The freedom of issuance and bimetallism: Say’s answers
Say had proposed answers to these questions. His starting point is Smith’s idea: the introduction of money is a precondition to the development of exchanges because it allows overcoming the problem of double coincidence of needs implied in direct barter.
Money is defined as a medium of exchange - even if it is also a measure and store of value. Its value, like that of any other good, is determined by its quantity and our need for it. Hence there follow two consequences. If gold and silver coins are accepted as payment, they cannot keep a fixed relative value. The factors that affect the prices of these two metals are different. When the governments declared constant what is variable, they simply excluded gold or silver from the circulation. He therefore discarded bimetallism.After much hesitation, Say came to believe that paper money does not derive its value from an unlikely repayment, but from the need of a medium of exchange: a commodity without intrinsic value can play the role of money. The case of convertible banknotes is different. These are tokens of money like promissory notes and bills of exchange. They do not derive their value from our need for them but from the need of the amount of which they guarantee the payment. However, tokens of money replace it in the circulation and depreciate its value. The issue which then arises is “to know how far the power can be left to individuals or individual companies to change at their discretion the value of a good in which the obligations between individuals are stipulated” (Say 1826a [2006]: 587). Say concludes that the government may impose to the issuing of banknotes some restrictions dictated by caution, without clearly ruling out that several banks be allowed to issue promissory notes as was the case at the time he was writing.
If money is a medium of exchange, it is tempting to think that its scarcity makes selling difficult.
In order to rule fight this idea Say wrote the chapter “Des debouches” of the Traite; however, his arguments changed across the various editions of the book. In 1803, he put forward the idea that everyone finds himself with more or less the same amount of money at the end of the year as at the beginning even if large amounts of money have changed hands. He thus justifies what will later be called Say’s identity: the sum of excess demands for goods, money excluded, is identically nil. In the second edition, he abandoned this assumption and asserted that “when money runs out at the mass of business, it is easily compensated” (Say 1814 [2006]: 248). In the absence of gold and silver, bills, checks or bills of exchange will be used as medium of exchange. The quantity of the means of payment is endogenous and therefore there cannot exist an excess demand for it.Nevertheless, Say argued that the origin of the crises in the excess issuance of banknotes must be sought. Studying the crisis of 1825 in England, he wrote that “the spirit of speculation was aroused in an exaggerated manner by the banks that have all, in England, the power to issue notes payable to the bearer” (Say 1826b: 43). The abundant circulation provoked the decrease of the value of coins as compared to the ingot; there was a run to banks to change notes for gold coins that were melted to get ingots. Bank reserves were exhausted and banks found themselves incapable of discounting commercial bills presented to them. Unable to meet their commitments, entrepreneurs found themselves bankrupt.