THE EXAMPL 1E OF FRANCE. TWO ESSAYS ON THE PAYMENT OF THE INDEMNITY, AND THE MANAGEMENT OF THE CURRENCY SINCE THE GERMAN WAR, 180-'74. BY VYITOR BONNET. TRANSLA TED FROiM THE REVUUEDES DEU X.MONVDES BY GEORGE WALKER. NEW YORK: D. APPLETON AND COMPANY 649 AND 551 BROADWAY. 1875. APPLETONS' JOURNAL,:FO:R I76APPLETONS' JOURNAL will sustain, during the ensuing year, its reputation for general excellence. The publishers will endeavor, more strenuously than ever, to furnish a pec riodical of a high class, one which shall embrace a wide scope of topics, and afford the reader, in addition to an abundance of entertaining popular literature, a thorough sur. vey of the progress of thought, the advance of the arts, and the doings in all branches of intellectual effort. As the design is to make a superior literary journal, engravings will be employed only when they serve to illustrate the text, and never merely as pictures. 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TWO ESSAYS ON THE PAYMENT OF THE INDEMNITY, AND THE MANAGEMENT OF THE CURRENCY SINCE THE GERMAN WAR, 18t0-'74. BY VICTOR BONNET. TRANSLATED FROM THE REVUE DES DEUX IONDES BY GEORGE WALKER. NEW YORK: D. APPLETON AND COMPANY, 549 AND 551 BROADWAY. 1875. ENTERED, according to Act of Congress, in the year 187S, BY D. APPLETON AND COMPANY, In the Office of the Librarian of Congress, at Washington. TRANSLATOB'S PREFACE. IN the present heated state of the currency discussion, popular opinion is more likely to be influenced by example than by argument, and I have therefore thought that the recent financial experiences of France might be studied to advantage in this country. The payment of a thousand million dollars in gold, as a ransom to a foreign country, in the short space of two years and a half, after an almost equal expenditure at home, is an extraordinary achievement in finance; and to have done this without disturbing the industry and commercial relations of the country, and without seriously impairing its stock of the precious metals, is a triumph of financial administration of which France may well be proud. Hardly less remarkable and interesting is the management of the currency in France during and since the German War. The war lasted less than ten months, having been declared on the 19th of July, 1870, and terminated by the treaty of peace on the 10th of May, 1871. According to the report of M. Magne, the Minister of Finance, made in November, 1873, the total expenditure arising 4 TRANSLATOR'S PREFACE. out of the war, directly or indirectly, to that date, was 9,288,882,000 francs ($1,857,776,400), an amount equal to two-thirds of our war debt, and incurred in less than one-fourth the time occupied by our war. In July, 1870, when the war began, the circulation of the Bank of France was 1,255,000,000 francs ($251,000,000), and the specie in hand 1,145,000,000 ($229,000,000), or about 90 per cent. Specie payments were suspended, and bank-notes made a legal tender, in August of that year. The first bank statement published after the peace (June, 1871) showed a circulation of 2,212,000,000 francs ($442,000,000), and a specie reserve of 549,000,000 ($110,000,000), or about 25 per cent. The highest figures attained by the circulation (November 19, 1873) were 3,012,000,000 francs ($602,000,000), and the specie reserve at that date was 731,000,000 ($146,000,000), or 24 per cent. The greatest depreciation of bank-notes, as compared with gold, was in November, 1871, when it rose to 21 per cent., but it shortly afterward declined to par. At the latest date received (December 10, 1874), the circulation stands at 2,547,000,000 francs ($509,500,000), and the specie reserve at 1,318,000,000 ($264,000,000), or more than 52 per cent. There would seem, therefore, to be no longer any financial obstacle to the immediate resumption of specie payments. The change in the situation of the Bank, within the last twelve months, is indicated by a decline in the circulation of $61,000,000, and a gain of specie of $116,000,000, showing an aggregate improvement in cash means, as compared with immediate liabilities, of $177,000,000. I have grouped these salient facts together, in order TRANSLATOR'S PREFACE. 5 that the reader may the better understand the essays which follow. These essays are from the pen of M. Victor Bonnet, a financial writer of established reputation in France, and one of the witnesses invited by the Government to testify before the Imperial Commission on Banks and Institutions of Credit in 1865. They were contributed to the Revue des Deux Mifondes, numbers of July 1, 1873, and July 15, 1874. Although the first of them relates primarily to the payment of the indemnity, and is therefore less immediately pertinent to the discussions on the currency, now going on in the United States, than the other, it contains much valuable information in respect to France, its wealth, commerce, savings, habits of business, metallic stock, banking, etc., and a comparison of the country in many of these respects with England. It also anticipates the discussion of the circulation, of crises, and of kindred topics, which are more immediately the subjects of the second essay. Each is properly the complement of the other, and I have, therefore, thought it desirable to place them together before American readers. The lesson in respect to the currency, which M. Bonnet aims to inculcate in these essays, is, that the maintenance of a paper circulation at par with gold, in any country, depends on two things: first, on a large stock of the precious metals constantly remaining in the country; and, secondly, on a favorable condition of the foreign exchanges. To the concurrence of these two essential conditions he attributes the remarkable 6 TRANSLATOR'S PREFACE. fact, already mentioned, that the notes of the Bank of France have at no time, since the passage of the existing legal-tender law, been more than 21 per cent. below par in gold (and that only for a very brief period), although in less than a year their volume was nearly doubled, and the specie reserve against them reduced by more than one-half. If this specie had left the country, as well as the Bank, or if the foreign exchanges had been unfavorable, a very different result, according to our author, would have followed, as he shows by numerous examples of other countries, our own included. As it was, France retained most of her specie, though it was withdrawn from the Bank and from use, and the people accorded to the notes, practically represented by it, though temporarily inconvertible, much the same sort of confidence which was formerly given to the notes and circulating receipts of the Banks of Venice and of Amsterdam, a paper currency which was represented by a full equivalent of specie, seldom seen, it is true, but known to exist behind them. The opinions of M. Bonnet respecting the currency are those held by a large majority of the best English and French economists. He is not a bullionist, and, in fact, in the last of these essays, he endeavors to combat (without, as it seems to me, fairly stating) the views of that growing school. He'holds to a mixed currency, with a large infusion of specie, and strongly supported by reserves of it behind the paper. He prefers the system of the Bank of France to that of the Bank of England, because it is less artificial, and less hampered by positive laws, while its specie reserves are larger, and all its traditions and usages quite as conser TRANSIATOR'S PREFACE. 7 vative. A most interesting part of the last essay is that which contrasts the habits of the French people with those of the English, in the use of bank accounts, checks, and other subsidiary instruments of credit, showing that the absence of these expedients makes a larger monetary circulation necessary in France than in England. In a letter which I addressed to Mr. Wells, the special Revenue Commissioner of the United States, in 1868, on the Currency Systems of the United States and Europe, and which is printed in the appendix to his official report of that year, I called attention to this fact, and to the national peculiarities from which it arises. With much ampler means of information, M. Bonnet fully confirms the conclusions, with respect to France, at which I arrived in that letter. In point of economy in the use of capital, the English have signally the advantage, inasmuch as the widely ramified system of banks and savings-banks in the United Kingdom gathers up and aggregates all the petty hoards and savings of the nation, drawing almost the entire metallic stock of the country, not in actual use, into the Bank of England. But this far-reaching economy entails on the country corresponding dangers. It makes it peculiarly susceptible to crises, and involves the whole nation in any misfortunes which may overtake the centre. The entire kingdom vibrates with every shock experienced in London; and London, as we have seen so many times in the last three years, is agitated by every political or commercial event which disturbs the tranquillity of Europe or America. What France loses by the wide diffusion and comparative immobility of her capital is partly made up 8 TRANSLATOR'S PREFACE. by the greater steadiness which results from a system of trade and industry, which segregates it in the hands of individuals, and renders each person, trade, and section, measurably independent of what happens to others. It is, perhaps, hardly fair to judge of the two systems by the condition of individuals, or even of the masses of population, in the two countries, since the influences of race, education, and social life, have much to do with national economy; but we cannot fail to remember, in this connection, the remarkable statement of Sir Robert Peel, confirmed by M. Bonnet in one of these essays: "That in England one person in five spends his entire income or earnings, while in France only one in forty does the same, the other thirtynine making savings." There is much in the examples of both countries worthy of imitation in our own; and there never was a time when the study of these examples by us, to that end, was more suitable than now. G. W. SPRINGFIELD, MASS., December 21, 1874. SINCE writing the above, I have received the official report on the Payment of the Indemnity, made to the French Assembly, by M. Leon Say, late Minister of Finance, in the name of the Commission of the Budget of 1875. Though more full and exact than the statement of M. Bonnet, being based on official documents, it does not conflict, in any material point, with the facts and conclusions stated by him. I have not, therefore, thought it advisable to embody any considerable part of it in this publication. "THE PAYMENT OF THE GERMAN INDEMNITY, AND THE CONDITION OF THE FINANCES OF FRANCE." [From the Revue des Deux Mondes of July 1, 1873.] AT the date of the appearance of these pages the evacuation of the last of our departments occupied by the enemy will have been begun; we shall have paid nearly the whole of our indemnity-4,500,000,000 francs out of 5,000,000,000-and the 500,000,000 remaining will be paid in the two following months, August and September, at the rate of 250,000,000 a month. Until then, the fortress of Verdun will be the last pledge in the hands of the Prussians. This result will have been attained in two years and a half since the conclusion of peace, and notwithstanding the terrible civil war of the Commune. To understand the full importance of it, it must be remembered that we had not merely to transfer to Germany a capital equal to 5,000,000,000 francs in some form, but that we were obliged to pay it in specie, or in equivalent values. Never before was there such a financial problem presented to a people. In 1815, after the reverses of our first great war, the indemnity which was imposed on us was 700,000,000 francs; it was increased to about 1,100,000,000 by the paying off of the troops of the Army of Occupation, and by other claims which they were able to establish against us. We had five years to pay it in; and when, at the end of three years, owing to the skillful negotiations of the Duc de Richelieu, the enemy consented to evacuate our territory, we still owed him 265,000,000 francs, for which he consented to accept rente to the amount of 100,000,000, and engagements for the remainder, guaranteed by Messrs. Baring and Hope, and payable in 10 THE EXAMPLE OF FRANCE. monthly installments, during a period of nine months. At the present time, no credit whatever is accorded to us; we must have paid the last napoleon in specie before the departure of the last Prussian. What we have to pay consists not only of the principal of the indemnity, but of the interest also, and of the expenses of the hostile Army of Occupation; and, if we add to these the contributions levied directly by the Prussians during the war, and the ransoms which were exacted from certain cities-notably the 200,000,000 from the city of Paris-we arrive at a sum of more than 6,000,000,000 francs, from which only are to be deducted, as not having been paid in specie, the 325,000,000 appropriated to the purchase of the railways in Alsace and Lorraine, and the 100,000,000 in bills of the Bank of France, which the Prussians consented to accept for the ransom of the capital. The American people had also enormous charges to liquidate after the War of Secession. Their previous debt of scarcely 1,000,000,000 francs ($200,000,000) had risen to 15,000,000,000 or 16,000,000,000 ($3,000,000,000 or $3,200,000,000) during the war; but this increase had been spread over a period of four years, and a great part of it arose from loans contracted at home, by the issue of bonds, or of paper-money. When peace was at length restored, the country had no ransom to pay, and no metallic money to raise at any cost; it had only to meet the interest on its debt, and to retire a portion of it every year. We, on the contrary, have had first to pay the German indemnity in specie, and afterward to find the means of liquidating our own expenses, which have been very large. I. IT is well known that France is rich. Favored by an excellent climate, it produces almost all the more important necessaries of life; the cereals, wine, coal, iron, oils of every kind. Above all, it possesses a skilled labor unequaled in the working of raw materials, and in its ability to draw from them those marvels of art and of industry for which all the world competes. We know, also, that owing to improvements of every sort, to the inventions of modern science, to railways, to the electric THE EXAMPLE OF FRANCE. 11 telegraph, and also to the discoveries of the new gold-fields, the country has increased its production in proportions hitherto without example. If we consult the tables of our foreign trade, if we compare the figures of to-day with those of twenty years ago, we shall find that they are trebled. The Bank of France performs operations five or six times greater than in 1850, and, side by side with it, there have grown up other establishments of credit, which have also a very important clientele. All these facts are well known; but what is not equally well known is the degree to which our country, great as a producer, and skillful as a workman, is, at the same time, an economist in her domestic habits. A distinguished statesman recently informed us that, in 1841, Sir iRobert Peel, in discussing with him the comparative wealth of France and England, said: " In England, one person in five spends all his income, or his earnings; in France, there is scarcely one in forty who does the same; the other thirty-nine make savings." The same statesman added that, on his return to France, he endeavored to ascertain for himself the truth of this assertion, and that he had found it entirely correct. In short, in our country, in spite of the small disposition to save, which is manifested by the artisan class, especially by those who earn large wages, it is undeniable that, if the whole population is taken into the account, and the habits of the agricultural classes considered, the spirit of economy predominates to a remarkable degree. It is difficult to say how much all the united savings of the nation annually amount to. If we had an income tax, as they have in England, reaching all branches of the public wealth, we might, by capitalizing the increase of income each year subjected to taxation, estimate, with some degree of accuracy, the amount of the annual savings; but this method is wanting to us, and we have nothing to take the place of it, so that we are reduced to the use of approximate data. Let us first consider the extraordinary expenses which have been incurred within a given period. If we can calculate these expenses, and show that they have not made us poorer, we shall have a right to conclude that the country has paid them out of its surplus, and that they represent not more than the amount of its savings. Now, during the period of the Second Empire, we borrowed, partly to cover deficiencies in the budget, which were, so to 12 THE EXAMPLE OF FRANCE. speak, permanent, and partly to satisfy extraordinary wants, as for the Crimean and Italian Wars, about 4,500,000,000 francs, or nearly 250,000,000 a year, for nineteen years. We expended in extraordinary public works, railways and others, at least 1,000,000,000 a year; we devoted to improvements of all sorts, which are represented by more comfortable habitations, and richer interior appointments, a yearly sum equal, perhaps, to 500,000,000; and the embellishments of the city of Paris alone absorbed more than 200,000,000. If, now, we add to these our portion of the revenue derived from industrial enterprises in other countries, and from foreign loans, which must amount to 5,000,000,000 more, or 260,000,000 a year, we arrive at a round sum of 2,000,000,000 francs of annual savings. And yet, in spite of this ex.traordinary use of capital, before the war of 1870 France was far from being exhausted; it sustained easily the burdens which an improvident government had imposed upon it, and had vast resources in reserve to meet unexpected necessities. This was clearly manifested during the war; and, what still better attests the fact, is the facility with which the country has risen from its reverses; it could only have found means of doing this in the resources previously accumulated. We may, therefore, assert that the sum of 2,000,000,000 francs does not fully represent the annual savings of the country, which ought to be considerably larger. We can form some estimate of this by a simple comparison with England: that country, with a foreign trade of 12,000,000,000 to 13,000,000,000 francs ($2,400,000,000 to $2,600,000,000), realizes, it is said, an annual saving of about 5,000,000,000 ($1,000,000,000). Our foreign trade exceeds 8,000,000,000 francs; at this same rate, we ought to make a saving of more than 3,000,000,000 ($600,000,000). This estimate is the more probable since, according to the very just observation of Sir Robert Peel, France, with equal revenues, saves more than England. But has this annual saving of 3,000,000,000 francs, which was probably realized during the ante-war period, been continued since There is every reason to suppose so. Although our country is a prey to political revolutions, has no assured future, and is torn by contending parties, it nevertheless preserves an actual economic and industrial vigor, which resists every thing. We may even say that, by a constant experience of revolutions, THE EXAMPLE OF FRANCE. 13 it has become habituated to them, and is no longer seriously disturbed; it has come to rely on Providence, or the course of events, to restore order. We can only, in this way, explain the difference which there is between our situation to-day and that which followed the Revolution of February, 1848. We have certainly much more capital than then, we have a better industrial outfit, and our relations with other countries are better established; but all this would not suffice to maintain our commercial activity at its present stand-point, if there had not also been a considerable change in national feeling, and in our way of looking at events. In 1848 we had only lost a throne; society was all alive with conservative interests and instincts-the elections which followed the revolution prove this-and yet, as there was an unknown element in the future, and as the first words of socialism had begun to be pronounced, the public mind was agitated, and business could not be resumed so long as the revolutionary period lasted. To-day we have just emerged from a war, the most disastrous which France has ever experienced, and from a domestic insurrection not less formidable; strangers still occupy our soil, or, at least, they occupied it but yesterday; we have an immense ransom to pay; more than ever, we are living in the unknown; radicalism is menacing; yet we follow our pursuits in the accustomed way, and, if business has not all the activity which is to be desired, it has, nevertheless, attained proportions sufficient to meet all our charges. In 1872, according to the statements of the custom-house, the foreign and special trade of France was 3,447,000,000 francs of imports, against 3,303,000,000 in 1868; and 3,679,000,000 francs of exports, against 3,074,000,000 in 18&9; showing an aggregate increase of about 750,000,000. It is evident, therefore, that our commercial activity has not abated, in spite of our reverses, and that we ought at the present time to be making as great savings as in 1868 and 1869. Now, supposing this activity to have been as great since the close of the war, that is to say, for two years past, we should already have gained enough to pay our indemnity, without trenching on the national capital, such as it was in 1870. But this is only one part of the question. We were obliged, as already stated, to pay the ransom in metallic money, or in equivalent values: now, how could 5,000,000,000 francs be raised among us to send abroad? 