And now we reach the very critical question - In what numbers will convertible bank-notes circulate? It is the crucial question to test the soundness of every theory of currency. All who talk and write on currency are bound to push this question home to their minds, and not be content till they have framed for themselves a definite and intelligible answer.
Mr Tooke discerned the true answer; Mr Mill, with some little wavering, saw the light; but the general literature on money matters profoundly ignores the fact. The answer is the same as that which has already been given to the parallel question respecting coin. So many bank-notes as the public has a distinct want for will circulate, and no more. It is the universal law of all commodities in use, the law of demand and supply. Neither bankers, nor Parliament, nor suspensions of the Bank Act, nor the need of borrowers, but the wants and convenience of the public, its willingness to hold bank-notes, the number and amount of the specific payments which bank-notes accomplish, with a certain spare stock as for all articles in use, can determine how many convertible bank-notes will remain in circulation, and not be returned upon the bankers for payment. This is the truth of truths for a convertible paper currency. This is so obvious a consequence of the fact that bank-notes are tools, and that their quantity will be regulated by the specific work which there is for them to do, that it almost seems a platitude to proclaim it; yet the whole array of traders and writers on money refuse to see this patent truth. They all believe, for instance, that to set free the issue of Bank of England notes by the Suspension of the Act of 1844 enables any amount of these notes to be issued at pleasure. They refuse to perceive and to learn.
An inflated circulation of bank-notes payable on demand is a pure absurdity, nothing better than nonsense. It would be just as sensible to speak of an inflated circulation of hats. It is easy for a hatter to make more hats than can be sold; but where would be the inflation in that case? In the number of hats circulating about the town? - in each man having a dozen hats in his house? The very question is puerile; there would be an inflation of hats, but it would be found in the shops of the hatters, not in the circulation of hats. Let any one ask himself how he can inflate his own use of banknotes? Why should any one keep bank-notes which he cannot employ in a desk or till? He can buy with them, is the universal answer; but if he has already machinery enough with cheques, bills, and the ordinary supply of notes suited to his wants for purchasing, how can he need more? True, it is replied; but a banker can lend them to a man who has no money, and with them he can buy or meet his engagements in the day of difficulty. That is so, no doubt; but unhappily for the banker, the man to whom his borrower pays them has already as many notes as his business requires; the excess now pouring in upon him he either himself, or indirectly through his banker, sends in to the issuing bank, which finds to its cost that it has lent, not banknotes which remain out in circulation, but the funds wherewith it has to redeem these surplus lent notes, which instantly come back upon it for payment. And so, in actual fact, in the time of crisis, borrowers do not take away their loans in bank-notes; they receive authority from the lending bank to draw cheques upon it, which are settled at the Clearing House without any cash passing. The Bank of England never has been so absurd as to say to a distressed borrower, "You shall have assistance, only you must take it out in notes;" yet this would have been its language if it had believed that it could increase its means of lending by getting additional bank-notes out into circulation. It knows perfectly well that the notes would return upon it in a few hours for payment. Those who had received the bank-notes from the persons to whom the Bank had lent them would at once place them to the credit of their accounts, either directly with the Bank of England, or with their own bankers, who would pass them on, as unwanted, to their credit with the Bank. They then would draw cheques on the Bank to meet purchases or to make payments; and the final result would be that the Bank had got back the bank-notes, but would be obliged to face these cheques out of its other resources. The forcing the borrowers to take the loan in bank-notes would have done the Bank no good; it would have made a simple loan precisely as if these bank-notes had never existed. No issuer of notes can by any possibility add to his resources and powers of lending by means of convertible notes, except to the extent that the public will keep them in circulation, and will not present them to him for payment.
An elaborate circular of a Chamber of Commerce lays down that "to restrict the supply of bank-notes is to stifle commerce. A contracted circulation raises prices. A limitation on the issue of notes raises the rate of interest charged by bankers on discounting merchants' bills." These are the universal ideas of traders; but where do they get these fine principles from? Not from science, nor from analysis of the facts which they claim, as practical men, peculiarly to understand; they must be primitive truths, dawning on the mercantile mind by-intuition, and shining by their own transparent light. There are many assumptions involved in this language, and much ignorance too. How can the want of banknotes stifle commerce? Commerce is the exchanging of goods; the bank-note is one of its tools; but it gives no increase of wealth nor of buying power; it is but a piece of paper; what it does is to give to the banker buying power which he can lend to a borrower. But where does the banker get this buying power from? Not from his own resources, certainly; he obtains it from the public. The real nature of the act of issuing notes is that the banker has first obtained property or the command of property, from a part of the public, his depositors. He then repays them with the notes, retaining the property; in other words, he gives in payment of the deposits another debt due by him to the holders of the notes - he pays a debt with another debt - and it is the holder of the notes who enables the banker to satisfy the demand of his depositor, and yet retain the property. The holder of the notes is the true lender through the bank to the man who obtains assistance, who borrows from the bank. But there is no increase of buying power in all this, not a particle of wealth or of lending power is created by it. Bank-notes are but intermediate agency. Their action consists in making the holder of the notes lend his spare property, not himself directly, but through the agency of a bank, to a man who wishes to borrow and to use it. Suppress the notes, the wealth of England will remain the same. Those who paid for them would have the same wealth at their disposal, the same disposition to lend, only the lending would be made through cheques instead of bank-notes, or by direct loan to borrowers. Commerce is not stifled or vitalised by notes; it only gets a convenient machine for exchanging wealth, but no increase of wealth except so far as coin would have had to be bought from a foreign miner.