49. From the amazing confusion of language and thought which pervades almost all treatises on monetary science, the plain and obvious method of controlling the paper currency has almost entirely eluded observation. No person who apprehended the true nature of banking, and expressed it in simple language, could fail to see the natural controller. The main business of commercial banking is discounting mercantile bills-that is buying debts. Discounting a bill for a merchant is not lending him money but buying a debt due to him; and the price of such debt must follow exactly the same laws as the price of corn, or any other article. If money is very scarce, and wheat very abundant, the price of wheat must fall; if money is very abundant, the price of wheat will rise. The price of debts obeys the same rules. If money becomes very scarce, the price of debts must fall, i.e., the discount must rise. If specie becomes abundant, the price of debts will rise, i.e., the discount will fall. The price of debts, then, must follow the same great laws of nature that the price of wheat does. Now, does not every man of common sense know that it is the most foolish and insane thing to try to control the price of wheat? As we have shewn in another place, it is not the fluctuation of the price of wheat that is the evil, but it is only the sign of evil. The real evil is the change in the proportion of the demand and supply, and the fluctuation of the price is the grand natural corrector of the evil. Does not every one know that a high price of corn is the way to attract corn where it is deficient, and a low price the way to repel it from where it is already too abundant? Does not every one with common sense know that it is the most fatal folly to force down the price of wheat when there is a real scarcity, and to sell it below the price it would naturally attain? Can any course be more suicidal?

50. Now, apply all the arguments which suggest themselves so irresistibly in the case of wheat to the case of credit, or the purchase of debts, and the same results follow. The same great law of nature operates to preserve the due proportion between specie and credit and any interference with this great law must necessarily be attended with the same evil consequences as an interference with the natural price of wheat. And yet almost all legislation up to a very recent period, and almost all writers on

political economy, and too many of the commercial world, were in a perverse combination to thwart this great law of nature, and attempt to keep the rate of discount, or the price of debts, fixed at a uniform scale !

51. While, therefore, the greater part of commercial complaints are levelled against variations in the rate of discount as the great evil, the truth is, it is only the sign of the evil. The real evil is the altered proportion between specie and credit, and a variation in the rate of discount is the grand natural corrector of the evil. To attempt to keep the rate of discount uniform, is to thwart and contravene the laws of nature just the same as an attempt to fix the price of wheat. Like all true laws of nature, the simplicity, beauty, and perfection of its action is marvellous, and it produces a multitude of results which are not perhaps very obvious at first. If specie is leaving the country and becoming scarce compared to credit, every principle of nature shews that the value of money must rise, i.e., the rate of discount must rise; and this has a tendency to prevent the outflow of bullion, and to attract it from abroad; on the other hand, if specie be flowing into the country and likely to become too abundant compared to credit, a fall in its value, or a fall in the rate of discount repels it from the country. If a nation be visited with a great failure of the crops it can only buy such food from foreign countries with its commodities or its money; it cannot send its credit in payment abroad. Now, if commodities are too dear, it must pay with money, and credit in this country is the great producing power, and credit for a time is a great sustainer of prices by enabling people to withhold their commodities from the market. Now, raising the rate of discount curtails credit, forces sales, and thereby lowers the prices of commodities, and makes it less profitable to export specie, and more profitable to export goods. Moreover, this rise in the value of money here, i.e., the low price of debts and commodities, tempts buyers from neighbouring countries to bring their money here. It thus causes an inflow of bullion and restores our currency to a uniformity of value, with that of neighbouring countries. Again, if this nation has to spend a great part of its money in buying foreign corn, it is quite clear that it has not got so much to spend in purchasing goods; an over-pro

duction of goods, therefore, can only end in a disastrous fall in prices. And here, too, the beautiful action of this great law of nature is manifest. So enormous a proportion of the commodities of this country are produced by the credit system, that a rise in the rate of discount just hits profits between wind and water, as we may say. Consequently, a rise in the rate of discount retards and curtails production in proportion to the diminished consuming powers of the nation, and so prevents such a ruinous fall in prices as would necessarily follow an undiminished production, accompanied by a diminished power of consumption

