1. Promissory notes issued by the state or by a state bank are under the pro tection of the law, and are made a legal tender. When once in circulation they discharge debts as completely as the cur rent coin ; they may not be refused in payment, although if from any cause their value be depreciated, they may be taken in exchange for a less sum than they profess to represent. Such notes are therefore money, to all intents and pur poses, just as if they were compmed of gold and silver. Their value is liable to fluctuation, according to the regulations under which they are issued : but they are lawful money, coined by the state in paper, instead of in the precious metals. Such money will be current throughout the country in which it is issued; but it differs from gold and silver, inasmuch as it cannot serve the purposes of an inter national currency. Gold and silver are current all over the world, and their value is everywhere understood ; but paper money is necessarily confined to the pur poses of internal circulation.
2. Promissory notes issued by bankers or other persons unconnected with the state, not being a legal tender, may be re fused in payment of any debt. They can only be circulated, therefore, with the entire concurrence of those-who receive them. It is by means of banking ac commodations, however, that they usually get first into circulation. A person who wishes to borrow money is not very par ticular concerning the form in which he obtains it, and he willingly accepts a note, if it be offered him instead of gold. He probably owes money to another to whom he, in his turn, offers the note as payment. This third party will readily accept it, for he wishes to secure the payment of the debt, and if he distrust the value of the note, he may immediately call upon the party who issued it, for gold. When the credit and solvency of a bank are well known in any neighbourhood, its notes pass from hand to hand without any dis trust, but they rarely circulate beyond the adjacent district. Within its own district they are received as money, as readily as a state bank-note is received all over the country ; beyond its district they are sure to be returned for gold, just as a Bank of England note would be returned from Russia. A bank of issue is also a bank of deposit, and the people amongst whom its notes are circulated pay them into the bank whence they issued, and receive credit for them—not as notes only, but as current money : and when they draw again upon their deposits, they may receive the amount in gold and silver or in state bank-notes. In this manner the dis tinction between local notes and other descriptions of money is gradually lost sight of; they are readily convertible : they are universally circulated : habit familiarises the use of them ; and at length, without the sanction or protection of any law, they become money usage, and not the state, has coined them. Still any one may refuse to receive them, and the extent of their circulation depends upon the credit of the issuer. Let a whis
per be heard against his solvency, and in a single day all his notes may be returned to him for immediate payment in the cur rency of the state.
The circumstances which occasion a large circulation of both these kinds of paper-money in a country, are the con venience of such a circulation and the difficulty of obtaining a sufficient coinage for effecting the various purposes for which money is used. The demand for money is continually increasing in pro portion to the increase of commodities in quantity and value : and in a rapidly im proving country no coinage can keep pace with such an increase. When paper money is issued it does not supersede gold and silver, but is used concurrently ith them. Its denominations of value are the same as those of the coins ; and if it be a properly regulated currency, its value will also be precisely the same as that of the coins of a like denomination. A hundred pound note should be of pre cisely the same value as a hundred sove reigns. But how is this equality of value to be maintained between two descriptions of money differing so materially in cha racter? Gold and silver, as already ex plained, have a known value as articles of commerce, and their real value depends upon the quantity of labour required for their production. If this continue unchanged for many years, their ex changeable value may still be liable to fluctuation by reason of varying propor tions between supply and demand. The supply of them may be the same with an increased. demand : or the demand may remain the same and the supply be either increased or diminished. But paper has scarcely any real value when used as money ; the labour expended upon it compared with its denomination of value is merely nominal : and its value, sup posing its credit to be good, must there fore depend entirely upon the proportion which the quantity issued bears to the requirements of commerce. If less be issued than there is a demand for, its value will rise ; if it be issued in excess, its value will be depreciated. So strong is the operation of this principle, that pro missory notes, which are a legal tender, may even be raised above the value of gold, though inconvertible into specie, if their amount be sufficiently limited. This result was actually produced, after the suspension of specie payments in 1797 ; when, so far from being depre ciated in value, bank-notes bore a premium over gold, until they were issued in excess and fell to a discount. It is evident, there fore, that the value of paper-money is independent of convertibility. If con vertible, but issued in excess, its value will be depreciated ; if inconvertible, but limited in amount, its value will be sustained. And further, if government paper and local notes be concurrently iu circulation, and if either be issued in excess, the value of both will be depre ciated, because the aggregate quantity of paper-money will be increased beyond the demand for it.