 10½ d. per ounce by not later than May 1, 1821; after May 1, 1822, the Bank could pay its notes in gold coin or in ingots upon demand as it chose.

The price of gold fell to the mint price almost immediately, the exchanges turned in favor of England, and gold began to flow into the Bank. There was no demand whatsoever for the gold bars, and early in 1821 an act was passed, at the request of the Bank, which did not like the ingot plan, permitting it to cash its notes in gold
coin after May 1, 1821.
*2

From 1816 on, there was a long period of economic distress, although with short intervals of prosperity. There had been voices raised before resumption, warning that it would bring evil consequences.
*3 Once it was in effect, many persons attributed the distress to it, and there arose an extensive controversy over the expediency of the resumption and of the manner and occasion of bringing it about, which was actively to persist for many years, and was in fact not completely to end until after the middle of
the century there occurred a reversal in the hitherto downward trend of the price level.

II. RESPONSIBILITY OF RESUMPTION FOR THE FALL IN PRICES

From a peak according to Silberling’s index of 198 in 1814, the English price level fell to 136 in 1819, to 114 in 1822, to 106 in 1824, and to 93 in 1830. Ricardo had predicted that resumption would bring about a fall in prices not greater than the then prevailing premium on gold, or from 3 to 8 per cent.
*4 After the event Ricardo conceded that resumption had probably caused a greater fall in prices than he had anticipated. He still contended, however, that if resumption had been managed in accordance with the plan which he had proposed, it would not have caused a greater fall in prices than 5 per cent. If resumption had actually caused a fall in prices greater than this it was because the Bank of England had so mismanaged the resumption as unnecessarily to bring about a rise in the world value of gold.
*5 He held that there was no certain way of determining how much of the increase in the world value of gold was due to this mismanagement and how much to other causes, but he accepted as a plausible guess Tooke’s estimate of 5 per cent as the additional fall in English prices resulting from the mismanagement of the Bank.
*6 This would make the total reduction in English prices which according to Ricardo could be attributed to the resumption some 8 to 13 per cent, with the remainder of the fall attributable to other causes operating simultaneously to raise the world value of gold. At other times, however, Ricardo assigned to the Bank’s mismanagement responsibility for a greater portion of the deflation of prices than Tooke’s estimate would indicate.
*7 In the absence of any index numbers, he could have had only a vague
idea as to the extent of the fall in the price level which had occurred, and he seems to have seriously underestimated it.

In his ardent defense of resumption in principle, and also, though to a lesser extent, in his criticism of the management of resumption by the Bank, Ricardo occupied a somewhat isolated position. In the face of the depression which followed resumption, defenders of the resumption were few and these tended to rest their defense on the claim that a metallic standard of some sort was desirable, without undertaking to justify the restoration of the old par or to blame the Bank for the evils which they admitted had resulted from resumption as it had actually been brought into effect. Of the ardent bullionists who during the inflation period had insisted upon the desirability of a return to the metallic standard, some were now dead, or inactive as far as the currency controversy was concerned; and others, such as Wheatley and Lauderdale, when faced with falling prices, lost their earlier enthusiasm for a return to the metallic standard at the old par. Even so ardent a disciple of Ricardo as McCulloch thought that the return to cash payments at the old par had been a mistake. Much later in the century the Resumption Act of 1819 came to be generally regarded as a great achievement of economic statesmanship, but the economic distress which had followed it and the extensive literature of protest and criticism to which it gave rise had by then been largely forgotten.
*8

Ricardo, however, had given more hostages to fortune than the other bullionists. Not only had he been still active in 1819 in advocating resumption at the old par, when other bullionists had become silent or had advised devaluation, but he alone, or almost so, among the bullionists had insisted that the premium on bullion was a
measure of the extent to which the suspension of cash payments had been responsible for the rise in English prices, and therefore he alone was now bound, if he were to be consistent, to maintain that it would also be a measure of the extent to which resumption of cash payments at the old par would lower prices. The other bullionists had not committed themselves to any quantitative estimate of the inflationary effect of suspension of cash
payments. They were now free to reject Ricardo’s measure of the deflationary effect of resumption.
*9

It was later frequently alleged, mainly on the evidence of Heygate, a vigorous opponent in Parliament of the Resumption Act, that Ricardo, shortly before his death in 1823, had admitted to friends that he had been wrong in forecasting that resumption would cause a fall in prices of only 5 per cent.
*10 This, however, seems doubtful. Ricardo, as we have seen, openly admitted that resumption, as actually carried out, had resulted in a greater fall of prices than 5 per cent, but he continued to deny, apparently to the end, that this greater fall had been an inevitable result of resumption.
*11 When Ricardo stated that resumption would
cause a fall of 5 per cent in English prices, he did not mean that resumption might not be
followed by a much greater fall in prices. Other factors might well be operating simultaneously, but independently, to lower prices. Ricardo, moreover, when forecasting in 1819 the effect of resumption on prices, assumed proper management of the resumption,
*12 and he always had reference to the level of prices and the premium on gold as they were in 1819, and not, as did some of his later critics, to the higher
prices and higher premiums of the preceding years.
*13 Ricardo had been charged during the inflation period with exaggerating the extent of the depreciation of paper and of the rise in prices. He was now to be charged, sometimes by the same persons, with minimizing the extent to which paper had been depreciated and therefore also the extent to which resumption had been responsible for the fall in prices which followed it.
*14

Ricardo had proposed that convertibility should be restored in terms of ingots of bullion instead of coin, and that the actual circulating currency should consist wholly of paper. In this way a metallic standard could be reestablished with a minimum drain on the world’s supply of gold, and therefore with a minimum appreciation of the world value of gold.
*15 The Bank, however, was unwilling to follow this plan and instead engaged in what Ricardo regarded as an unnecessary contraction of credit and accumulation of gold, thus raising its world value and forcing additional deflation of English commodity prices. Ricardo believed that if the Bank had acted in accordance with his plan it would not have found it necessary to add to the stock of gold which it already had in 1819: “There was nothing in the plan which could cause a rise in the value of gold, for no additional quantity of gold would have been required.”
*16 This alleged mismanagement
of resumption by the Bank aroused strong feeling on the part on Ricardo.
*17

Table IV presents some statistical data on the operations of the Bank during the critical years of preparation for and actual establishment of cash payments. They appear in general to lend confirmation to Ricardo’s criticism. But although the Bank’s holdings of bullion increased greatly after 1819, they had been unusually low in that year. It is difficult to find a basis for an estimate of what would have been a conservatively safe gold reserve for the Bank at that time, in the absence of data as to the extent of the credit superstructure for which the Bank’s bullion holdings were the base. If we use the ratio of its gold holdings to its own total demand liabilities as a measure of the status of the Bank’s gold reserves, it would seem fairly clear that from 1821 to 1825 the Bank maintained larger reserves than were necessary. But with reserves at their peak in 1825, the Bank barely managed to survive the crisis of 1826 without suspension of cash payments. Even if the Bank’s difficulties in 1826 were due to inexcusably reckless credit expansion on its part, the rapidity and the extent of the drain on its bullion reserves demonstrated that large reserves were necessary, given the quality of the Bank’s management and the nervous state of public opinion with respect to the solidity of the paper circulation in times of financial strain. Information is lacking as to what the Bank’s motives were in accumulating gold and in pushing it out into circulation, but one consideration seems to have been its desire
to rebut the charge that it was unduly concerned about its own profits.
*18