52. In fact, when a commercial crisis occurs in a country, it invariably means that more persons are wishing to sell than there are persons to buy, or, at least, at remunerative prices. A commercial crisis invariably arises from a lack of purchasers, which is, in fact, over-production. True prudence, therefore, shews that in all commercial crises, production should be curbed. It is much better not to produce at all, than to produce and be obliged to sell at a loss. To produce, and be obliged to sell below the cost of production, is loss of capital. It is better, therefore, not to employ the capital at all than to lose it. Raising the rate of discount, therefore, acts as a timely warning to producers to hold hard. It is necessary to dispose of the stock already produced, before producing more, and if the stream of sale is stopped while production continues, it can only end in a more aggravated fall at last

53. Now, what is the necessary consequence of an attempt to thwart this great law of nature? In time of scarcity of food, and a necessary export of money to buy it, if the rate of discount be kept unnaturally low, nothing but money will go; commodities are too dear, they will not go. Again, money being kept at an unnaturally low rate here, no one will bring it here from neighbouring countries; consequently, great quantities of money will go out and none will come in, till at last the circulating medium will be nothing but "promises to pay," and no money to pay them with. Then, at last, violent convulsions, total destruction of credit, every one wishing to sell, and no one wishing or able to buy

54. On the other hand, if, when specie is flowing in with too great abundance, it be not repelled by a due diminution in the value of money, i.e., a fall in the rate of discount, it will continue to do so until it is so superabundant that a violent fall takes place. Persons who are accustomed to depend on the incomes they derive from the interest of money, suddenly find that their means are seriously diminished. In the year 1824 there was such a plethora of capital in the country that the Scotch banks gave no interest on deposits; after 1824 came 1825. Then wild speculations find favour in the public mind, promising higher profits; and then the community goes through the cycle of bubble speculations, extravagant credit, ending in a commercial catastrophe. We may feel quite certain that if during the various crises this country had passed through, there had been more attention paid to observe the natural rate of discount, instead of thwarting the course of nature, though the variations would have been more frequent, they would have been less violent and extreme. If specie is coming in with too great speed it is good to lower the rate of discount quickly to prevent it getting lower; if specie is going out too rapidly, it is good to raise the rate quickly to prevent its being higher

55. Such, however, is the perversity of man, that many think that a uniform and invariable rate of discount is the great thing to be preserved, no matter what nature may say to the contrary, and their ingenuity is racked to devise a plan for always keeping it so, just as if the governor of the steam engine ought always to revolve with uniform velocity. Now, the inevitable consequence of taking these means to thwart nature will be, that when specie is scarce, it will be repelled by a lower rate than the natural one; when it is already too abundant, it will be still further attracted by a rate higher than the natural one

56. The extreme anxiety of persons to obtain an impossible object, always to have the power of selling debts due to them at a uniform rate, has led to a very prevalent theory, which seems very innocent and simple. It being desirable always to maintain the currency at a uniform amount, they propose that, as gold goes out, paper should be issued to supply its place. This theory

is adopted by Sir Archibald Alison, who says, after condemning the theory that gold and paper must vary together

"The true system would be just the reverse. Proceeding on the principle that the great object is to equalise the currency, and with it prices and speculations, it would enlarge the paper currency when the precious metals are withdrawn, and credit is threatened with a stoppage, and proportionately contract it when the precious metals return, and the currency is becoming adequate without any considerable addition to the paper

57. There would be certainly something specious in the idea of issuing bank notes to supply the place of the gold that went out if, unfortunately, it had not been tried over and over again, and been attended unfortunately with a catastrophe. When gold was leaving the country in vast quantities in 1796, the Bank of England still maintained its issues, against its own will, it is true, but yet the fact illustrates the principle, and the consequence was the suspension of cash payments in 1797. When the Bank had got right again in 1817, a drain for foreign loans began, and the bank extended its issues in 1818, and the consequence was the second suspension of cash payments in 1819. In 1824 when bullion was departing from the country like a flood, the Bank extended its issues; then, when it saw itself right in the vortex of bankruptcy, it suddenly altered its policy, and the result of all this was the catastrophe of 1825. In 1838-39, a similar drain occurred, the Bank with marvellous perversity, maintained its rate of discount considerably below the market rate, and the result was the monetary crisis of 1839. In 1847, there was the same error and the same result. Surely these instances are enough to destroy this fatal delusion.

58. In fact, Sir Archibald, and the great body of public writers who share these sentiments, wholly mistake the object to be sought for in so delicate and artificial a machine as a paper currency. The object to be aimed at is not to preserve a uniform rate of discount in this country, but to maintain a uniformity in the value of the British currency with that of other countries. If money is made artificially cheap in this country, that is, cheaper than it is in neighbouring countries, persons in this country will