"I proceed to explain and substantiate this opinion.

"Money acts upon prices in no other way than by being tendered in exchange for commodities. The demand which influences the prices of commodities consists of the money offered for them. But the money offered is not the same thing with the money possessed. It is sometimes less, sometimes much more. In the long run, indeed, the money which people lay out will be neither more nor less than the money which they have to lay out; but this is far from being the case at any given time. Sometimes they keep money by them for fear of an emergency, or in expectation of a more advantageous opportunity for expending it. In that case, the money is said not to be in circulation; in plainer language, it is not offered, nor about to be offered, for commodities.. Money not in circulation has no effect on prices. The converse, however, is a much commoner case; people make purchases with money not in their possession. An article, for instance, which is paid for by a check on a banker, is bought with money which not only is not in the payer's possession, but generally not even in the banker's, having been lent by him (all but the usual reserve) to other persons. We just now made the imaginary supposition that all persons dealt with a Bank, and all with the same Bank, payments being universally made by checks. In this ideal case, there could be no money anywhere except in the hands of the banker; who might then safely part with all of it, by selling it as bullion, or lending it, to be sent out of the country in exchange for goods or foreign securities. But though there would then be no money in possession, or ultimately, perhaps, even in existence, money would be offered, and commodities bought with it, just as at present. People would continue to reckon their incomes and their capitals in money, and to make their usual purchases with orders for the receipt of a thing which would have literally ceased to exist. There would be in all this nothing to complain of, so long as the money in disappearing left behind it an equivalent value in other things, applicable when required to the reimbursement of those to whom the money orignally belonged.

"In the case, however, of payment by checks, the purchases are at any rate made, though not with money in the buyer's possession, yet with money to which he has a right. But he may make purchases with money which he only expects to have, or even only pretends to expect. He may obtain goods in return for his acceptances payable at a future time, or in his note of hand, or on a simple book credit, that is, a mere promise to pay. All these purchases have exactly the same effect on price, as if they were made with ready money. The amount of purchasing power which a person can exercise is composed of all the money in his possession or due to him, and of all his credit. For exercising the whole of this power, he finds a sufficient motive only under peculiar circumstances; but he always possesses it, and the portion of it which he at any time does exercise is the measure of the effect which he produces on price.

"Suppose that, in the expectation that some commodity will

rise in price, he determines not only to invest in it all his ready money, but to take up on credit, from the producers or importers, as much of it as their opinion of his resources will enable him to obtain. Every one must see that by thus acting he produces a greater effect on price than if he limited his purchases to the money he has actually in hand. He creates a demand for the article to the full amount of his money and credit taken together, and raises the price proportionally to both. And this effect is produced, although none of the written instruments called substitutes for currency may be called into existence, though the transaction may give rise to no bill of exchange, nor to the issue of a single bank-note. The buyer, instead of taking a mere book credit, might have given a bill for the amount, or might have paid for the goods with bank-notes borrowed for that purpose from a banker; thus making the purchase not on his own credit with the seller, but on the banker's credit with the seller, and his own with the banker. Had he done so, he would have produced as great an effect on price as by a simple purchase to the same amount on a book credit, but no greater effect. The credit itself, not the form and mode in which it is given, is the operating cause." 1

Two things, or influences, according to Mill, act upon prices,money (coin) and credit, each in ratio to its quantity or amount. Bills, notes of Banks, checks, and the like, do not act upon them. It is undoubtedly possible that all the sugar in the market might be bought on a credit to mature in six months. The contract might not even be reduced to writing. The purchaser might then put up the price. So far, credit may be said to act upon prices. But the same result might have been produced without any credit whatever. The holders of the sugar, which they purchased and paid for, might put up its price, by refusing to sell except at an advance; or a purchaser might secure the whole for an advance, by paying cash or bank-notes for it. The same result would be produced without credit as with. Credit, consequently, may or may not be the cause of the rise. If it were unaccompanied by any contract or bill, then the rise in price would be confined to the specific article operated in. But suppose the purchase, for speculative purposes, to be made by a threemonths' bill, and that this be discounted, the holder of the sugar purchased in the mean time refusing to sell it, the credit in such case would affect the price of every article upon the market. The sugar would have been converted into money, or into that which had all the potency of money,

1 Political Economy, vol. ii. pp. 50-53.

equal in amount to its whole value, to act upon the price of articles other than that which it represented. The sugar