The Bank’s abandonment of the bullion standard was more assuredly a mistake. The Bank, and other critics of Ricardo’s plan, cited the absence of any immediate demand for ingots as a demonstration of its impracticability. But under the bullion standard, and in the absence of domestic gold hoarding, there could have been a demand for ingots only for industrial purposes and
for export. The fact, therefore, that from 1819 to 1821, when the Bank was contracting its discounts, when paper was not at a discount, and when the exchanges were favorable, there was no demand for ingots, in no way reflected on the practicability or the desirability of the bullion standard. If the Bank had not withdrawn its small notes from circulation, there would have been no demand for
coin or ingots.
*19 The chief virtue of the ingot plan lay in the fact that at a time when the general return to metallic currencies was threatening to cause a price deflation, it would enable England to make her return to the gold standard with a minimum drain on the world supply of gold. It had the additional virtue that in times of depression, when there was still confidence in the paper currency but impaired confidence in the profitability of investment, the desire for cash liquidity could be met wholly in notes instead of in bullion, thus avoiding forced deflation by the Bank of England. It was open to the objection, however, that it would lessen the stabilizing influence of the pressure brought to bear on the Bank of England by an increase in active circulation during periods of credit expansion and of the leeway given to the Bank to expand credit in times of depression by the decline in active circulation and the consequent influx of gold to the Bank.

From February, 1819, to August, 1822, the Bank reduced its circulation of notes under £5 from £7,400,000 to £900,000, mostly by substituting gold coin for paper in circulation. This also was undoubtedly a mistake. In case of internal distrust, it was mostly the small notes which came back to the Bank for payment in gold, and these were therefore the part of the paper circulation which was most dangerous to the maintenance intact of the gold standard, and conservative opinion in England has always regarded notes of small denominations with misgivings. But the substitution of specie for paper could have been made more gradual
without serious risk. Some writers argued, further, that the gold standard could not be safely operated unless there was a secondary reserve of gold in the form of circulating coin from which external drains could be met,
*20 but it is doubtful whether the Bank could ever draw in circulating gold quickly enough to serve as a means of meeting a severe external drain, and during an internal crisis in a country where gold circulates it is likely to be withdrawn from the banks into private hoards.

Samuel Turner, a director of the Bank of England at the time of the resumption, attempted to meet Ricardo’s charge that the Bank after 1819 had added to the difficulties resulting from resumption by making excessive purchases of bullion by the argument that the Bank paid for the bullion in bank notes, and that in the absence of such purchase its owners would have taken the bullion to the mint to have it coined; the Bank’s purchases therefore merely made the increase in circulation come more promptly than would have been the case if the holders of bullion had been obliged to wait until they could get coin in exchange for their bullion.
*21 But the data in table III make it appear probable that the bullion would not have come to England at all if the Bank had not contracted its discounts and withdrawn its small notes, and that, instead of being exchanged at the Bank for notes, the bullion imports were used, directly or indirectly, to cancel indebtedness to the Bank and as a substitute circulating medium for notes. The Bank was not a purely passive agent, as its defenders claimed, but by maintaining its discount rate unchanged,
*22 by substituting
specie for small notes, and by reducing its holdings of public securities, it was promoting deflation.

The government, however, must share responsibility with the Bank for any mistakes that were made in connection with the resumption of cash payments, at least prior to 1822. The Bank had been hostile to resumption in 1819, and embarked upon it only because compelled to do so. The Resumption Act had not been a government measure, but the government had not opposed it, and there is probably some basis for Mathias Attwood’s charge
*23 that the committee hearings of 1819 operated, whether intended to do so or not, to trap the opposition in Parliament to advocate measures which the government itself wished to have carried into effect, but for which it was reluctant to assume full responsibility. The committees and the government itself also yielded too readily, in spite of their misgivings,
*24 to the Bank’s insistence upon a drastic reduction of its floating debt to the Bank, a measure deflationary in its effect. The substitution of gold coin for small notes was made necessary by the provision in the Act of 1816 terminating the Bank’s right to issue small notes two years after resumption of cash payments.
*25This provision received little or no mention when the Resumption Act was passed, and it has been suggested that its existence had been forgotten.
*26 But the government was no doubt aware of its existence and in
any case was alone responsible for it, and it was probably also due in part to pressure from the government that the Bank had built up its gold reserves by gold purchases even when gold was still at a premium.
*27

Whether Ricardo overestimated the influence on the world price of gold of the accumulation of bullion after 1819 by the Bank of England it seems impossible to determine. Mathias Attwood pointed out that Ricardo was not consistent in his treatment of inflation and of deflation. In accepting the premium on gold as an adequate measure of the rise in English prices caused by the suspension of cash payments, Ricardo in effect denied any importance to the inflationary influence on world gold prices of the release of a quantity of gold from English monetary use. “But if a purchase of bullion on the part of the Bank be capable of preventing bullion from falling, with an advance in the value of the currency, it must be equally clear, that a sale of bullion by the same body can prevent bullion from advancing along with a depreciation [i.e., in the value] of the currency.”
*28It was Mathias Attwood’s position, not that Ricardo was exaggerating the deflationary influence on prices of the Bank’s accumulation of gold, but that, by virtue of his use of the premium on gold as a measure of the influence of the Bank’s activities on prices, Ricardo had underestimated both the inflationary influence of suspension and the deflationary influence on prices of the Bank’s accumulation of gold, since even at their peak the bullion holdings of the Bank of England were only an insignificant fraction of the estimated world stock of gold and silver, and since much of the gold acquired by the Bank had probably come out of English hoards rather than from the stocks of other countries.
*29 But the comparison should be between, on the one hand, the English absorption for monetary purposes of non-hoarded gold,
including the gold which went into English circulation through the agency of
the Bank, and, on the other hand, not the world’s
total stocks of gold and silver, but the world’s
monetary stocks of gold and silver, but with greater emphasis on gold. The fact that the greater part of the world was then in fact, if not in law, on a silver standard basis makes it seem at least plausible that resumption as it was carried out involved a significant absorption of gold by England.

But whether or not Ricardo did exaggerate the deflationary effect of the English absorption of gold on world gold prices, he probably underestimated rather than overestimated the deflationary influence on
English prices of the resumption of cash payments. In taking 1819 for his base year, Ricardo overlooked the probability that the mere anticipation of early resumption would depress prices, and that the fall in the premium on gold and the decline in prices from 1816 to 1819 were also therefore to be regarded as in part at least the consequence of the agitation for resumption. One writer, George Woods, had pointed out some time before that prices would not rise in full proportion to the increase in paper issue, the physical volume of trade remaining the same, if “speculators…invest their capital in bank paper…in anticipation of being ultimately paid in specie or bullion.”
*30 For the same reason prices could fall before actual resumption, the paper issues and the physical volume of trade remaining the same, if speculators were hoarding paper or dishoarding gold in anticipation of resumption. But Ricardo, like most of the writers of the period, paid little or no attention to the effects of speculative factors on the value of paper money in terms of bullion or of commodities. One writer claimed also that prior to the resumption of cash payments, mechanical inventions and the subsidy to labor from the poor rates had operated to keep the money costs and therefore the prices of exports, and thus to give a temporarily high exchange value to the English currency,
*31 but it is not clear that these factors ceased to operate, or operated in lesser degree, after 1819.