14 THE EXAMPLE OF FRANCE. It was almost the sum total of our metallic stock. If that had been exhausted, a formidable financial crisis was to be apprehended; and, besides, what practical method was there of realizing these 5,000,000,000, and of drawing them out of the private purse of the nation? Here, at the outset, was a difficulty which seemed insurmountable, and many of our most able financiers thought it was not possible to solve the problem in the space of two years. It was for this reason that the Government was led to demand, in the Treaty of Frankfort, concluded in 1872, a year longer for the payment of the last 1,000,000,000 francs of the indemnity, in case we should not have been able to pay the whole of it before the spring of 1874; but it turns out that, so far from requiring another year, we have even shortened the time of the original contract. In September, 1873, all will have been paid, and in specie, without our country having exhausted its metallic reserves, and even without our having had a serious financial crisis. The disturbance in the money-market, which occurred in the autumn of 1872, after the placing of the loan of 2,000,000,000 francs, and which was coincident with our first payment of the indemnity, was by no means a serious affair. It was caused more by unwise measures of administration than by difficulties inherent in the situation. It is certain, at all events, that as we have gone on in our payments of the indemnity, we have experienced less and less embarrassment; and that to-day, on the eve of having paid the whole of it, the exchanges have turned in our favor, and gold bears only an insignificant premium. How, then, has the problem been solved? It has been solved in three ways: 1. By the exchanges of our foreign trade; 2. By demands of all sorts which we had upon foreign countries, and which consisted chiefly of our interest in foreign loans, and in the shares and obligations of industrial enterprises abroad; and 3. By the high credit which we enjoy in Europe, and which has enabled us to appeal successfully to foreign capital. It is through these three channels that we have been able, in so brief a period, to make payment of the 5,000,000,000 francs of our indemnity, without the occurrence of any financial disturbance; and, singular as it may appear, without our having been as much embarrassed as the Germans, who have received our money. Let us first look at the commercial exchanges. If we examine the returns of the THE EXAMPLE OF FRANCE. 15 custom-house, we find that the balance to our credit in 1872 was 362,000,000 francs; but these returns give but a very imperfect idea of the increase of public wealth, and even of the balance which results from our foreign trade. In the first place, there are errors in the way in which the returns are made up. When the value of merchandise for export is calculated, it is taken at the point of departure, at the port of embarkation, or at the frontier of the country, without considering the other expenses which it will have to sustain, the cost of transportation, and insurance, and the commissions, which are to be paid to various parties in the course of the transit. There is a great difference between the price of merchandise at the moment when it leaves the country, and when it arrives at its destination; this difference generally inures to the profit of the national trade. Moreover, merchandise for export, being subjected only to a simple duty of registration, is not appraised at its true value: no one concerns himself about it, or has any interest to ascertain the truth. On the contrary, that which arrives from abroad having duties to pay, an attempt is made to estimate its value exactly; moreover, it comes charged with expenses of transportation, with commissions, and with insurance. There is therefore no similarity in the mode of valuing these two elements of foreign commerce; and hence arise considerable errors, which disturb the calculations respecting them. Nor is this all: the balance of trade itself, even if it were exactly ascertained, is of little significance in the estimate of national wealth; we may have it against us, and grow rich much faster than if we had it in our favor. This comes from the fact that this balance does not result from the exchanges of commerce only; it has other sources also. Take, for example, a country which has loaned its capital abroad: there is sent to it every year, in payment of interest, either merchandise or the precious metals, which go to swell its imports in a natural way: it is evident that if its exports fall below its imports, the nation is not thereby made the poorer; but, on the contrary, is enriched, inasmuch as it has not been obliged to give any thing in exchange for the excess of imports, which it has received, purely and simply, as a return on its invested capital. This is what happens in England. Every year, in that country, the exports are considerably below the imports; 16 THE EXAMPLE OF FRANCE. in a period of ten years, the difference will have been, perhaps, 10,000,000,000 francs (~400,000,000). Does it follow from this that England has lost that sum? So far from it, she has gained it, for it is a tribute which other nations, whose creditor she is, have had to pay to her; and even when exchange happens to be against the country, as is sometimes the case, it is also a sign of its wealth. It is because, not having employment at home for all its capital, it sends it abroad to take part in public loans, or in industrial enterprises; and if it is not, at the same time, entitled to receive an equal amount from abroad, it suffers a temporary loss in exchange. France was in the same position before the war of 1870. In examining the customs returns during the last fifteen years of the Empire, we find that the exports hardly balance the imports. It would seem to follow from this, according to the current theories concerning the balance of trade, that we had gained nothing, and had only exchanged products without increasing our capital. It is perfectly well known, however, that France grew much richer during that period: it had become, like England, the creditor of nearly the whole of Europe. Indebted countries came to us to borrow money, and capital was found in our markets for all sorts of foreign undertakings. We loaned in this manner from 4,000,000,000 to 5,000,000,000 francs, and yet our metallic stock has not ceased to increase; it has risen 1,837,000,000 francs in the last ten years, according to the custom-house returns. The exchanges have almost always been favorable to us, and would have been still more so, if we had not sent abroad again, in the form of loans, the capital which we received from foreign countries in payment of interest. On the other hand, there are countries which export more than they import, and are not enriched thereby: it is thus of Russia, Austria, and Italy. In each of these countries the exports generally exceed the imports, but in spite of this they cannot keep the exchanges in their favor, nor maintain the value of their paper-money. This paper is at a discount of from 10 to 20 per cent. It is owing to the fact that the excess of exports is devoted to the payment of interest on debts which they have contracted abroad. They receive nothing in exchange for exports of this character. Whenever they shall have paid THE EXAMPLE OF FRANCE. 17 off these debts, their exports will approach more nearly to their imports, and they will become richer. Again, there is sometimes a surplus of exports which is owing to a forced liquidation. A crisis occurs in a countrypolitical, financial, or otherwise; it is no longer able to sell any thing, and business is arrested; but it is compelled to create resources in some way; it has therefore to submit to a sacrifice, and push its merchandise into foreign markets at a loss. In this way, exports can be made to exceed imports, and a favorable balance of trade may be created, although the process is artificial, and the country is not enriched by it. We had an experience of this in 1848, after the Revolution of February: in the three years which followed, the exports exceeded the imports by 929,000,000 francs. This result was not bad in itself, for it helped us out of our embarrassment. It revived industry, which would have been completely paralyzed without a foreign outlet, and it led to an influx of specie, of which there is always great need in times of crisis; but it was certainly not an evidence of accumulating wealth. Formerly, when credit did not extend much beyond the boundaries of countries, and little capital was invested abroad, the balance of trade might have had some significance; it showed almost exclusively the state of foreign relations, and we could believe that it fairly indicated their condition, which was favorable if exports predominated, unfavorable if imports. It is no longer so, at the present day; the country, where the imports exceed the exports, is, on the contrary, that which enriches itself the most; for a part of the imports represent income on invested capital. No decisive inference in our favor can, therefore, be drawn from the balance of trade in 1872, such as the returns of the custom-house indicate it to have been; for it is evident that our foreign commerce has yielded us an advantage of more than 332,000,000 francs. We can estimate it more accurately by considering the average profits of mercantile transactions. This average should be, at least, 12 per cent. At that rate, as the volume of foreign and general business exceeded 8,000,000,000 francs, it must have yielded us a profit of about 1,000,000,000. If we add to this what was probably realized during the last half of 1871, after the suppression of the insurrection of the Commune, and in the first half of 1873, we reach, in two years, the sum of 2,000,000,000 2 18 THE EXAMPLE OF FRANCE. francs of profits, available to us in the form of credits on other countries, and which we have been enabled to pay to the Prussians, without withdrawing any thing from the metallic stock of France. Thus we have disposed of two-fifths of our ransom. Continuing the inquiry, we find that we have availed ourselves of foreign stocks held in this country, and which our savings in prosperous times had enabled us to amass. These, as we have heretofore explained, consisted of portions of the public debts of different countries, and of the shares and obligations of iudustrial companies. Of this property we have disposed of a portion. It would be difficult to say what amount we have thus parted with; the transfer has been effected chiefly by credit establishments, and by bankers, who held it in sums more or less considerable. These parties, having very suddenly to create available assets, and finding, at the same time, an opportunity to realize a large profit, by converting foreign stocks, of which the prices have remained nearly stationary, into French funds, which suffered a great decline, emptied their portfolios, and must have sold at least 1,000,000,000 francs of this kind of property. This, also, we have turned over to the Prussians, without sustaining any loss of specie. Two thousand millions remain to complete the payment of the indemnity; this sum we have obtained by the influence of our credit. Two loans were made in 1871 and 1872, equaling together the full amount of the indemnity, besides a sum of 600,000,000 or 700,000,000 francs added for supplementary expenses. If we had been able to raise theseloans by recourse to French capital only, that capital, abundant as it was, would not have relieved us from embarrassment; it would still have been necessary to take 2,000,000,000 francs from our metallic stock, as we could not pay the Prussians in any other way than in specie or its equivalent. Now, the sudden withdrawal of these 2,000,000,000 in the situation in which we were, and in which we are to-day (July, 18T3), could not have been effected without a severe financial crisis. Those who suggested the possibility of paying the indemnity by a public subscription, or even by a tax on capital, had not reflected on this result, which would have been disastrous. It was only by the help of foreign capital that we could provide the 2,000,000,000 francs which were still wanting. To foreign capitalists, therefore, we appealed, and THE EXAMPLE OF FRANCE. 