This section is from the book "The English Manual Of Banking", by Arthur Crump. Also available from Amazon: The English manual of banking.
In these enlightened times it is hardly necessary to enlarge upon the evils attending a forced or inconvertible currency. When a firm in business cannot meet their acceptances and are compelled somehow or other to get them renewed, they are doing much the same thing as a government that issues a forced currency. If a government cannot meet the national obligations, either due to its own subjects or to foreigners, a foreign or internal loan is had recourse to. Failing success there are two alternatives; one is not to pay and thereby make a public declaration of bankruptcy, or to force a loan out of the people by compelling them to accept for all government payments an inconvertible medium of exchange; in other words, to adopt a paper currency which is based practically on nothing but the national credit. In proportion as this inconvertible paper money is forced into circulation prices nominally rise, and the precious metals disappear. Currency should be supplied to all countries automatically, as is the case where either the precious metals exclusively circulate, or where metals and paper convertible into metals on demand circulate. According to the varying wants of the trading community so should the amount of currency in circulation vary. The currency requirements of the non-trading portion of the community have been shown to vary so little in ordinary circumstances, that the fluctuations in the amount of currency in circulation may be said to be governed either by the course of trade, or the changes in the condition of a nation's special industry, or the arts which its people may practise. It is a well known fact that the power to issue inconvertible paper currency has always been abused. The depreciated currency has existed in Russia, for instance, for more than a century. Imperial edict repeatedly placed a limit to the issue, but it was always exceeded; apart from the trouble and annoyance occasioned to all engaged in foreign business by the existence of a depreciated currency, it encourages speculation with its attendant evils, gives rise to false hopes of future profit, and brings suffering upon every individual who has a fixed income from whatever source derived.
It may be useful just for a moment to consider the difference between forcing into circulation a metallic or convertible currency and an inconvertible. Suppose, for example, a manufacturing town provided itself with an extra supply of coin to pay its wages with, and that this money flowed into the various markets to purchase commodities, what would be the result? Prices must of necessity rise through the currency becoming redundant. Exportation would rapidly diminish and importation as rapidly increase. The country in this position would soon have a heavy foreign balance against it, the exchanges would become adverse, and gold would flow out and be distributed, each nation taking its share according to its wants and commercial standing. In the case mentioned prices would rise really through the actual increase in the quantity of that commodity by which the price of the others was measured. In the case of an inconvertible currency being forced into circulation through the necessities of the State, prices do not rise as in the instance before stated; they rise in a negative as compared to a positive sense. The prices do not actually rise, but the currency falls, the proof of which is that the metallic currency disappears from circulation.
The rapid progress which some nations have made in the acquisition of wealth has been held by some writers, Jacob for instance, to be due in a large measure to the opportunities afforded them by the increase in the quantities from time to time of the precious metals in circulation. This is a point deserving of attention, and one in the consideration of which we are very liable to be led into erroneous deductions. It is scarcely necessary to do more than quote a remark of Mr. J. S. Mill on the point. He says "Although therefore Mr. Senior is right in pointing out the great efficiency of English labour as the chief cause why the precious metals are obtained at a less cost by England than by most other countries, I cannot admit that it at all accounts for their being of less value; for their going less far in the purchase of commodities." The effect of a rise of prices in one country as the result of an increase of the precious metals is a stoppage of exportation and an increase of importation as we have stated, until the redundant currency leaves the country and distributes itself. Although this process was undoubtedly slower hundreds of years ago than it is now, it must always have been in operation between commercial countries using the precious metals as currency, in a greater or less degree, and therefore we are unable to see how any one country could gain any very great advantage merely by the action of a rise in prices through an increase in the precious metals.
Jacob says during the existence of the Saxon Heptarchy in England it is probable the scarcity of money and the depression of prices reached the lowest point. In those parts of Britain where coins were very scarce almost all debts were paid and purchases made with 'living money'- that is, slaves, horses, "cows, sheep, etc. This was so much the case that it is much doubted if any coins were struck in those countries in the Saxon period.
It was estimated that between the arrival of the Saxons and the Norman conquest the money in western Europe was a twelfth or fifteenth of the stock in 1831, and that a large portion was accumulated in eastern Europe, and especially at Constantinople, the seat of the remnant of the Roman Power, where it remained, or a large proportion of it, till the final conquest of that city by the Turks. Money was as scarce in France also. Copper bore a higher value in proportion to silver than it did at the above date.
It is related that in the time of Solon (550 years before Christ) an ox in Athens cost five drachmas or nearly three shillings, a sheep one drachma or seven-pence three farthings, and a medimnus of corn or one bushel and three gallons the same as a sheep; but prices rose gradually to five times, in many cases to ten or twenty times their former amount, which after the example of more recent times does not seem surprising. The quantity of money was not only increased, but through a rising population and extended intercourse its circulation was accelerated.
 
Continue to: