The mode of regulating the issue of paper-money so as to sustain its value and to prevent it from fluctuation, is one of those difficult problems which have per plexed theorists and statesmen, and still remain to be completely elucidated by experience; but theprinciples upon which any sound system of paper-currency mast be founded are now agreed upon by the best authorities.
Let it be supposed that no paper-money is in circulation but government notes, inconvertible into specie, and that it is the desire of government to maintain them at the same value as the gold and silver coinage. By what principle could the issue be regulated so as to effect this object? Gold and silver maintain a sonable steadiness of price, as they are of a real value, and being in all over the world, are buted in quantities proportioned to the wants of each country. Without any dard price being fixed by the state, their value will, therefore, be self-regulated; but paper-money, not being possessed of any real value, has no element of stability in itself, and unless its issue be adjusted with the utmost nicety, its value will be constantly fluctuating. As the object to be secured is an equality of value tween the precious metals and paper money, and as the former have an ele ment of stability which is wanting in the latter, it is clear that paper-money must be made, in some manner, to conform to the value of the precious metals. Now this can only be accomplished by making paper-money convertible into gold or silver, whenever its holders demand such a conversion. To regulate the issues of inconvertible paper is like filling a vessel with water, in the dark, and without a measure : it is by the overflow only, that the vessel is known to be full ; while a convertible paper, under proper_ rel3uk don, adjusts itself to the standard of the precious metals.
If convertibility be desirable when there is no other paper in circulation but that issued by government, it is indis pensable when promissory notes are per mitted to be issued by other parties; for, in that case, it is necessary to guard against an excessive issue of both descrip tions of paper ; and when government paper is convertible, other issues of paper will in some degree conform to its stand ard, as it, in its turn, conforms to that of the precious metals.
The manner in which convertibility restrains the over-issue of notes may be thus explained. If too much money be in circulation, its value is depressed, and the prices of commodities relatively raised. It thus becomes more profitable to export money than commodities in payment of the price of imports; but paper-money not being current abroad, gold or silver is taken, and whenever this occurs, the exchanges are said to be unfavourable. If a state bank issuing notes be required to five gold or silver in exchange for them, it must be constantly possessed of a large store of the standard metal. If it be the sole or chief bank of issue, it will be the principal depository of bullion in the country; and thus any drain caused by unfavourable exchanges will be first and chiefly felt by it. Persons wishing to export bullion will demand it of the bank in exchange for notes. In this way the bank is apprised of the state of the foreign exchanges, and learns that money is too abundant; while it has the power of immediately contracting its circulation by means of this very demand for bullion.
It has merely to lock up those notes which it has received back in exchange for bullion, and every exportation of its bullion effects a proportionate contraction of the currency and restores the ex changes to a healthy state, by adjusting the quantity of money to the requirements of commerce. This is a simple mode of regulating the circulation of a country, and if all the paper-money were issued by one body only, it could not fail to be effec tual. So far as the principle has been tested in England it has been successful ; but its operation has been interfered with by the competing issues of many independent banks, and by the admixture of banking business with the issue of notes, in the bank itself. Both these causes of dis turbance have been partially provided against by the recent Bank Charter Act (7 & 8 Viet. s. 32), and the experience of a few years will show if there be any imperfection in the principle, that the paper-eirculation of the country must be regulated by the foreign exchanges.