John Stuart Mill.

Principles of political economy with some of their application to social online

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is incident to the notes of the most solvent firm, company, or
government ; that of being depreciated in value from being issued
in excessive quantity. The assignats, during the French Revolution,
were an example of a currency grounded on these principles. The
assignats " represented " an immense amount of highly valuable
property, namely the lands of the crown, the church, the monasteries,
and the emigrants ; amounting possibly to half the territory of
France. They were, in fact, orders or assignments on this mass of
land. The revolutionary government had the idea of " coining "
these lands into money ; but, to do them justice, they did not
originally contemplate the immense multipHcation of issues to which
they were eventually driven by the failure of all other financial
resources. They imagined that the assignats would come rapidly
back to the issuers in exchange for land, and that they should be

T 2

548 BOOK lit CHAPTJ:R XIIL § 3

able to reissue them continually until the lands were all disposed
of, without having at any time more than a very moderate quantity
in circulation^ Their hope was frustrated : the land did not sell
so quickly as they expected ; buyers were not inclined to invest
their money in possessions which were likely to be resumed without
compensation if the Revolution succumbed : the bits of paper
which represented land, becoming prodigiously multiplied, could
no more keep up their value than the land itself would have done
if it had all been brought to market at once : and the result was that
it at last required an assignat of six hundred francs to pay for a
pound of butter.^

The example of the assignats has been said not to be conclusive,
because an assignat only represented land in general, but not a
definite quantity of land. To have prevented their depreciation,
the proper course, it is affirmed, would have been to have made a
valuation of all the confiscated property at its metallic value, and
to have issued assignats up to, but not beyond, that limit ; giving
to the holders a right to demand any piece of land, at its registered
valuation, in exchange for assignats to the same amount. There
can be no question about the superiority of this plan over the one
actually adopted. Had this course been followed, the assignats could
never have been depreciated to the inordinate degree they were ;
for — as they would have retained all their purchasing power in
relation to land, however much they might have fallen in respect
to other things — before they had lost very much of their market
value, they would probably have been brought in to be exchanged
for land. It must be remembered, however, that their not being
depreciated would pre-suppose that no greater number of them
continued in circulation than would have circulated if they had
been convertible into cash. However convenient, therefore, in a
time of revolution, this currency convertible into land on demand
might have been, as a contrivance for selling rapidly a great quantity
of land with the least possible sacrifice ; it is difficult to see what
advantage it would have, as the permanent system of a country,
over a currency convertible into coin : while it is not at all difficult
to see what would be its disadvantages ; since land is far more
variable in value than gold and silver ; and besides, land, to most
persons, being rather an encumbrance than a desirable possession,
except to be converted into money, people would submit to a

' [Until the Gth ed. (18G5) the paragraph ended with " five hundred francs
to pay for a cup of coffee."]



much greater depreciation before demanding land, than they will
before demanding gold or silver.* ^

* Among the schemes of currency to which, strange to say, intclHgent
writers have been found to give their sanction, one is as follows : that the state
should receive, in pledge or mortgage, any kind or amount of property, such as
land, stock, &c., and should advance to the owners inconvertible paper money
to the estimated value. Such a currency would not even have the recom-
mendations of the imaginary assignats supposed in the text ; since those into
whose hands the notes were paid by the persons who received them, could not
return them to the government, and demand in exchange land or stock which
was only pledged, not alienated. There would be no reflux of such assignats
as these, and their depreciation would be indefinite.

1 [In the 2nd ed. (1849) was inserted the following section, which did not
disappear till the 5th ed. (1862) :

" § 4. One of the most transparent of the fallacies by which the principle
of the convertibility of paper money has been assailed, is that which pervades
a recent work by Mr. John Gray, Lectures on the Nature and Use of Money :
the author of the most ingenious, and least exceptionable plan of an incon-
vertible currency which I have happened to meet with. This writer has
seized several of the leading doctrines of political economy with no ordinary
grasp, and among others, the important one, that commodities are the real
market for commodities, and that Production is essentially the cause and
measure of Demand. But this proposition, true in a state of barter, he affirms
to be false under a monetary system regulated by the precious metals, because
if the aggregate of goods is increased faster than the aggregate of money, prices
must fall, and all producers must be losers ; now neither gold nor silver, nor
any other valuable thing, ' can by any possibility be increased ad libitum,
as fast as all other valuable things put together : ' a limit, therefore, is arbi-
trarily set to the amount of production which can take place without loss
to the producers : and on this foundation j\Ir. Gray accuses the existing
system of rendering the produce of this country less by at least one hundred
million pounds annually, than it would be under a currency which admitted
of expansion in exact proportion to the increase of commodities.

"But, in the first place, what hinders gold, or any other commodity whatever,
from being ' increased as fast as all other valuable things put together ? '
If the produce of the world, in all commodities taken together, should come
to be doubled, what is to prevent the annual produce of gold from being
doubled likewise ? for that is all that would be necessary, and not (as might
be inferred from Mr. Gray's language) that it should be doubled as many
times over as there are other ' valuable things ' to compare it with. Unless
it can be proved that the production of bullion cannot be increased by the
apphcation of increased labour and capital, it is evident that the stimulus of an
increased value of the commodity will have the same effect in extending the
mining operations, as it is admitted to have in all other branches of production.

"But, secondly, even if the currency could not be increased at all, and if
every addition to the aggregate produce of the country must necessarily be
accompanied by a proportional diminution of general prices ; it is incom-
prehensible how any person who has attended to the subject can fail to see that
a fall of price, thus produced, is no loss to producers : they receive less money ;
but the smaller amount goes exactly as far, in all expenditure, whether pro-
ductive or personal, as the larger quantity did before. The only difference
would be in the increased burthen of fixed money payments ; and of that
(coming, as it would, very gradually) a very small portion would fall on the
productive classes, who have rarely any debts of old standing, and who would


§ 4, Another of the fallacies from which the advocates of an
inconvertible currency derive support, is the notion that an increase
of the currency quickens industry. This idea was set afloat by
Hume, in his Essay on Money, and has had many devoted adherents
since ; witness the Birmingham currency school, of whom Mr.
Attwood was at one time the most conspicuous representative.
Mr. Attwood maintained that a rise of prices, produced by an increase
of paper currency, stimulates every producer to his utmost exertions,
and brings all the capital and labour of the country into complete
employment ; and that this has invariably happened in all periods
of rising prices, when the rise was on a sufficiently great scale. I
presume, however, that the inducement which, according to Mr.
Attwood, excited this unusual ardour in all persons engaged in
production, must have been the expectation of getting more com-
modities generally, more real wealth, in exchange for the produce
of their labour, and not merely more pieces of paper. This expecta-
tion, however, must have been, by the very terms of the supposition,
disappointed, since, all prices being supposed to rise equally, no
one was really better paid for his goods than before. Those who
agree with Mr. Attwood could only succeed in winning people on
to these unwonted exertions by a prolongation of what would in
fact be a delusion ; contriving matters so, that by a progressive
rise of money prices, every producer shall always seem to be in
the very act of obtaining an increased remuneration which he never,
in leahty, does obtain. It is unnecessary to advert to any other
of the objections to this plan than that of its total impracticability.
It calculates on finding the whole world persisting for ever in the
behef that more pieces of paper are more riches, and never discover-
ing that, with all their paper, they cannot buy more of anything
than they could before. No such mistake was made during any
of the periods of high prices, on the exj)erience of which this school
lays so much stress. At the periods v/hich Mr. Attwood mistook
for times of prosperity, and which were simply (as all periods of
high prices, under a convertible currency, must be) times of specula-
tion, the speculators did not think they were growing rich because
the high prices would last, but because they would not last, and
because whoever contrived to realize while they did last, would
find himself, after the recoil, in possession of a greater number of
pounds sterling, without their having become of less value. If, at

suffer almost solely in the increased onerousness of their contribution to the
taxes which pay the interest of the National Debt."]


the. close of the speculation, an issue of paper had been made,
sufficient to keep piices up to the point whicli they attained when
at the highest, no one would have been more disappointed than
the speculators ; since the gain which they thought to have reaped
by realizing in time (at the expense of their competitors, who bought
when they sold, and had to sell after the revulsion) would have
faded away in their hands, and instead of it they would have got
nothing except a few more paper tickets to count by.

Hume's version of the doctrine differed in a slight degree from
Mr. A tt wood's. He thought that all commodities would not rise
in price simultaneously, and that some persons therefore would
obtain a real gain, by getting more money for what they had to
sell, while the things which they wished to buy might not yet have
risen. And those who would reap this gain would always be (he
seems to think) the first comers. It seems obvious, however, that
for every person who thus gains more than usual, there is necessarily
some other person who gains less. The loser, if things took place
as Hume supposes, would be the seller of the commodities which
are slowest to rise ; who, by the supposition, parts with his goods
at the old prices, to purchasers who have already benefited by the
new. This seller has obtained for his commodity only the accus-
tomed quantity of money, while there are already some things of
which that money will no longer purchase as much as before. If,
therefore, he knows what is going on, he will raise his price, and
then the buyer will not have the gain, which is supposed to stimulate
his industry. But if, on the contrary, the seller does not know
the state of the case, and only discovers it when he finds, in laying
his money out, that it does not go so far, he then obtains less than
the ordinary remuneration for his labour and capital ; and if the
other dealer's industry is encouraged, it should seem that his must,
from the opposite cause, be impaired.

