sion. On the first supposition, they were made by withdrawing deposits from bankers, and thus cutting off a part of the streams which fed the loan-market; on the second supposition, they were made by actual drafts on the loan-market, either by the sale of securities, or by taking up money at interest. This combination of a fresh demand for loans with a curtailment of the capital disposable for them, raised the rate of interest, and made it impossible to borrow except on the very best security. Some firms, therefore, which, by an improvident and unmercantile mode of conducting business, had allowed their capital to become either temporarily or permanently unavailable, became unable to command that perpetual renewal of credit which had previously enabled them to struggle on. These firms stopped payment; their failure involved, more or less deeply, many other firms which had trusted them; and, as usual in such cases, the general distrust, commonly called a panic, began to set in.”

An occasion to make large foreign remittances may arise either from a sudden increase of imports, or from a sudden diminution of exports. In the United States, as we may always raise more food than is necessary for our own consumption, it is more likely to proceed from the latter cause; in Great Britain, where the crops in the most fruitful seasons are hardly sufficient to feed the people, and are liable to frequent though partial failures, the former cause is most likely to operate. Here, a financial pressure is occasioned by an excess of food, or a want of demand in Europe for our surplus crops, so that we are called upon to remit gold instead of exporting provisions; there, it arises from a scarcity or dearth, which compels the people to buy grain of other nations. But in either case, a remittance of gold is not a necessary or a characteristic feature of the phenomenon. In the long run, commodities are always purchased with commodities; we pay for our imports with our exports. But the call being a sudden one for the remittance of actual values, and not having anything else to send abroad except at a great sacrifice, we send bullion or coin, and the drain comes upon the bank reserves; but the next year, we have to buy the specie back again, by either restricting our imports, or increasing our exports. The bank reserves being lessened by this abstraction of coin, those institutions usually

diminish their discounts, in order to provide for their own security. But in 1847, the Bank of England, though £7,000,000 in coin had been taken from its coffers to send to America and the Baltic for food, adopted the bolder policy of increasing both its discounts and its circulation; or rather, the latter was increased in spite of itself, in order to fill up the vacuum both in the loan-market and the currency which had been created by these foreign remittances. The financial pressure would otherwise have been much greater; and in fact, it was at last stopped entirely by an announcement from the Bank, under the sanction of the government, that it was prepared to make further advances, though at a high rate of interest.

And generally, it may be observed, that the drain of specie, by falling upon the bank reserves, though it should produce a slight decrease of the circulation, is not so great an evil as it would be if it were all subtracted from the active circulation, or if domestic commodities should be immediately sent abroad at a great sacrifice to pay the debt, through our inability to make the remittance in bullion. These reserves, being locked up in the vaults, have no effect whatever on prices, and a large portion of them might be sent abroad without the loss being perceived at the time,- certainly without its being indicated by any change whatever in the market. True, the money must all be bought back again, ultimately, to provide for future emergencies of the banks of a different character; and it will all be bought back again within a year, either by restricting our imports or increasing our exports, so as to make up for the temporary excess of the former, which first produced the drain of specie. We send abroad the money at first, only as a convenient article to serve for a sort of pledge or security that we will soon pay our debts in commodities. When the promise

* Mr. F. Baring stated in Parliament, December 3, 1847, that "the amount of bullion in the Bank on September 12, 1846, was £16,354,000, and that, on April 17, 1847, it was reduced to £9,330,000, being a diminution of £ 7,024,000. Now I take the same dates with respect to the circulation of notes, and I find that, on September 12, 1846, the amount was £20,982,000, and on April 17, 1847, it was £21,228,000, being an increase of £ 246,000. Perhaps it was impossible, before the bill [of 1844] was in practical operation, to see how the reserve of notes would operate; but it certainly never entered into the contemplation of any one then considering the subject, that £7,000,000 in gold should run off, and yet that the notes in the hands of the public would rather increase than diminish."

is fulfilled, the pledge is returned. We wanted what the financiers call "an extension," in order that we might have time to raise the flour, cotton, and tobacco wherewith to pay our debts; and by sending the specie as a pledge, we obtain the delay that we wanted.