19 they have taken a large interest in our loans. In this way, by means of the payments effected by them, we have had large sums at our disposal in foreign countries. Thus have we, in two years and a half, compassed the payment of our entire indemnity, without having created an adverse exchange, without having depreciated our paper-money, and without having had to export much specie. The most diverse estimates have been made as to the quantity of specie which has, after all, had to be sent abroad. Some place it at 1,200,000,000 francs; others at 1,000,000,000; others still at a much smaller sum. It is impossible to obtain very accurate figures respecting it. The public treasury will have directly remitted, at the most, 400,000,000 or 500,000,000 francs, including a sum of 200,000,000, for which they reserve the right to call upon the Bank of France.! As to the remittances of specie made through the agency of bankers, they may have had other objects than the payment of bills drawn in payment of the indemnity. What is certain is, that if we consult the returns of the custom-house, during the year 1872, we find that the movement of the precious metals has still been in our favor. The imports have exceeded the exports by 67,000,000 francs. These figures do not, of course, represent the exact truth, but they are approximately correct, and they are sufficient to prove that our metallic stock has not been diminished by the payment of our ransom. A fact which would strengthen this conclusion, if necessary, is the stability of our paper-money. This has risen to nearly 3,000,000,000 francs, against a specie reserve of 800,000,000, and it maintains itself at par. It must not be supposed from this that we are getting more accustomed to this paper, and are passing wholly out of the dominion of hard money; those who flatter themselves with this idea are deceived by appearances, and have not gone to the root of the matter. What constitutes the solidity of the bills of the Bank of France is the large stock of the precious metals which is to be found in the country. Although it is known not to be in the vaults of the Bank, and therefore not in condition to serve 1 The exact amount directly paid by the French Government to Germany on account of the indemnity, in gold and silver, was $512,294,933 francs; of which 273,003,058 francs was in gold, and 239,291,875 francs in silver. See official "Report on the Payment of the Indemnity," by M. Leon Say, late Minister of Finance. (TR.) 20 THE EXAMPLE OF FRANCE. as an immediate guarantee to the credit circulation, we are sat, isfied that it is here, that it is only temporarily out of sight. and will reappear as soon as there is greater political ti'anquillity: it is this conviction which suffices to keep the bills of the Bank at par. II. WE would here make an observation respecting the quantity of specie which is in possession of France, and which cannot be far from 6,000,000,000 francs ($1,200,000,000). It has often been estimated at a higher figure, and it has been claimed that there would be an advantage in reducing it, and in resorting, more than we are accustomed to do, to the instruments of credit which are in use in other countries, such as checks, transfers in account current, and clearinghouses. These expedients have, it is true, certain advantages over specie. They are more expeditious modes of payment, and, besides, they cost nothing. They are the "wagon way through the air"' spoken of by Ricardo, while specie, which has a value of its own, resulting from its scarcity, and from the labor employed in obtaining it, is the highway on the solid earth, which cannot be constructed without more or less of cost. The example of England, which with 2,500,000,000 francs of specie ($100,000,000) does more business than we do, has been often cited. England effects settlements every year to the amount of 150,000,000,000 francs ($30,000,000,000) through its clearing-house, without, so to speak, exchanging any sovereigns, and almost equally without the employment of bank-notes: more than this, it effects settlements for the whole world, simply on this stock of the precious metals. It is very remarkable: but there is another side to the medal. In 1 This figure is original with Adam Smith, and not with Ricardo, as appears from the following passage: " The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and' cornfields, and thereby to increase very considerably the annual produce of its land and labor. " Wealth of Nations," Book 2, chapter 2. (TR.) THE EXAMPLE OF FRANCE. 21 order to maintain intact the credit of which it makes so large a use, that country is obliged to confine its credit circulation within very narrow limits. Beyond a fixed amount of 375,000,000 francs (~15,000,000), the Bank of England cannot issue a note, without holding the equivalent of it in specie. Very great embarrassments sometimes result from this. Through the habit which prevails in that country of utilizing all savings, and of placing them in private banks, which keep their reserves in the Bank of England, that institution is made the pivot on which the entire credit system of the nation turns, the only place where metallic money is to be procured. Consequently, whenever there is the least pressure on the money-market, the least extraordinary demand, applications pour in upon the Bank from all quarters; and as it has always a limited specie reserve, and cannot enlarge its credit circulation at will, it is forced, in order to protect itself; to raise the rate of discount suddenly, and to an unexampled height. It is not unusual to see the bank rate advance three or four per cent. in a few weeks, and it is fortunate if, even at this price, a crisis can be avoided, without resorting to still more rigorous measures, such as the refusal of paper, and a suspension of its charter. England, with its metallic reserve of 2,500,000,000 francs (~100,000,000), would never have been able to pay an indemnity of 5,000,000,000; and if the Bank of England had been relieved from the obligations of the act of 1844, which regulates the emission of its notes, it could not have multiplied them as we have done, and kept them at par. As the case now stands, serving only as an intermediary in the payment of the bills drawn by us in favor of Germany, the English moneymarket has been trembling on the brink of a crisis; the rate of discount has been lately seven per cent., and the price of money changes every moment. It results from the fact that the monetary base upon which the whole credit system of the country rests is very narrow, and the superstructure is, therefore, always in danger. What has saved us in France (aside from the wealth and saving habits of the country) has been, on the one hand, the freedom which the Bank of France enjoys in the issue of paper, and, on the other, the largeness of our metallic stock. These two elements of strength, each supporting the other, have enabled us to meet a situation which has 22 THE EXAMPLE OF FRANCE. no parallel in history. But we must take care that no false inferences be drawn from this experience. People are very ready to believe, when they see the stability of our paper-money, in spite of the large emission, that there is no harm in giving to the bills of the Bank the quality of legal tender, and that we have, therein, a remedy by which all future financial crises may be arrested. This idea, which has often been put forward in times of embarrassment, and which has always been opposed as a chimera by thoughtful persons, acquires a certain apparent force from the recent state of things in this country, which it is our duty to dispel. In 1857 and 1863 (to speak only of the later crises), the metallic reserve of the Bank of France had fallen to 189,000,000 and 205,000,000 francs, respectively, against a note circulation which in 1857 did not exceed 581,000,000, and, in 1863, 800,000,000. It was then urged upon the Bank to increase its issues, and even to suspend specie payments, rather than raise the rate of interest, or curtail discounts. We were of those who expressed a contrary opinion, and yet, at that time, there was no thought of raising the circulation to any such figure as 3,000,000,000 francs, nor had we to encounter the payment of a heavy ransom to an enemy, and the liquidation of a large debt at home. It is argued that we might, on these former occasions, have augmented the issue of bank-notes without any danger: this is a great mistake. What is now transpiring has not, in the least, weakened the true principles upon which a credit circulation rests. In 1857 and 1863, crises occurred, because speculation had given an unhealthy stimulus to industrial and commercial enterprises. Production had gone beyond demand, piling up merchandise for which there was no outlet. We were in the condition which the English justly describe as over-trading: ought we, then, to have added to the difficulty of the situation, by aiding the further development of business, and encouraging a production which had already outrun its natural limits? This is what would have happened if, instead of raising the rate of interest and reducing discounts, we had increased the issues of papermoney and created a factitious capital, to furnish to those who demanded it: speculation would have continued its excesses; and by-and-by we should have had to meet a disastrous liquidation, which nothing could have averted. We nust not THE EXAMPLE OF FRANCE. 