§ 5. There is no way in which a general and permanent rise
of prices, or in other words, depreciation of money, can benefit
anybody, except at the expense of somebody else. The substitu-
tion of paper for metallic currency is a national gain : any "further
increase of paper beyond this is but a form of robbery.

An issue of notes is a manifest gain to the issuers, who, until
the notes are returned for payment, obtain the use of them as if
they were a real capital : and so long as the notes are no permanent
addition to the currency, but merely supersede gold or silver to


the same amount, the gain of the issuer is a loss to no one ; it is
obtained by saving to the community the expense of the more
costly material. But if there is no gold or silver to be superseded
— if the notes are added to the currency, instead of being substituted
for the metallic part of it — all holders of currency lose, by the depre-
ciation of its value, the exact equivalent of what the issuer gains.
A tax is virtually levied on them for his benefit. It will be objected
by some, that gains are also made by the producers and dealers
who, by means of the increased issue, are accommodated with
loans. Theirs, however, is not an additional gain, but a portion
of that which is reaped by the issuer at the expense of all possessors
of money. The profits arising from the contribution levied upon the
public, he does not keep to himself, but divides with his customers.

But besides the benefit reaped by the issuers, or by others through
them, at the expense of the public generally, there is another unjust
gain obtained by a larger class, namely by those who are under
fixed pecuniary obligations. All such persons are freed, by a
depreciation of the currency, from a portion of the burthen of their
debts or other engagements : in other words, part of the property
of their creditors is gratuitously transferred to them. On a super-
ficial view it may be imagined that this is an advantage to industry ;
since the productive classes are great borrowers, and generally owe
larger debts to the unproductive (if we include among the latter
all persons not actually in business) than the unproductive classes
owe to them ; especially if the national debt be included. It is
only thus that a general rise of prices can be a source of benefit to
producers and dealers ; by diminishing the pressure of their fixed
burthens. And this might be accounted an advantage, if integrity
and good faith were of no importance to the world, and to industry
and commerce in particular. Not many, however, have been found
to say that the currency ought to be depreciated on the simple
ground of its being desirable to rob the national creditor and private
creditors of a part of what is in their bond. The schemes which
have tended that way have almost always had some appearance of
special and circumstantial justification, such as the necessity of com-
pensating for a prior injustice com^mitted in the contrary direction.

§ 6. Thus in England, for many years subsequent to 1819, it
was pertinaciously contended, that a large portion of the national
debt and a multitude of private debts still in existence, were con-
tracted between 1797 and 1819, when the Bank of England was


exempted from giving cash for its notes ; and tliat it is grossly
unjust to borrowers (that is, in the case of the national debt, to
all tax-payers) that they should be paying interest on the same
nominal sums in a currency of full value, which were borrowed in
a depreciated one.^ The depreciation, according to the views and
objects of the particular writer, was represented to have averaged
thirty, fifty, or even more than fifty per cent : and the conclusion
was, that either we ought to return to this depreciated currency,
or to strike off from the national debt, and from mortgages or
other private debts of old standing, a percentage corresponding
to the estimated amount of the depreciation.

To this doctrine, the following was the answer usually made.
Granting that, by returning to cash payments without lowering
the standard, an injustice was done to debtors, in holding them
liable for the same amount of a currency enhance*d in value, which
they had borrowed while it was depreciated ; it is now too late to
make reparation for this injury. The debtors and creditors of
to-day are not the debtors and creditors of 1819 : the lapse of years
has entirely altered the pecuniary relations of the community ;
and it being impossible now to ascertain the particular persons
who were either benefited or injured, to attempt to retrace our
steps would not be redressing a wrong, but superadding a second
act of wide-spread injustice to the one already committed. This
argument is certainly conclusive on the practical question ; but
it places the honest conclusion on too narrow and too low a ground.
It concedes that the measure of 1819, called Peel's Bill, by which
cash payments were resumed at the original standard of 3/. 17s. lO^d.,
was really the injustice it was said to be. This is an admission
wholly opposed to the truth. Parliament had no alternative ; it
was absolutely bound to adhere to the acknowledged standard ;
as may be shown on three distinct grounds, two of fact, and one of

The reasons of fact are these. In the first place, it is not true that
the debts, private or public, incurred during the Bank restriction,
were contracted in a currency of lower value than that in which the
interest is now paid. It is indeed true that the suspension of the
obligation to pay in specie did put it in the power of the Bank to
depreciate the currency. It is true also that the Bank really exercised

1 [Until the 5th eel. (1862) the text ran : " from 1819 to the present time,
it has been . . . contended," and " the answer " was spoken of in the present

