A Treatise on Currency & Banking

 

 

 

A TREATISE

ON

CURRENCY AND BANKING.

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BOOK FIRST.

OF THE LAWS WHICH REGULATE A CURRENCY COMPOSED ENTIRELY OF THE PRECIOUS METALS.

ADAM SMITH, and other elementary writers on the science of Political Economy, have shown the principles upon which commodities must have been exchanged in that rude condition of society which preceded the use of metallic money, and it is not my intention to travel over the same ground, and occupy the attention of the reader in recapitulating details with which he is probably already familiar. Nor is it my intention to give a history of the various inventions to facilitate barter, which have been adopted at various periods in different countries, such as the use of cattle, cowry shells, tobacco, iron, and some other objects, each of which has been at some period employed to perform the function of what has been appropriately denominated “a medial commodity,” by which the relative value of other things could be determined. I propose at once to enter upon the subject of currency as we find it at the present day in commercial nations, and shall first point out the laws by which commerce is carried on in a country where there are no bank notes or paper money of any kind, and where gold and silver alone constitute the currency; and, as it would be carried on in every country, if there did not exist paper money.

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CHAPTER I.

OF THE INTRINSIC VALUE OF THE PRECIOUS METALS, AND OF THEIR ADAPTATION TO THE PURPOSES OF A CIRCULATING MEDIUM.

GOLD and silver, it is well known, are produced in various parts of the globe, at the cost of labor and capital, precisely in the same manner that iron, lead, and other metals are produced; and with regard to all the mining countries, they constitute, if not the only, at least the most inviting product of industry to which a portion of the land, labor, and capital, of their inhabitants can be applied. As products, therefore, of industry, they possess an intrinsic value, like all other commodities, dependent upon the cost of producing them; that is, upon the amount of the rent paid to the owner of the land for the privilege of mining them, the amount paid for the wages of the laborers employed in digging and smelting the ore and in refining the metal, and the amount of the ordinary profits on capital invested in the enterprise. Were this not the case, it is evident that mines would not be worked, for no proprietor of land or capitalist would embark in an undertaking that would lead to certain loss, the object of mining not being to produce gold and silver, but to produce gold and silver of a value greater than that of the capital expended in its production. This much is premised, in order that the reader may have at the outset a clear view of this fundamental truth in political economy, that gold and silver being products of industry, possess a value as real and substantial as that which belongs to any other commodities; not indeed founded upon the basis of convention, as some people imagine, but upon their well known applicability to various purposes of utility and ornament for which no other materials possess equal qualities, and which renders them on that account universally sought for. They are therefore not mere representatives of wealth as many persons fancy, but real wealth itself to the full extent of their value.

What proportion of the actual value of gold and silver, as exchangeable for other commodities, is due to their applicability to objects of utility and ornament, and what proportion to their fitness for the purposes of a circulating medium, now that they are applied to that purpose, it would not be easy to determine; nor is it at all necessary to this investigation that it should be determined. It is sufficient for us to know, that almost every individual who can afford a silver spoon, or a gold watch, or a plated or gilt ornament, will have one; and that if gold and silver were to be wholly disused as money, they would retain a large share of their present value for the purpose of being converted into plate and other objects of manufacture, and in process of time, would again rise to the cost of their production, which would be an indispensable requisite to ensure a future fresh supply.

It will, perhaps, remain for a future day to develope all the reasons why gold and silver have become so universally adopted by all civilised people as the medial commodity, that is, the commodity in exchange for which any other commodity can almost always be readily had. Those with which we are already acquainted, are the following:—

1. Their uniformity of value, varying from one year to another, and from one period of years to another, less than any other known commodities, and therefore well adapted to be the commodities of contracts and obligations payable at a future day.

2. The universality of this uniformity of value, by which they serve not only as standards for comparing prices at different periods of time, but prices in different countries at the same time.

3. Their convenient portability, possessing a great value in a small bulk, and yet a bulk not too small for all practical purposes.

4. Their divisibility into pieces of any weight, and of the most exact quantities, and their convertibility by fusion back again into larger masses without loss.

5. Their malleability and toughness, which render them not liable to break.

6. Their susceptibility of receiving impressions as coins.

7. Their uniformity of physical quality, pure gold or silver being the same at all times and at all places, and thus unlike most other metals and commodities which have different degrees of excellence.

8. Their capacity of admixture with alloy which renders them as coins less destructible by wear and tear, and of their being again separated from it with very little loss.

9. Their durability, not being easily destroyed by fire, and not at all by rust.

10. Their clear sound when dropped upon a hard substance, by which they can be known from base metals, and be thus distinguished from counterfeits.

11. Their specific gravity, which differs from that of other metals of the same bulk, and thus renders the detection of counterfeits easy by a practised hand.

The beauty of the metals adds to their value for purposes of utility and ornament, but perhaps not to their value as money; and hence I have not embraced that quality in the foregoing enumeration.

CHAPTER II.

OF THE DISTRIBUTION OF THE PRECIOUS METALS THROUGHOUT THE COMMERCIAL WORLD.

ALL the gold and silver annually produced in the four quarters of the globe, and not required for consumption in manufactures or for currency in the countries where produced, are in the constant course of distribution throughout the commercial world in exchange for commodities which are more desirable to the producers than the metals themselves; and when thus distributed, they are liable in common with that portion of the pre-existing mass which retains the form of coin and bullion, to such further changes of place as the wants and circumstances of each particular country may require. In these distributions, each country does not equally participate, but each draws to itself that proportion of the whole quantity which is called for by the extent of its wealth, its population, its commerce, and the state of confidence or credit existing amongst its inhabitants. A rich nation, caeteris paribas, will require more gold and silver than a poor one—a large population more than a small one—a nation carrying on much trade more than one which carries on little—and a nation where confidence and credit are circumscribed, more than one in which they are expanded. The first three of these propositions are self-evident. The fourth needs perhaps some illustration, and as I wish to leave nothing in dispute as I go along, I will state more plainly what is meant by it, which is, that in a country where no credits or comparatively few are given on the sale of property or merchandise, and where consequently payments are made entirely or chiefly in coin on the delivery of the articles sold, a larger amount of gold -and silver is required, than in another country of equal wealth, population and trade, in which sales are usually or frequently made on credit.

What proportion the supply of the precious metals which each country secures to itself as a circulating medium bears to its wealth, its population, its trade, or, to the existing state of confidence or credit, it would not be easy to ascertain: nor is it indeed necessary that it should be ascertained, as far as any practical good can result from the knowledge. Those who carry on the operations of trade will take care that a country has neither too much nor too little of them, and it may be assumed as a safe position, that when the precious metals neither flow out from a country in which there are no gold or silver mines, nor flow into it faster than is incident to her additional share of the new annual production of the mines, she has her exact proportion. These proportions, when once attained as nearly as the nature of circumstances will permit, establish what may be called the general level of currencies, and it is to this level, as to a species of standard, that reference is made, when we say that money like water will find its level. It is true, that owing to the constant production of the mines, which may at times occasion unequal distributions, or, distributions other than through the accustomed channels, as was the case after the revolutions in Spanish America took place, which caused to be sent first to the United States or England, the metals which formerly all went to Spain, as well as to a great variety of other circumstances which disturb the currency of particular countries, this level may never be a perfect one. It is sufficiently so, however, for all purposes of reasoning upon it, and perhaps as much so as fully warrants the figure by which a fluid-like property is ascribed to the precious metals. The surface of the ocean is never free from undulation, and the daily operation of the tides is constantly interfering with its level, as well as with that of rivers. Moral causes, operating like the physical causes which influence the movement of the waters, operate upon gold and silver, in driving them from one place to another, but it is easily to be seen, that were the extent of wealth, population, commercial transactions, and confidence, in all countries to remain the same for a long period together, and were the new productions of the mines to be distributed in due proportions, and the old stock in each country to be diminished by consumption in an equal ratio, gold and silver would assume such a uniformity of exchangeable value, as to arrive at a perfect state of quiescence. Indeed, as it is, gold and silver are of all commodities the least likely to be exported from any country, except from those in which they are produced, and where of consequence they form a portion of the produce of the land and labor of the people, as iron and lead do in some other countries; or, from those which, in addition to their supply for the purpose of currency, have possessed themselves of an amount specifically intended for exportation to countries having products not procurable by any other means than by purchase with gold and silver.1 We may therefore conclude, that a level does exist, created as will be seen hereafter, by the imports and exports of commodities other than the precious metals themselves, towards which the currencies of all countries have a perpetual tendency, and from which, if they do not precisely conform to it, they do not greatly depart.

CHAPTER III.

ON THE RELATIVE VALUE OF GOLD AND SILVER.

GOLD and silver, like all other commodities, have each their own peculiar value founded upon the immutable law of supply and demand, by which all values are determined. The scarcity of the one compared with that of the other, in connection with the difference in their respective costs of production, that is, of the expenses of mining and smelting the ore, and of refining the metal, establish between them a very wide difference as regards their relative value. An ounce of pure gold has always been, and probably always will be, worth more than an ounce of pure silver. But the ratio of this difference, it must be manifest, is not fixed by any law of nature, any more than the ratio between any two other commodities. Nature does not say, that an ounce of gold shall always be worth so many ounces of silver, any more than she says that a pound of copper shall always be worth so many pounds of iron, or a pound of cotton so many pounds of flour, and hence it is clear, that there is no law of nature applicable to gold and silver, which is not equally applicable to all other commodities.

What nature, however, has left undone, man in his limited wisdom has attempted to accomplish, by the enactment of laws fixing the ratio at which gold and silver shall be exchangeable for each other. These laws, when first enacted, were no doubt founded upon the observation of the fact, that in the general market of the commercial world, these two metals had, for long periods together, preserved something like a fixed proportion, and it was no doubt conceived, that chaining them together by statute, would prevent them from ever separating.

We learn from Adam Smith,2 that prior to the discovery of the American mines, which first began to show its effects somewhere about the year 1570, in the diminished value of both the precious metals by the new and annually augmenting supplies which were derived from that fruitful source, the value of pure gold to pure silver was established in the different mints of Europe, at proportions varying from one to ten, to one to twelve; that is, one ounce of pure gold, was declared to be the equivalent of ten to twelve ounces of pure silver; and in their respective coinages these proportions were consequently observed. At about the middle of the 17th century, that is, about the year 1650, the ratio between gold and silver came to be regulated in the proportion of one to fourteen, and one to fifteen ounces of silver, no doubt occasioned by the fact, that although both metals had become more abundant in proportion to the demand, and had both been depreciated below their former value, yet silver had depreciated more than gold, to an extent that had created new proportions in the general market, which it was the design of the new laws to follow up.

From the period last mentioned, there does not appear to have been any material change in the relative value of gold and silver in the general market of the trading world prior to the beginning of the present century, when a further depreciation of silver in reference to gold began to show itself, so that by the year 1820, an ounce of gold came to be worth near sixteen ounces of silver, of which the consequence was, that all the gold coins of the United States, where the mint proportion had been fixed at one to fifteen, were exported from the country, to be exchanged for their proper equivalent.3

The author believes that he was one of the first, if not the first, writer in this country who called the attention of the public to this new change, and apprehensive at the time, that the legislative folly of attempting to establish by law what nature herself could not establish, would be repeated by a new enactment, he urged in December, 1821, upon the late Mr. Lowndes, a representative in congress from South Carolina, and chairman of the committee of finance, the expediency of abolishing the coinage of eagles and their fractional parts, and of substituting in their place new pieces, to weigh respectively an ounce, a half ounce, and a quarter of an ounce of standard gold, under the full conviction that they would soon be introduced into circulation at their proper equivalent, without involving us in the absurdity of having two legal tenders.4 The arguments presented to Mr. Lowndes in conversation were at his particular request reduced to writing, together with answers to two points raised by him, and were published in the National Gazette of 26th January, 1822. A copy of this paper will be found in the Appendix, marked A.

The death, in the course of the last mentioned year, of Mr. Lowndes, who was one of the few individuals in congress who had studied the subject of the coinage, appeared to suspend the action of that body in regard to the alteration of the mint regulations, and although several propositions were at different periods subsequently submitted, yet nothing was done until the 28th of June, 1834, when the law usually known as the gold bill was passed. A short history of these propositions was drawn up by the author in the last named year, and as it may be of service to those who have a desire to study the subject, extracts therefrom have been placed in the Appendix marked B.

In connection with this subject, it may not be amiss to remark, that the proportion of one to fifteen or sixteen in the relative value of gold to silver, does not by any means warrant the inference that there is just fifteen or sixteen times as much silver as gold in existence. Adam Smith advances conclusive arguments to show that the quantity of silver at the time he wrote was far greater than the proportion which it bore to gold called for, and indeed any one may be convinced of this fact if he will reflect upon the very small value of gold compared with silver, that is consumed in plate and ornaments. The relative value of no two commodities determines their relative quantities, and it is easy to be perceived, that if a barrel of flour were worth ten dollars, and a box of Spanish segars twenty dollars, it would not necessarily follow that there were in existence only twice as many barrels of flour as there were boxes of segars.

CHAPTER IV.

OF THE BALANCE OF TRADE, OR OF THE CAUSES WHICH OCCASION THE TRANSMISSION OF THE PRECIOUS METALS FROM ONE COUNTRY TO ANOTHER.

IN a preceding chapter, it was stated that the precious metals are distributed by the operations of commerce throughout the trading world, in such a way as to establish what is called a general level of currencies. I shall now proceed to show the mode by which this distribution is accomplished, which is according to the laws of what is termed the balance of trade.

It must be manifest to every observant mind, that even under the most perfect level which the currencies of all commercial nations can attain, that is, under such a state of things as may be imagined where no motive of profit could lead to the importation or exportation of the precious metals, except as relates to the annual production of the mines, the prices of other commodities will not be in all countries the same. Were this the case there could be no commerce, for the only object of commerce is to transport commodities from countries where they can be purchased for a comparatively small quantity of gold and silver; that is, at a comparatively low price; to other countries where they can be sold for a greater quantity of gold and silver; that is, at a higher price.5 Any one can perceive that iron would not be imported into the United States from England unless it could be sold here at a higher price than it cost at the place of production, and that cotton would not be exported from the United States to Europe unless it could be sold there at a higher price than it could be purchased for here. The prices of different articles, it is self-evident, in every country, are regulated by causes peculiar to themselves, such as the soil, climate, wages of labor, degree of skill required, extent of population, capital, and taxation; and this it is which sets in motion the whole machinery of commerce. Even in the case of barter with savage nations, although gold and silver be absent, yet the trader has reference in his calculations to the metallic standard, in order to enable him to determine how much he can afford to give of what he has to dispose of, in exchange for the commodities which he is to receive in payment.

The foreign commerce of a nation is usually of two kinds. The first is that wherein the export and import trade are carried on by the same individual, in the same vessel, and in the prosecution of the same voyage. Such is the trade of the United States with most parts of the West Indies, South America, Africa, some parts of India, and some other countries. The imports from those regions consist of the articles purchased with the proceeds of the outward cargoes, and this trade is strictly an exchange of equal values, and although it may exhibit what is called a balance of trade on one side or the other, yet it calls for no payment. The same is true of the whale and other fisheries, wherein although the amount imported may far exceed in value the amount exported, yet no balance of trade is left to be paid, the difference being made up by the value of the labor expended by the crew, of the freight earned by the ship, and by the profits of the enterprise.

The second trade is that wherein the exports and imports are made by different classes of merchants, without any previous consultation or agreement with one another. Such is our trade with Great Britain and most of the other maritime nations of Europe. The exporters of cotton, rice, tobacco, flour, and the other commodities which form the bulk of our exports to Europe, are very rarely the same individuals who import the dry goods, hardware, and the infinite variety of other manufactures and productions which constitute the bulk of our imports from Europe. The former ship their cargoes to foreign countries, without any knowledge of the quantity or value of the commodities which the importing merchants intend to order from abroad, and the latter send their orders abroad for goods without any knowledge of the amount for which the exported cargoes will be sold. The former class, that is, the exporters, get paid for their cargoes by drawing bills of exchange upon the proceeds in the hands of their foreign correspondents; and the latter class, or the importers, pay for their goods by purchasing and remitting these same bills.

Under a course of operations carried on by so many independent traders, it would indeed be miraculous if the exports and imports should be so exactly equal as to leave no balance one way or the other. In truth, experience shows that the exports will sometimes exceed the imports, and that sometimes the imports will exceed the exports, leaving a balance of trade in the former case in favor of the country, and in the latter case against it.

Let us now suppose, that in a given country where the currency is at its proper level, where no gold or silver flows out or flows in, and where consequently exchange would be at par, an excess of imports should take place. What would be the first effect? The answer must be, a demand for more bills of exchange than are for sale in the market, the effect of which is a rise in the rate of exchange above par, which obviously holds out an inducement for the exportation of commodities for which a sufficient inducement did not previously exist. A rise in the exchange of one or two per cent, may sometimes determine shipments, which without such rise would not have been thought of; not that so small a profit would of itself induce shipments, but because one or two per cent, added to the profit which might have been made without such addition, would elevate the gain to the height of the average mercantile rate of profit requisite to warrant a shipment. A profit in advance is a powerful stimulus to exportation, especially where two thirds or three fourths of the capital employed in the purchase of the exported commodities can be immediately replaced by the sale of a bill of exchange. The additional demand, therefore for bills, to assist towards paying the balance is met, we will suppose, at once by additional exports, it sometimes even happening that the remitting merchant, to save, as it is called, the premium on bills, becomes himself an exporter.

Thus far it is manifest that the balance of trade occasions no exportation of the precious metals, and that consequently the general level of currencies is not disturbed. But it may happen that the increased demand for exportable commodities arising from the augmented premium on exchange, may raise their price to an extent equal to the rise in the price of bills, and thus put an end to their exportation, by taking away the additional profit. A new expedient is then resorted to by capitalists to take advantage of the premium on exchange, which is to obtain a credit abroad upon which they may draw bills, under the calculation that at some future, not very distant period, they will be able to replace the funds at a lower rate of exchange, and thereby realise a profit by the operation. The transmission, too, of public securities, bank, railroad, and canal stocks, and the extension of credits by the consent of the foreign creditors upon allowing interest for the extended term, are all well known levers in the mechanism of trade, (to say nothing of bankruptcy), by which the tendency of an unfavorable balance of trade to cause an exportation of the precious metals is frequently neutralised. But it may happen, however, that all these measures combined will not keep down the price of bills of exchange to the rate which will render them more advantageous to remit than gold or silver. That an exportation of the precious metals will then commence is quite apparent, but compared with the whole balance that may be due, it will be exceedingly trivial, as I will proceed, to show.

We will suppose ten millions of dollars to be the circulating medium of the supposed debtor country, and that that is the amount which is requisite to circulate her commodities and to maintain her currency at an equivalency with the currencies of other countries. No sooner does this quantity become diminished by the exportation of any part of it, than a scarcity of money begins to be felt. A scarcity of money invariably occasions a fall in the prices of commodities, as every body knows, and that fall operates as an incentive to exportation, inasmuch as domestic products, which were before too high to export, will now afford a profit. A fall in the price of cotton of one cent a pound has sometimes occasioned the exportation of immense quantities in a short period; and it is very clear that there is a price at which almost any article might be exported to advantage, and that a gradual diminution of the currency, if continued long enough, will eventually establish that price. It is idle to say that possibly the debtor country may not have on hand a sufficiency of products to discharge the debt, and that therefore she must be drained of her precious metals to the last dollar. This can never be. If her wealth or her powers of production had not been commensurate to her demand for foreign commodities, she could not have had sufficient credit to run deeply into debt. At all events, she would have on hand a large portion of the foreign commodities in the purchase of which the debt was incurred, and a scarcity of money might even bring down prices so low as to render the exportation of foreign commodities a profitable trade. It might even be an object to send back to the place of production the very commodities, the importation of which created the unfavorable balance.6 It is quite probale that a very small reduction of the amount of coin would produce such a fall in the prices of commodities as would lead to their exportation to an extent adequate to keep down the price of bills so as to prevent any further exportation of the precious metals; but if this should not be the case, and if the scarcity of money should continue to increase, those who had remittances to make would either become bankrupt and make no remittances at all, or become so embarrassed as to default in their punctuality, either of which events would diminish the demand for funds abroad, and stop pro tanto the exportation of gold and silver.7 And here it may be remarked by the way, that a real scarcity of money is always accompanied by an artificial scarcity which aggravates the effects of the former. If, for instance, a million of dollars in coin be exported, so as to produce an outcry about scarcity of money, timid people and speculators will withhold another million from circulation; the former because they are afraid to lend it, and the latter because they expect to profit by forcing down the prices of property and commodities to a still lower point, the effect of which would be to diminish the demand for the exportation of coin by reducing the prices of commodities.

But independent of the tendency of the causes above enumerated, to restrain the exportation of specie, another operation simultaneously takes place, which adds to their efficiency. This is, the cessation of fresh imports, owing to the fall in prices of foreign commodities, occasioned by the existing scarcity of money. This cessation, even though it be but for a short period, affords time for the exportation of the products of the country which had not previously been brought into market; and although the tendency of an unfavorable balance of trade is unquestionably to drive the precious metals from a debtor country; yet in point of fact it does not effect it, for the reasons above stated, beyond a very limited extent. But were this, however, not the case, an outward stream would soon be met by an inward one. The low prices of domestic products would soon invite the attention of foreigners, who, to obtain them, would bring into the country, not foreign commodities, which from their low price could only be sold at a loss, but the precious metals.8 Whilst gold and silver would be flowing out of the country in some directions it would be flowing into it from others, and sooner or later the equilibrium would be restored, and the double current arrested.

It may here be remarked, that the accounts current between nations in their commercial dealings, that is, between the individual merchants of one country and those of another, which is the only sense in which we speak of commercial transactions between nations, are not periodically settled like the accounts between individuals of the same country, which are generally settled by the actual payment of the balance. National accounts current are never settled. The balance may be one way to-day and another way to-morrow, and as there is no general pay day, like the first of January, upon which a general balance is struck, facilities are afforded for warding off such a pressure on the bill market as would exist if a periodical punctuality were rigidly enforced.

Having thus given a detail of the operations which would take place under an unfavorable balance of trade, I will say a few words upon those which would occur under a favorable balance. And in doing this, we will take for illustration the same country that we have just been considering, and will suppose that an excess of exports should take place. Of such a state of things, what would be the first effect? The answer must be, a fall in the price of bills of exchange in the market. More money would have to be drawn for than the amount required to pay for the imports, and the competition of the bill drawers might reduce the rate of exchange down to the point at which it would be more profitable for them to import gold and silver from abroad, than to draw bills. Still the quantity that would be thus imported, would be comparatively limited. The very existence of a foreign balance in favor of the country, would be proof of the ability of the nation to consume an additional amount of foreign commodities, and the gain which could be made by the importing merchants of one or two per cent, on the exchange, by buying bills below par,in addition to the usual profits, would invite to more extensive importations. Additional importations would in fact take place, and the supply of these new commodities would be met by a corresponding demand on the part of those whose means of consumption from extraordinary crops or extraordinary profits on their business, had thus become augmented.

But a fall in the price of bills would have a tendency to discourage the exports of domestic products, and this discouragement, in its turn, would have the effect of raising the price of bills by a diminution of the supply in the market, and thereby of removing the motive for the importation of the precious metals. The importation of gold and silver, however, should it commence, would make money plentier than before, and thus raise the prices of commodities, foreign as well as domestic. This rise in price would encourage the importation of foreign commodities, because they could be sold at an increased profit, whilst it would discourage the exportation of domestic products, by which means a part of the specie previously imported would again be exported, in preference to the domestic products, which could only be procurable at an augmented price. It thus appears, that a favorable balance of trade, although it has a tendency to bring the precious metals into a country, yet in point of fact it does not effect it beyond a limited amount, resembling in this particular, the former case of an unfavorable balance; two streams might be flowing, one into the country and one out of it, and sooner or later the equilibrium would be restored, and the level regained.

Thus it would be impossible to retain in any country any more than its true share of the aggregate mass of the gold and silver of the trading world, or to exclude from it any portion of that share. No human contrivance or legislation could possibly effect either, and hence all the efforts which have been made in all parts of the world to alter what the natural laws of commerce have decreed, by prohibiting the exportation of the precious metals under heavy penalties, or by attempting to encourage their importation by protective or prohibitory duties on merchandise, or, by resorting to any other expedient, have proved utterly futile. Money, as has been said, like water, will find its level, and although the former like the latter, may for a period be forced into unnatural channels, the deviation cannot long continue.

And here, I will take occasion to remark, that in forming an estimate of the comparative value of the exports and imports of the United States, the custom house returns, as they appear in their aggregates, are but imperfect guides to determine the balance of trade. The value of the exports given is their value at the time and place of shipment, as furnished by the shippers under oath, in the form of manifests. The value of the imports, is their cost abroad, as ascertained by the invoices, also furnished under oath, subject to such revision by the custom house appraisers as may, in case of suspected fraud in the valuation of goods chargeable with ad valorem duties, be deemed right and just. These foreign invoices embrace the cost of the articles, and what are called the shipping charges, that is, the charges without the payment of which they could not be put on shipboard, but include no frieght, or insurance; and where they are made out in Brazil, Buenos Ayres or other countries, where a depreciated paper currency exists, due allowance is made for the depreciation.

Now, as cargoes shipped abroad from the United States, are burthened with the expenses of freight and insurance, their value at foreign ports must generally be augmented by the amount of these expenses and the profits on the voyage, and consequently the nett proceeds of their sales must always furnish’ a fund adequate to the purchase of foreign commodities to a greater value than their cost at home. On this account it necessarily follows, that where the trade of a country is profitable, its imports will always exceed its exports, and this too, just in the degree that it is profitable, and nothing is clearer than that if the voyage out and home does not give a greater amount of imports than of exports, the trade would be abandoned. Of this proposition there can be no dispute, and it is quite probable that an export of a hundred millions of dollars would purchase abroad as many commodities as would show an import on the custom house books of a hundred and twenty or more millions of dollars, thus overthrowing the theory of that class of reasoners who maintain that the balance of trade is against a country when it imports more than it exports, and who consequently believe that a nation is growing poor when she is in reality growing rich.

But to make this matter perfectly plain, I will illustrate it by a practical case that every body can understand.

A merchant in Philadelphia purchases one thousand barrels of flour at eight dollars per barrel, and ships it to the West Indies. The custom house books in this case would show an export of eight thousand dollars. On the arrival of the cargo abroad it sells for twelve dollars per barrel, and after paying freight, duties, commissions, and all other charges, leaves the nett proceeds ten thousand dollars. This sum is invested in coffee, and brought home, where it is entered upon the custom house books as an import of that amount. Here, then, we would have an export of eight thousand dollars and an import of ten thousand dollars, showing a clear gain of two thousand dollars, without leaving any balance due one way or the other. A stronger illustration than this even, is to be found in the operation of our whaling ships. A vessel with a cargo consisting of nothing but provisions sufficient to feed a crew for a voyage, and as many staves, hoops, and headings, as will make casks enough to hold a cargo of oil, clears out at New Bedford for the South seas. The custom house books show an export of ten thousand dollars, perhaps, and when the ship returns with a cargo of oil, they give us an import of fifty thousand dollars, thus showing what the superficial reasoners above referred to would call a balance of trade against the country of forty thousand dollars, but which is a clear evidence of a gain to the owners and crew, and consequently to the country.

But even if the custom house books were to furnish accurate statements of the nett proceeds of the sales of the cargoes exported, as well as of the foreign cost of the homeward cargoes, they would not be sufficient to enable us to form a correct estimate of the real balance of trade. Debits and credits are created in the foreign trade of every country, which never appear on the custom house books. Specie is imported and exported by emigrants and passengers in their trunks, or secretly shipped by merchants to avoid penalties or odium, or, exposure of their operations. Goods are smuggled, and others are purchased with funds earned by vessels abroad, engaged in the carrying trade, and thereby augment the imports, whilst ships are frequently sold abroad, and thereby augment the exports. Large amounts of property are also exported from some countries for which no proceeds are to return, or at least, to return at an early day, such as happens in the case of foreign subsidies, the maintenance of troops and navies abroad, the transmission of revenues to non-resident capitalists, and funds for the expenses of travellers in foreign countries. To these may be added losses at sea, or by fires abroad, the bankruptcy of the persons to whom the exported commodities are sold, and investments in foreign loans and joint-stock companies. In most of these cases property of some kind or other is sent abroad which appears on the custom house books amongst the exports; and, although in many of them the actual transmission for these specific objects may be in the form of bills of exchange, yet it is manifest, that these bills could only be drawn upon shipments of property.

In the foregoing remarks it has been laid down as an axiom, that the price of bills of exchange is determined by the balance of trade. Strictly speaking, however, this is not always the case, for this balance is liable to be modified by what is called the balance of payments; and in truth this latter principle it is which regulates the daily rate of the exchanges. If all the merchandise exported and imported was to be immediately paid for at the time of its changing hands, the balance of trade and the balance of payments would be identical. But, in the intercourse between nations we know that this is not always the case, and that circumstances occur to prevent the immediate influence of the balance between imports and exports from acting directly upon the exchanges. Amongst these circumstances are the following:—

1. Where the imported articles are bought on a credit, and are to be paid for at a distant time, whilst the exported articles are sold for cash, or vice versa.

2. Where in the case of both imports and exports the sale is on credit, but the credits are not of the same length.

3. Where the articles shipped abroad from one of the countries should not meet with a ready sale, and should be kept on hand for a length of time without being drawn upon, whilst on the other side a prompt sale is made, and bills drawn for the proceeds.

In either of these cases, the operation of the balance of payments on the exchanges might be such as not only to neutralise for a time the operation of the balance of trade, but to turn the exchanges against the country which had the balance of trade in its favor. A case in point can readily be referred to.

If an account current were to be made out of the past state of debits and credits between the United States and Great Britain, it would no doubt be found, that from the date of planting the first British colony in this hemisphere, we have owed a balance of trade that has never been discharged, and which at times may have amounted to a hundred millions of dollars or more; and yet, owing to the credit that has been extended to us, by which the pay-day has been deferred, the exchange has not always been against us, but has, on the contrary, been so controlled by the balance of payments as frequently to have been in our favor.9

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CHAPTER V.

ON THE PRINCIPLES OF EXCHANGE.

BILLS of exchange are those commercial instruments by which a merchant in one country or place directs money which is subject to his control in another country or place to be paid over to a third party. In the commercial transactions of every nation, some of the merchants become indebted to other merchants in foreign countries for commodities purchased there upon credit, whilst some others have funds in those foreign countries arising from the sale of cargoes disposed of there. If bills of exchange did not exist, the debtor class of these merchants would be obliged to incur the expense and risk of transporting coin or bullion to foreign countries in discharge of their debts, and the creditor class would also be obliged to incur the same expense and risk in importing coin or bullion in payment of their cargoes sold abroad. By this double transmission, the merchants, and consequently the nations to which they belonged, would be losers to an amount equal to all the expenses and risks so incurred, together with interest on their capitals for the time they were out of their reach. Nor could this be avoided unless the importers and exporters were always the same identical individuals, in which case the merchandise purchased abroad would be paid for by the proceeds of the merchandise sold. By the operation, then, of bills of exchange, the necessity of this double transmission is entirely avoided, and the funds abroad, instead of being sent home, are transferred to those who have debts to pay abroad, and who are thus exempted from the expense and risk of sending coin or bullion in payment of their debts.

But this benefit, in which the whole nation participates, is not limited to the mere application of funds in any given place to the payment of a debt due in that place. It matters not whether the fund and debt both stand on the books of merchants at the same place, or whether the debt be due at Manchester and the fund be at Paris. The magic power of bills of exchange transfers the payer and receiver both to London, the great seat and centre of British and indeed of European commercial operations.

But the merchants who make remittances of bills of exchange to foreign countries, to pay for merchandise purchased there, do not, it is manifest, procure those bills of exchange for nothing. They must purchase them from those who have funds abroad to draw for, and in doing this they will endeavor to procure them at as cheap a rate as they can. It is, on the other hand, the interest of those who have bills for sale, to secure the highest price for them they can, and it is this competition between buyer and seller that determines the market price, which, like the market price of commodities, must always depend upon the proportion which the supply bears to the demand. If bills of exchange are scarce, their price will be high. If they are plenty, their price will be low. There is, however, one peculiarity belonging to a bill of exchange, which is not common to any commodity, and which ought always to be kept in mind in discussing this subject. It is, that if it cannot be sold at a price that will suit its owner, he has it in his power to avoid the necessity of a sale at great loss by importing his funds in coin; and if it cannot be purchased at a price that will suit a purchaser, the latter can avoid the necessity of a disadvantageous purchase by exporting coin in payment of his debt. The existence of this peculiarity places a limit upon the fluctuations in the rate of exchange, which cannot for any long period together fall and remain below par, or rise and remain above par, to a greater extent than to an amount equivalent to the expense of transporting the precious metals from the debtor country to the creditor country. For, if a merchant owes a debt abroad, and cannot procure a bill of exchange at an advance above par equal to the freight, insurance, commission, and brokerage, and to the value which he attaches to that certainty of punctuality in the fulfilment of his engagement abroad, which a set of bills of undoubted credit, sent by two or three different vessels affords, but which a shipment of coin cannot always furnish, how solvent and prompt soever might be the underwriters in settling in case of loss, he will unquestionably transmit coin as being the most economical mode of making a remittance.10 And so, on the other hand, the drawer of a bill, if he cannot sell at a price which will yield him as much money as the importation of coin would do, taking into the account, besides the charges of importation, the interest for the time he must wait before his money can arrive, and if money be scarce, the inconvenience or loss he would sustain by the delay, he will undoubtedly order his funds to be shipped to him in coin, as the most advantageous mode of getting them into his possession.

Of the correctness of these positions there cannot be a doubt, and whenever the market price of exchange differs from these rates, it must have its cause in one of the following circumstances.

If the exchange be above, it must either be that the merchants who have remittances to make are ignorant of their business, and therefore pay more for a bill than it is worth, or that small profits are not worth their attention, or that there is a penalty or a degree of odium attached to the exportation of coin which they are not prepared to encounter, or that the punctuality which is expected of them by their correspondents abroad is of a character that would not justify the hazard of a miscarriage by a single ship.

If the exchange be below, it must be because the owner of the funds abroad cannot afford to wait the time requisite for the transmission of the coin, or because in the actual state of the money market, money is worth to him more than the ordinary interest, or because there exists a penalty or a degree of odium attached to the exportation of coin in the country from which his fund is to be drawn.

It must, however, be remarked, that it sometimes happens that bills are sold below the limits here designated in the following cases, viz:

1. Where the commanders of ships of war on foreign stations have occasion to draw bills upon their government, at ports of limited trade, or at which the course of trade does not call for such bills. I have known a bill on the navy department drawn at a port in South America to be sold at twelve per cent, below the true par.

2. Where masters of vessels and supercargoes, at such ports, have not merchandise enough to fill up their vessels, and on that account find it for their interest to sell bills at a great discount, for the purpose of buying bulky commodities to bring home, and thereby earn a freight more than equivalent to the loss sustained on the bills.

3. Where masters of vessels enter such ports in distress, and are obliged to draw bills upon their owners for necessary repairs.

In wealthy countries, however, where bankers are prepared with large capitals devoted to speculations in bills of exchange, great fluctuations from the par are not likely to take place, inasmuch as bills can always be bought from or sold to them, by allowing a small profit beyond the expenses of exporting or importing coin. The trade of a banker in Europe is to study the exchanges not only between the place at which he resides and all other places, but also between all those places and each other, by which means he is generally enabled, by a combination of operations, by selling bills on one place and by buying them on another, not only to raise the fund with which he deals, but to realise a profit. Thus, for instance, if he reside at London, and can sell a bill on Hamburgh at half per cent, premium, and buy one on Paris at half per cent, discount, and with the latter buy one through his correspondent at Paris on Hamburgh at par, he will have realised one per cent, by the transaction, without the employment of any capital; the bill remitted from Paris to Hamburgh arriving in time to meet the bill drawn upon his correspondent at the latter place.

Having in the foregoing remarks spoken of the par of exchange, it is proper that the meaning of that term should be explained.

Exchange is an operation, which, strictly speaking, has relation only to the precious metals, and every bill of exchange is in reality a mere order for the delivery, on a certain day, of a given quantity of gold or silver. Exchange is at par or equality, when a merchant in one country can purchase with an ounce of pure gold, or an ounce of pure silver, a bill at sight upon a foreign country, which will there put him in possession of an ounce of pure gold or an ounce of pure silver, and the coins of full weight of the two countries which are the respective equivalents of an ounce of pure gold or an ounce of pure silver, will express that par. This is an axiom in political economy, and should never be lost sight of, whatever appearances to the contrary may at times be presented. Exchange is above par when a greater quantity is required for the purchase of a bill that will command an ounce of pure gold or pure silver; and it is below par when a less quantity is required. Now, if all the trading nations of the world were to use only one of those metals as their currency, and if their coins were of the same standard as to purity, and of the full mint weight, the science of exchange would be as simple as the plainest calculations in arithmetic. But this not being the case, each nation having its own standard of fineness, and its own particular coins, some having one metal and some the other, and some both, to constitute their currencies; and the coins of some countries being worn by wear and tear more than those of others, without being prohibited from passing by tale, and there being in some countries a seignorage charged on the coins, whilst in others there is none, the subject is involved in an obscurity which very few persons are disposed to take the trouble to penetrate, and indeed which very few persons have the means of penetrating. This has been particularly the case in reference to the exchange between the United States and England, which, being for many years past, up to the present day, quoted in all the newspapers, prices current, and correspondence, upon false principles, has occasioned a wide-spread error, the origin of which will now be explained.

By an act of congress, passed on the 31st of July, 1789, it was declared, that the British pound sterling (which, although not at that time a coin, was the equivalent of the quantity of gold contained in a guinea, less the one and twentieth part, the guinea being twenty-one shillings) should be taken as of the value of four Spanish silver dollars and fourty-four hundredth parts of a dollar in estimating ad valorem duties upon British merchandise at our custom houses. This estimate was founded upon the circumstance, that at that period, the Spanish dollar, the only coin of that denomination in circulation in the United States, was the well known equivalent in the British market, of four shillings and sixpence sterling, and very nearly such equivalent at the British mint.11

By another act of congress of 2d April, 1792, establishing the mint, and authorising a coinage for the United States, it was provided, that there should be silver dollars coined, “each to be of the value of a Spanish milled dollar,” to contain 17dwt. 8 grains of standard silver; and that the proportion which the gold and silver coins should bear to each other, should be that of 1 to 15, that is, that one ounce of pure gold should be the equivalent of fifteen ounces of pure silver.12

But there is no natural proportion between gold and silver, as has been observed on a former occasion, any more than there is between lead and iron, and it is therefore very manifest that no law can permanently fix a par of exchange between them. When any change in their relative value takes place in the market of the trading world, whether it be by an increased or diminished supply, of one or the other metal, or, by an increased or diminished demand for one or the other, the par becomes changed. This event did in reality take place, and in process of time, an ounce of gold, as has been already stated, became gradually worth more than fifteen ounces of silver, and finally reached the proportion of one to sixteen. With this gradual change in the relative value of gold and silver, the silver dollar ceased to be the equivalent of four shillings and sixpence sterling, and consequently the pound sterling became the equivalent of more than four dollars and fourty-four hundredth parts of a dollar, for the simple reason, that any person who possessed the quantity of gold represented by the pound sterling before the coinage of the sovereign, and now actually contained in that coin, could obtain for it more than four dollars and forty-four hundredth parts of a dollar in silver. But the mercantile usage did not conform to this change. The merchants adhered to the old par, as if a pound sterling was the equivalent of four dollars and forty-four cents by some unchangeable law of nature, and for many years continued to ascribe the nominal premium on sterling bills of exchange, which was the mere exponent of this change in the relative value of gold and silver, to the influence of the balance of trade. The delusion was partly removed by the act of congress of 14th July, 1832, which raised the value of the pound sterling for the calculation of ad valorem duties at the custom house to $4.80, and by two subsequent acts, one of 28th June, 1834, by which the British sovereign was made the equivalent in American gold coins of $4. 87.075+, and one of 18th January, 1837, by which it was made the equivalent of $4.86.65+, which is now the true par on London, corresponding within a very small fraction to 9½ per cent. premium on the old computed par.13 I say “partly removed,” because, strange as it may appear, there are thousands of persons at this very day, who have no other belief on this subject, than that the nominal premium quoted on exchange, is a real advance which takes so much money out of their pockets. To remove, however, the vestiges of this deep rooted error, the Chamber of Commerce of New York, early in the year 1839, recommended to the merchants of that city, to quote the exchange on England in dollars and cents for the pound sterling, instead of designating the per centage above or below par; a recommendation which was soon after followed up by the Chambers of Commerce of Philadelphia and other places, and will perhaps in time be generally adopted.14

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CHAPTER VI.

ON THE STEADINESS OF TRADE IN COUNTRIES EMPLOYING A METALLIC CURRENCY.

IF the principles laid down in the preceding chapters be sound, as it is believed they are, it must necessarily follow that the operations of commerce in countries employing a metallic curency, are as regular and as little liable to fluctuations as the nature of things will admit, and more than this can no where be looked for. That there will be occasional overtrading and over-speculation wherever there is credit, is too self-evident to require proof, and hence no country in which credit exists, can be entirely exempt from individual bankruptcies. Foreign wars, domestic disturbances, extensive conflagrations, storms and hurricanes, the failure of crops, the insolvency of foreign debtors, and a variety of other causes, may produce individual or even extensive commercial embarrassment. Too much credit may even lead incautious men into extravagance of expenditure, which may bring on their ruin, but in none of these cases is the currency chargeable with the catastrophe. The mischief, whatever it may be, can only be ascribed to the operations of credit; but as credit, when properly regulated, is far more influential in producing good than evil, as will be shown hereafter, it is not to be annihilated on account of the misfortunes or imprudence of a comparatively few individuals.

Such being the theory of this branch of my subject, I have the satisfaction to state in regard to the practice under it, upon the testimony of a respectable American merchant, who resided and carried on extensive operations for near twenty years at Gibraltar, where there has never been any but a metallic currency, that he never knew during that whole period, such a thing as a general pressure for money. He has known individuals fail from incautious speculations, or indiscreet advances, or expensive living; but he never saw a time that money was not readily obtainable, at the ordinary rate of interest, by any merchant in good credit. He assured me, that no such thing as a general rise or fall in the prices of commodities, or property was known there; and that so satisfied were the inhabitants of the advantages they enjoyed from a metallic currency, although attended by the inconvenience of keeping in iron chests, and of counting large sums in Spanish dollars and doubloons, that several attempts to establish a bank there were put down by almost common consent.

Upon this same subject, in reference to the city of Havanna, more satisfactory evidence still, because in an official form, and more in detail, can be adduced. N. P. Trist, Esq., consul of the United States at that port, in a letter addressed to the secretary of the treasury under date of 19th October, 1838, and laid before the senate on the 21st of January following, annexed to a report from the committee of finance, communicated many valuable particulars in reference to the practical working of a metallic currency.

After describing the trade and importance of Cuba, Mr. Trist employs the following language:—

“These are tolerably sure evidences of a state of active industry and prosperous credit. Nor are they less steady than active. They exhibit no alterations of feverish excitement and prostration; now rising to the energy of delirium, now sinking to correspondent enervation. The sudden stoppage of the current business in all, or in any one of its branches, is a thing as absolutely unknown in this island as the freezing of one of its rivers; and its inhabitants possess as little knowledge of the one phenomenon as they do of the other. Nay, less: for they not only read and hear of the freezing of our waters, as they do of those monetary prodigies in which the streams of industry and credit become arrested in the same way, and with equal suddenness; but, by means of the ice which our country sends hither, they can form a clear conception of the one wonder, and of all the horrors of navigation among its whirling and crushing masses, while no such means of knowledge can be brought home to their feelings in regard to the other.

“I am here indulging in no exaggeration. It is the literal truth; and for the proof that it is so, I refer to the testimony of the leading merchants of all nations established here, which forms a portion of the documents accompanying this letter. It is strictly and literally true, that such a thing as a monetary convulsion is absolutely unknown in any part of this island, which covers an area of about forty-three thousand square miles; has a line of sea-coast of about sixteen hundred miles; has nine ports open to foreign commerce, one of which is ‘ a commercial city, second to none in the new world, New York only excepted;’ has a population amounting to about one million of souls, who, in the last year, maintained a foreign exporting and importing business exceeding forty-three millions of dollars, after paying taxes to an amount which, in the year 1827, (when its exporting and importing business fell something short of thirty-two millions,) exceeded fourteen millions, and the rate of which has not since decreased; and the government of which is an absolute monarchy, maintained by the bayonet.

“This is the country the inhabitants of which actually have not the slightest knowledge of what a monetary convulsion means; where a general or an extensive stoppage of its commercial movement, (using the words in their most comprehensive sense, embracing all branches of business,) not only has never spontaneously occurred, but has never, for one single instant, been experienced at all; where the utmost effect that any foreign disturbing cause, however terrific its ravages at home, has ever been able to produce, has been a momentary pause—momentary only, and merely prudential—in regard to the particular branches of business, or rather the particular individuals, intimately and directly connected with the scene of the earthquake.

“This, I again repeat, is true to the very letter. The recent convulsion, in which the whole business of our country, from the city of New York to the remotest village in the west, exhibited the spectacle of chaos come again, was literally unfelt here. None but the mercantile class knew that any thing had happened; and of that class, it did not occasion a moment’s uneasiness to any, except those whose stability depended upon the punctual fulfilment of engagements by merchants in the United States or in Great Britain. Beyond these, and the few others who may have depended upon credit facilities from them, I do not believe that the business of a single man in the island was so much as sensibly slackened by it for a single day, or that a single individual received or spent one dollar the less, or so much as ever dreamed that any thing was the matter.

“For evidence upon this point, from persons far more competent to give it than I can be, I again refer to the accompanying documents. They afford proof of the fact. To estimate the force of that fact, it is necessary to take into consideration the extent and intimacy of the commercial connection between the two countries. Of this a conception may be conveyed in a few words. Of the two thousand five hundred and twenty-four vessels of all nations, Spanish included, which entered the ports of the island from other parts of the world, during the last year, one thousand three hundred and nineteen were Americans.

“Here then, are the facts. Here is flourishing industry, flourishing credit; above all, flourishing commerce, if such a thing exists under the sun. These are facts, the reality of which is beyond all question.”

Not wishing, however, to rest his statements upon his own evidence alone, Mr. Trist addressed a circular to a number of foreign merchants of the highest respectability residing in Havanna, in which he propounded to them a number of inquiries, the answers to five of which he above alludes to as the documents accompanying his letter.

From these answers the following particulars are gathered:—

First. That the imports into the Havanna are mostly on account of the foreign shippers, perhaps a third or a fourth being on home account.

Second. That these imports are mostly sold on credit, varying from one to ten months, upon promissory notes without endorsers, which are paid at maturity with great punctuality.

Third. That the rate of interest fluctuates according to the season.

One of the answers says,—

“The usual rate of interest for good paper is ¾ per cent. a month, and the extreme points may be placed at to 1 per cent.; but the latter rate is unusual.”

Another says,—

“In spring, when the bulk of the crops is shipped, it is sometimes difficult to get money for notes at 1½ per cent.; and in autumn, when shipments are of comparatively small amount, and foreign exchanges high, the rate of discount sometimes falls to ½ per cent.”

The third says,—

“The discount varies in ordinary times between ¾ and 1¼ per cent. per month. For signatures in good repute, the current rate scarcely ever exceeds 1 per cent.”

The fourth says,—

“The discount, is 1 per cent. a month, and frequently ¾ on first rate paper of merchants or retailers, but very often the notes of planters cannot be cashed at less than 2 per cent. a month.”

The fifth says,—

“The ordinary discount upon good paper is from ¾ to 1 per cent. I have sometimes known the discount in our market to be per cent., and rarely above 1¼. It may be said that there are every year two rates of discount in our market; the one from January to June, when the rate is from to 1 per cent., the other from July to December, when it is from ¾ to .”

Fourth. That at the market rate of discount there is never any difficulty to obtain money.

Fifth. That bills of exchange can always be sold at the current rate.

Sixth. That no such thing as a general scarcity of money is known.

Seventh. That individuals occasionally fail, but that such a thing as a general discredit may be said not to be known. The only exceptions were in 1836, occasioned by local speculation on sugars, and in 1829, when there was an extensive failure of the “retail dealers in dry goods, who had formed themselves into companies, the individuals of which made up for each other’s deficiencies. In this way they acquired great credit, and were enabled to make purchases with long terms of credit, extending from six to twelve months. The less regular trusted to the more, insomuch that the latter, after a series of increasing abuses, denied their liability for the former, and an almost general suspension of payments took place among them.”

Eighth. That the ordinary derangements of commerce in foreign countries produce no effect, except upon the parties immediately connected with it, as drawers or endorsers of protested bills. A violent and general commercial crisis, however, such as that which took place in the United States in 1837, exercises a temporary influence. That crisis was felt in Cuba, as it was, in fact, almost over the whole commercial world, although the answers differ in regard to its intensity, one affirming that it did not “shake credit and confidence to such a degree as to stop the current business in those branches on which it weighed the most directly.”

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CHAPTER VII.

OF THE DIFFERENT KINDS OF DEPRECIATION TO WHICH A METALLIC CURRENCY IS LIABLE.

IN discussions upon a metallic currency, the term depreciation or diminution of value, is frequently employed, and as it is necessary that the reader should be acquainted with the different kinds of depreciation to which reference may be had, they will be here pointed out.

The first is that general and gradual diminution in the value of the precious metals, which has resulted, and which may possibly hereafter result, from the discovery of new mines, or from the discovery of economical modes of extracting and refining the ore, by which the aggregate mass of gold and silver in the commercial world has been, or may be, augmented faster than the demand. The most remarkable depreciation resulting from this cause that has ever taken place, was that which commenced with the discovery of the mines of America about the middle of the sixteenth century, and which has been generally considered to have regularly continued, with some occasional interruptions, down to the present period.15

The second species of depreciation is that to which the metallic currency of a country may occasionally be for a short time subject, by an extraordinary importation of coin, not in the course of its regular distribution throughout the commercial world, but by some unusual event. A memorable example of this species of depreciation occurred in the United States somewhere about the year 1805, at which time there was war between Great Britain and Spain. The Spanish government, not finding it easy to evade the British cruisers in the Gulf of Mexico, which closely watched the exports of coin from Vera Cruz, made a special contract with the house of Hope & Co. of Amsterdam, of whom it had obtained a loan, by which authority was furnished to that house to receive in Mexico large amounts. In order to procure this coin, bills on Vera Cruz were sold in the United States by Hope & Co. through their agent, David Parrish, upon terms favorable to the purchasers, with the privilege of importing cargoes of merchandise into Mexico, to a class of responsible merchants, who fitted out fast sailing vessels, which could elude the British ships of war, and by means of that arrangement, many millions of Spanish dollars found their way into the United States, not called for in the ordinary course of trade, and not merely in transitu on its way to Europe, for most of it was here exchanged for coffee and other merchandise, and thus entering for a time into the circulation of the country, occasioned a depreciation of the currency to an extent plainly discernible.

A third species of depreciation is that which results from the wear and tear of the coins of a country, by which they lose in weight, and consequently in value. In some countries this diminution in the weight of the coins has been permitted to exist to such an extent before a new coinage has been ordered, as materially to affect the rate of exchange, the par of which calls for ounce against ounce, and consequently in such cases, the true par has differed from the nominal par, precisely to an extent equal to the depreciation.

A fourth species of depreciation is that which arises from the frauds of governments, by which their coins, whilst they retain the same denomination, are diminished in weight or in purity, or in both, so as to contain a less quantity of gold or silver in them than before, whilst they are declared to be legal tenders for the discharge of a debt for an equal number of pieces, contracted before the alteration took place. Many discreditable transactions of this species of fraud might be enumerated, amongst which are the following:—

The successive frauds in France by which the livre or pound of silver has been reduced to the livre or franc, equivalent to less than one-fifth part of a Spanish dollar.

The successive frauds in England, by which the pound of standard silver, originally coined into twenty equal parts, called shillings, has been coined into sixty-six equal parts, also called shillings, of which twenty are made a legal tender for the payment of a debt contracted at a time when twenty shillings contained a pound of silver.

The recent fraud practised in the United States by the act of 28th June, 1834, by which the gold coin called the eagle was reduced in weight and deteriorated in purity. Prior to that year the eagle contained 247½ grains of pure gold. By that act it was reduced to 232 grains of pure gold. Prior to that act its standard was twenty-two carats, that is, eleven parts of pure metal to one of alloy. By that act its standard was reduced to about 21.58 pure metal to 2.42 of alloy, the two operations reducing its value 68 cents, that is, from ten dollars to nine dollars 32 cents, whilst it was made a legal tender for all debts contracted before the 28th of June, 1834, as well as for those contracted after that date for ten dollars. By the act of 18th January, 1837, this fraud was slightly rectified, by augmenting the weight of pure gold in the eagle to 232 grains, as will be seen in the first note to Chapter 2, Book 4.

Changes in the intrinsic value of the coins of a country made in the manner here referred to, necessarily show themselves in the rate of the foreign exchanges. A palpable example is now before our eyes, in the case of the late alteration of our gold coinage, by which the par of exchange on England, when measured by gold, became altered to the whole extent of the diminished weight of pure metal in the eagle. As for example: prior to the 28th June, 1834, the British sovereign, which is the metallic pound sterling, if coined at our mint, would have produced $4.56½ and a fraction in gold currency, and consequently the latter would have been the true par of one pound sterling measured by gold. Under the present coinage, the same British sovereign can be converted into $4.86 and a fraction in gold currency, and consequently the latter is now the true par of one pound sterling, as was particularly shown at p. 32.

A fifth species of depreciation is that which results from the creation of paper money as a substitute for gold and silver, which operates upon the value of the total existing mass throughout the commercial world, precisely like the discovery of new mines. It will be shown in the proper place that the introduction of paper money into any country necessarily drives out a portion of its metallic money, and thereby augments the quantity previously existing in other countries, the inevitable effect of which is, to depreciate it there below its previous value.

I am aware that the term fraud as applied to the reduction of the weight of pure gold in the American eagle, is not an acceptable term to many people. It is certainly a harsh expression, and Congress might have avoided the imputation conveyed by it had it enacted that the laws of the 28th of June, 1834, and the 18th of January, 1837, should have had no application to contracts made anterior to the former date, thus leaving the rights of all creditors unimpaired. It is true that up to this time, creditors have not sustained any material injury from the operation of these laws, inasmuch as debtors have generally found it as profitable to pay in silver, which creditors have at all times been obliged to receive, as in gold; but this is an incident which could not have been positively foreseen, and which may, in fact before long cease to operate, for under the new proportions between gold and silver, the banks find it more advantageous to pay in gold than in silver, the quantity of gold contained in the eagle of the present coinage, being worth in the markets of Europe, less than ten silver dollars. That this is the case, may be inferred from the fact, that where our merchants import specie from Europe, they give a preference to gold, and where they export specie they give a preference to silver, which would not be the case if the legal proportions established an exact equivalency.

That this position, may not, however, rest upon mere inference, I will establish it by proof which cannot be disputed.

The price of Mexican dollars in London within the last two years has fluctuated between 4s. 9¾d, and 4s. 10½d. per ounce. They were quoted on the 27th February, 1838, at the former rate, and at the end of December, 1839, at the latter. Since January, 1840, to the date of the last advices, (the 10th of April,) the price has been 4s. 10¼d, and as American dollars are of the same standard as the Mexican, that is, nine parts pure silver to one of alloy, the same value may be attached to them. Now as the weight of the American dollar is 412½ grains, its value in British money is at this period 4s. 2d., and consequently, the value of ten silver dollars is £2 1s. 8d.

But the quantity of gold contained in the eagle, if sent to England and coined into British currency would only be worth £2 1s. 1d, as may be ascertained from the fact that the eagle contains 232 grains of pure gold, and the sovereign, or pound sterling, 113 grains.

For (omitting the fraction,) if 113 grains are equal to £1, 232 grains are equal to £2 1s. 1d.

This difference of near seven pence sterling, equal to about fourteen cents, upon ten dollars, shows that a gold eagle is now worth one and four tenths of one per cent less than ten silver dollars in England, and if it has not shown itself in the United States, it is simply on account of their legal forced equivalency, by which silver is undervalued as compared with gold, precisely as gold was undervalued as compared with silver, prior to the 28th of June, 1834.16 It matters not that at this day the difference is of a comparatively trifling amount. If it be but the tenth part of one per cent. the charge is established. But how do we know that in the course of time the proportions between gold and silver may not fall back to one to fifteen as they stood forty years ago, in which case not a debt would be discharged in silver, and consequently, creditors on all contracts, such as bonds, ground-rent deeds, annuities, state, city, and county loans as well as the loans of rail road, canal, and other corporations, contracted before the 28th of June, 1834, would be defrauded by law of six per cent of the amount of their debts? This is a grave question, and one in relation to which more will be said in the chapter “On the impolicy of adhering to our present mint proportions between gold and silver,” in Book the Fourth.17

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CHAPTER VIII.

ON THE “CREDIT SYSTEM,” OR THE INFLUENCE OF CREDIT IN PROMOTING NATIONAL WEALTH.

MUCH has been said in the United States of late years in reference to the important agency of what is called the “credit system,” in promoting national wealth, but few persons comparatively have examined the subject with sufficient minuteness to enable them to form a clear conception of its mode of operation. As the subject is one, however, which deserves to be thoroughly understood, I will endeavor to present it to the reader in such a way as cannot fail, I trust, to be intelligible.

The term credit is applied to that confidence reposed by one individual in another, which induces the former to permit the latter to have a portion of his capital, to be used as he may think proper, without the immediate transfer of an equivalent, but upon his stipulating to pay such equivalent at a future period, together with a compensation for the use of the capital during the time it is not under the control of its owner. Where the credit is given on a delivery of capital in the form of money, it is called a loan, and the charge which is made for the use of it is called interest. Where the credit is given on a delivery of capital in the form of other commodities or property than money, it is called a sale, and the charge which is made for the use of it is called profit. In both cases the credited party is placed in possession of something possessing intrinsic value, upon which industry can be employed, or by which it can be sustained; for even in the case where the capital consists of money, it must be exchanged for merchandise, raw materials, utensils, food, or clothing, before it can be productively employed by the borrower.

In countries where confidence between individuals does not extensively prevail, the credit system is but partially known. Happily for our country, this confidence has always existed amongst us, and for ages, amongst those from whom we are descended, and it is known to all who are acquainted with the history of the American colonies, that a system of credit was commenced by the mother country with the landing of the first pilgrim on our shores, and has never ceased to be continued to the present day. The United States owe a vast share of their prosperity to the credit system, and so manifest has this become to every well informed mind, that there are few persons with notions so antiquated as not to confess, that credit, when regulated by the rules of prudence, and not abused, is one of the most powerful stimulants to the production of national wealth.

The first subject for inquiry now is, how does credit operate in the production of national wealth? As this can best be shown by a practical illustration familiar to most people, I will explain it somewhat in detail.

We all know that a very large proportion of the settlers of our western country reach their tracts of land with no property in the world except an axe, a spade, a hoe, a gun, a cow, a few household utensils, and a change or two of clothing. They have paid a hundred dollars cash for eighty acres of land, the government price for some years past, or they may have bought it on a credit from private individuals, at a higher price; but the band is generally covered with limber, and is of no use in its present condition, for purposes of tillage. In this destitute condition, they find it absolutely impossible to commence the clearing of their lands, unless somebody will trust them with the articles of which they stand in need, until they produce a crop of some kind or other. They go to a neighboring merchant and satisfy him that they are industrious, economical and honest, and that if he will let them have on credit some of his capital, in the form of sugar, tea, coffee, flour, corn, potatoes, seed, salt provisions, winter clothing, and such other things as are absolutely indispensable for their subsistence, and for protecting themselves against the weather, they will pay him as soon as the land produces. The merchant, who has located himself in this spot for the very purpose of supplying the wants of the settlers, consents to the request, and agrees to give to his new neighbors, credit for fifty or a hundred dollars worth of things. With this borrowed capital each settler begins his labors, and when the crops are harvested, the merchant is paid in grain and other productions, and the settler finds himself, by the aid of this credit, in possession of a surplus, sufficient in part to support his family for another year, which he could not possibly have possessed, had the merchant refused to give him credit.

Here we see at once the agency of credit in creating a new capital. The settler without the credit, would have perished, or have dragged out a wretched life, whilst the merchant might have had a dead stock lying unemployed, producing nothing for its owner, or for any body else.

What has been here described in reference to the poorest class of settlers, is equally true of those who emigrate to the western country with a moderate share of wealth. There is scarcely an individual amongst them, who for the purpose of extending the culture of his land, or adding to his improvements, does not, at some period of the year, purchase goods or implements on credit of the neighboring merchants, in anticipation of his next crop, thereby acquiring the means of augmenting the products of his farm, and consequently of creating a capital which could not have existed but for the credit he obtained. Most especially is this true, in regard to a large proportion of the planters of the cotton growing states. These planters, it is well known, are in the practice of obtaining large supplies of clothing and subsistence for their slaves, and of every article for their own consumption, upon credit from the neighboring merchants, in anticipation of the next year’s crop; and it is hence manifest, that the wealth of those states is eminently promoted by the operation of credit.

And now, whilst I am on this subject, it may not be amiss to trace to their source the further operations of credit, by which the country merchants have been enabled to aid the settlers and planters in augmenting the national wealth. Few or none of these traders, have a capital of their own adequate to carry on business to the extent they do. They are themselves obliged to obtain most of their supplies upon credit from the wholesale merchants of the large interior towns and the Atlantic cities, whilst these in turn avail themselves more or less of credit with the European manufacturers. This, it is true, is not the case at the present day, as much as it formerly was, owing to the gradual accumulation of domestic capital; but, nevertheless, it not unfrequently happens that a settler in the remotest region of Missouri ploughs his land and produees his crop by means of credit obtained, it may be, through three or four successive links, from a manufacturer of hardware in Birmingham, or of one of dry goods in Manchester. And yet, with such facts before our eyes, there are still to be found amongst us, a few remains of that weak-minded prejudice against foreign capital, which was at no very distant day so universal, that it was deemed by many of the states unwise to borrow foreign capital at five per cent., that could be productively employed at a profit of ten per cent., upon the ground that it would drain the country of specie equal to the interest. Happily, however, new views have broken in upon the minds of most of our legislators, and although there are still laws prohibiting the free introduction of foreign capital into some of our local investments, yet foreign loans upon the security of public stocks and of those of improvement companies, and banks have of late been carried to quite a sufficient extent.18

It is not, however, to those engaged in agriculture alone, that credit is beneficial. The merchant frequently undertakes a voyage with a cargo purchased on credit, which, when successful, adds to the national wealth. The manufacturer, too, who has physical power applicable to the production of commodities, but no raw materials to work upon, finds himself, by the aid of credit, enabled to procure the raw materials of other people, to which he adds a value by the application of his labor, and consequently also augments the national wealth. The same remark may apply to mechanics and even to day laborers, and there is hardly in the community an individual engaged in any species of business who has not at some period found himself benefitted by the exercise of credit.

With such advantages resulting from the use of credit, so palpable and so well known to every body, it is not extraordinary that the “credit system” should be so much extolled. It is indeed a great moral power, without the employment of which our country could never in so short a period of time have attained to its present advanced state of wealth and prosperity. Whilst seeing and acknowledging, however, this important truth, we must not lose sight of another truth equally important, which is, that nothing but capital, that is, something which possesses an intrinsic value, can possibly be the means of enabling the person who obtains it on credit to produce a new commodity or a new value, and we must be particularly careful to remember that the credit system thus extolled, is not the banking system, as some would endeavor to inculcate in their speeches and writings.

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CHAPTER IX.

ON THE LAWS WHICH REGULATE THE HIRE OF CAPITAL, AND ON THE IMPOLICY OF USURY LAWS.

WHEN a person has more capital than he wants to employ in his own particular business, he very naturally prefers to let other people have the use of it, to permitting it to lie idle and unproductive, and for this use he will charge such sum per annum as the competition of the market will enable him to obtain. If his capital consist of lands or houses, the compensation which he derives from its use is called rent. If it consists of ships, it is called freight. If it consists of horses and carriages, it is called hire. If it consists of railroads, bridges, or canals, it is called toll. If it consists of commodities, it is called profit; and if it consists of money, it is called interest. In all these cases except the two last, the specific things loaned or hired are returned to their proprietors. In the case of commodities, a sum of money equal in value to the commodities purchased, with the seller’s profit added, is the uniform mode of replacing this species of hired capital. In the ease of money, another sum, though not consisting of the identical pieces of coin, equal in value to the amount of the sum loaned, with the interest, is the uniform mode of replacing this species of hired capital.

In all countries where the competition of the market is permitted to operate without legislative restrictions, it is evident that the charge for the use of capital in any of its forms can never be permanently or materially higher or lower than that medium which presents the common ground upon which it is the interest of the capitalist and the person with whom he deals, to meet. If lands, houses, horses, wagons, railroads, bridges, and canals, be abundant in proportion to the demand, the charge for the use of them will be proportionally low. If they be scarce, it will be proportionally high. The same is true of commodities, under which head is included merchandise and produce of every description, and which, with the metallic money, constitute what is called the circulating capital of a country, without which neither lands, houses, ships, horses, wagons, railroads, bridges nor canals, would be of any immediate value.

Now although metallic money constitutes one of the forms in which capital is hired by persons who wish to employ capital in any industrious pursuit, yet, as observed in the last chapter, it is never the identical thing that is wanted, except indeed by gold and silver ware manufacturers for the purpose of melting. Money is merely hired as the instrument by which raw materials, agricultural produce, or merchandise, are more conveniently to be obtained by the borrower, or by those in his employ to whom he has paid it away as wages; and it must therefore be very evident, that as a component part of the total mass of the circulating capital, it is governed by the same laws as those by which the rest of this mass is governed. In other words, the rate of interest in a country is determined by the aggregate quantity of circulating capital, metallic money itself included. If that be abundant, interest will be low, as in England and Holland; and if that be scarce interest will be high, as in all the new states of our Union.

The unfortunate existence, however, in many countries, and amongst them our own, of laws restricting the charge which the owner of capital in the form of money shall derive from its hire, disturbs in some degree the natural operation of things, and prevents that uniform relation which profit and interest would otherwise invariably bear to each other. By imposing a penalty upon loans at a higher rate of interest than six per cent, per annum, for example, the most usual rate established by our state laws, capital is either driven out to more favored quarters, or prevented from flowing in, in either of which events the mass of the circulating capital is diminished, and consequently the hire for its use augmented. In addition to this, too, a burdensome tax is imposed upon the industry of the country, by compelling those who have not the best security to offer, which embraces a large portion of the industrious classes, to resort to lenders, who in addition to the fair value of the money, and a reasonable allowance for the risk of loaning on personal security, which would be the uniform market price in the absence of usury laws, must be paid for the odium and risk they incur by violating the laws of the land. There is no sound reason why the charge for the use of money should be fixed by law, that would not equally apply to fixing by law the rent of lands and houses, or the freight of ships, the hire of horses and carriages, or the profit on merchandise sold. The lending of money for a year is nothing but selling capital upon a credit for a year, and so convinced of the absurdity of discriminating between a sale of money, and a sale of goods is a large proportion of the capitalists of every country, that evasions of the usury laws are every where practised by expedients which it is not easy to prevent. Some of these expedients will be treated of in a future part of this work, but a very common one is that practised almost daily on the stock exchanges of New York and Philadelphia, whereby under a. fictitious purchase of stock for cash, and a fictitious sale on credit of the same ideal stock, through the agency of a broker, money is loaned at a rate as far above the legal rate as covers the risk of trusting to personal security, as well as the charge for the odium and hazard incurred by an illegal transaction.19

These remarks on the value of money, as a component part of the circulating capital of a country, it will be observed, have reference to that general and enduring state of things, which covers a period of years. Thus, I would say, that capital is more plenty in the United States in the year 1840 than it was in the year 1798. In the latter year the Federal government could not borrow money at less than eight per cent. It could now borrow at five per cent., and has even, at one period since the year 1815, borrowed at four and a half per cent. Most of the Atlantic states, and some of the western states, have of late years borrowed money at five per cent., and it may be remarked, that although the market price of public stocks may be temporarily affected by various causes, yet no permanent influence can be exerted upon them, unless a diminution of the aggregate mass of the circulating capital of the country, that is, of the national wealth, should take place.20 The fluctuations in the money market of merchants and stock-jobbers, and even at times in the market of mortgages, by which sometimes a high rate of interest is paid for capital, are generally of a temporary nature, and to be accounted for upon the principle that wherever there is credit, and especially if there be banks, there will at times be over-trading and over-speculation. The rate of interest upon capital must in the long run be governed by the rate of profit to be made by its employment; whilst for short periods, it will depend upon the ratio of the supply to the demand, and upon the security offered in the money market.

CHAPTER X.

EXAMINATION OF THE COMMON OPINION RESPECTING THE SINKING OF CAPITAL.

THERE is a subject intimately connected with that of money, which deserves a passing notice in a work of this kind. I allude to the common notion, that a community sustains no injury from the construction of public works or improvements that turn out unproductive, inasmuch as they afford employment to many people without occasioning any loss of capital, the money not being sunk, but merely having changed hands. To this error, which is more widely spread than many people imagine, may be ascribed the loss of tens of millions of dollars of property in the United States, and if not eradicated, it will lead to the loss of tens of millions more. Immense expenditures are annually made by the federal government, by all the state governments, by counties, townships, cities, towns, boroughs, and villages, by private corporations of every description, and by institutions established for every imaginable purpose, literary, charitable, and religious, which would never be made if this matter were perfectly understood; and as it is one that can be made plain by a very simple illustration, I will present such a one to the reader.

In a former chapter it was shown that metallic money was never employed as capital for the carrying on of any branch of industry, except that of the manufacture of gold and silver ware, but was the mere instrument by which capital, consisting of other commodities, could be conveniently transferred from hand to hand. The function, therefore, which money performs in the business operations of the community, may be compared to the function performed by carts, wagons, ships and railroad-cars, in transporting from one possessor to another the commodities which he needs to carry on his business. Now every body can perceive, that in performing the business of transporting commodities, the vehicles here mentioned are not destroyed or sunk until they are worn out, so neither is the money which performs the function of conveying the commodities from the possession of one person to that of another, destroyed or sunk. It is, therefore, clear, that although the common mode of expressing a loss by an abortive undertaking is that “money has been sunk,” yet it is easy to be seen, that no money can ever have been sunk, but that the sinking has been of something else than money. What that something else has been will now appear.

In Pennsylvania, as well as in other states, there have been at times extraordinary excitements in reference to internal improvements. Turnpike roads, bridges, canals, and railroads, have each in their turn commanded popular favor, and have been extensively constructed, without a due examination of their cost and of their probable results. The consequence has been, that some of these enterprises have proved wholly abortive, and have been abandoned without being completed, or, if completed, have been useless as a source of income, and have consequently occasioned to their proprietors a loss equal to the whole expenditure. Now in all such cases, what has been the capital that has been sunk? I answer, the raw materials of which the works were constructed, such as stone, lime, wood, timber and iron, the food and drink, clothing and fuel of the laborers employed upon the same, (for the procuring of which the money paid to them as wages only served as the instrument,) the vehicles, implements, and tools worn out or deteriorated by the work, and the food consumed by the horses and cattle employed. All these articles, being forms of accumulated capital, possessing a value equivalent to the sum in money paid for them, constitute the capital sunk, and they are said to have been sunk, because after they have been used or consumed, there is nothing of value to be shown in their place. The process which has in reality taken place has been the mere transmutation of stone and lime, wood and iron, from a form in which they possessed a value into one in which they possess no value, and the conversion of a large quantity of bread and meat, whiskey and rum, butter and milk, sugar and coffee, coats and jackets, coal and wood, hay and oats, into roads and canals, without the possibility of a reconversion to those original elements.

But it may be said, that even admitting all this to be true, still a vast number of people will have been employed. Granted; but employed in producing nothing of value, so that their industry has been of no more benefit to the community than if it had been employed in turning grindstones where there was nothing to grind, or in digging ditches merely to fill them up again. It would hardly be argued that had it not been for this employment, these people would have remained idle. This would have been impossible. The identical capital consumed in the abortive enterprise would have been seeking for laborers in some other pursuit, and these laborers would have met it on the way, or have taken the place of those who did. These remarks, it will be observed, have reference to cases where the whole enterprise has failed, such as happened many years ago, with a total sinking of large capitals, in the construction of the Philadelphia and Susquehanna, and the Chesapeake and Delaware canals. They are, however, equally applicable to partial failures of enterprises as far as they go, and the only true test of the result of an improvement, is to be found in its nett income. If that be greater than the amount that could have been derived from the employment of the same capital in some productive branch of agriculture, commerce, or manufactures, the investment will have been a profitable one. If it be merely of an equal amount, it will have been an indifferent investment, and if it be of less amount, it will have been a positive loss to the community as well as to the proprietors. The truth of this proposition can easily be seen by any one who will apply it to the case of a single farm. If a farmer, who has a thousand dollars which he can lend at six per cent., or cause to produce him six per cent., by grazing cattle or tilling more ground, should lay it out in making a new road to facilitate his intercourse with the market, by which he should only save twenty dollars a year in the reduced transportation of his produce, it is clear that he would not be as well off by forty dollars a year, as if he had continued to use the old road, and employed his capital in one of the other modes. An entire state is but a large farm, and what is true of one is true of the other.

But there is an argument which may here be urged with some apparent force, and it is one that is entitled to consideration. It is that in estimating the value of a road or canal, the whole benefit to the community resulting from it is not to be measured by the mere income which the owners or stockholders derive from it. A part of the benefit is shared by the public, that is, by the producers and consumers of the commodities which pass over the road or canal, and by the persons who travel over it. It may, therefore, very well happen, say the objectors, that whilst the stockholders of the road get only three per cent, dividends on their stock, the advantages which the community gain may be equal to three, five, or seven per cent. more. Let us analyse this argument, which appears to possess so much plausibility, and see to what it will lead us.

The interest of money or capital is that sum which is paid to the owner of money or capital for its use, and is, as we have shown in another place, that rate which is established by the competition of the market. When persons borrow capital for employment in any productive branch of industry, whether connected with agriculture, commerce, or manufactures, it is always with the expectation that they can make out of it a sum beyond that which they pay for its use, and the average rate of interest may be considered to be the rate which all judicious applications of capital ought to produce. In the Atlantic states of the Union, where capital is more abundant than in the western states, the annual net profits of capital, after defraying all the expenses of wages, rent, superintendence and other charges incident to the enterprise, may be estimated at about six per cent.,21 and six per cent, may therefore be considered, in the region of country mentioned, as the profit which ought to be produced from capital, and consequently in those cases, where a road or canal does not produce a benefit to the stockholders, equal to six per cent, upon the outlay, there will have been a sinking of capital equal to the principal sum that ought to have yielded the deficiency; and for this reason, that six per cent, would have been the profit derived from the employment of the capital in other pursuits.

The next question then which presents itself is this. Can it be, that the public shall derive a benefit of three, five or seven per cent, per annum from the construction of a road or canal, whilst the proprietors of the improvement derive only a profit of three per cent?

It is a possible case, that a charter of incorporation may have fixed the rates of toll on a road or canal so low, without any power on the part of the company to raise them, as that the income arising therefrom shall not be more than equivalent to three per cent, upon the expenditure. In such an instance, it might happen that the public should enjoy an advantage equal to what has been named and even more. But, I apprehend, that no such cases exist in the United States; and I think I am warranted in saying, that no company has ever accepted of a charter which does not allow a chance for a revenue exceeding six per cent., besides reserving a sum adequate to keep the works in repair and pay all other expenses. When, therefore, the income of a road or canal falls short of an average of six per cent., it must be, and can only be, in consequence of its not being used to a sufficient extent, that is, in consequence of a sufficient portion of the public’s not finding it to be for its interest to pay the toll, rather than to transport their commodities or their persons on some other route. The only conceivable mode of ascertaining the utility to the public of an improvement, is by the amount they are willing to pay for its use; and if this amount be equivalent to not more than three per cent, of the capital expended, it may be considered as an indisputable point, that the present loss to the community by the investment is equal to at least one half of the capital. Whether this shall have resulted from a bad location of the improvement, from the limited quantity and number of commodities and passengers that are transported over it, from an excess in the cost of the work over the estimates, from extraordinary damage or obstruction from freshets or droughts, or other causes, or from the road or canal being superseded or interfered with by a rival improvement, it matters not. The effect is precisely the same in either case. The stockholders, and consequently the community, have not only failed to reap the usual profit on a portion of their capital, but have seen it transmuted into a form wherein it can never again be rendered capable of producing that profit.

But it may be said that roads and canals increase the value of the lands through and near which they pass. This may be sometimes true, but it must not be forgotten that they also diminish the value of other lands through which they do not pass, by drawing off a part of their population, and of the travelling which used to frequent old routes.22 But after all, there is no real value conferred upon the country at large by a road or canal in an economical point of view, but what is to be measured by the actual reduction in the expense of transporting its produce to market and obtaining its distant supplies, and in the facilities afforded to the conveyance of passengers. Where the aggregate of these benefits is to the parties concerned of such value as to induce them to pay to the capitalists who have constructed the improvement for them, the same interest for the use of their capital, that they could have obtained by its employment in other pursuits, then, and then only, has the expenditure been beneficial to the country. It is no doubt true, that turnpike roads or rail roads are very convenient and advantageous to those who reside on their route, and that they may all be willing at times to pay for the privilege of passing over them. But even the value of this convenience and advantage has its limits. The turnpike road from Philadelphia to Frankford, a distance of six miles, is extremely convenient in the winter season to all those who reside on its border and in its vicinity; yet as they prefer other roads in summer, and are not willing to pay for its use in winter an aggregate sum equal to the interest on the capital expended in its construction, it is manifest that the existence of the road is not considered to be worth to them that amount. Who could doubt that the investment of a thousand dollars in an omnibus to run from the Delaware to Schuylkill would be a loss to the community as well as to the owner, if the public for whose benefit it was established, would prefer to walk rather than to pay for its use more than thirty dollars a year over and above the expenses and repairs? I say “loss to the community,” because, had it not been for this misapplication of capital, sixty dollars might have been obtained for it on loan by the proprietor, and consequently the aggregate wealth of the community would have been augmented to the additional extent of thirty dollars.

There is still, however, another popular error very prevalent on this subject, which ought not to be passed over without notice. It is, that although roads and canals may not produce to their proprietors at the very moment of their completion, an income equal to the ordinary interest on capital, yet that they will do it at some future period, say, three, five, or ten years hence. If a farmer were to expend a hundred dollars to-day in the purchase of a wagon, which he did not expect to use for three, five, or ten years, he would be a very bad calculator, if he did not know that the interest on a hundred dollars or the profit he could have made on that sum for that number of years, would add to its cost an amount precisely equal to that interest or profit, and that the whole of this amount would be an uncompensated loss to him, besides what he might lose by the deterioration of the wagon. The same is true of all other investments made in anticipation of future periods. One million of dollars expended on a road, that should not be wanted for eleven or twelve years, would cost two millions of dollars at the expiration of that term, because money at compound interest of six per cent, per annum, doubles in about eleven years and eight months, and that sum would have been the amount in the hands of the capitalists had they employed it in any branch of productive industry.23 If repairs should also be required, the amount would make a further addition to the cost of the road, unless they were met by the receipt of a corresponding amount of tolls; and hence it is evident, that those who leave out of view in their estimates of the judiciousness of investments, the accumulating power of capital at compound interest, are very unsafe counsellors. It is true, that nobody would be so unwise as purposely to construct a road or canal, a long time before it was wanted at all, and hence so strong a case as the one above supposed, has probably never occurred. Still, the principle here laid down is true as regards every investment made in advance, to the extent of that portion of the capital that does not yield the ordinary income. A regular interest account current would show the true amount of the cost of the improvement, and if reference were had to this test of productiveness more frequently than it is, it would be found that many investments which have been usually considered productive, have been upon the whole losing transactions.

 

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24 From the period of the Independence of the United States up to about the year 1823, nearly all their imports from China and India were paid for by an exportation of silver dollars, brought into the country in addition to the supply required for the currency. Since the year mentioned, the chief part of the China and India cargoes, are paid for by credits or bills on London, exports of manufactures, and by coin procured in Europe.

25 Wealth of Nations, Book I. Chap. xi.

26 In corroboration of this fact, the following statement of the coinage of Gold by the mint of the United States, at, and about the period referred to, is adduced.