23 forget that the paper-money which is put into circulation is worth nothing of itself; that it is only valuable for the operations which it represents. If these are good, if they have for their object the creation or exchange of products which enter immediately into consumption, it is all very well; the paper is useful, and will maintain its value. It is quite otherwise if the object is to encourage speculative operations, to breed an excessive production and exchange of merchandise, which will not for a long time find consumers. Then the increase of paper-money becomes a grave danger, it adds to a mischief which should be abated; and the paper-money depreciates, because no one can tell what the operation, for which it was issued, will be worth when it terminates. To increase the credit circulation in such a case, is like giving food to a man who is ill from over-eating: he can only be cured by temporary dieting. The raising of the rate of interest and the reduction of discounts is dieting, and very healthful dieting, imposed on trade, when it has been guilty of excesses. In 185T and 1863, if the circulation had been increased by 200,000,000 or 300,000,000 francs, as was demanded, and if a suspension of specie payments had been the consequence, the bills of the Bank would certainly have depreciated. What is the situation to-day, and how does it differ from the former one? To-day there is no commercial crisis, no appearance of over-trading; our production is scarcely up to the home and foreign demand; consequently all the discounts of the Bank of France, and the notes issued in connection with them, rest on sound business operations; there is nothing factitious in industrial enterprises, and, aside from occasional accidents, it is nearly certain that all commercial paper will be paid at maturity. A portion, it is true, of the new circulation, and the largest portion, has been caused by advances to the Government. This is certainly irregular; the Bank of France, in making these advances, has departed from its ordinary function, which is to lend assistance to commerce; but the exceptional circumstances through which we have passed explain and justify that departure, whereby an immense service has been rendered to the country, for which it can never be sufficiently grateful. Our present inquiry relates simply to the question whether the paper-money, which represents the debt of the Gov 24 THE EXAMPLE OF FRANCE. ernment, has a proper place in the circulation. It would not have in ordinary times, even if the Government were in less pressing need; but it has now, for the reason that it takes the place of specie, which is deficient and hidden, but which, I repeat, is still in store for future use. Now, inasmuch as the Government is perfectly solvent, and able to respond to its engagements, the paper guaranteed by it is readily accepted. It would be less so, from the moment specie payments were resumed, and coin began again to form a part of the circulation. The reason is obvious: from that moment it would come into competition with specie; the circulation would be overloaded, and, as always happens in such cases, the specie would be the part of it to go out of the country, leaving the field to the paper currency. In order, therefore, to estimate properly the value of the notes of the Bank, we should consider less the magnitude of the issue than the causes which gave it birth. At the present time, in spite of the enormous figure which it has attained, the circulation is not excessive; it represents a real necessity, and it is sufficiently secured. Moreover, we have a somewhat accurate criterion for determining whether a credit circulation is in excess: it is the state of the exchanges. In the autumn of 1871, at the time of our first payment to Germany, exchange on London rose to 26 francs, and to a premium of three or four per cent. on different places in Germany.' Immediately, our paper-money, which had then reached only 2,400,000,000 francs, declined 2~ per cent. The premium on gold rose to 25 to the 1,000 (24 per cent.). If we had continued to go on as we were going, without thinking of providing for ourselves other resources than those created by the issue of bank-notes, the depreciation would speedily have become greater, and we should have found ourselves much embarrassed. The situation became less difficult, as the pressure to make payments of the indemnity diminished, and as we provided ourselves with resources in a more regular fashion. Then the premium on gold sensibly declined, and the strange 1 The par of exchange between Paris and London is 25 francs and 22 centimes (nearly) to the pound sterling. Every additional 25 centimes is equivalent to a premium of one per cent. in favor of London. At the present time (December, 1874) sterling exchange in Paris is at 25.10 to 25.15, or at a considerable discount, while in Switzerland it is as low as 25.05. (TR.) THE EXAMPLE OF FRANCE. 25 phenomenon was witnessed of a credit circulation growing less depreciated in proportion as it increased in volume. It was, nevertheless, the result of natural causes, and the triumph of true principles. Did we desire other proof of what we have said than is to be found at home, we have only to examine what takes place in other countries, which have a legal-tender currency of paper; in Italy, in Austria, in Russia, and even in the United States. Italy has rather less than 1,000,000,000 francs of credit circulation, fully guaranteed by the Government, against a specie reserve of 250,000,000 to 300,000,000; nevertheless, its paper is at a discount of 10 to 12 per cent., simply because the exchanges are against the country, which is debtor to foreign countries, instead of creditor, and for this reason obliged constantly to remit specie to balance its accounts. It is the same with Austria: paper was depreciated in that country 35 or 40 per cent. when it had only some 1,200,000,000 to 1,300,000,000 francs in circulation; at the present time, the depreciation is only 15 per cent., because of an improved state of the exchanges. The same statement may be made respecting Russia; there, there is no equality between specie and paper-money, because the balance of trade with foreign countries is, and for a long time has been, destroyed. Russia owes more than it is entitled to receive, and so long as this situation continues, the exchanges will be unfavorable to it, and the credit circulation will not return to par. The United States are in the same situation since the War of Secession. No one doubts the perfect solidity of the paper-money which exists in that country; it is guaranteed by the Government, and every year, owing to the prodigious resources at the command of the public treasury, the quantity of it is diminished in a notable. manner,' and the time is already anticipated when specie payments will be resumed; nevertheless, paper is at a discount of 15 to 20 per cent. Why? Because a part of the debt contracted by the American Union during the war having been placed abroad, chiefly in Germany and Holland, the balance of trade has been thereby unfavorably affected. Paper1 It is not necessary to explain to American readers that M. Bonnet is in error in this statement. By authority of Congress the reduction of the legal-tender notes was begnn in 1866, under the administration of Mr. McCulloch, but in January, 1868, the further reduction was forbidden, and it has not since been resumed. (TR.) 26 THE EXAMPLE OF FRANCE. money is at par with us, in spite of an excessive emission, because the exchanges are no longer against us, and we have found means to pay the Prussians without having to send much specie out of the country. But we should deceive ourselves greatly if we supposed that we could augment the credit circulation with an unfavorable exchange; we should, in that case, fall into the same embarrassment as Italy, Austria, and Russia. There is another curious phenomenon to be considered in connection with the payment of the Prussian indemnity. It is the effect which it has produced on Germany itself. It would seem that if we, the debtor, have been able to acquit ourselves of the debt thus easily, the creditor, who has received our money, ought to have profited by it largely, and at once. But, in fact, exactly the contrary has happened. We have paid over 5,000,000,000 francs to Germany, and at the same moment that country has encountered a most formidable crisis. Money has never been more scarce or dear, and never have there been witnessed so many failures in that country. It recalls to us the history of Spain after the discovery of America. Every year, galleons laden with gold and silver arrived in the Peninsula; it seemed as if there was no longer need of working, in order to get rich; industries were arrested, and at last, when the galleons ceased to come, Spain found herself poorer than before. In Germany, however, the stoppage of industries has not been the consecuence of our indemnity payments; on the contrary, they have been too much stimulated by them. It was supposed that, with such an indemnity, every thing might be undertaken, and that there was no longer any check to be put upon speculation. Consequently, speculations of all sorts have been set on foot, good and bad, especially the latter, which have absorbed a vast capital; but when the first fever had subsided, and these speculations were subjected to the true criterion of value, that is to say, the power to turn them into money, it was found that the larger part of them rested on no serious foundation. A very competent authority on financial subjects, on the other side of the Rhine, M. Bamuberger, has lately published, in a German periodical, an article on the consequences of our indemnity. He regrets, for the sake of his country, that it has been paid so rapidly, and in specie. In the opinion of this writer, there was likely to result from it an extravagance in public under THE EXAMPLE OF FRANCE. 27 takings, and a rise in wages which was wholly unjustifiable. He anticipated the moment when these works would cease, by reason of the indemnity being exhausted, and that a frightful crisis and great misery would ensue. The picture is perhaps a little overdrawn, but it is substantially correct; nothing should come too quickly, riches no more than other things; and the most substantial progress is that which is accomplished by time. Germany, receiving suddenly 5,000,000,000 francs inr metallic money, is like a poor man to whom a considerable inheritance has fallen; such a man must be very prudent, very much master of himself, not to commit, in the first moments of intoxication, follies which will deprive him of a portion of his new wealth. Germany has committed these follies, and it is not unnatural. It must also be added, to explain the crisis which the country has gone through, that the money paid to the Prussians has gone, not to the nation, but to the Government. The latter keeps it, for a longer or shorter time, in its own coffers before dividing it with its allies; and it reserves, besides, a considerable portion for its own wants, to increase the funds of the army, to improve the condition of its military property, and for a change of its monetary system. The immediate effect, therefore, of our payments has not been to diffuse more money through the country; it has even produced this singular result, that, many bills created by us on Germany having been accepted by German bankers, in exchange for equivalent French values, the acceptors have been obliged to raise funds to meet them at maturity, and have thus helped to reduce the metallic reserve in the hands of the German people, for the benefit of the Government. It is easy to perceive how much embarrassment this must have occasioned, which was all the greater because the profits of the indemnity had been discounted in advance. Such is the situation of Germany: after having received 5,000,000,000 francs, it has to encounter a financial crisis, and its money market is much less established than our own. Strange contradiction of human foresight! III. WE must now turn our attention to ourselves, and ask whether, after having paid our ransom, there will be nothing more for us to do than to repose upon a bed of roses. We 28 THE EXAMPLE OF FRANCE. should be very unwise to think so. It is true we shall have settled with the Prussians, but not with those who have lent us the 5,000,000,000 francs, with which to accomplish the settlement. This sum will continue to figure among our liabilities, under the head of the public debt, and in the form of a supplementary rente' of more