554 BOOK m. CHAPTER Xlll. § G

that power, though to a far less extent than is often pretended ;
since the difference between the market price of gold and the Mint
valuation, during the greater part of the interval, was very trifling,
and when it was greatest, during the last five years of the war,
did not much exceed thirty per cent. To the extent of that
difference, the currency was depreciated, that is, its value was
below that of the standard to which it professed to adhere. But the
state of Europe at that time was such — there was so unusual an
absorption of the precious metals, by hoarding, and in the military
chests of the vast armies which then desolated the Continent,
that the value of the standard itself w^as very considerably raised :
and the best authorities, among whom it is sufficient to name Mr.
Tooke, have, after an elaborate investigation, satisfied themselves
that the difference between paper and bullion was not greater
than the enhancement in value of gold itself, and that the paper,
though depreciated relatively to the then value of gold, did not
sink below the ordinary value, at other times, either of gold or of
a convertible paper. If this be true (and the evidences of the
fact are conclusively stated in Mr. Tooke' s History of Prices) the
foundation of the whole case against the fundholder and other
creditors on the ground of depreciation is subverted.

But, secondly, even if the currency had really been lowered
in value at each period of the Bank restriction, in the same degree
in which it was depreciated in relation to its standard, we must
remember that a part only of the national debt, or of other permanent
engagements, was incurred during the Bank restriction. A large
part had been contracted before 1797 ; a still larger during the early
years of the restriction, when the difference between paper and gold
was yet small. To the holders of the former part, an injury was
done, by paying the interest for twenty-two years in a depreciated
currency : those of the second, suffered an injury during the years
in which the interest was paid in a currency more depreciated than
that in which the loans were contracted. To have resumed cash
payments at a lower standard would have been to perpetuate the
injury to these two classes of creditors, in order to avoid giving an
undue benefit to a third class, who had lent their money during the
few years of greatest depreciation. As it is, there was an underpay-
ment to one set of persons, and an overpayment to another. The
late Mr. Mushet took the trouble to make an arithmetical comparison
between the two amounts. He ascertained, by calculation, that if
an account had been made out in 1819, of what the fundhoiders had


gained and lost by the variation of the paper currency from its
standard, they would have been found as a body to have been losers ;
so that if any compensation was due on the ground of depreciation,
it would not be from the fundholders collectively, but to them.

Thus it is with the facts of the case. But these reasons of fact
are not the strongest. There is a reason of principle, still more
powerful. Suppose that, not a part of the debt merely, but the
whole, had been contracted in a depreciated currency, depreciated
not only in comparison with its standard, but with its own value
before and after ; and that we were now paying the interest on this
debt in a currency fifty or even a hundred per cent more valuable
than that in which it was contracted. What difference would this
make in the obligation of paying it, if the condition that it should be
so paid was part of the original compact ? Now this is not only
truth, but less than the truth. The compact stipulated better terms
for the fundholder than he has received. During the whole con-
tinuance of the Bank restriction, there was a parliamentary pledge,
by which the legislature was as much bound as any legislature is
capable of binding itself, that cash payments should be resumed on
the original footing, at farthest in six months after the conclusion of
a general peace. This was therefore an actual condition of every
loan ; and the terms of the loan were more favourable in considera-
tion of it. Without some such stipulation, the Government could
not have expected to borrow, unless on the terms on which loans
are made to the native princes of India. If it had been understood
and avowed that, after borrowing the money, the standard at which
it was commuted might be permanently lowered, to any extent
which to the " collective wisdom " of a legislature of borrowers
might seem fit — who can say what rate of interest would have been
a sufficient inducement to persons of common sense to risk their
savings in such an adventure ? However much the fundholders had
gained by the resumption of cash payments, the terms of the con-
tract insured their giving ample value for it. They gave value for
more than they received ; since cash payments were not resumed in
six months, but in as many years, after the peace. So that waiving
all our arguments except the last, and conceding all the facts asserted
on the other side of the question, the fundholders, instead of being
unduly benefited, are the injured party ; and would have a claim to
compensation, if such claims were not very properly barred by the
impossibility of adjudication, and by the salutary general maxim
of law and policy, " quod interest reipublicre ut sit finis litium,"



§ 1. After the elementary exposition of the theory of money
contained in the last few chapters, we shall return to a question in
the general theory of Value, which could not be satisfactorily dis-
cussed until the nature and operations of Money were in some measure
understood, because the errors against which we have to contend
mainly originate in a misunderstanding of those operations.

AVe have seen that the value of everything gravitates towards
a certain medium point (which has been called the Natural Value),
namely, that at which it exchanges for every other thing in the ratio
of their cost of production. We have seen, too, that the actual or
market value coincides, or nearly so, with the natural value only on
an average of years ; and is continually either rising above, or falling

Online LibraryJohn Stuart MillPrinciples of political economy with some of their application to social → online text (page 62 of 112)