The result of this whole discussion may be summed up in the following proposition:-that the function of money as a means of effecting exchanges is entirely distinct from its function as a standard or measure of value. For the former, which is its chief purpose, the relative abundance or scarcity of money is a matter of no importance whatever. If we have more money than we need, a portion of it will lie idle, either in the vaults of banks or in the pockets of individuals. If we have less money than might seem necessary, we can get along very well with substitutes, and can even dispense with the use of money altogether. In other words, money is a convenience, but not a necessity. Thus, if we have no gold or silver coin, bits of paper, called bank-notes, will do just as well; if we have not even bank-notes, then checks, bills of exchange, book-credits, transfers of credit on the books of a bank or a clearinghouse, will enable us to purchase goods, and to make or receive payments; and if we have not even these contrivances, we can still barter commodities directly for commodities, as we already do, to a considerable extent, through the institution of mutual accounts current. Turn the matter as we may, we cannot impute all the evils in the commercial world to money as the universal scape-goat, or hope to get rid of them by tinkering the currency. Trade is an exchange of merchandise; and money plays as insignificant a part in it, to recur to a former illustration, as the carts in which the merchandise is transported. If we have not carts enough, we can carry the goods on our backs; if we have not money, we can still exchange, though with some additional trouble. When we

spend, we consume, not money, but commodities that gratify our tastes and appetites. When we contract debts, we borrow, not money, but the goods which we purchase with the money. And when we find any difficulty in paying our debts, the scarcity of money is not at fault, but the want of capital, and this want arises from our own improvidence.

The other function of money, that of serving as a standard

or measure of value, is performed through a delicate comparison of the value of all other commodities with that of the two precious metals, for the purpose of ascertaining, not so much the relation of merchandise to specie, as the relation of all the different articles of merchandise to each other. It is useful to know that a barrel of flour is worth ten dollars, and a coat twenty dollars, not because it is a fact of any practical importance that a barrel of flour will buy ten times 345.6 grains of pure silver, or that a coat will buy twenty times this quantity, because very few persons have occasion to buy silver at all; but as the tailor and the farmer most frequently barter coats for flour, it is convenient for them to know the exact relative values of these two commodities. For this latter purpose, the amount of silver in a dollar might be increased or diminished to any extent, and it would answer the end equally well. Consequently, in relation to this function also, the abundance or scarcity, the high or low value, of the precious metals, concerns us very little. For the purposes of trade between different nations, or for comparison of international values, moreover, this alteration of the quantity of gold and silver passing under a given name is a matter of no importance, as the bullion-merchants take care, by equalizing their distribution, that these two metals shall have the same relative value to other commodities all over the commercial world. It is only, as we have seen, for transactions extending over long periods of time, that it is necessary to ascertain if this relative value has undergone any alteration.

CHAPTER XXIV.

THE DOCTRINE OF INTERNATIONAL EXCHANGES; THE POLICY OF ENCOURAGING DOMESTIC MANUFACTURES BY LAYING DUTIES ON IMPORTED GOODS.

THE explanation which has been given in former chapters of the circumstances which determine prices, and of the course of exchange with foreign countries, has prepared the way for a fuller consideration of the general question between free trade and the protective system. I have already endeavored at some length to show,* that the general doctrine of free trade is perfectly reconcilable with the policy of granting protection under special circumstances; that it does not conflict, for example, with the system of imposing for a time duties on imported goods in order to foster the manufacturing interest here in America, which cannot flourish, or even subsist to any great extent, without such favor. I now resume the subject, in order to consider more particularly the effects of such a system upon our intercourse with other nations. This brings us at once to an explanation of the theory of international values and exchanges, a recent and valuable addition to the science of Political Economy, and one which has lately compelled the old-fashioned advocates of free trade to make numerous and very significant concessions to their opponents. It has struck away the great prop of the universality of their system, and has compelled them to acknowledge that the importation of foreign manufactures may be excessive, even for a long period of years; and that the inevitable consequence of such excess is to depress the prices of our exports in all foreign markets, and thus to neutralize all our natural advantages for producing these articles of export, by compelling us to exchange them for foreign goods upon the most disadvantageous terms.

Hitherto, the evil of excessive importation has been held to be, that it caused a drain of specie from the country, or what

* See ante, pp. 25 – 27, and Chapters VIII. and XIV.