The defenders of the resumption were justified, however, in
denying that it had been responsible for all of the decline in prices which occurred after 1816, or even after 1819, especially as this decline continued until the 1850’s.
*32Other countries which had been on a paper basis with inflated prices during the war returned to a metallic basis at old parities after its termination and therefore participated with England in the scramble for bullion, which was not available in sufficient quantities to support the existing price levels. The long-continued decline in the English price level after resumption is probably to be accounted for, moreover, by a failure, for the world as a whole, of the production of gold to keep pace with the growth of commerce and industry. The post-Napoleonic fall in prices appears not to have been confined to England, but to have been a world-wide phenomenon.

But whether or not the resumption of cash payments was causally responsible for part or all of the decline in the English price level, in resuming cash payments at the old par England was surrendering the means by which that downward trend could have been checked if not wholly avoided. This argument was at the basis of much of the criticism of the return to a metallic standard. Even Ricardo conceded that the Bank had some power to check a fall in prices, as long as its notes were inconvertible, which it did not have under a metallic standard, and that this was an advantage. But it was an advantage offset, according to him, by the disadvantages of an inconvertible currency.
*33

III. THE ECONOMIC EFFECT OF CHANGING PRICE LEVELS

There was general agreement at the time that changes in price levels resulted in arbitrary and inequitable redistribution of wealth
and income. There appeared, however, during this period some new arguments in support of the doctrine that falling prices had adverse effects on the
volume of wealth and production which made them particularly undesirable, and that rising prices might bring advantages for production and wealth-accumulation to compensate for their inequitable influence on distribution. The general trend of these arguments was such as to constitute at least a partial defense of the wartime inflation and to strengthen the opposition to resumption at the old par. Whether by implication or expressly, these doctrines gave encouragement to the advocates of a national paper currency free from the limitations to which an international metallic currency was subject. To Ricardo these doctrines were for this as well as for other reasons unpalatable, and later “orthodox” economists, following in his path, tended to ignore or to ridicule them. They were, no doubt, carried to extreme and even absurd lengths. They represent, nevertheless, a substantial contribution to economic analysis which in later years had to be rediscovered.

If prices were to fall suddenly, and generally, and equally, in all things,
and if it was well understood, that the amount of debts and obligations were to fall in the same proportion, at the same time,it is possible that such a fall might take place without arresting consumption and production, and in that case it would neither be injurious or beneficial in any great degree, but when a fall of this kind takes place in an obscure and unknown way, first upon one article and then upon another, without any correspondent fall taking place upon debts and obligations, it has the effect of destroying all confidence in property, and all inducements to its production, or to the employment of laborers in any wav.
*34

A contraction of the currency, on the other hand, was injurious because the rigidity of costs prevented it from being followed immediately by a reduction in prices. During the interval consumers, finding themselves possessed of reduced funds, would buy less physical quantities of goods. Workmen would thus lose employment, “until the action of intense misery upon their minds, and of general distress upon all, shall so far have reduced their
monied wages and expenses, as to reduce the price [of their product]…within the reduced monied means of the capitalist.”
*35

Wheatley, abandoning his original views, now argued similarly that falling prices, unless they resulted from increasing per capita output, were a burden on farmers and manufacturers because rent, wages, and taxes would not fall in proportion:

All the distress arises from an inability to make good the contracts, which individuals entered into with each other and the state when prices were high, and nothing can remove the embarrassment, but altering the contracts, lowering rent, wages, and taxes, according to the reduction of prices, or raising prices to their former standard by increasing our currency to its former amount.
*36

These and other writers argued in like manner that an increase in the quantity of money operates to increase employment and prosperity. The argument took two forms. In one of them, the “forced-saving” doctrine now first introduced in England,
*37 it is held that the increase in money results in an increase in commodity prices unaccompanied by a corresponding increase in the prices of the factors. There results a forced saving on the part of the recipients of the relatively fixed incomes, not in the monetary sense of an increase in the amount of unspent funds, but in
the opposite sense of a decrease in the amount of real consumption while money expenditures are maintained. The increase in money is retained by entrepreneurs, who invest it in additional production. In the other form of the argument, commodity prices do not rise immediately or do not rise in as great proportion as the increase in money, and the money left over is available for additional expenditures and consequently for the employment of additional labor. This form of the doctrine, of course, was not novel, but goes back to Hume, and even earlier to William Potter and John Law,
*38 and rests on the assumption that there are idle resources.

The first stages of the development in England of the doctrine of forced saving have been ably traced by Hayek.
*39He finds the first statement in print of the doctrine in the following passage from Henry Thornton:

It must be also admitted that, provided we assume an excessive issue of paper to lift up, as it may for a time, the cost [read
prices?] of goods though not the price of labor, some augmentation of stock will be the consequence; for the laborer, according to this supposition, may be forced by his necessity to consume fewer articles, though he may be exercise the same industry. But this saving, as well as any additional one which may arise from a similar defalcation of the revenue of the unproductive members of the society, will be attended with a proportionate hardship and injustice.
*40

Jeremy Bentham had shortly before completed an extended exposition of the same doctrine, but it remained in manuscript form until published in 1843 as his
Manual of political economy.*41 According to Bentham, if an increase of money passes in the first instance into hands which employ it “productively,” it results in reduced consumption, because of higher prices, on the part of all who use their income for “unproductive expenditure,” until the new money reaches hands which will use it unproductively. During this interval the reduced consumption of wage earners and
recipients of fixed incomes results in corresponding additions to the national stock of capital.
*42

Hayek refers also to reasoning along similar lines by Malthus, Dugald Stewart, Lauderdale, Torrens, and Ricardo,
*43with the caution that he would “not be surprised if a closer study of the literature of the time revealed still more discussions of the problem.” Some important additions can be made to Hayek’s citations, including both further discussions of the problem by the writers whom he has cited
*44 and discussions by other writers, and most notably by Joplin.
*45

In the other form of the doctrine that an increase in money meant an increase in production, it was argued that an increase in the quantity of money would increase the monetary volume of purchases more rapidly than it would increase prices, with the result that there would be a substantial interval during which the increase of spendable funds would be absorbed by increased employment in the production of consumers’ goods rather than by increased prices.
*46 In this form of the doctrine, the increase
in money results in increased real consumption, whereas in the forced-saving form it results in increased investment, but in both forms it makes possible increased employment.

The contributions of Joplin to the discussion are interesting because of the way in which, in the midst of much confused analysis, there appear concise statements anticipating some of the “innovations” in both terminology and concepts of present-day monetary theory. Hayek credits Wicksell with “a contribution of signal importance” by his rediscovery of Thornton’s doctrine of the effect of the rate of interest, through its influence on the volume of bank loans, on the volume of money, and his combination therewith of the doctrine of forced saving resulting from an increase in the quantity of money.
*47 But Joplin has claims of priority in this respect. Hayek has himself pointed out
*48 that Joplin in 1823 and later had ably analyzed the influence of the rate of interest on the quantity of money. Joplin not only stated clearly the doctrine of forced saving, but on the basis of these two doctrines reached conclusions as to the proper criteria of currency management which in their essentials seem to anticipate Hayek’s “neutral-money” doctrine.

Joplin stated the forced-saving doctrine in several of his writings. There follows one such statement:

If a person borrows one thousand pounds of a banker who issues his own notes, the banker has seldom any means of knowing whether he has lent him money that has been previously saved or not. He lends him his notes, and if either he or some other banker should not have previously had a thousand pounds’ worth of notes deposited with them, he has at once added a thousand pounds to the capital and a thousand pounds to the currency of the country. To the party who has borrowed the money, he has given the power of going into the market and purchasing a thousand pounds’ worth of commodities, but in doing this he raises their price and diminishes the value of the money in previous circulation to the extent of one thousand pounds, so that he acquires the commodities by depriving those of them who held the money by which they were represented and to whom they properly belonged. On the other hand, if a person pays a thousand pounds into the hands of a banker, and the currency is contracted to that extent, both one thousand pounds of capital and
one thousand pounds of currency are destroyed. The commodities represented by the money thus saved and cancelled, are thrown on the market, prices are reduced, and the power of consuming them is obtained by the holders of the money left in circulation.
*49

Joplin does not approve of forced saving. It involves a fraud on those who were holders of money prior to the increase in its issue. At first it results in a stimulus to trade such as “in all probability would more than compensate the holders of the money in previous circulation for the loss they incurred,” but if the increase of issue continues, definite injury and injustice results.
*50 “Legitimately a banker can never lend money which has not been saved out of income. Money saved represents commodities which might have been consumed by the party who saves it. Interest is paid for the use of the commodities and not for the money.”
*51 If banks have the power to issue money, the amount of such issue is determined by the rate of interest which the banks charge on loans. If forced saving is to be avoided, banks should charge “the natural rate of interest,” which he defines as the rate which keeps savings and borrowings equal.
*52 Under a purely metallic currency in its most perfect state, the quantity of money (and/or the scale of value) would be “fixed and unchangeable” and banks would be able to lend only what others had saved. But where banks acquired the right to issue paper currency not fully covered by gold, the quantity of money, “which ought, if possible, to be as fixed as the sun-dial, came to depend upon the credit of bankers with the public, and the credit of the public with the bankers, upon the supply of bills, the value of capital, and innumerable contingencies, which ought no more to affect the amount of currency in circulation than the motions of the sun.”
*53 To remedy this situation he would confine the circulation of paper money to
certificates of deposit of bullion exchangeable for and issued only in exchange for bullion.
*54

Other doctrines were presented during this period which tended similarly to lead to the conclusion that the inflation of the war period had contributed to the augmentation of the national wealth or the national income. Bentham had argued that if taxation fell on funds which otherwise would have been spent on consumption, and if the proceeds of the taxes were not spent unproductively by the government, the “forced frugality” on the part of the taxpayers would operate to increase the national wealth.
*55 Lauderdale, to the same effect, argued that the sinking-fund involved a “forced accumulation of capital…annually raised by taxation,” thus “transferring from the hands of the consumers a portion of their revenues to commissioners, who are bound by law to employ it as capital, whilst, if it had remained in the hands to whom it naturally belonged, it would have been expended in the purchase of consumable commodities.” Like Bentham, Lauderdale disapproved of this “forced accumulation,” but not on the grounds of equity to which Bentham appealed. Lauderdale claimed that when the government’s current expenditures fell below its revenues, there resulted a diminution of “effectual demand” and consequently of production. While the war continued,
he wanted the government to carry on its increased wartime expenditures by borrowing, and without forcing individuals, through taxation, to decrease their expenditures.
*56 After the war had ended, he urged the government to offset the decline in military expenditures by increased civil expenditures on public works, in order to restore the demand for labor.
*57

William Blake similarly argued that increased government expenditures financed by borrowing operated to increase prices, profits, and production, by bringing into activity capital which if left in private hands would have remained “dormant,” by which he meant apparently that it would have been kept either as idle cash or as idle stocks of goods. He explained the post-war difficulties as due to “the transition from an immense, unremitting, protracted, effectual demand, for almost every article of consumption, to a comparative cessation of that demand.”
*58

John Rooke believed that spending on consumption contributed to prosperity whereas savings, apparently even if invested, did not. He therefore held that the cessation of military expenditures, unless offset by deliberate currency inflation, would operate to cause deflation and depression, especially if these military expenditures had been financed by borrowing:

As the funds which had supported them [i.e., soldiers] in a military capacity, particularly in England, were partly derived from borrowed money, the savers who had supplied this money did not become spenders in the place of government; nor would the war-taxes which were remitted immediately pass into circulation through the medium of consumption, the basis of all income.
*59

In one of his earliest essays, John Stuart Mill denied Blake’s argument that it was the cessation of the government’s war expenditures which brought about the depression:

…every argument is [fallacious] which proceeds upon the supposition that a fund becomes a source of demand by being spent, while it would not have become so by being saved. A loan is a mere transfer of a portion of capital from the lender to the government: had it remained with the lender it would have been a constant and perennial source of demand: when taken and spent by the government, it is a transitory and fugitive one.
*60

Mill is here tacitly assuming that the government borrowed funds which the lenders would otherwise have themselves invested. But Blake had argued that if left in private hands these funds would have remained “dormant,” i.e., would have been kept either as idle hoards of cash or as idle stocks of commodities. He could even more effectively have argued that the funds borrowed by the government were in large part created by the banks for the purpose of being lent to the government and therefore might not have existed at all in the absence of the government borrowings.
*61 Mill also objected that Blake’s contention that there could be oversaving rested on the reasoning that although the savers were the only persons who could purchase the (net?) products of their investment, men saved because they did not wish to consume. Mill replied, that on the contrary, men saved because they wished to consume more than they saved.
*62 Mill is here once more clearly identifying saving with investment. He overlooks the possibility that men may save without investing because for the time being they wish neither to consume nor to invest, but merely to preserve their capital resources without risk of loss through unprofitable investment, and that this is especially likely to be the case when prices are falling rapidly and no investment seems profitable or secure.
*63

It is not surprising that Ricardo, with his loyalty to the metallic standard and his temperamental reluctance to explore the shortrun and intermediate phases of economic process, also did not take kindly to these doctrines.
*64 His references to them are few,
and tend to be obscurantist in nature. As in other cases, he alternated between outright denial of their validity, on the one hand, and qualified admission of their correctness for the short run but with minimization of their importance, on the other hand.