than 300,000,000. It will be necessary, besides, to pay our own expenses, to reimburse the Bank of France its advances, to pay the interest on the loans of 1870 (the -Magne loan and the Morgan loan), to grant indemnities to those who have suffered from the invasion, to replenish our war material, and to rebuild our strong places. All these expenditures may reach an amount at least equal to the Prussian indemnity; and, until we have made this general settlement, we shall not know what our financial situation really is. Until this is done, we are in the midst of uncertainties, and are liable to fall into error. There is, in the first place, an account to be examined, which is called the liquidation account, and which is very much mixed up. To this account has been charged every thing which, to a certain degree, bears the character of an extraordinary expense, growing out of the war. According to the account of it, given by M. Thiers, it will include the expense of reconstructing our war material, that of creating a new line of strong places to hold the frontiers of the country, that of restoring the great historical monuments of Paris, destroyed by the Commune, and finally an indemnity for the expenses of the militia called into active service. To cover these expenses, which are estimated at 773,000,000 francs, there have been credited to the account, to an amount of 644,000,000 francs, unused and canceled appropriations, estates to be sold in Paris, premiums on the last loan, and finally an increase in the revenue from new taxes. After making these allowances, the deficit will be 180,000,000 francs. We shall certainly not be regarded as too much of a pessimist, if we say that the expenses will exceed, and the receipts fall below the estimates. The estates in Paris cannot be sold at all, at the present time; the appropriations to be canceled are always less than is estimated, by reason of supplementary expenses, which, 1 The American reader may perhaps need to be reminded that the word Rente, which is the usual designation of the public debt of France, signifies literally the annual interest, and not the principal, of that debt. (TR.) THE EXAMPLE OF FRANCE. 29 to a certain extent, come in to affect them; and, as to the gain of revenue from new taxes, it is quite as problematical, especially any gain from the tax on raw materials. It is true that the liquidation account will not be settled until after the end of five years, and that, in the mean time, the deficit which it presents will be carried along in the floating debt. In the budget estimates presented for 1874, by the last Minister of Finance, very little anxiety is manifested regarding this debt; it is to-day 847,000,000 francs; it is anticipated that, byand-by, it may come up to 1,000,000,000, and, in reference to it, it is said, " This is not an excessive figure, and it has been heretofore attained without danger, at a time when the budget was by no means as large as it is now." This is, indeed, a singular theory, that the more liabilities we have, and the greater the consolidated public debt, the better is our position to support another debt equally large, but as yet unfunded. Thus our credit is to be measured by our necessities, and not by our resources. It is, indeed, possible, now that we have so enlarged the domain of our credit as that we have 3,700,000 holders of our securities, in place of the 1,200,000 who existed a few years ago, to borrow more easily, at certain times, and to carry along a larger debt not permanently provided for; but these debts, whether floating or funded, constitute none the less a great danger, the greater by the more we are embarrassed by them. We must anticipate the time when, by reason of some crisis, we shall be called upon to repay the overdue portion of the floating debt: and that repayment will be far more easy if the debt is only 847,000,000 francs than if it had risen to 1,000,000,000. Over and above a certain amount-say, perhaps, 500,000,000 or 600,000,000 francs, in which are included all the sums required legally to be on deposit, such as pledges and guarantee funds of all sorts, the funds of municipal bodies and of public establishments-all the surplus of the floating debt is payable on demand. When we put it at 1,000,000,000 francs we are accepting the estimate of M. Leon Say; it would be more accurate to put it at 1,200,000,000, or even as high as 1,500,000,000 francs. Those who speak thus lightly of our floating debt, do not consider how heavily it will weigh upon the public credit when it reaches a point which will render the consolidation of it necessary. Our credit would be more injured by a loan which 30 THE EXAMPLE OF FRANCE. had for its object this consolidation, than if it had been for sums which we are obliged to pay as a part of the Prussian indemnity. In the latter case, the question would relate to an expenditure wholly exceptional, and which need not be repeated; in the former, it would be regarded as a proof of bad financial management, or of an inability to meet all our obligations. In proof of this, we have only to observe what is going on in Italy, in Austria, and even in Russia, not to speak of Spain, which has reached the lowest point of financial embarrassment. In each of these countries, they borrow at constantly advancing rates, because the loans are made to cover deficits. It is a bottomless abyss which opens under their feet. Premising so much as to the liquidation account, which has probably in reserve for us some disagreeable surprises, let us see how the budget of 1874 looks; for it is with that that the serious trial begins. All other budgets since the war, including that of 18T3, will be adjusted by means of the balances of loans; that of 1874 will have only regular resources to depend upon. According to the last Minister of Finance (M. Leon Say), the receipts will easily balance the expenses; there ought, indeed, to be a small surplus of 2,500,000 francs. We may say, at the outset, that he does not include all the expenditures which the budget ought to contain. The Government owes, every year, to the great railway companies, for interest guaranteed to them, a sum varying from 30,000,000 to 35,000,000 francs, and which has even gone as high as 40,000,000. Instead of reimbursing them in capital, it has been thought more convenient to pay the interest only. This is a disguised loan, which adds to our permanent expenses about 2,000,000 francs annually. We need only to go on for a short time in this way, in order to have a new debt of considerable magnitude arising from that source. NSow, the budget cannot properly be said to be balanced, if we are carrying to the account of increased indebtedness a guarantee which forms really a part of ordinary expenses. Again, no provision is made for the supplementary credits (deficiency bills), which will not fail to be needed; and as they have, at the same time, discounted the overplus which may be derived from taxes (if there should be any), by taking the estimates of the current year's production, instead of that of last year as should have been done, there THE EXAMPLE OF FRANCE. 31 will be some miscalculations to correct on this head. It is true that the published receipts for the first quarter of 1873 have already given us a surplus of 10,000,000 francs over the estimates; but we cannot be sure that this improvement will continue during the whole financial year, and that there will not be some falling off in consequence of the disquietude which the late elections have occasioned. Finally, reliance is had on some very doubtful sources of income. First, there is the tax on raw materials, estimated at 93,000,000 francs. Now this tax is very much disputed; there is to-day a probability that it may be taken off altogether; but even if it should be retained, with modifications, it will not yield the 93,000,000 francs expected of it. This tax on raw materials is the grand mistake of the last Government. They do not seem to have considered that there are some taxes which cost more than they come to, and this is one of the number. What to-day is the great interest of the country a It is to give all possible extension to our foreign trade, in order that it may bear more easily the charges to which we are obliged to subject it. Now, if by taxing the materials which enter into manufactures, we increase the cost of production, we put it out of our power to contend against foreign competition; we tie our legs when we want to walk. If this tax on raw materials was capable of yielding the 93,000,000 francs with which it stands charged in the budget, it would still be indefensible, because it will subtract a far greater sum from the public wealth. If we were to examine them closely, we should find the same to be true of other taxes voted last year, and which, though obstinately adhered to, are no better than the tax on raw materials. We might cite, for example, the special tax on personal property (valeurs nobili'res). This tax now amounts to more than six per cent., and we shall not be contradicted by anybody, when we affirm that the inconveniences which attend it, and which can only be appreciated by men engaged in financial business, are not compensated by the 20,000,000 francs which it yields to the Government. If we recapitulate what, on the one side, has not been carried into the expenses of the budget of 1874, which ought to have been there, and, on the other, the deficiencies which are likely to occur in the receipts, if only by the abolishing or 32 THE EXAMPLE OF FRANCE. modification of the tax on raw materials, not to speak of other unexpected changes, which are far more likely to affect the debit than the credit side of the estimates, we arrive at a deficit of 110,000,000 to 120,000,000 francs, and this without touching certain new taxes, which were proposed by the last finance minister, amounting to 39,000,000 (and which his successor does not seem inclined to support), which, if not availed of, would add a further sum of some 30,000,000 francs to the deficiency. There would be, then, about 150,000,000 francs of supplementary resources to be hunted up. Where should we find them? We could hardly call for an increase of the indirect taxes; these have already been pushed to the extreme limit; they are excellent and productive taxes when moderately high, but very burdensome and unproductive when carried to excess. There is only the tax on salt, which has not hitherto been touched, and which could easily be increased. Ten per cent. added to this tax would yield 33,000,000 francs, and if we were to make it 20 per cent., to bring it up to the rate which existed before 1848, the gain to the revenue would be over 60,000,000 francs. This would be a gain worth having, but they shrink from the unpopularity which, it is supposed, would result from the restoration of this higher tax. No party dares to take the responsibility of proposing it, and the Government seems no more disposed to do it than the rest. Meanwhile, there is talk of a tax on sales (ffactures), or on the amount of business operations, a tax which was discussed last year, and which ought to yield 100,000,000 francs. But this is not practicable, as we shall immediately see, if we examine the working of it. Take the case