The Principles of Currency (1869)
The year after his election Price published six of his lectures as The Principles of Currency (1869a). It comprised his Inaugural Lecture with five others. To this were added appendices on rates of discount, a letter from Michel Chevalier on the treaty of commerce with France and a related paper by Charles Gairdner.
On metallic money, Price argued that money was not sought for its own sake but simply for its role as a medium of exchange. Money was as much on sale as another good; however, its utility lay solely in its transactional use. So ‘money hoarded or not used is for the time annihilated as money... [I]t ceases to be a portion of the nation's capital' (Price 1869a: 45). The underlying real value of goods was determined by the relative labour or production costs. In turn, the quantity and circulation of money had no real effect. The quantity used is the quantity needed; any excess would have to be stored or exported to countries with a further use for it. Price's world was characterised by the veil of money: it was goods that bought other goods; money was the convenient intermediary that could make no real difference.
The cheques and bills which make up the majority of the business of the banks were not money. Thus, bankers deal in and transfer debts. The whole business does not affect the quantity of money. Whilst admitting that these debts, in terms of cheques, bills and loans could also be described as purchasing power, Price does not see them as real capital or wealth:
A bank possesses no capital beyond the coin in its till and its house with the furniture contained in it. Capital is not what a bank deals in or lends: it cannot lend what it does not possess. What it has to give is the right and power to buy capital. It bestows this power by transferring the right to demand gold (ibid.: 76).
Price saw wealth as only what was realised when sold; there was no such thing as intangible wealth.
Whilst there could be crises of confidence and defaults on debt, ‘Mercantile crises never have their origin in a deficiency of currency, of coin, and notes of legal tender' (ibid.: 79). What Price was objecting to was the conflation in the press and popular terminology of what were, to him at least, two separate things, money and loans of money. At the same time, he clearly realised the importance of these wider means of payment: ‘The rising flood of cheques, as it is a sign of the activity, so also is it the usual mark of the profitableness of business; their ebb too surely announces the drooping resources of commerce. Great is the note, I admit; but far greater yet is the cheque' (ibid.: 95).Price's view was that whoever held such bills, cheques and loans of money rather than money itself
has for the time lost wealth; he recovers it only when the bill is paid. For the moment he has a piece of paper, and no other wealth than the intrinsic worth of that piece of paper, that is, nothing at all. That piece of paper is purchasing power; it can buy, it can procure wealth; but wealth and the power to get wealth are two most different things (ibid.: 102).
Banknotes, he went on to argue, were nothing more than a cheque drawn by a banker on himself. So what made this money, where cheques were not? The difference was in their general circulation, in their use in multiple transactions, unlike a cheque which was used but once before ceasing to exist. In turn, that difference was determined by the perceived creditworthiness of the issuer. There was limited knowledge of the standing for a personal cheque, but the banker is widely known and trusted in his area. What was also important was the guarantee of convertibility of banknotes.
In looking at the quantity of banknotes in circulation, Price came to the same conclusion as he had for coin:
So many banknotes as the public wants and can use will circulate and no more. Neither the bankers, nor Parliament, nor the law, nor the need of borrowers, nor any other power, but the wants and convenience of the public, the number and amount of the specific payments in which banknotes are used, can determine how many convertible banknotes will remain in circulation (ibid.: 110).
Therefore, ‘An expanded or inflated circulation of banknotes is an absurdity, nothing better than pure nonsense' (ibid.).
Currency is not the regulator, but simply a humble instrument of trade. So in these terms the contemporary debate over free banking was largely irrelevant, except in terms of confidence in the note issue, which would make convertible notes always superior to an inconvertible currency.Price fully realised, however, that loans are rarely made in actual currency: ‘Most advances are given by a line placed in a ledger to the credit of the borrower, who then draws out by degrees this power of buying and paying' (ibid.: 116). Furthermore:
The City is but one great accountant's office. Its merchants, its bankers...are only clerks employed in the distribution of wealth. The wealth and capital of England are not in the merchants' offices or bankers' ledgers; not in bills and balances; they are spread over the whole land: they are England itself, and all that it contains (ibid.: 121—122).
Turning to his discussion on Mill, Price rejected the quantity theory that Mill outlined. Yes, it was true there was a total supply of money, and that there was a total amount of goods for sale and a volume of transactions made in money. But Price totally opposed the conjecture that this latter element constituted the demand for money. The purchases could be made in a wide variety of ways, for example, bills or forward promises, many of which involved no actual quantity of money. The
true demand for money, as for every other commodity which men desire to purchase, consists in those requirements for money in which money is actually used... The actual quantity of the goods sold, the size and importance of the trade, have no direct and necessary connection with the use of money (ibid.: 165).
On the other hand, he welcomed Mill's conclusions on the effect of an expansion of credit on prices. For Price, it was not the circulation of banknotes nor cheques and bills that matter but credit and the wider concept of “buying”. ‘What raises prices universally is buying. [T]he greater the buy- ing...the stronger will be the tendency of the articles in demand to rise in price' (ibid.: 168).
Price was opposed to bimetallism as it set a false fixed conversion rate between silver and gold, whereupon Gresham's Law would operate (see Price 1881a, 1882, and the material reproduced in Gibbs and Grenfell 1886). He approved, in principle, of Clarmont Daniell's plan, published in 1879,[51] to extend the legal tender status of silver coin, as subsidiary to gold, but at a properly regulated metals market-based conversion rate. This would make an expansion of metallic coinage possible to meet the demands of a growing world population without an undue rise in the price of gold (see Price 1882: 575).
In a letter to Henry Grenfell, a leading member of the Bimetallic League and a Governor of the Bank of England, Price wrote:
An artificial ratio of value between two metals in the coinage is perfectly possible, and may easily be, and is, involved in the present bimetallist proposal; but the power of purchasing commodities lies quite in another region, namely, in the worth of the coined metals as commodities. I have no fear: the actual proposition of bimetallism is irrational (Price to Grenfell, 5 October 1882, in Grenfell and Price 1886: 300).
In addition:
I did say, and do say, that the value of money is determined by the cost of production of the metal, like the value of a loaf of bread is determined by what it costs to produce. And I say further, that at particular times, the state of supply and demand will alter the value of the metal in exchanging, precisely as the character of the seasons may largely affect the price of wheat in a particular year (Price to Grenfell, 12 November 1882, in ibid.: 323).
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