would not be on sale, but would at the same time be a purchasing power to the whole extent of its value. It is impossible, however, that any considerable number of sales in large amounts should be made by book account, for the reason that holders of merchandise will as a rule, not sell, unless they can either get money, or that which by means of Banks can be turned into money. If they can get no other acknowledgment than book accounts, they will prefer to hold, unless they are disposed to sell on speculation. It is to be remembered, that they are usually owing for what they hold; and they must sell for that which will pay their debts, for that which can be turned into money. Ordinarily, a bill given for merchandise is equivalent to money. The object of Banks is to turn the representatives of bona fide transactions into money, for the purpose of enabling production to anticipate the sale and collection of the proceeds of the merchandise already put upon the market. It is the only way in which consumption can be anticipated; in which the producer, the moment he parts with his merchandise, is in the same condition as he would be after his products were sold and their proceeds paid over to him. Where merchandise is sold on book account, its consumption and payment cannot be anticipated by the seller. A book account is not a proper subject for discount. He can get his money only when the credit falls due. The assertion of Mill, therefore, that purchases made by bills can exert no more influence over prices than purchases made by book account is directly opposed to the fact. It is the notes of and checks upon Banks which chiefly, with money, do act upon prices. But to go a step further: credits by book account can only act upon the merchandise that is in actual existence, and can affect only that to which they relate; but by means of Banks moonshine itself-accommodation bills - may be turned into money. Now it is impossible that such a result could have been produced without the process and instruments described. It is demonstrable, therefore, that whatever may be the effect of credit upon prices, the most direct and potent of all are negotiable instruments, which may or may not represent capital, but which exert as money precisely the functions of a currency of coin.

From a convertible, Mill proceeds to the discussion of an inconvertible, currency.

"After experience had shown that pieces of paper of no intrinsic value, by merely bearing upon them the written profession of being equivalent to a certain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the issuers which could have been produced by the coins they purported to represent, governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound, and consenting to receive it in payment of the taxes. And such is the influence of all established governments, that they have generally succeeded in attaining this object. I believe I might say they have always succeeded for a time; and the power has only been lost to them after they had compromised it by the most flagrant abuse.

"In the case supposed, the functions of money are performed by a thing which derives its power of performing them solely from convention. But convention is quite sufficient to confer the power; since nothing more is needful to make a person accept any thing as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others. The only question is: What determines the value of such a currency? since it cannot be, as in the case of gold and silver (or paper exchangeable for them at will), the cost of production.

"We have seen, however, that even in the case of a metallic currency, the immediate agency in determining its value is its quantity. If the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on cost of production. The quantity of a paper currency not convertible into the metals at the option of the holder can be arbitrarily fixed, especially if the issuer is the sovereign power of the State. The value, therefore, of such a currency is entirely arbitrary.

"Suppose that, in a country of which the currency is wholly metallic, a paper currency is suddenly issued to the amount of half the metallic circulation; not by a banking establishment, or in the form of loans, but by the government, in payment of salaries and purchase of commodities. The currency being suddenly increased by one-half, all prices will rise, and, among the rest, the prices of all things made of gold and silver; an ounce of manufactured gold will become more valuable than an ounce of gold coin by more than the customary difference which compensates for the value of the workmanship; and it will be profitable to melt the coin for the purpose of being manufactured, until as much has been taken from

the currency by the subtraction of gold as has been added to it by the issue of the paper. Then prices will relapse to what they were at first, and there will be nothing changed, except that a paper currency has been substituted for half of the metallic currency which existed before. Suppose, now, a second emission of paper: the same series of effects will be renewed; and so on, until the whole of the metallic money has disappeared: that is, if paper be issued of as low denomination as the lowest coin; if not, as much will remain as convenience requires for the smaller payments. The addition made to the quantity of gold and silver disposable for ornamental purposes will somewhat reduce, for a time, the value of the article and as long as this is the case, even though paper has been issued to the original amount of the metallic circulation, as much coin will remain in circulation along with it as will keep the value of the currency down to the reduced value of the metallic material; but, the value having fallen below the cost of production, a stoppage or diminution of the supply from the mines will enable the surplus to be carried off by the ordinary agents of destruction, after which, the metals and the currency will recover their natural value. We are here supposing, as we have supposed throughout, that the country has mines of its own, and no commercial intercourse with other countries; for, in a country having foreign trade, the coin which is rendered superfluous by an issue of paper is carried off by a much prompter method. Up to this, the effects of a paper currency are substantially the same, whether it is convertible into specie or not.

"In order that the value of the currency may be secure from being altered by design, and may be as little as possible liable to fluctuation from accident, the articles least liable of all known commodities to vary in their value- the precious metals - have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist of which the value cannot be made to conform to theirs. Nor has this fundamental maxim ever been entirely lost sight of, even by the governments which have most abused the power of creating inconvertible paper. If they have not (as they generally have) professed an intention of paying in specie at some indefinite future time, they have at least, by giving to their paper issues the names of their coins, made a virtual, though generally a false, profession of intending to keep them at a value corresponding to that of the coins. This is not impracticable even with an inconvertible paper. There is not, indeed, the self-acting check which convertibility brings with it; but there is a clear and unequivocal indication by which to judge whether the currency (inconvertible) is depreciated, and to what extent. That indication is the price of the precious metals. When holders of paper cannot demand coin to be converted into bullion, and when there is none left in circulation, bullion rises and falls in price like other things; and if it is above the mint price, - if an ounce of gold, which would be coined into the equivalent of £3 178. 10d., is sold for £4 or £5 in paper, the value of the currency is sunk just that much below what the value of a