To Malthus’s argument, that an increase in the quantity of money would operate to transfer purchasing power from those with fixed money incomes, an “idle and unproductive class,” to farmers, manufacturers, and merchants, and would thus result in an increase of capital, Ricardo replied that an increase of prices resulting from such increase of money, by reducing real fixed incomes, might reduce the savings of those receiving such incomes to an equal degree instead of reducing their consumption.
*65

In answer to questions put to him by the Lords Committee in 1819, Ricardo dealt further with the question of forced saving. He denied that bank credit created capital:

Credit, I think, is the means which is alternately transferred from one to another, to make use of capital actually existing; it does not create capital; it determines only by whom that capital should be employed…Capital can only be acquired by saving.
*66

Asked what in his opinion was the difference between “a stimulus… by fictitious capital
*67 arising from an overabundance of
paper in circulation, and that which results from the regular operation of real capital employed in production,” he merely replied:

He conceded that an increase in paper money circulation, by changing the proportions in which the national income is divided in favor of the saving classes, “may facilitate the accumulation of capital in the hands of the capitalist; he having increased profits, while the laborer has diminished wages.” This is not an acceptance of the forced-saving doctrine, for the increase of investment is held to result indirectly and voluntarily from the redistribution of real income from a non-saving to a saving group, rather than directly and involuntarily from the rise in the consumer’s cost of living. Ricardo, moreover, added that “This may sometimes happen, but I think seldom does.”
*68

Although Ricardo conceded that a sharp fall in prices was a serious evil, the only undesirable consequence of such a fall which he emphasized was the arbitrary redistribution of wealth which resulted therefrom.
*69 He admitted also that economic depression was likely to follow the end of war, but he attributed it to a relative shift in the demands for particular commodities, to which the capital equipment of the country had not yet had time to adjust itself.
*70 Ricardo’s position on these questions was closely related to his acceptance of the James Mill-J. B. Say doctrine that production, if properly directed, created the demand for its product, and that a general insufficiency of demand to absorb all of the possible output of industry was impossible. This doctrine leads naturally to a denial that a fall in prices would operate to
restrict production or a rise in prices to increase it. It rests on concepts of “supply” and “demand” too physical and an implicit assumption of price and money-cost flexbility too unrealistic to serve adequately the purposes of analysis of short-run disturbances in a monetary economy. If “supply” and “demand” are interpreted, as they should be, not as simply quantities of commodities but, in the modern manner, as
schedules of quantities which would be produced or purchased, respectively, at specified schedules of prices, it becomes easy to see that if money costs are inflexible the schedules of demand prices may fall more rapidly than the schedules of supply prices, with a consequent reduction, not only in prices, but also in volume of sales, in output, in employment, in willingness of capitalists to invest, and in willingness of bankers to lend even if there were would-be borrowers.

The fallacy of Mr. Mill’s argument depends entirely upon the effect of quantity on price and value. Mr. Mill says that the supply and demand of every individual are of necessity equal. But as supply is always estimated by quantity, and demand only by price and value; and as increase of quantity often diminishes price and value, it follows, according to all just theory, that so far from being always equal, they must of necessity be often very unequal, as we find by experience. If it be said that reckoning both the demand and supply of commodities by value, they will then be equal; this may be allowed; but it is obvious that they may then both greatly fall in value compared with money and labor; and the will and power of capitalists to set industry in motion, which is the most general and important of all kinds of demand, may be decidedly diminished at the very time that the quantity of produce, however well proportioned each part may be to the other, is decidedly increased.
*71

It was not Malthus
*72 but the two Attwoods, and especially
Thomas Attwood, who first explained in reasonably satisfactory fashion the dependence of the “demand and supply” of price theory on the state of the currency:

…while it is certain that a reduction of the quantity of money in circulation necessarily occasions a reduction in the monied prices of all commodities; it is of equal necessity, that the price of no commodity whatever can decline, without some alternation in its relative proportion of supply and demand. The manner, therefore, in which a lessened quantity of money reduces monied prices, is by operating on those ulterior principles by which supply and demand are themselves governed. A scarcity of money makes an abundance of goods. Increase the quantity of money, and goods become scarce. The relative proportion between money and commodities can never alter without producing these appearances. Mr. Tooke, and Mr. Ricardo, will find in this obvious principle an exposition of many of the difficulties and inconsistencies in which they have involved the subject.
*73

Money is as necessary to constitute price, as commodities: increase the supply of money, and you increase the demand for commodities; diminish the supply of money, and you diminish the demand for commodities. The supply of commodities is the demand for money, and the supply of money is the demand for commodities. The prices of commodities, therefore, depend quite as much upon the “proportion” between the supply of, and demand for, money, as they do upon the “proportion” between the supply of, and demand for, commodities. This is a truth which Sir Henry Parnell has altogether overlooked, and his neglect in this respect has led him into a labyrinth of errors. He has considered the supply of, and demand for, commodities as acted upon by some obscure, uncontrollable, and capricious principles, having no reference to the state of the currency, and none to the legislative enactments, which, at one period, have introduced cheap money and high prices, and, when enormous monied obligations have been contracted in such cheap money, have then, at another period, introduced dear money and low prices, and have
thus strangled the industry of the country by compelling it to discharge monied obligations which its monied prices will not redeem.
*74

IV. RICARDO’S POSITION ON THE GOLD STANDARD

Although Ricardo believed that stability of its purchasing power was the criterion for an
ideal standard of value, the effect of the suspension of cash payments on the purchasing power of the pound received no emphasis in his appraisal of the consequences of the suspension. In the first place, he thought the measurement of general purchasing power impossible.
*75 Secondly, he attached great importance, on ethical grounds, to the maintenance of contractual obligations, and regarded it as vital that creditors should be enabled to collect, upon the maturity of their claims, the amount of gold specified by or contemplated by the contractors. He regarded it as unjust to withhold from a creditor the benefit of any rise in the purchasing power of his monetary claim as long as he was obliged to assume the risk of any fall in its purchasing power.
*76

It is a mistake to suppose, however, that Ricardo assumed or believed that gold always maintained a constant purchasing power, and that a premium on gold over paper always meant that paper had fallen in value and never meant that gold had risen in value, views frequently attributed to him by anti-bullionists and apparently ascribed to him by Silberling in the following passage: “Ricardo assumed that gold was still effective as a legal standard and could never itself rise in price in terms of paper. It was always paper that fell, not gold…that rose.”
*77 Ricardo never denied that it was possible for the value of gold to fluctuate, and claimed for it only that it was more stable in value than any other commodity:

A measure of value should itself be invariable; but this is not the case with either gold or silver, they being subject to fluctuations as well as other commodities. Experience has indeed taught us, that though the variations in the value of gold and silver may be considerable, on a comparison of distant periods, yet, for short spaces of time, their value is tolerably fixed. It is this property, among other excellencies, which fits them better than any other commodity for the uses of money.
*78

Ricardo complained, in fact, that while all his argument rested on the fluctuations in the
price of gold, his opponents insisted on raising objections based on the fluctuations in its
value. Although he was justifiably skeptical of it, he did not deny that an increase in the value of gold had occurred during the war; he claimed only that it was irrelevant to the question of whether depreciation of the paper currency had occurred.
*79

The violent currency and price fluctuations which followed the termination of hostilities led Ricardo later to admit that gold and silver were more variable in their value even in short periods of time than had generally been recognized. He still insisted, however, that the variations in the value of gold were irrelevant to
the bullionist case, and that in spite of these variations gold and silver still provided the most stable standard of value available.
*80 It was apparently Ricardo’s position that since gold and silver were in general more stable in value than an inconvertible paper currency would be, in case of departure from a metallic standard the paper currency should ordinarily be so regulated as to give to it the value which a metallic currency would have had under like circumstances, even if this should occasionally result in a greater instability of the value of the currency than would have prevailed if the paper currency had not been so regulated.

Malthus, in the same spirit, maintained that even if gold had risen in its world value during the Restriction, as some critics of the Bullion Report had claimed, it would nevertheless be desirable to restore the paper currency to parity with gold.
*81Although sufficiently loyal to the metallic standard, John Stuart Mill refused to go so far, though his refusal, given his denial that the circumstances which would justify this heresy had ever existed, was rather academic:

…Mr. Blake is of opinion, that instead of causing a variation,
it [the Bank Restriction] prevented that which would necessarily have taken place, if the currency had continued on a level with its nominal standard. We ourselves, if we could believe the Bank Restriction to have had this effect, should be among the warmest of its defenders and supporters.
*82

V. REFORM WITHOUT DEPARTURE FROM THE METALLIC STANDARD

From at least 1809 on, proposals had been made that further depreciation of the currency should be checked, and at the same time a disastrous fall in prices avoided, by returning to the gold standard at then prevailing price of gold in terms of paper, instead of at the old par. The Bullion Committee held that devaluation would be a “breach of public faith and dereliction of a primary duty of Government,”
*83 while Huskisson characterized it as “a stale and wretched expedient.”
*84 Ricardo, writing in September, 1809, when, it should be noted, a marked depreciation had been prevailing for less than a year, not only termed devaluation “a shocking injustice,” but for some reason which he does not make clear, claimed that it would not remove the premium
on gold over paper and would result in a further rise in commodity prices.
*85

Devaluation was not without its advocates in 1819, but they failed to receive a sympathetic hearing in influential circles. There was considerable impatience at the failure of the government to redeem the pledge which it had repeatedly given from 1814 on that resumption would be carried out at the old par as soon as practicable; and the decrease of the premium on bullion in 1819 to a point where the paper currency was almost at a par with gold, and the widespread feeling that the resumption of cash payments at anything less than the mint par would serve still further to increase the reputedly excessive profits of the Bank of England, also operated strongly to prevent devaluation from becoming a practical issue at the critical moment when policy was to be decided. Ricardo was therefore in accord with parliamentary sentiment in giving little or no consideration to the desirability of resumption of cash payments at a higher mint price for gold than the old par. In his testimony before the Parliamentary Committees of 1819 Ricardo still advocated resumption at par, with no reference to devaluation that I have been able to find.
*86 But in a speech in Parliament in 1820, Ricardo stated that if the premium on gold had not fallen to 5 per cent while the 1819 Committees were sitting, he would have favored an alteration of the standard in preference to a return to cash payments at the old standard,
*87 and he later made similar statements.
*88

By Silberling and Angell, this is taken as evidence of a revolution
in Ricardo’s views, corresponding to a change in his personal economic status from that of presumably a large holder of fixed-income securities to that of a landed proprietor. But Ricardo’s will shows that he still had very large holdings of securities at his death, and the apparent change in his views can be explained in a much more creditable—and credible—way. When he attacked devaluation in 1809, the pronounced depreciation in the currency had prevailed only for a few months. By 1819 it had prevailed for some ten years, and many of the existing contracts had been entered into on the basis of such depreciation. What would be glaring injustice in the one situation might well be defended as the closest approach to justice available in the other situation.
*89

During the period of rising prices, the bullionists, Ricardo included, had always explained the mode of operation of a metallic standard as if, under given conditions in the world at large, it dictated to a country adhering to it a specific quantity of currency and a specific range of commodity prices. After 1815, however, Ricardo made it clear that he regarded the gold standard as not absolutely inflexible, but as permitting for short intervals of time some degree of latitude with respect to the quantity of currency and the level of prices which could be maintained under it. His charge that the Bank had so managed resumption as to bring about a greater contraction of the currency and a sharper fall in prices than was necessary would be unintelligible if he did not hold such views.
*90 In 1816 he proposed a remedy for the periodic
scarcities in currency which occurred prior to the dates of payment by the government of the quarterly dividends on the public debt.
*91 He thought that the rigid rules for granting loans followed by the directors of the Bank made commercial discounts unsuitable as an instrument for the regulation of the volume of currency, and therefore recommended that the managers of the currency should engage in open-market operations when expansion or contraction of the currency was desirable.
*92

Walter Hall argued that if there were a return to the gold standard—which he vigorously opposed—the Bank of England should maintain generous specie reserves, so that it would not be necessary for it to make its note issue fluctuate in exact correspondence with specie movements. Whenever an unfavorable balance of payments occurred which was due to temporary factors, the Bank should permit gold to flow out without contracting its issues.
*93

John Rooke, although an advocate of more thoroughgoing currency stabilization than was possible on a fixed metallic basis,
*94 insisted that there were limited possibilities of price stabilization even on a fixed metallic basis:

A plain view of actual events would, therefore, seem to point out the justice and propriety of augmenting the circulating medium when prices have a tendency to fall, and of diminishing it when they have a tendency to rise. There is always a direct mode of acting at hand. A greater or less amount of bank paper may always be forced out of or into circulation, as occasion may require, and to a given extent, without causing the price of gold to vary. It evidently does not follow at all times, that an increase of bank paper will occasion a rise in the market rate of gold, since that depends upon the circumstance, whether the circulation of the paper money be carried to its greatest possible extent, which is seldom the case.
*95

Torrens also claimed that the gold standard permitted some scope for flexibility of the quantity of the currency, within the limits of the gold points. If a return were made to the gold standard, it would be desirable that the range between the gold
points should not be too small. He therefore urged the retention of the laws against the melting and export of coin, as operating to raise the gold export point. For the same reason, he opposed Ricardo’s plan of substituting ingots of bullion for gold coin. Coin was a “less eligible article of export” than bullion, and therefore would not reflect as closely as bullion the fluctuations in the foreign balance of payments.
*96

In 1812 Torrens had advocated raising the tariff as a means of making resumption of cash payments possible without resulting in a fall in the English price level. He conceded that this would involve a loss of the advantages of the “territorial division of employment,” but he maintained that the evil of a fall in prices was greater than the benefit from foreign trade.
*97 Another writer made a similar proposal in 1818:

A more rapid method however of increasing the price of commodities, may be found in the adoption of a paper currency; which, if aided by uniform duties on importation, will not entirely drive out of circulation the precious metals. By this means they may be kept at par with the paper, so long as the amount of paper issued does not exceed its due proportion to the rate of the import duties.
*98

In 1819 the Bank of England urged that if it were to be required to make gold payments, it should not be at a fixed rate, but at the market price of gold in paper, whatever that might be when its notes were being presented for payment in gold.
*99 Ricardo pointed out the obvious flaw in this proposal: The Bank, by regulating its issue of paper, could determine the price of gold in paper, and therefore would not be subject to any real
limitation on its note issue.
*100 Only slightly less naive was George Booth’s proposal.
*101 He advocated a paper standard currency. He vaguely suggested that a paper currency must
de natura retain a constant general purchasing power, but gave no hint as to what he would do if the purchasing power of the paper currency should in fact fluctuate. But because of the liability to forgery of paper money of small denominations, he would retain gold and silver coinage. The standard would be the paper money, of which £1 would equal 20 silver shillings. The quantity of silver in a silver shilling would be made to vary with the market price of silver in paper money, so as to maintain parity of value between a paper pound and the quantity of silver in 20 silver shillings. The existing gold guineas were to be retained unaltered in their metallic content, but the number of shillings, paper or silver, which the guinea was to represent was to be varied according to the market price of gold in shillings. Booth failed to specify, however, any criterion for regulating the quantity of paper shillings in order to maintain stability of their purchasing power.