	1818,	.	.	$242,940,
	1819,	.	.	258,615,
	1820,	.	.	1,319,030,
	1821,	.	.	189,325,
	1822,	.	.	88,980,
	1823,	.	.	72,425,
	1824,	.	.	93,200.

This diminution in the coinage of gold after 1820 arose from the circumstance that nobody wished to import gold into the country to have it coined into eagles at ten dollars each, when the gold contained in an eagle was worth more than ten dollars.

27 The ducat of Holland is current all over the continent of Europe at its fair equivalent. Gold in France circulates at the market rate of premium, silver being the ordinary currency.

28 The reader will be pleased to keep in mind, that price in political economy is the value of a thing expressed in money only, and therefore differs from the term value, which expresses the worth of things as compared with other things than gold and silver. Thus we would say that five dollars is the price of a hat, where money is to be paid for it, but we would say that five pairs of shoes are the value of a hat, if the hat is to be paid for in that many shoes.

29 British goods have frequently been sent back from the United States to England, as affording the best market for them, and it is a very common thing for vessels to bring back from the West Indies part of their outward cargoes, owing to their being worth more at home than they could be sold for abroad.

30 All the propositions here laid down, have recently been fully established as practical truths in the United States, and especially at New York even to the reshipping of British goods to England.

31 During the panic of 1834, when the scarcity of money greatly lowered the prices of commodities, the amount of specie imported into the United States for the purchase of cotton at the low price of the period was very great, as will appear from the following official table.

Table of Imports and Exports of gold and silver coin and bullion from 1821 to 1838, each year ending on 30th of September.

	IMPORTED.	EXPORTED.
1821	$8,064,890	$10,478,059
1822	3,369,846	10,810,180
1823	5,097,896	6,372,987
1824	6,473,095	7,014,552
1825	6,150,766	8,797,055
1826	6,880,966	4,663,795
1827	8,151,130	8,014,880
1828	7,489,741	8,243,476
1829	7,403,602	4,924,020
1830	8,155,964	2,178,773
1831	7,304,945	9,014,931
1832	5,907,504	5,656,340
1833	7,070,368	2,611,701
1834	32 17,911,632	2,076,758
1835	13,131,447	6,477,775
1836	13,400,881	4,324,336
1837	10,506,414	5,976,249
1838	17,747,116	3,513,565

33 A part of this amount was the result of the passage of the gold bill of 28th of June of this year, and to the same bill is to be ascribed the large importations of 1835 and 1836.

34 For a table of Imports and Exports of the United States from 1789 to 1839, see Appendix F.

35 Specie was shipped from New York to England, at a loss, in October, 1839, in preference to bills at par, owing to the apprehended difficulty of getting them discounted under the pressure of the London money market. Other shipments were made, at the same time, of specie, under the impression that the Bank of England was about to stop cash payments, in which event, the specie would have commanded a premium in London. The cost of freight and insurance on specie from the United State3 to Europe, may be computed at one per cent.

36 The mint price of silver at that period, as well as at the present, was 5s. 2d. per ounce. The weight of the dollar was 17dwt. 8 grains, hut somewhat inferior in quality to the British standard, so that if sent to the mint, it would have produced about 4s. 5½d. As an exportable foreign coin, it was probably worth in the market an additional ½d., there being at that time a prohibition against the exportation of British coins.

37 The adoption of this proportion was probably the result of a sort of average, founded upon the comparison of the mint proportions of several different countries. What they were at that precise date, I cannot say, but, by some tables that I have seen, it appears that the mint proportions in 1810, at the places named, were as follows, and probably had been so for a long period.

Paris,	1 to 15.65-129.
Cadiz,	1 to 16.
Lisbon,	1 to 15.7-10.
Naples,	1 to 14.5-10.
Genoa,	1 to 14.53-100.
Leghorn,	1 to 14.53-100.
Venice,	1 to 14 88-100.
London,	1 to 15 13-62
Bengal,	1 to 14 861.
Madras,	1 to 13 872.
Bombay,	1 to 15.
China,	1 to 14 296.

Amsterdam, no regulation: market rate, about 1 to 14 7-10.

Hamburgh, no regulation: market rate, about 1 to 14 83-100.

38 The sign + at the end of the figures in this sentence, and wherever it occurs, denotes that there is a fraction still remaining.

39 Since the appearance of the first edition of this book, the author has been politely furnished, by Joseph Perry Esq., of the General Post Office at Washington, with a very detailed statement of the value of the sovereign in American currency under the different acts of congress, ascertained by algebraical calculations, from which it appears, that the par of the pound sterling, was

By the act of 2d April, 1792—$4.5657+ which was 2 per cent above the computed par of $4.4444.

By the act of 28th June, 1834, commonly called the gold bill—$4.87075+ which was 9.591875+ or within a small fraction of 9 per cent. above the same computed par, and

By the act of 18th January, 1837, now in force—$4.8665+ which is 9.496+ or very nearly 9½ per cent. above the same computed par.

The British mint price of standard gold is £3. 17s. 10½d. per oz. and consequently the weight of the sovereign, the coin of one pound sterling is 123.2744+ grains. The British standard of gold is, 22 carats fine, that is, 11 parts pure metal and 1 part alloy, and consequently the quantity of pure gold contained in a sovereign is 113.001 grains.

The standard of gold in the United States by the existing act of 18th January, 1837, is 21.60 carats fine, that is 9 parts pure metal and 1 part alloy, and the weight of the eagle, the coin of ten dollars, is 258 grains standard, or 232.2 grains pure gold.

Now as the sovereign of full weight and standard purity contains precisely as much pure gold as is contained in 4.866563+ parts of an eagle, it follows that the true par of the pound sterling is $4.866563+ that is $4.86 and a fraction of nearly of a cent.

But it appears by the Report of the Director of the Mint of the United States of March 19, 1839, that by the latest assays made by him of the British gold coins, their standard does not exceed 915 ½ thousandths, whereas by the British mint regulations, it ought to he 916 thousandths, which is equal to 22 carats. Taking this then as the true standard of the sovereign, it contains when of full weight only 112.8577 grains pure gold, and consequently the par of the pound sterling thus found, is but $4.860366, that is $4.86 and a very small fraction, equal to 9.35+ or 9 per cent above the old computed par.

But this is not all. The act of congress of June 28, 1834, entitled “An act regulating the value of certain foreign gold coins within the United States,” declares that the sovereign when of Standard purity, shall be a legal tender, at the rate of 94 cents per penny weight. By this act which has never been altered, a sovereign of full weight and of the legal standard is worth in our gold currency the same as by the gold bill of 1834, above referred to, that is $4.87 and a fraction, thus presenting the anomaly of foreign coins having a higher value attached to them than their intrinsic worth in the coins of the country.

It so happens, however, that many of the sovereigns that reach this country, have been somewhat worn, and on this account, no doubt, in connection with the deficiency of purity above referred to, they have been received and paid out by the banks at $4.85.

For the benefit of practical men, the following documents are submitted.

PRESENT VALUE OF THE POUND STERLING IN DOLLARS AND CENTS AT DIFFERENT RATES OF EXCHANGE ON THE COMPUTED PAR OF $4.4444.

RATE.			Above par.
Par.		. . . . . .	4.4444
	¼	. . . . . .	4.4555
	½	. . . . . .	4.4666
	¾	. . . . . .	4.4777
1 per cent.		. . . . . .	4.4888
	¼	. . . . . .	4.5000
	½	. . . . . .	4.5111
	¾	. . . . . .	4.5222
2 per cent.		. . . . . .	4.5333
	¼	. . . . . .	4.5444
	½	. . . . . .	4.5555
	¾	. . . . . .	4.5666
3 per cent.		. . . . . .	4.5777
	¼	. . . . . .	4.5888
	½	. . . . . .	4.6000
	¾	. . . . . .	4.6111
4 per cent.		. . . . . .	4.6222
	¼	. . . . . .	4.6333
	½	. . . . . .	4.6444
	¾	. . . . . .	4.6555
5 per cent.		. . . . . .	4.6666
	¼	. . . . . .	4.6777
	½	. . . . . .	4.6888
	¾	. . . . . .	4.7000
6 per cent.		. . . . . .	4.7111
	¼	. . . . . .	4.7222
	½	. . . . . .	4.7333
	¾	. . . . . .	4.7444
7 per cent.		. . . . . .	4.7555
	¼	. . . . . .	4.7666
	½	. . . . . .	4.7777
	¾	. . . . . .	4.7888
8 per cent.		. . . . . .	4.8000
	¼	. . . . . .	4.8111
	½	. . . . . .	4.8222
	¾	. . . . . .	4.8333
9 per cent.		. . . . . .	4.8444
	¼	. . . . . .	4.8555
	½	. . . . . .	4.8666
	¾	. . . . . .	4.8777
10 per cent.		. . . . . .	4.8888
	¼	. . . . . .	4.9000
	½	. . . . . .	4.9111
	¾	. . . . . .	4.9222
11 per cent.		. . . . . .	4.9333
	¼	. . . . . .	4.9444
	½	. . . . . .	4.9555
	¾	. . . . . .	4.9666
12 per cent.		. . . . . .	4.9777
	¼	. . . . . .	4.9888
	½	. . . . . .	5.0000
	¾	. . . . . .	5.0111

THE PAR OF EXCHANGE ON FOREIGN COUNTRIES.

Extract from the Report of the Secretary of the Treasury of 28th May, 1838, on Exchanges.

The quotations of exchange on France, are so many france and centimes, (or hundredth parts of a franc,) payable in France for a dollar paid here. According to the regulations of the French mint, the silver franc should contain 69.453 troy grains of pure silver, equivalent to 18.708-1000 cents in silver currency of the United States, (not quite 18¾ cents.) The quantity of pure silver in an American dollar, is equal to that in 5 francs 34.5341000 centimes. But as foreign coins are not a legal tender in France, and as a seignorage of about 1½ per cent is charged on silver coinage at the French mint, American dollars, when sold as bullion in France, are said to bring on an average not more than 5 francs 26.25-1000 centimes. This is, by some writers assumed as the par of exchange on France. Other writers assume 5 francs 34 centimes as about par.

The quotations of exchange on Holland, are so many cents a guilder; on Hamburgh, so many cents a mark banco; and on Bremen, so many cents a rix dollar.

The exact value of the guilder of Holland, is 39.97-100 cents of United States silver currency; but 40 cents are usually assumed as the par of exchange.

The mark banco of Hamburg is a money of account, equal to 35.144-1000 cents United States currency.

The rix dollar of Bremen is a money of account, equal to 80 cents and a very small fraction United States currency.

FROM TATE’S CAMBIST.

The par of exchange between London and
Paris,	is 25 francs, 22 centimes per £ stg. in gold.
“	is 25     “      57     “         “        in silver.
Amsterdam,	is 12 guilders, 09 centimes          “ in gold.
“	is 11      “      97     “         “       in silver.
Hamburgh,	is ,13 m’cs banco, 10½ schillings,        “
Bremen	is 609¼ Rix dollars for 100 £ stg. in gold.

40 Those who are desirous of being particularly informed on this subject, are referred to Smith’s Wealth of Nations, Book I, chap. xi, Part III, where they will find the matter examined with great care and ability.

41 If it be said that American dollars would not be as saleable in England as Mexican dollars, although of equal intrinsic value, on account of the greater notoriety of the former, I would reply, that this may be the case, and on that account I have no objections, if the reader chooses, to reduce the estimate of the undervaluation of silver, one quarter or one half per cent. which has been the premium in New York upon Mexican dollars, when paid for in American silver or gold, from January, until May of the present year, remarking at the same time, that during the same period, the weekly quotations of “The Philadelphia Price Current” of Mexican dollars, and American half dollars in Philadelphia depreciated paper currency, have been uniformly the same.

42 See also Appendix A and B.

43 It is computed that at this period (1840) upwards of a hundred millions of dollars of European capital, chiefly British, are invested in such securities. Many persons estimate the amount at near two hundred millions, but that is probably an over estimate.

44 This operation is thus performed: A borrower is willing to give 12 per cent, per annum for the use of money, and he agrees to give $112 at twelve months’ credit for a stock worth in the market only $100, and stipulates with the broker, that contemporaneously with the purchase he is to sell the stock at $100 cash. The broker finds a lender who has money but no stock, but who is willing to give $100 cash for stock, if he can contemporaneously sell it at $112 for an approved note at twelve months credit. The broker manages the negotiation, and thus two persons are made to buy and sell what has no real existence. Such transactions, however, are clearly illegal, but cases rarely occur in which an appeal is made to the law.

45 Since the first edition of this work was published, a great depression has taken place in the English and American markets in the price of state stocks, putting an end for the present to the possibility of obtaining loans at five per cent.

46 The laws of New York establish the rate of interest at seven per cent. In all the other Atlantic states it is fixed at six per cent.

47 The following article is taken from a late English newspaper as being quite in point.

Effects of Railroads upon Tavern Property.—Previously to the opening of the Great Western and the Southampton railroads there were eighty-two long stages passed through the town of Egham daily, nearly all of which changed horses at the several inns in the town. Now, the eighty-two are reduced to four. Some of the inns have been closed, and several others are about to be shut up. The following is a proof of the great reduction which has taken place in the value of tavern and public house property:—Three years ago the Catherine Wheel Inn Egham, which makes up thirty beds, and to which are attached an acre and a half of garden ground, a bowling green, large barns, sheds, coach house, and stabling for upwards of thirty horses, let for 250l. a year. It then carried on a profitable trade, and the proprietor realised a handsome living. The same property was let, a few days since, at 50l. a year.

48 The present value of a million of dollars payable eleven years and eight months hence, is five hundred thousand dollars, which of course would be the present loss, or sinking of capital in the case supposed. If ten per cent, were taken as the annual profit that could have been made on the employment of the capital, (a profit which capital will earn in some parts of the “Western country,) the result would of course be much more unfavorable to the community.

