savings were made expressly to be employed in railway adventure, the amount thus employed must have been derived either from the actual capital of persons in business, or from capital which would have been lent to persons in business. In the first case, the subtraction, by crippling their means, obliges them to be larger borrowers; in the second, it leaves less for them to borrow; in either case it equally tends to raise the rate of interest.

$ 4. From the preceding considerations it would be seen, even it were not otherwise evident, how great an error it is to imagine that the rate of interest bears any necessary relation to the quantity or value of the money in circulation. An increase of the currency has, in itself, no effect, and is incapable of having any effect, on the rate of interest. A. paper currency issued by government in the payment of its ordinary expenses, in however great excess it may be issued, affects the rate of interest in no manner whatever. It diminishes indeed the power of money to purchase commodities, but not the power of money to purchase money. If a hundred pounds will buy a perpetual annuity of four pounds a year, a depreciation which makes the hundred pounds worth only half as much as before, has precisely the same effect on the four pounds, and, therefore, cannot alter the relation between the two. Unless, indeed, it is known and reckoned upon that the depreciation will only be temporary; for people certainly might be willing to lend the depreciated currency on cheaper terms if they expected to be repaid in money of full value.

It is perfectly true that in England, and most other commercial countries, an addition to the currency almost always seems to have the effect of lowering the rate of interest; because it is almost always accompanied by something which really has that tendency. The currency in

common use, being a currency provided by bankers, is all issued in the way of loans, except such part as happens to be employed in the purchase of gold or silver. The same operation, therefore, which adds to the currency, also adds to the loans, or to the capital seeking investment on loan; properly, indeed, the currency is only increased in order that the loans may be increased. Now, though as currency these issues have not an effect on interest, as loans they have. Inasmuch, therefore, as an expansion or contraction of paper currency, when that currency consists of bank notes, is always also an expansion or contraction of credit; the distinction is seldom properly drawn between the effects which belong to it in the former and in the latter character. The confusion is thickened by the unfortunate misapplication of language, which designates the rate of interest by a phrase ("the value of money") which properly expresses the purchasing power of the circulating medium. Not only, therefore, are bank notes supposed to produce effects as currency, which they only produce as loans, but attention is habitually diverted from effects similar in kind and much greater in degree, when produced by an action on loans which does not happen to be accompanied by any action on the currency.

For example, in considering the effect produced by the proceedings of banks in encouraging the excesses of speculation, an immense effect is usually attributed to their issues of notes, but until of late hardly any attention was paid to the management of their deposits, although nothing is more certain than that their imprudent extensions of credit take place more frequently by means of their deposits than of their issues. "There is no doubt," says Mr. Tooke, that banks, whether private or joint stock, may, if imprudently conducted, minister to an undue extension

* Inquiry into the Currency Principle, ch. xiv.

of credit for the purpose of speculations, whether in commodities, or in overtrading in exports or imports, or in building or mining operations, and that they have so ministered not unfrequently, and in some cases to an extent ruinous to themselves, and without ultimate benefit to the parties to whose views their resources were made subservient." But, "supposing all the deposits received by a banker to be in coin, is he not, just as much as the issuing banker, exposed to the importunity of customers, whom it may be impolitic to refuse, for loans or discounts, or to be tempted by a high interest? and may he not be induced to encroach so much upon his deposits, as to leave him, under not improbable circumstances, unable to meet the demands of his depositors? In what respect, indeed, would the case of a banker in a perfectly metallic circulation, differ from that of a London banker at the present day? He is not a creator of money, he cannot avail himself of his privilege as an issuer in aid of his other business, and yet there have been lamentable instances of London bankers issuing money in excess."

In the discussions, too, which have been for so many years carried on respecting the operations of the Bank of England, and the effects produced by those operations on the state of credit, although for nearly half a century there never has been a commercial crisis which the Bank has not been strenuously accused either of producing or of aggravating, it has been almost universally assumed that the influence of its acts was felt only through the amount of its notes in circulation, and that if it could be prevented from exercising any discretion as to that one feature in its position, it would no longer have any power liable to abuse. This at least is an error which, after the experience of the year 1847, we may hope has been committed for the last time. During that year the hands of the Bank were absolutely tied, in its character of a bank of issue; but through

its operations as a bank of deposit it exercised as great an influence, or apparent influence, on the rate of interest and the state of credit, as at any former period; it was exposed to as vehement accusations of abusing that influence; and a crisis occurred, such as few that preceded it had equalled, and none perhaps surpassed, in intensity.

5. Before quitting the general subject of this chapter, I will make the obvious remark, that the rate of interest determines the value and price of all those salable articles which are desired and bought, not for themselves, but for the income which they are capable of yielding. The public funds, shares in the joint stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase money, with allowance for all differences in the risk incurred, or in any circumstance of convenience. Exchequer

bills, for example, usually sell at a higher price than consols, proportionally to the interest which they yield; because, although the security is the same, yet the former being annually paid off at par, the purchaser (unless obliged to sell in a moment of general emergency) is in no danger of losing anything by the resale, except the premium he may have paid.

The price of land, mines, and all other fixed sources of income, depends in like manner on the rate of interest. Land usually sells at a higher price, in proportion to the income afforded by it, than the public funds, not only because it is thought, even in this country, to be somewhat more secure, but because ideas of power and dignity are associated with its possession. But these differences are constant, or nearly so; and in the variations of price, land follows, cæteris paribus, the permanent (though of course not the daily) variations of the rate of interest. When

interest is low, land will naturally be dear; when interest is high, land will be cheap. The last war presented a striking exception to this rule, since the price of land as well as the rate of interest was then remarkably high. For this, however, there was a special cause. The continuance of a very high average price of corn for many years, had raised the rent of land even more than in proportion to the rise of interest and fall of the selling price of fixed incomes. Had it not been for this accident, chiefly dependent on the seasons, land must have sustained as great a depreciation in value as the public funds; which it probably would do, were a war to break out hereafter; to the signal disappointment of those landlords and farmers who, generalizing from the casual circumstances of a remarkable period, so long persuaded themselves that a state of war was peculiarly advantageous, and a state of peace disadvantageous, to what they chose to call the interests of agriculture.

CHAPTER XXIV.

OF THE REGULATION OF A CONVERTIBLE PAPER CURRENCY.

§ 1. THE frequent recurrence during the last half century of the painful series of phenomena called a commercial crisis, has directed much of the attention both of economists and of practical politicians to the contriving of expedients for averting, or at the least, mitigating its evils. And the habit which grew up during the era of the bank restriction, of ascribing all alternations of high and low price to the issues of banks, has caused inquirers in general to fix their hopes of success in moderating those vicissitudes, upon