We have now reached the region where theory revels in all its forms: inconvertible bank-notes. Great Governments seize with avidity upon this form of currency as the means of reaping gain at the expense of the community, and then they justify their practice by throwing dust into the eyes of the public by the help of every kind of arbitrary and unscientific assertion. The subject deserves the closest examination.
An inconvertible bank-note is a paper tool of exchange which acknowledges on its face a debt to be due, which promises to pay it, but specifies no fixed time for the payment, and for which consequently the coin promised cannot be obtained on demand. The first thought which arises is the question: how is it that any one is willing to give away his property in exchange for such paper? A convertible bank-note indeed is not payment, but the coin, which is payment, can be procured for the asking; thus the guarantee it furnishes to a seller, that he shall be able to obtain other goods equal to those he has sold, is complete. A bank-note not payable on demand supplies no such guarantee; it is not certain that it ever will be paid at all. It circulates for two reasons; it is issued by the Government, and the belief is universal that a Government will never repudiate its liability, and will pay at last. But this belief, by itself alone, would not be sufficient to ensure a large and easy circulation for such paper guarantees, so Governments apply to them an instrument of great efficacy for attaining their end. They endow them with the right of legal tender; they enact a law which compels every creditor who has debited a buyer with a dollar or pound to accept these notes as a full discharge of his debt. Upon such a basis the operation of issue becomes feasible. The Government owes interest on a national debt, and purchases supplies of all kinds from traders. It forces the national creditors to take these notes as payment of the interest due, and persuades contractors to supply them with goods by means of the knowledge that they will be able in turn to pass on these notes to all to whom they are indebted. Thus the notes come forth, and, once out, do not return upon the issuer.
2. The next fact to notice is that on one condition these notes, for which payment cannot be demanded at pleasure, circulate on a level of value with coin - the condition that their numbers shall not be in excess of the want of the public for these tools; that their supply shall not exceed the demand. In the case of coin, as we have seen, an excess of metallic dollars or sovereigns flows back at once to the strong holds for storing them, precisely as the farmer's ploughs in icy winter return to their sheds. In the same manner bank-notes payable on demand come back upon the issuers; no one wants them. But inconvertible bank notes have no such machinery for adapting their numbers to the requirements of the public for them; once out in circulation, they are always out; there is no self-adjusting apparatus for them, as there is for the other tools of exchange. Now, it may well happen that the quantity of inconvertible notes issued is not greater than what the public requires; so it was with the Bank of England notes for several years, when it was forbidden by law to pay its notes in gold. Similarly in other countries excess has been often found to be very small. But what is excess? As with all tools, too many for the work they have to do; and it has been shown that that work is to effect those exchanges, that buying and paying, in which each particular tool is employed. Ready money payments are the work to be performed; and if these payments do not increase, whilst the stock of bank-notes circulating is enlarged, then there is excess.
3. But what is the test of the existence of excess, or to use popular language, of inflation? What effect is-generated which leads to the discovery of its cause? A fall in the value of the paper compared with the value of the coin which it acknowledges to be due. The supply of them is too great; many persons have more of them than they know what to do with; to get rid of them they are willing to part with them at a reduced value. It may be difficult to specify the case of a definite holder of them who goes through this process of thinking, and then resolves to reckon them as worth less; but it is impossible to doubt that this is what takes place in practical life, and that the depreciation of the notes, whether expressed in the United States by the premium which gold bears compared with paper dollars, or, as formerly in England, by the discount attached to the notes, is the result purely of an excess of supply, which lowers the value of all commodities alike. Each additional issue adds to the depreciation and to the disorder which it creates in all money transactions. The notes are worth less and less.
4. Thus, an inconvertible bank-note becomes tainted with the worst vice which a currency can possess - un steadiness of value. It purchases more or else less of the same goods at different times. We know that the essence of a good currency is, that it should give to the man who takes it a reliable assurance that he shall be able with it to procure other goods of the same value with those which he has given away: an inconvertible bank note deliberately corrupts and vitiates that assurance. He is not sure that he will not incur special loss through the bank-note currency, a loss intended by neither buyer nor seller, but not the less real on that account. The debasement of the tool of exchange is an annoying and mischievous nuisance, thrust into a region from which it should be rigorously excluded, the exchanging of the necessaries and enjoyments required by civilization. It is thrust in for a motive absolutely unconnected with the sole purpose for which any currency exists and passes into universal use. It is as wanton a perversion of a most indispensable tool as if any one were to impart to the blade of a knife a quality which would make it sharp or blunt capriciously. The change in the nature of the currency tells on every price in every shop or store - for price is only the quantity of currency computed to be equal to the value of the goods. The more civilized a nation is, the vaster the development of its trade, the larger the number of debts to be settled and stipulated annuities to be continuously paid, the more disastrous is the violence done to the currency, the more injurious its consequences to society. Every sale on credit is converted into gambling, and what but pure harm can come from adding an inevitable element of gambling to every shopkeeper's accounts, to every bill which moves the operations of commerce, to every purchase of a house or farm which covenants for the payment of a rent of so many dollars or pounds for a number of years, to every man who lives by the interest of the national debt of the country? And no small part of the evil hence resulting is the necessity imposed on traders to add to the natural price of their goods as a protection against the risks consequent on the corruption of the public money. Most of all is this felt in foreign trade. The Englishman or German who sends a cargo of goods to "America, knows that he will be paid with bills expressed in dollars: he cannot tell what will be the value of the dollar when the bills become due: he protects himself by exacting from the American buyer a stiffer price.