• 1* From the period of the Independence of the United States up to about the year 1823, nearly all their imports from China and India were paid for by an exportation of silver dollars, brought into the country in addition to the supply required for the currency. Since the year mentioned, the chief part of the China and India cargoes, are paid for by credits or bills on London, exports of manufactures, and by coin procured in Europe.
• 2* Wealth of Nations, Book I. Chap. xi.
• 3† In corroboration of this fact, the following statement of the coinage of Gold by the mint of the United States, at, and about the period referred to, is adduced.
• 4* The ducat of Holland is current all over the continent of Europe at its fair equivalent. Gold in France circulates at the market rate of premium, silver being the ordinary currency.
• 5* The reader will be pleased to keep in mind, that price in political economy is the value of a thing expressed in money only, and therefore differs from the term value, which expresses the worth of things as compared with other things than gold and silver. Thus we would say that five dollars is the price of a hat, where money is to be paid for it, but we would say that five pairs of shoes are the value of a hat, if the hat is to be paid for in that many shoes.
• 6* British goods have frequently been sent back from the United States to England, as affording the best market for them, and it is a very common thing for vessels to bring back from the West Indies part of their outward cargoes, owing to their being worth more at home than they could be sold for abroad.
• 7† All the propositions here laid down, have recently been fully established as practical truths in the United States, and especially at New York even to the reshipping of British goods to England.
• 8* During the panic of 1834, when the scarcity of money greatly lowered the prices of commodities, the amount of specie imported into the United States for the purchase of cotton at the low price of the period was very great, as will appear from the following official table.
• 9* For a table of Imports and Exports of the United States from 1789 to 1839, see Appendix F.
• 10* Specie was shipped from New York to England, at a loss, in October, 1839, in preference to bills at par, owing to the apprehended difficulty of getting them discounted under the pressure of the London money market. Other shipments were made, at the same time, of specie, under the impression that the Bank of England was about to stop cash payments, in which event, the specie would have commanded a premium in London. The cost of freight and insurance on specie from the United State3 to Europe, may be computed at one per cent.
• 11* The mint price of silver at that period, as well as at the present, was 5s. 2d. per ounce. The weight of the dollar was 17dwt. 8 grains, hut somewhat inferior in quality to the British standard, so that if sent to the mint, it would have produced about 4s. 5½d. As an exportable foreign coin, it was probably worth in the market an additional ½d., there being at that time a prohibition against the exportation of British coins.
• 12† The adoption of this proportion was probably the result of a sort of average, founded upon the comparison of the mint proportions of several different countries. What they were at that precise date, I cannot say, but, by some tables that I have seen, it appears that the mint proportions in 1810, at the places named, were as follows, and probably had been so for a long period.
• 13* The sign + at the end of the figures in this sentence, and wherever it occurs, denotes that there is a fraction still remaining.
• 14* Since the appearance of the first edition of this book, the author has been politely furnished, by Joseph Perry Esq., of the General Post Office at Washington, with a very detailed statement of the value of the sovereign in American currency under the different acts of congress, ascertained by algebraical calculations, from which it appears, that the par of the pound sterling, was
• 15* Those who are desirous of being particularly informed on this subject, are referred to Smith’s Wealth of Nations, Book I, chap. xi, Part III, where they will find the matter examined with great care and ability.
• 16* If it be said that American dollars would not be as saleable in England as Mexican dollars, although of equal intrinsic value, on account of the greater notoriety of the former, I would reply, that this may be the case, and on that account I have no objections, if the reader chooses, to reduce the estimate of the undervaluation of silver, one quarter or one half per cent. which has been the premium in New York upon Mexican dollars, when paid for in American silver or gold, from January, until May of the present year, remarking at the same time, that during the same period, the weekly quotations of “The Philadelphia Price Current” of Mexican dollars, and American half dollars in Philadelphia depreciated paper currency, have been uniformly the same.
• 17* See also Appendix A and B.
• 18* It is computed that at this period (1840) upwards of a hundred millions of dollars of European capital, chiefly British, are invested in such securities. Many persons estimate the amount at near two hundred millions, but that is probably an over estimate.
• 19* This operation is thus performed: A borrower is willing to give 12 per cent, per annum for the use of money, and he agrees to give $112 at twelve months’ credit for a stock worth in the market only $100, and stipulates with the broker, that contemporaneously with the purchase he is to sell the stock at $100 cash. The broker finds a lender who has money but no stock, but who is willing to give $100 cash for stock, if he can contemporaneously sell it at $112 for an approved note at twelve months credit. The broker manages the negotiation, and thus two persons are made to buy and sell what has no real existence. Such transactions, however, are clearly illegal, but cases rarely occur in which an appeal is made to the law.
• 20* Since the first edition of this work was published, a great depression has taken place in the English and American markets in the price of state stocks, putting an end for the present to the possibility of obtaining loans at five per cent.
• 21* The laws of New York establish the rate of interest at seven per cent. In all the other Atlantic states it is fixed at six per cent.
• 22* The following article is taken from a late English newspaper as being quite in point.
• 23* The present value of a million of dollars payable eleven years and eight months hence, is five hundred thousand dollars, which of course would be the present loss, or sinking of capital in the case supposed. If ten per cent, were taken as the annual profit that could have been made on the employment of the capital, (a profit which capital will earn in some parts of the “Western country,) the result would of course be much more unfavorable to the community.
• 24What proportion the supply of the precious metals which each country secures to itself as a circulating medium bears to its wealth, its population, its trade, or, to the existing state of confidence or credit, it would not be easy to ascertain: nor is it indeed necessary that it should be ascertained, as far as any practical good can result from the knowledge. Those who carry on the operations of trade will take care that a country has neither too much nor too little of them, and it may be assumed as a safe position, that when the precious metals neither flow out from a country in which there are no gold or silver mines, nor flow into it faster than is incident to her additional share of the new annual production of the mines, she has her exact proportion. These proportions, when once attained as nearly as the nature of circumstances will permit, establish what may be called the general level of currencies, and it is to this level, as to a species of standard, that reference is made, when we say that money like water will find its level. It is true, that owing to the constant production of the mines, which may at times occasion unequal distributions, or, distributions other than through the accustomed channels, as was the case after the revolutions in Spanish America took place, which caused to be sent first to the United States or England, the metals which formerly all went to Spain, as well as to a great variety of other circumstances which disturb the currency of particular countries, this level may never be a perfect one. It is sufficiently so, however, for all purposes of reasoning upon it, and perhaps as much so as fully warrants the figure by which a fluid-like property is ascribed to the precious metals. The surface of the ocean is never free from undulation, and the daily operation of the tides is constantly interfering with its level, as well as with that of rivers. Moral causes, operating like the physical causes which influence the movement of the waters, operate upon gold and silver, in driving them from one place to another, but it is easily to be seen, that were the extent of wealth, population, commercial transactions, and confidence, in all countries to remain the same for a long period together, and were the new productions of the mines to be distributed in due proportions, and the old stock in each country to be diminished by consumption in an equal ratio, gold and silver would assume such a uniformity of exchangeable value, as to arrive at a perfect state of quiescence. Indeed, as it is, gold and silver are of all commodities the least likely to be exported from any country, except from those in which they are produced, and where of consequence they form a portion of the produce of the land and labor of the people, as iron and lead do in some other countries; or, from those which, in addition to their supply for the purpose of currency, have possessed themselves of an amount specifically intended for exportation to countries having products not procurable by any other means than by purchase with gold and silver.* We may therefore conclude, that a level does exist, created as will be seen hereafter, by the imports and exports of commodities other than the precious metals themselves, towards which the currencies of all countries have a perpetual tendency, and from which, if they do not precisely conform to it, they do not greatly depart.
• 25We learn from Adam Smith,* that prior to the discovery of the American mines, which first began to show its effects somewhere about the year 1570, in the diminished value of both the precious metals by the new and annually augmenting supplies which were derived from that fruitful source, the value of pure gold to pure silver was established in the different mints of Europe, at proportions varying from one to ten, to one to twelve; that is, one ounce of pure gold, was declared to be the equivalent of ten to twelve ounces of pure silver; and in their respective coinages these proportions were consequently observed. At about the middle of the 17th century, that is, about the year 1650, the ratio between gold and silver came to be regulated in the proportion of one to fourteen, and one to fifteen ounces of silver, no doubt occasioned by the fact, that although both metals had become more abundant in proportion to the demand, and had both been depreciated below their former value, yet silver had depreciated more than gold, to an extent that had created new proportions in the general market, which it was the design of the new laws to follow up.
• 26From the period last mentioned, there does not appear to have been any material change in the relative value of gold and silver in the general market of the trading world prior to the beginning of the present century, when a further depreciation of silver in reference to gold began to show itself, so that by the year 1820, an ounce of gold came to be worth near sixteen ounces of silver, of which the consequence was, that all the gold coins of the United States, where the mint proportion had been fixed at one to fifteen, were exported from the country, to be exchanged for their proper equivalent.†
• 27The author believes that he was one of the first, if not the first, writer in this country who called the attention of the public to this new change, and apprehensive at the time, that the legislative folly of attempting to establish by law what nature herself could not establish, would be repeated by a new enactment, he urged in December, 1821, upon the late Mr. Lowndes, a representative in congress from South Carolina, and chairman of the committee of finance, the expediency of abolishing the coinage of eagles and their fractional parts, and of substituting in their place new pieces, to weigh respectively an ounce, a half ounce, and a quarter of an ounce of standard gold, under the full conviction that they would soon be introduced into circulation at their proper equivalent, without involving us in the absurdity of having two legal tenders.* The arguments presented to Mr. Lowndes in conversation were at his particular request reduced to writing, together with answers to two points raised by him, and were published in the National Gazette of 26th January, 1822. A copy of this paper will be found in the Appendix, marked A.
• 28It must be manifest to every observant mind, that even under the most perfect level which the currencies of all commercial nations can attain, that is, under such a state of things as may be imagined where no motive of profit could lead to the importation or exportation of the precious metals, except as relates to the annual production of the mines, the prices of other commodities will not be in all countries the same. Were this the case there could be no commerce, for the only object of commerce is to transport commodities from countries where they can be purchased for a comparatively small quantity of gold and silver; that is, at a comparatively low price; to other countries where they can be sold for a greater quantity of gold and silver; that is, at a higher price.* Any one can perceive that iron would not be imported into the United States from England unless it could be sold here at a higher price than it cost at the place of production, and that cotton would not be exported from the United States to Europe unless it could be sold there at a higher price than it could be purchased for here. The prices of different articles, it is self-evident, in every country, are regulated by causes peculiar to themselves, such as the soil, climate, wages of labor, degree of skill required, extent of population, capital, and taxation; and this it is which sets in motion the whole machinery of commerce. Even in the case of barter with savage nations, although gold and silver be absent, yet the trader has reference in his calculations to the metallic standard, in order to enable him to determine how much he can afford to give of what he has to dispose of, in exchange for the commodities which he is to receive in payment.
• 29We will suppose ten millions of dollars to be the circulating medium of the supposed debtor country, and that that is the amount which is requisite to circulate her commodities and to maintain her currency at an equivalency with the currencies of other countries. No sooner does this quantity become diminished by the exportation of any part of it, than a scarcity of money begins to be felt. A scarcity of money invariably occasions a fall in the prices of commodities, as every body knows, and that fall operates as an incentive to exportation, inasmuch as domestic products, which were before too high to export, will now afford a profit. A fall in the price of cotton of one cent a pound has sometimes occasioned the exportation of immense quantities in a short period; and it is very clear that there is a price at which almost any article might be exported to advantage, and that a gradual diminution of the currency, if continued long enough, will eventually establish that price. It is idle to say that possibly the debtor country may not have on hand a sufficiency of products to discharge the debt, and that therefore she must be drained of her precious metals to the last dollar. This can never be. If her wealth or her powers of production had not been commensurate to her demand for foreign commodities, she could not have had sufficient credit to run deeply into debt. At all events, she would have on hand a large portion of the foreign commodities in the purchase of which the debt was incurred, and a scarcity of money might even bring down prices so low as to render the exportation of foreign commodities a profitable trade. It might even be an object to send back to the place of production the very commodities, the importation of which created the unfavorable balance.* It is quite probale that a very small reduction of the amount of coin would produce such a fall in the prices of commodities as would lead to their exportation to an extent adequate to keep down the price of bills so as to prevent any further exportation of the precious metals; but if this should not be the case, and if the scarcity of money should continue to increase, those who had remittances to make would either become bankrupt and make no remittances at all, or become so embarrassed as to default in their punctuality, either of which events would diminish the demand for funds abroad, and stop pro tanto the exportation of gold and silver.† And here it may be remarked by the way, that a real scarcity of money is always accompanied by an artificial scarcity which aggravates the effects of the former. If, for instance, a million of dollars in coin be exported, so as to produce an outcry about scarcity of money, timid people and speculators will withhold another million from circulation; the former because they are afraid to lend it, and the latter because they expect to profit by forcing down the prices of property and commodities to a still lower point, the effect of which would be to diminish the demand for the exportation of coin by reducing the prices of commodities.
• 30We will suppose ten millions of dollars to be the circulating medium of the supposed debtor country, and that that is the amount which is requisite to circulate her commodities and to maintain her currency at an equivalency with the currencies of other countries. No sooner does this quantity become diminished by the exportation of any part of it, than a scarcity of money begins to be felt. A scarcity of money invariably occasions a fall in the prices of commodities, as every body knows, and that fall operates as an incentive to exportation, inasmuch as domestic products, which were before too high to export, will now afford a profit. A fall in the price of cotton of one cent a pound has sometimes occasioned the exportation of immense quantities in a short period; and it is very clear that there is a price at which almost any article might be exported to advantage, and that a gradual diminution of the currency, if continued long enough, will eventually establish that price. It is idle to say that possibly the debtor country may not have on hand a sufficiency of products to discharge the debt, and that therefore she must be drained of her precious metals to the last dollar. This can never be. If her wealth or her powers of production had not been commensurate to her demand for foreign commodities, she could not have had sufficient credit to run deeply into debt. At all events, she would have on hand a large portion of the foreign commodities in the purchase of which the debt was incurred, and a scarcity of money might even bring down prices so low as to render the exportation of foreign commodities a profitable trade. It might even be an object to send back to the place of production the very commodities, the importation of which created the unfavorable balance.* It is quite probale that a very small reduction of the amount of coin would produce such a fall in the prices of commodities as would lead to their exportation to an extent adequate to keep down the price of bills so as to prevent any further exportation of the precious metals; but if this should not be the case, and if the scarcity of money should continue to increase, those who had remittances to make would either become bankrupt and make no remittances at all, or become so embarrassed as to default in their punctuality, either of which events would diminish the demand for funds abroad, and stop pro tanto the exportation of gold and silver.† And here it may be remarked by the way, that a real scarcity of money is always accompanied by an artificial scarcity which aggravates the effects of the former. If, for instance, a million of dollars in coin be exported, so as to produce an outcry about scarcity of money, timid people and speculators will withhold another million from circulation; the former because they are afraid to lend it, and the latter because they expect to profit by forcing down the prices of property and commodities to a still lower point, the effect of which would be to diminish the demand for the exportation of coin by reducing the prices of commodities.
• 31But independent of the tendency of the causes above enumerated, to restrain the exportation of specie, another operation simultaneously takes place, which adds to their efficiency. This is, the cessation of fresh imports, owing to the fall in prices of foreign commodities, occasioned by the existing scarcity of money. This cessation, even though it be but for a short period, affords time for the exportation of the products of the country which had not previously been brought into market; and although the tendency of an unfavorable balance of trade is unquestionably to drive the precious metals from a debtor country; yet in point of fact it does not effect it, for the reasons above stated, beyond a very limited extent. But were this, however, not the case, an outward stream would soon be met by an inward one. The low prices of domestic products would soon invite the attention of foreigners, who, to obtain them, would bring into the country, not foreign commodities, which from their low price could only be sold at a loss, but the precious metals.* Whilst gold and silver would be flowing out of the country in some directions it would be flowing into it from others, and sooner or later the equilibrium would be restored, and the double current arrested.
• 32† A part of this amount was the result of the passage of the gold bill of 28th of June of this year, and to the same bill is to be ascribed the large importations of 1835 and 1836.
• 33† 17,911,632
• 34If an account current were to be made out of the past state of debits and credits between the United States and Great Britain, it would no doubt be found, that from the date of planting the first British colony in this hemisphere, we have owed a balance of trade that has never been discharged, and which at times may have amounted to a hundred millions of dollars or more; and yet, owing to the credit that has been extended to us, by which the pay-day has been deferred, the exchange has not always been against us, but has, on the contrary, been so controlled by the balance of payments as frequently to have been in our favor.*