of two merchants: one makes 100 per cent. or more on his transactions; with a business of only 200,000 francs he realizes a profit of 100,000 francs. At one-tenth of one per cent., if that was the rate of taxation, he would pay 200 francs a year into the public treasury. Side by side with him, in the IRue du Sentier, for example, there is another dealer, who is content with a profit of 2 or 3 per cent. on each operation, repeating it very often; to gain 100,000 francs, he must do a business of 4,000,000 or 5,000,000 francs. At the same rate as in the other case, this man would pay to the treasury 5,000 francs, that is to say, twenty-five times as much as the other. A tax which is tainted with such an inequality, aside from THE EXAMPLE OF FRANCE 33 other considerations which render it a difficult one to maintain, is not defensible, and would not for a moment engage the attention of prudent men. What, then, is to be done? We shall look in vain, if we expect to find any thing in the expedients proposed which can furnish the sum required: it is too large, and, since we are unwilling to exact any thing more of salt, or of the land-tax (which there seems equal reluctance to increase), there is only one way left to help us out of the difficulty-it is to have recourse, purely and simply, to an income-tax. When this tax was first under discussion, two years ago, the opponents of it denounced it as a chimera, which was nowhere in practical operation, and which would carry us, under filll sail, into a sea of socialism. Now, this chimera exists all around us, in England, in Germany, in Russia, and in the United States; and it produces excellent results everywhere. England adopted it under circumstances much less grave than ours, in order to work out an economical reform, and equalize a budget to which there was wanting only some 40,000,000 francs, a sum which could easily have been found elsewhere. The reform was accomplished to the satisfaction of all interests, and now the budget exhibits a considerable surplus. This example ought to encourage us to try the experiment; but there is no country where what takes place elsewhere has less influence than in our own. It would seem that we enjoyed, in every thing, a science peculiar to ourselves, and had no need to borrow any thing from our neighbors. Alas! recent events should have taught us to be more modest. The income-tax has succeeded in England, why should it not succeed in France? It is said " we do not like the personal declarations on which it generally depends;" but neither do foreigners like them any better than ourselves, yet they submit to them notwithstanding, because, after all, a personal declaration is the best basis which can be found for an income tax, and the least vexatious. As to the objection that, in a democratic country like ours, an income-tax would prove a fatal step toward the progressivetax (l'impo) p))rogressif), that is to say, to socialism, it is an argument which has been too much abused. The radicals, if they should get into power, would not need this precedent to establish the progressive-tax, if they had a desire to do it; they 3 3-1 THE EXAMPLE OF FRANCE. could equally well take the method of direct taxation. The United States is also a democratic country; the income-tax does not there necessarily lead to the triumph of socialism. That this tax has its disadvantages; that it does not rest on exact equality by reason of the inaccuracy of the declarations made, and the inefficiency of the means for obtaining accurate information, is quite probable; but what tax is there without some objections? We know of none in our fiscal legislation, and there are many to which greater objections could be urged than to the income-tax. Besides, we could establish it provisionally, as has been done in England and the United States, until such time as the excess of revenue enabled us to dispense with it; and as it had been a resource in a difficult emergency, it would be only just to forego the benefit of it as soon as the situation was sufficiently improved to enable us to do so. What seems to us certain is, that, by making it as general as possible, and by putting the limit of exemption low enough, we might easily, with a tax of 2 per cent., raise the 150,000,000 francs which we need. Who is there who would be unwilling, for the sake of balancing the budget, to pay a tax of 2 per cent. on his income? People should do it all the more willingly, because they would be saved from having to pay as much under some other form, possibly more burdensome. In short, whether we take the income-tax, or some other form of raising money, it is absolutely necessary to secure the equilibrium of the budget; it is the first condition of a good financial situation. The second condition, as we have already stated, is the maintenance of a substantial sinking-fund. Two hundred million francs are now included in the budget, for the regular reduction of the debt to the Bank of France. This is an important reduction of our indebtedness; we cannot ask more; but it ought to be continued after the debt to the Bank is paid, or, at least, an annual reduction made of 150,000,000. Can we do it? We made a great mistake in our mode of borrowing the 5,000,000,000 francs to pay the indemnity; we ought to have created terminable annuities, to be paid off at shorter and longer dates. In this way, the reduction of the debt would have been compulsory, and not open to discussion. Having chosen to borrow in the form of a perpetual rente, the reduction of the debt is now merely optional. After the debt to the Bank is paid, many peo THE EXAMPLE OF FRANCE. 35 ple will be unwilling to go on reducing, and will argue that it is better to diminish taxes than to provide for paying off a debt which nobody thinks about, and which is, after all, easily enough carried. If this language comes to prevail, it will seriously injure our credit; for a reduction of debt has the double advantage of diminishing the burdens of the future, and improving credit in the present. In this matter, America offers a remarkable example; it has a large debt, as we know, but it devotes a very considerable sum, every year, to its reduction. The result is, that America is now able to borrow at 5 per cent., while a few years ago, before the War of Secession, loans would not have been made to that country at less than 7 or 8 per cent. If we could only be certain, in this country, that the debt to the Bank of France would inevitably be paid within the prescribed time, at the rate of 200,000,000 francs a year; and that afterward we should resolutely apply a sum of 150,000,000 annually to the further reduction of our indebtedness, our credit would experience an immediate, and perhaps very important, advance. Suppose the advantage gained were 1 per cent; 1 per cent., applied to transactions amounting to at least 100,000,000,000 francs annually, resting on credit-paper, would yield us a saving of 1,000,000,000, independently of the vast influence which would be exerted on all business, by a reduction in the rate of interest. This is a sum large enough to merit very serious consideration, and when we see people, even now, before the debt to the Bank is paid, contesting the utility of reducing that debt, wishing that the reduction might be diminished, or other provision made for continuing the obligation, we are appalled at the ignorance of finance which exists in this country. There is no public measure of greater present importance than the maintenance of the debt reduction; and, if we had to purchase it at the price of still greater sacrifices, it would not be too dear; for it would always be giving us an improving credit, worth much more than it would cost. In conclusion, we may say that, in completing the payment of our indemnity to Germany, we have accomplished only half our task, though, perhaps, the most repulsive and the most difficult half; it remains to us to prove that we are now able to meet all our obligations; that we have a balanced budget, and resources in reserve with which to diminish our debt. In reali 3 6 THE EXAMPLE OF FRANCE. ty, nothing ought to be more easy than this, for whatever may be our burdens, if we only adjust our revenue to them, we shall find that they are not overwhelming. According to statistics of the best authority, the actual revenue of France is between 18,000,000,000 and 20,000,000,000 francs; the interest of the debt, without allowing for its reduction, only represents 5 per cent. of it, and the entire budget (which, aside from special appropriations, amounts to about 2,000,000,000 francs) represents only 10 per cent. England, according to Mlr. Dudley Baxter, had to pay, in 1815, simply for interest on capital borrowed, 7 per cent. of her revenue, and, at least, 18 per cent. of it if we include all the budget; but this has not prevented her from meeting every charges of obligation, discharging a part of her debt, and developing her prosperity in an unexampled measure. We can do the same, and much more easily, as our point of departure is better; but it is only on condition of having a'good financial administration. THE CIRCULATION OF THE BANK OF FRANCE UNDER THE LEGAL-TENDER ACT OF 1870. [From the Revue des Deux ~Mo1aides of July 15, 1874.] WHEN the Bank of France was established, in 1806, the Emperor Napoleon said there were no men in the country who understood the nature of a bank, but that the class had got to be created. It would seem that such a class is still wanting, since an eminent publicist, writing a few years ago in the Edinbu)rgh Review, said'it is astonishing to see with how little financial science commercial affairs of the greatest magnitude are carried on." Is it, then, true that, in respect of one of the most important interests of society, the world is practically surrendered to empiricism, and that there is no science to which we can refer the movement of capital, and particularly whatever relates to the monetary circulation, otherwise called the medium of exchange? We should be tempted to come to this conclusion, when we see what is every day written on these subjects, and how they are discussed in the legislative assemblies of the most civilized nations. In 1810, when the celebrated investigation was made in England into the depreciation of bank-notes, during the suspension of specie payments, there were eminent statesmen, financiers, and even directors of the Bank of England, who declared that no such depreciation existed. Although the notes had lost 25 per cent. of their value in exchange for gold, these authorities insisted that their intrinsic value was not diminished, but that the price of gold had risen, owing to exceptional causes, and chiefly to speculation. They tried to devise some mode 38 THE EXAMPLE OF FRANCE. of fixing the value of the pound sterling, so as to protect it from changes caused by speculation in the precious metals. Some proposed to declare by law that it was equal to the interest of ~33 6s. 8d. invested in 3 per cent. consols; while others, and among them Lord Castlereagh, maintained that it had an ideal value independent of the metallic money used to represent it; they also claimed that it was impossible to determine whether there was any depreciation, because bank-notes had never