John Rooke, in 1824, made a somewhat similar proposal, which was not guilty, however, of the crucial omission in Booth’s scheme of any plan for the regulation of the paper money issues.
*102 Rooke advocated a convertible paper currency so regulated in its amount as to have stable purchasing power. He proposed that, as the purchasing power of the paper currency increased, the amount of paper money should be increased, and vice versa. The market price of gold in paper should be permitted to fluctuate freely, but convertibility of the paper currency should be maintained by changing the value in shillings or the denominations of the gold coins whenever necessary. The paper money would thus have a constant purchasing power, but the gold coins would have a variable value both in shillings and in general purchasing power. Rooke preferred, as the criterion for stabilization of the purchasing power of the currency, the “annual price of farm labor” to the price of any other commodity or set of commodities, because it has few or no short-term fluctuations. But he conceded that “the prices of
other things might be taken into account as well as labor, if doing so would give more exactness to the exchangeable value of the currency.”
*103

Henry James, in 1818, advocated continuance of the Bank Restriction in order to avoid deflation.
*104 In 1820 he recommended stabilization of the purchasing power of the currency in terms of wheat and agricultural labor, but did not make any concrete suggestions as to the method of stabilization.
*105

Joplin was in general a strong adherent of a metallic standard currency, but he nevertheless recommended that gold payments should be stopped temporarily during periods of crop shortages, if otherwise the external drains of gold would result in sharp declines in prices.
*106

VI. PAPER STANDARD CURRENCIES

All of the proposals described above provided for the continuance in some degree of a metallic basis for the currency. But advocates were not lacking of a complete break with the metallic standard and the adoption of an inconvertible paper currency. All of the defenders of the suspension of cash payments had thereby demonstrated their preference for an inconvertible paper over a metallic standard at least during the continuance of a great
war involving heavy foreign remittances. One anti-bullionist even appeared to find the superiority of the inconvertible paper currency over the metallic standard under wartime conditions to lie in the fact that the former was not set up or regulated in accordance with any deliberate plan.
*107 Many of the anti-bullionists claimed that England profited during the war from having a currency independent of international entanglements, and therefore free from the necessity of adjusting itself to all the wartime fluctuations in England’s balance of payments.
*108 The suspension of cash payments, as one writer put it, gave England “the advantages of an insulated currency, under the circumstances of an expensive war.”
*109 But while the war continued, most of the supporters of the Restriction defended inconvertibility only as an emergency measure, and looked forward to an eventual return to a metallic standard. The writers who then ventured to declare for an inconvertible paper currency as a permanent institution were few in number and do not appear to have attracted any following. Among them were: advocates of an “abstract currency” divorced from the precious metals, which in some unexplained way would always maintain a proper value and be issued in the correct volume;
*110 crude inflationists, for whom no amount of money could be excessive;
*111 and others who laid chief stress on the importance of having a currency which was not liable to flow abroad irrespective of internal needs.
*112 But when the war had
ended, and especially when resumption of cash payments was accompanied by sharply falling prices, the advocates of an inconvertible paper currency became fairly numerous, although apparently never influential with the government. Of greater interest were the writers who, prior to 1830, advocated some form of stabilized paper standard.

An anonymous writer as early as 1797 had proposed a system of control of the inconvertible paper currency through the use of the interest rate, although he failed to make clear whether or not his proposal contemplated a
variable interest rate as the regulator of the quantity of the currency, and he failed to formulate an intelligible criterion of the proper quantity of currency. He proposed that all bank notes should be suppressed and that national paper money, issued in exchange for government securities, should be substituted for bank notes. The Bank of England should be obliged to accept for deposit at
interest whatever quantity of national paper money individuals should offer it, and the government should be obliged to accept from the Bank all the paper money above what the Bank found necessary for carrying on its business. The government should pay interest to or receive interest from the Bank according as to whether the government was indebted to the Bank or the Bank to the government.
*113

Although John Wheatley had been one of the most outspoken critics of the suspension of cash payments, his belief in the metallic standard diminished under the impact of the fall in prices accompanying the approach and the realization of resumption of cash payments.
*114 In his writings from 1816 on, he expressed preference at times for a currency so regulated as to maintain constancy in the price level, at other times for a currency constant in quantity. But stability of prices was apparently his ultimate objective, for he indicated that, where population was increasing
and there was a corresponding growth of production, the quantity of money should be increased in the same proportion, so as to prevent prices from falling. This would seem to lead to a regulated paper currency, but in 1816 he still advocated a return to the gold standard, on such a basis as to restore the 1813 level of prices: “a currency of coin is neither liable to sudden excess, to defraud the creditor, nor sudden contraction, to defraud the debtor…. With a circulation of paper it is impossible to prevent a constant variation in the amount of our currency. In times of confidence the banks issue too much, in times of distrust they issue too little.”
*115 In 1819 he still advocated resumption. The evil of deficiency of currency, which produces low prices, was greater than the evil of excess, which produces high prices, but under inconvertibility the currency system was liable to both deficiency and excess. All that was necessary to get a proper currency system was to abolish small notes, which were most liable to variation in their quantity, and to build up the stock of gold very gradually so as not to cause a sharp contraction of prices and so as not to involve other countries in difficulties.
*116 But in 1822 he argued that sterling should have been allowed to remain depreciated until the world price level had risen to equilibrium with the English price level. If under inconvertibility the amount of the paper currency had been kept constant, it would have been better that resumption of cash payments should never take place. He now advocated that there be increased issue of paper until the 1812-13 level of the price of corn had been restored, and that thereafter there should be only such changes in the quantity of currency as would be necessary to maintain prices and incomes at this level, with the metallic standard, presumably, definitely abandoned.
*117

Thomas Attwood may not have had any great zeal for a stabilized paper currency, and his real objective seemed to be whatever increase in currency and prices should prove necessary to bring about full employment, without limitations prescribed in advance.
*118 But he was deeply convinced that falling prices were
a serious evil which could not be avoided except through an inconvertible paper currency, and his stabilization suggestions seem to have been made in the hope that they would make his plea for an inconvertible paper currency more palatable to public opinion. They are nevertheless of considerable interest. Attwood recommended an inconvertible paper currency issued by the government and its quantity regulated through open-market purchases and sales of its own securities by the government.
*119 As the criterion for the stabilization of the currency he wavered between the price of wheat,
*120 the general rise or fall in the prices of commodities,
*121 the rate of interest,
*122 and the wages of agricultural labor.
*123 He clearly was not prepared to commit himself definitely to any one criterion. Regulation of the amount of the currency should be entrusted to a legislative commission, and should be carried out not by “laws of maximum and minimum but by judicious legislative operations upon the issue of bank notes, or other national paper.”
*124 He recognized that if wages of labor were used as the standard for stabilization, there would be timelags between changes in the quantity of currency and resultant changes in wages. He suggested, therefore, that, to supplement wages, the market rate of interest should be used as a more sensitive index of the effects of changes in the quantity of currency, the rate of interest to be used as a “temporary” and the wages of labor as a “permanent” guide in the regulation of issues.
*125