• 35But the merchants who make remittances of bills of exchange to foreign countries, to pay for merchandise purchased there, do not, it is manifest, procure those bills of exchange for nothing. They must purchase them from those who have funds abroad to draw for, and in doing this they will endeavor to procure them at as cheap a rate as they can. It is, on the other hand, the interest of those who have bills for sale, to secure the highest price for them they can, and it is this competition between buyer and seller that determines the market price, which, like the market price of commodities, must always depend upon the proportion which the supply bears to the demand. If bills of exchange are scarce, their price will be high. If they are plenty, their price will be low. There is, however, one peculiarity belonging to a bill of exchange, which is not common to any commodity, and which ought always to be kept in mind in discussing this subject. It is, that if it cannot be sold at a price that will suit its owner, he has it in his power to avoid the necessity of a sale at great loss by importing his funds in coin; and if it cannot be purchased at a price that will suit a purchaser, the latter can avoid the necessity of a disadvantageous purchase by exporting coin in payment of his debt. The existence of this peculiarity places a limit upon the fluctuations in the rate of exchange, which cannot for any long period together fall and remain below par, or rise and remain above par, to a greater extent than to an amount equivalent to the expense of transporting the precious metals from the debtor country to the creditor country. For, if a merchant owes a debt abroad, and cannot procure a bill of exchange at an advance above par equal to the freight, insurance, commission, and brokerage, and to the value which he attaches to that certainty of punctuality in the fulfilment of his engagement abroad, which a set of bills of undoubted credit, sent by two or three different vessels affords, but which a shipment of coin cannot always furnish, how solvent and prompt soever might be the underwriters in settling in case of loss, he will unquestionably transmit coin as being the most economical mode of making a remittance.* And so, on the other hand, the drawer of a bill, if he cannot sell at a price which will yield him as much money as the importation of coin would do, taking into the account, besides the charges of importation, the interest for the time he must wait before his money can arrive, and if money be scarce, the inconvenience or loss he would sustain by the delay, he will undoubtedly order his funds to be shipped to him in coin, as the most advantageous mode of getting them into his possession.
• 36By an act of congress, passed on the 31st of July, 1789, it was declared, that the British pound sterling (which, although not at that time a coin, was the equivalent of the quantity of gold contained in a guinea, less the one and twentieth part, the guinea being twenty-one shillings) should be taken as of the value of four Spanish silver dollars and fourty-four hundredth parts of a dollar in estimating ad valorem duties upon British merchandise at our custom houses. This estimate was founded upon the circumstance, that at that period, the Spanish dollar, the only coin of that denomination in circulation in the United States, was the well known equivalent in the British market, of four shillings and sixpence sterling, and very nearly such equivalent at the British mint.*
• 37By another act of congress of 2d April, 1792, establishing the mint, and authorising a coinage for the United States, it was provided, that there should be silver dollars coined, “each to be of the value of a Spanish milled dollar,” to contain 17dwt. 8 grains of standard silver; and that the proportion which the gold and silver coins should bear to each other, should be that of 1 to 15, that is, that one ounce of pure gold should be the equivalent of fifteen ounces of pure silver.†
• 38But there is no natural proportion between gold and silver, as has been observed on a former occasion, any more than there is between lead and iron, and it is therefore very manifest that no law can permanently fix a par of exchange between them. When any change in their relative value takes place in the market of the trading world, whether it be by an increased or diminished supply, of one or the other metal, or, by an increased or diminished demand for one or the other, the par becomes changed. This event did in reality take place, and in process of time, an ounce of gold, as has been already stated, became gradually worth more than fifteen ounces of silver, and finally reached the proportion of one to sixteen. With this gradual change in the relative value of gold and silver, the silver dollar ceased to be the equivalent of four shillings and sixpence sterling, and consequently the pound sterling became the equivalent of more than four dollars and fourty-four hundredth parts of a dollar, for the simple reason, that any person who possessed the quantity of gold represented by the pound sterling before the coinage of the sovereign, and now actually contained in that coin, could obtain for it more than four dollars and forty-four hundredth parts of a dollar in silver. But the mercantile usage did not conform to this change. The merchants adhered to the old par, as if a pound sterling was the equivalent of four dollars and forty-four cents by some unchangeable law of nature, and for many years continued to ascribe the nominal premium on sterling bills of exchange, which was the mere exponent of this change in the relative value of gold and silver, to the influence of the balance of trade. The delusion was partly removed by the act of congress of 14th July, 1832, which raised the value of the pound sterling for the calculation of ad valorem duties at the custom house to $4.80, and by two subsequent acts, one of 28th June, 1834, by which the British sovereign was made the equivalent in American gold coins of $4. 87.075+, and one of 18th January, 1837, by which it was made the equivalent of $4.86.65+, which is now the true par on London, corresponding within a very small fraction to 9½ per cent. premium on the old computed par.* I say “partly removed,” because, strange as it may appear, there are thousands of persons at this very day, who have no other belief on this subject, than that the nominal premium quoted on exchange, is a real advance which takes so much money out of their pockets. To remove, however, the vestiges of this deep rooted error, the Chamber of Commerce of New York, early in the year 1839, recommended to the merchants of that city, to quote the exchange on England in dollars and cents for the pound sterling, instead of designating the per centage above or below par; a recommendation which was soon after followed up by the Chambers of Commerce of Philadelphia and other places, and will perhaps in time be generally adopted.*
• 39But there is no natural proportion between gold and silver, as has been observed on a former occasion, any more than there is between lead and iron, and it is therefore very manifest that no law can permanently fix a par of exchange between them. When any change in their relative value takes place in the market of the trading world, whether it be by an increased or diminished supply, of one or the other metal, or, by an increased or diminished demand for one or the other, the par becomes changed. This event did in reality take place, and in process of time, an ounce of gold, as has been already stated, became gradually worth more than fifteen ounces of silver, and finally reached the proportion of one to sixteen. With this gradual change in the relative value of gold and silver, the silver dollar ceased to be the equivalent of four shillings and sixpence sterling, and consequently the pound sterling became the equivalent of more than four dollars and fourty-four hundredth parts of a dollar, for the simple reason, that any person who possessed the quantity of gold represented by the pound sterling before the coinage of the sovereign, and now actually contained in that coin, could obtain for it more than four dollars and forty-four hundredth parts of a dollar in silver. But the mercantile usage did not conform to this change. The merchants adhered to the old par, as if a pound sterling was the equivalent of four dollars and forty-four cents by some unchangeable law of nature, and for many years continued to ascribe the nominal premium on sterling bills of exchange, which was the mere exponent of this change in the relative value of gold and silver, to the influence of the balance of trade. The delusion was partly removed by the act of congress of 14th July, 1832, which raised the value of the pound sterling for the calculation of ad valorem duties at the custom house to $4.80, and by two subsequent acts, one of 28th June, 1834, by which the British sovereign was made the equivalent in American gold coins of $4. 87.075+, and one of 18th January, 1837, by which it was made the equivalent of $4.86.65+, which is now the true par on London, corresponding within a very small fraction to 9½ per cent. premium on the old computed par.* I say “partly removed,” because, strange as it may appear, there are thousands of persons at this very day, who have no other belief on this subject, than that the nominal premium quoted on exchange, is a real advance which takes so much money out of their pockets. To remove, however, the vestiges of this deep rooted error, the Chamber of Commerce of New York, early in the year 1839, recommended to the merchants of that city, to quote the exchange on England in dollars and cents for the pound sterling, instead of designating the per centage above or below par; a recommendation which was soon after followed up by the Chambers of Commerce of Philadelphia and other places, and will perhaps in time be generally adopted.*
• 40The first is that general and gradual diminution in the value of the precious metals, which has resulted, and which may possibly hereafter result, from the discovery of new mines, or from the discovery of economical modes of extracting and refining the ore, by which the aggregate mass of gold and silver in the commercial world has been, or may be, augmented faster than the demand. The most remarkable depreciation resulting from this cause that has ever taken place, was that which commenced with the discovery of the mines of America about the middle of the sixteenth century, and which has been generally considered to have regularly continued, with some occasional interruptions, down to the present period.*
• 41This difference of near seven pence sterling, equal to about fourteen cents, upon ten dollars, shows that a gold eagle is now worth one and four tenths of one per cent less than ten silver dollars in England, and if it has not shown itself in the United States, it is simply on account of their legal forced equivalency, by which silver is undervalued as compared with gold, precisely as gold was undervalued as compared with silver, prior to the 28th of June, 1834.* It matters not that at this day the difference is of a comparatively trifling amount. If it be but the tenth part of one per cent. the charge is established. But how do we know that in the course of time the proportions between gold and silver may not fall back to one to fifteen as they stood forty years ago, in which case not a debt would be discharged in silver, and consequently, creditors on all contracts, such as bonds, ground-rent deeds, annuities, state, city, and county loans as well as the loans of rail road, canal, and other corporations, contracted before the 28th of June, 1834, would be defrauded by law of six per cent of the amount of their debts? This is a grave question, and one in relation to which more will be said in the chapter “On the impolicy of adhering to our present mint proportions between gold and silver,” in Book the Fourth.*
• 42This difference of near seven pence sterling, equal to about fourteen cents, upon ten dollars, shows that a gold eagle is now worth one and four tenths of one per cent less than ten silver dollars in England, and if it has not shown itself in the United States, it is simply on account of their legal forced equivalency, by which silver is undervalued as compared with gold, precisely as gold was undervalued as compared with silver, prior to the 28th of June, 1834.* It matters not that at this day the difference is of a comparatively trifling amount. If it be but the tenth part of one per cent. the charge is established. But how do we know that in the course of time the proportions between gold and silver may not fall back to one to fifteen as they stood forty years ago, in which case not a debt would be discharged in silver, and consequently, creditors on all contracts, such as bonds, ground-rent deeds, annuities, state, city, and county loans as well as the loans of rail road, canal, and other corporations, contracted before the 28th of June, 1834, would be defrauded by law of six per cent of the amount of their debts? This is a grave question, and one in relation to which more will be said in the chapter “On the impolicy of adhering to our present mint proportions between gold and silver,” in Book the Fourth.*
• 43And now, whilst I am on this subject, it may not be amiss to trace to their source the further operations of credit, by which the country merchants have been enabled to aid the settlers and planters in augmenting the national wealth. Few or none of these traders, have a capital of their own adequate to carry on business to the extent they do. They are themselves obliged to obtain most of their supplies upon credit from the wholesale merchants of the large interior towns and the Atlantic cities, whilst these in turn avail themselves more or less of credit with the European manufacturers. This, it is true, is not the case at the present day, as much as it formerly was, owing to the gradual accumulation of domestic capital; but, nevertheless, it not unfrequently happens that a settler in the remotest region of Missouri ploughs his land and produees his crop by means of credit obtained, it may be, through three or four successive links, from a manufacturer of hardware in Birmingham, or of one of dry goods in Manchester. And yet, with such facts before our eyes, there are still to be found amongst us, a few remains of that weak-minded prejudice against foreign capital, which was at no very distant day so universal, that it was deemed by many of the states unwise to borrow foreign capital at five per cent., that could be productively employed at a profit of ten per cent., upon the ground that it would drain the country of specie equal to the interest. Happily, however, new views have broken in upon the minds of most of our legislators, and although there are still laws prohibiting the free introduction of foreign capital into some of our local investments, yet foreign loans upon the security of public stocks and of those of improvement companies, and banks have of late been carried to quite a sufficient extent.*
• 44The unfortunate existence, however, in many countries, and amongst them our own, of laws restricting the charge which the owner of capital in the form of money shall derive from its hire, disturbs in some degree the natural operation of things, and prevents that uniform relation which profit and interest would otherwise invariably bear to each other. By imposing a penalty upon loans at a higher rate of interest than six per cent, per annum, for example, the most usual rate established by our state laws, capital is either driven out to more favored quarters, or prevented from flowing in, in either of which events the mass of the circulating capital is diminished, and consequently the hire for its use augmented. In addition to this, too, a burdensome tax is imposed upon the industry of the country, by compelling those who have not the best security to offer, which embraces a large portion of the industrious classes, to resort to lenders, who in addition to the fair value of the money, and a reasonable allowance for the risk of loaning on personal security, which would be the uniform market price in the absence of usury laws, must be paid for the odium and risk they incur by violating the laws of the land. There is no sound reason why the charge for the use of money should be fixed by law, that would not equally apply to fixing by law the rent of lands and houses, or the freight of ships, the hire of horses and carriages, or the profit on merchandise sold. The lending of money for a year is nothing but selling capital upon a credit for a year, and so convinced of the absurdity of discriminating between a sale of money, and a sale of goods is a large proportion of the capitalists of every country, that evasions of the usury laws are every where practised by expedients which it is not easy to prevent. Some of these expedients will be treated of in a future part of this work, but a very common one is that practised almost daily on the stock exchanges of New York and Philadelphia, whereby under a. fictitious purchase of stock for cash, and a fictitious sale on credit of the same ideal stock, through the agency of a broker, money is loaned at a rate as far above the legal rate as covers the risk of trusting to personal security, as well as the charge for the odium and hazard incurred by an illegal transaction.*
• 45These remarks on the value of money, as a component part of the circulating capital of a country, it will be observed, have reference to that general and enduring state of things, which covers a period of years. Thus, I would say, that capital is more plenty in the United States in the year 1840 than it was in the year 1798. In the latter year the Federal government could not borrow money at less than eight per cent. It could now borrow at five per cent., and has even, at one period since the year 1815, borrowed at four and a half per cent. Most of the Atlantic states, and some of the western states, have of late years borrowed money at five per cent., and it may be remarked, that although the market price of public stocks may be temporarily affected by various causes, yet no permanent influence can be exerted upon them, unless a diminution of the aggregate mass of the circulating capital of the country, that is, of the national wealth, should take place.* The fluctuations in the money market of merchants and stock-jobbers, and even at times in the market of mortgages, by which sometimes a high rate of interest is paid for capital, are generally of a temporary nature, and to be accounted for upon the principle that wherever there is credit, and especially if there be banks, there will at times be over-trading and over-speculation. The rate of interest upon capital must in the long run be governed by the rate of profit to be made by its employment; whilst for short periods, it will depend upon the ratio of the supply to the demand, and upon the security offered in the money market.
• 46The interest of money or capital is that sum which is paid to the owner of money or capital for its use, and is, as we have shown in another place, that rate which is established by the competition of the market. When persons borrow capital for employment in any productive branch of industry, whether connected with agriculture, commerce, or manufactures, it is always with the expectation that they can make out of it a sum beyond that which they pay for its use, and the average rate of interest may be considered to be the rate which all judicious applications of capital ought to produce. In the Atlantic states of the Union, where capital is more abundant than in the western states, the annual net profits of capital, after defraying all the expenses of wages, rent, superintendence and other charges incident to the enterprise, may be estimated at about six per cent.,* and six per cent, may therefore be considered, in the region of country mentioned, as the profit which ought to be produced from capital, and consequently in those cases, where a road or canal does not produce a benefit to the stockholders, equal to six per cent, upon the outlay, there will have been a sinking of capital equal to the principal sum that ought to have yielded the deficiency; and for this reason, that six per cent, would have been the profit derived from the employment of the capital in other pursuits.
• 47But it may be said that roads and canals increase the value of the lands through and near which they pass. This may be sometimes true, but it must not be forgotten that they also diminish the value of other lands through which they do not pass, by drawing off a part of their population, and of the travelling which used to frequent old routes.* But after all, there is no real value conferred upon the country at large by a road or canal in an economical point of view, but what is to be measured by the actual reduction in the expense of transporting its produce to market and obtaining its distant supplies, and in the facilities afforded to the conveyance of passengers. Where the aggregate of these benefits is to the parties concerned of such value as to induce them to pay to the capitalists who have constructed the improvement for them, the same interest for the use of their capital, that they could have obtained by its employment in other pursuits, then, and then only, has the expenditure been beneficial to the country. It is no doubt true, that turnpike roads or rail roads are very convenient and advantageous to those who reside on their route, and that they may all be willing at times to pay for the privilege of passing over them. But even the value of this convenience and advantage has its limits. The turnpike road from Philadelphia to Frankford, a distance of six miles, is extremely convenient in the winter season to all those who reside on its border and in its vicinity; yet as they prefer other roads in summer, and are not willing to pay for its use in winter an aggregate sum equal to the interest on the capital expended in its construction, it is manifest that the existence of the road is not considered to be worth to them that amount. Who could doubt that the investment of a thousand dollars in an omnibus to run from the Delaware to Schuylkill would be a loss to the community as well as to the owner, if the public for whose benefit it was established, would prefer to walk rather than to pay for its use more than thirty dollars a year over and above the expenses and repairs? I say “loss to the community,” because, had it not been for this misapplication of capital, sixty dollars might have been obtained for it on loan by the proprietor, and consequently the aggregate wealth of the community would have been augmented to the additional extent of thirty dollars.
• 48There is still, however, another popular error very prevalent on this subject, which ought not to be passed over without notice. It is, that although roads and canals may not produce to their proprietors at the very moment of their completion, an income equal to the ordinary interest on capital, yet that they will do it at some future period, say, three, five, or ten years hence. If a farmer were to expend a hundred dollars to-day in the purchase of a wagon, which he did not expect to use for three, five, or ten years, he would be a very bad calculator, if he did not know that the interest on a hundred dollars or the profit he could have made on that sum for that number of years, would add to its cost an amount precisely equal to that interest or profit, and that the whole of this amount would be an uncompensated loss to him, besides what he might lose by the deterioration of the wagon. The same is true of all other investments made in anticipation of future periods. One million of dollars expended on a road, that should not be wanted for eleven or twelve years, would cost two millions of dollars at the expiration of that term, because money at compound interest of six per cent, per annum, doubles in about eleven years and eight months, and that sum would have been the amount in the hands of the capitalists had they employed it in any branch of productive industry.* If repairs should also be required, the amount would make a further addition to the cost of the road, unless they were met by the receipt of a corresponding amount of tolls; and hence it is evident, that those who leave out of view in their estimates of the judiciousness of investments, the accumulating power of capital at compound interest, are very unsafe counsellors. It is true, that nobody would be so unwise as purposely to construct a road or canal, a long time before it was wanted at all, and hence so strong a case as the one above supposed, has probably never occurred. Still, the principle here laid down is true as regards every investment made in advance, to the extent of that portion of the capital that does not yield the ordinary income. A regular interest account current would show the true amount of the cost of the improvement, and if reference were had to this test of productiveness more frequently than it is, it would be found that many investments which have been usually considered productive, have been upon the whole losing transactions.