Attwood realized that it might not prove easy to reverse the trend of prices, and that more would be necessary than simple authorization to the banks to issue more paper:

It would be of no use to act upon the “rag makers,” without at the
same time acting also upon the public mind; for unless the public are willing to borrow the “rags,” the “rag maker” cannot issue them. It is therefore necessary to act upon both parties; the one must be stimulated to
borrow, and the other to
lend. Both these dispositions are rather stagnant at present, and are becoming daily more so. Prudent and safe men are afraid to borrow money, because they cannot safely and beneficially employ it. Bankers are afraid to lend it, because they know that it cannot be safely employed, and because they remember the late panic, when they were compelled to pay everybody, whilst nobody could pay them.
*126

Although all of the prominent members of the classical school were adherents of a fixed metallic standard, I have not been able to find any serious attempt during this period to meet these claims that a better currency standard was available. There was then, as there has continued to be since, a marked tendency on the part of the exponents of the fixed gold standard to rely on dogmatic assertions of the injustice of any other system and of the impossibility of devising any system of currency which would have more stability of value than the precious metals.
*127 Attempts to stabilize the value of money beyond what metallic money would do of itself, they asserted, were impracticable, and were straining after unattainable perfection: “It does not seem the design or intention of the Author of the world, that…stability [of the currency] should be perfect and invariable”;
*128 “to demand a standard abstractedly free from variation, is like seeking for better bread than is made of wheat.”
*129 As has already been pointed out, James Mill, Ricardo, and their disciples, also tended to minimize both the extent and the evil consequences of changing price levels, and thus to foster the attitude that the metallic standard, variable though it was, met adequately the requirements of a good currency standard.

During this period the adherents of a fixed metallic standard did not expressly claim as an advantage of such a standard that
it was an international rather than a purely national standard.
*130 The bullionists had laid great emphasis on the fall in the exchanges as evidence of the undesirable mode of operation of the inconvertible paper currency, but primarily or solely because exchange depreciation indicated internal depreciation in terms of bullion. I have found only one instance of even bare mention by a bullionist of instability of the exchanges as an evil in itself,
*131 and I have failed to discover what specific disadvantages, if any, the bullionists believed would result from a fluctuating exchange other than the fluctuations in the bullion value of the currency and in relative price levels as a whole at home and abroad which would be associated with it.

Few of the anti-bullionists conceded that fluctuating exchanges were an evil, and when they did they insisted that the advantages of a stable exchange could be acquired or retained only at an excessive cost, without as a rule indicating what they regarded as the disadvantages of a fluctuating exchange. As one paper-money advocate exclaimed, under a metallic standard: “The natural order of things will be reversed. Instead of a steady currency and fluctuating currency!!”
*132 One anti-bullionist, Walter Hall, did, however, carry the discussion a little further. He was not prepared to concede that the disadvantages of a fluctuating exchange were very serious: “What may be the value of a steady exchange, I shall consider hereafter; but it seems to me it will cost too dear, if the price to be paid for it is a fluctuating currency.”
*133 “After all, what is this mighty evil of an unfavorable exchange, that so much should be lost and hazarded for it.”
*134 Clearly identifying
a fluctuating with a falling exchange, he conceded that it results in a disadvantage to the consumer of imported goods in the form of higher prices, but he argued that this burden would be diffused equally over the whole community, and would be counterbalanced to the country as a whole by the advantage which resulted to the manufacturer and exporter, whereas the forced sales and the decline in prices which would result from the contraction of the currency for which falling exchanges were a substitute would fall heavily on the merchant and the manufacturer, and would cripple for a time the productive activities of the country.
*135 He had earlier argued that changes in taxes result in serious changes in the relations between particular prices and thus change “the relations of society,”
*136 and had thus shown that he recognized that changes in relative prices as well as changes in price levels as a whole could have serious consequences, but his attempt to show that this did not apply to the changes in relative prices which would result from a depreciating exchange cannot be regarded as satisfactory. But superficial and inadequate as was his analysis of this vital phase of the problem, it was the only explicit recognition of it which I have found, not only in the literature of the bullionist controversy, but in such of the English nineteenth-century literature on the currency problem as I have examined.

It cannot be claimed for the literature of the bullionist controversy that it afforded a satisfactory answer to the issue, prominent now as then, as to the comparative merits of a metallic (and international) monetary standard, on the one hand, and a non-metallic (and national or “insulated”) standard, on the other. The defenders of the metallic standard contented themselves with an appeal to arbitrary dogmas and to moral issues, and with the claim that the limitations imposed by a metallic standard were a safeguard against the inflationary possibilities of an irresponsibly or incompetently managed paper standard currency. The exponents of a
national paper standard made out a better case for what I am inclined to regard as theoretically a moderately inferior
and under ordinary practical conditions a seriously inferior cause. They presented valid and novel arguments for the economic advantages of the freedom afforded by an independent monetary standard to escape a deflation (or inflation!) induced by external factors, to cope with a deflation resulting from internal factors and intensified by the prevalence of rigidity downwards in the prices of the factors of production, and, in general, to provide a country with the quantity of means of payment deemed best for it as against having that quantity dictated to it by external factors beyond its control. If the exponents of the paper standard, however, had intellectually somewhat the best of the argument, it was largely because of the failure of their opponents to set forth what seem to me to be the most important arguments for stability of the exchanges. The important issue lies between stable and unstable exchanges, and between a metallic standard and a paper standard only as and if the former in operation provides stable exchanges and the latter in operation fails to do so. First, fluctuating exchanges result in risks and uncertainties for foreign trade and foreign investment which are economically costly and for which the development of forward exchange markets and other facilities for hedging against exchange fluctuations provide only a strictly limited palliative. Second, although a paper standard currency managed without reference to the foreign exchanges could reduce the amplitude of short-term fluctuations in the
general price level as compared to what they would ordinarily be under an international monetary standard, it would thereby tend to increase greatly the amplitude of short-term fluctuations
relative to each other of sectional price levels—export commodities, import commodities, domestic commodities—as compared to what is conceivable under an international monetary standard. It was only under the stimulus of the recent great depression, however, that the analysis of these problems was carried much beyond the point at which it was left by the bullionists and their critics, and the present-day discussion seems to be tending to shift the issue from stable versus unstable exchanges to permanently stable versus shiftable exchanges. This is a much more significant issue, since almost no country for which foreign trade was of great importance has ever been willing for long to tolerate freely fluctuating exchanges, and stronger grounds can be presented for substituting a shiftable anchor for a permanently fixed one than for doing without an anchor at all.