had any other value than that accorded to them by public confidence, and that this confidence remained unimpairedo Such was the state of opinion in England in 1810, in the highest Government circles, and, as we have said, even among the directors of the Bank of England itself; for there were many, even in that body, who defended these theories. They denied the depreciation of bank-notes, and saw nothing in the existing state of things to call for any restriction of the credit circulation. It is true that these opinions were not shared by a majority of the committee which made the investigation. On the contrary, they arrived at quite an opposite conclusion, which is embodied in their report, since become celebrated under the name of the " Bullion Report." This report recognized the fact of depreciation, and declared that it was the cause of the general advance of prices, and of the export of gold; and maintained that it was the duty of the Bank of England to govern itself by the foreign exchanges, in increasing or diminishing the volume of paper-money. These conclusions, however, when submitted to Parliament, were not adopted. It was reasserted that the large volume of the circulation had nothing whatever to do with the rise in prices of commodities, and that bank-notes had lost nothing of their value. Robert Peel, who was destined to become, many years afterward, the author of the Bank Act of 1844, was of this opinion, and voted with the majority in rejecting the principles of the Bullion Report. It might well be supposed that, at the present day, in 1874, the world had made progress, and that no one could now be found to deny the danger of increasing the credit currency, or to doubt that it is depreciated when gold rises to a premium. Unfortunately, however, such is not the fact; there are men of high authority in the financial world, who still deny the inconveniences of making paper-money a legal tender, and trouble THE EXAMPLE OF FRANCE. 39 themselves little about the possible depreciation of bank-notes. We could, indeed, if we wished, trace a close analogy between what is now going on among ourselves, and what took place in England in 1810. Like our English neighbors, we had, in 1865, a commnission of inquiry into the credit circulation; and with us, as with them, the most singular propositions were advanced before the commission by bankers, merchants, and even economists. Our commission also had the good sense to arrive at a just conclusion, and adopted several very sound resolutions; but, if these resolutions were not condemned by the Legislature, as in England, they met with no better fate before the public, and have Litherto failed materially to enlighten the popular mind on this difficult subject. Unfortunately, the very conclusive report drawn up by M. de Lavenay, a councilor of state, and the Commissioner-General of the Inquest, had not the publicity which it deserved.' When, therefore, in 1871, upon a proposition to increase the circulation of the Bank of France, a discussion was had upon the Legal-Tender Act (Cours 8Force) which the unfortunate necessities of the time had forced upon us, the same heresies had to be encountered which were current in England in 1810. It was again maintained that we need not trouble ourselves about the depreciation of bank-notes, although the premium on gold was then 2} per cent.; that this premium was really the result of speculation; and that whatever amount of paper-money was demanded by the public, and corresponded to their business necessities, could be issued without dangerous consequences. The proposed increase was voted, and, in fact, as if to vindicate the truth of the propositions thus enunciated, fell one-half a few months later, and subsequently disappeared altogether. What has taken place in France since the war, in relation to the paper circulation, what is still taking place to-day, is a very 1 " Enquete sur les Principes et les Faits Gieneraux qui regissent la Circulation Monetaire et Filuciaire," 6 vols., imp. 4to, Paris, 1867-1869. Imprimerie Imperiale. The report of M. de Lavenay is in t.he sixth volume. It is to be regretted that this vast and valuable collection is very little known to the general public even of France, and very few copies have reached this country. It has never been for sale, but was printed by the Government for its own use. The sittings of the commission were not public, and the report of the oral depositions, of which an official abstract was furnished to the JIoniteur by M. Arthur Legrand, is very condensed and meagre. (TR.) 40 THE EXAMPLE OF FRANCE. curious phenomenon, and is in danger of being seriously misconstrued. It apparently reverses the economical and financial principles, which the best authorities on the subject have hitherto labored to establish. They have cautioned us against issuing too much paper-money having the quality of legal tender, holding that the volume of such paper should be very carefully limited, lest confidence in it should become impaired, and depreciation follow. Now it so happened that, almost at a single step, in the midst of our disasters, we issued more than 1,800,000,000 francs of new notes, with a metallic reserve of less than 600,000,000; and that this legal-tender paper has kept itself at par, the only time when it fell below par being upon the payment of the first installment of the indemnity to Germany. At that time, gold commanded a premium of 2j per cent., and, singular as it may seem, the price fell as soon as authority was given to issue bank-notes in excess of the previous limit of 2,400,000,000. In November, 1871, the note-issue of the Bank of France had reached only 2,300,000,000, and the gold premium was 2- per cent.; by the end of January, 1872, they exceeded 2,450,000,000, and gold had fallen to 1 per cent.; a short time afterward the limit of circulation was extended to 3,200,000,000, and no further attention was paid to it. The premium on gold had become insignificant, and, if it had been thought necessary to go further, as was at one time expected, when, on October 31, 1873, the circulation reached 3,071,000,000 francs, no opposition would probably have been made to it, and whatever the Government asked for would have been granted. To add to the singularity of these facts, we should also say that these extraordinary emissions were made under exigencies of the gravest character, at the time when we were paying our enormous indemnity to Germany, and trying to obtain specie from all quarters, for that purpose. Moreover, the paper issues were apparently intended to fill a void created in the metallic circulation. Such a phenomenon had never before been witnessed in the financial world. In England, during the suspension of cash payments, from 1797 to 1819, paper-money was issued to make good the loss of specie. It was, however, confined within narrow limits, and never exceeded 700,000,000 francs (~24,000,000). Nevertheless, bank-notes fell in 1819 to 25 per cent. discount, and did not again reach par until the THE EXAMPLE OF FRANCE. 41 resumption of specie payments. What has happened, then, to produce so great a change in the course of things? Is financial science assuming a new aspect, and proving that we have been all wrong in fearing irredeemable paper-money? Are we to learn that ideas have made progress, and that we are on the eve of realizing that famous "wagon-way through the air," spoken of by Adam Smith and Ricardo-a paper circulation without metallic base? There has always been, both in France and in other countries, a set of men who have declaimed against the tyranny of gold and silver, and attributed to them a large part of the financial and commercial crises which have shaken society. This was the doctrine of Law in 1720, and it has never been wholly abandoned.. Whenever trouble has occurred, they have tried to cut loose from metallic money, and to substitute equivalents for it, which cost nothing. They believe that, if this problem could be solved, there would be no more financial difficulties, and that business would always go on smoothly, without the risk of being suddenly arrested by a scarcity of the circulating medium. It would only be necessary to make that medium proportionate to the demand for it, and all would be well. There would then be no need of resorting to sudden advances in the rate of discount, and other rigorous measures which disturb the commercial world, and are only so many forms under which the tyranny of specie manifests itself. It is true that the majority do not go so far as this, and do not desire to get rid altogether of metallic money; but they wish to economize it as much as possible, both because it is a dear commodity, and it is more or less difficult to command it at certain junctures. The question is, To what extent can it be economized, and what can we substitute for it? This is the new problem which agitates the world, and as to which there is more uncertainty felt than ever, after what has recently taken place in France. Who would have dared believe that, in the midst of the greatest calamities which have ever befallen a nation, with an enormous ransom to pay to a foreign country, and with great domestic losses to repair, a credit circulation could be maintained four times as large as its metallic base; and that this circulation could reach the enormous figure of 8,000,000,000 francs, without depreciation? 42 THE EXAMPLE OF FRANCE. The boldest advocates of a large recesemable currency had maintained that, so long as bank-notes are issued in exchange for commercial paper, at short dates, and representing actual mercantile transactions, its value is maintained by the necessity which gives it birth, and that its price will not fall. This has been the doctrine put forth, especially at every successive crisis, when it has been proposed to increase the circulation of the Bank of France; but no one, unless an advocate of an irredeemable paper, would have ventured to maintain that we could also issue bank-notes in large quantities, without depreciation, to meet the exigencies of a public debt, not itself redeemable until after a considerable time. This, nevertheless, is what has happened. Out of the 2,500,000,000 francs of bank-notes now in circulation, about 1,000,000,000 represent an equal amount of the public debt; but people do not regard this fact, and accord equal confidence to it, notwithstanding. Side by side with the school already named, there is another, of totally different opinions, which is gaining influence in some countries, and has its adherents in our own.' This school denies the utility of credit-paper, circulating as money, altogether, even though it is supported by a metallic reserve supposed to be sufficient. It maintains that the excess of this circulation, over and above what is covered by specie, and which cannot be instantly redeemed in coin, is false money; that is to say, a medium of exchange of the most dangerous character, which alters commercial relations, changes prices, and paves the way to disaster. It admits that circulating notes payable to bearer have their place, and can be usefully employed, but only on condition that specie, equal to their amount, is held in reserve, and that they never exceed it. In a word, it advocates a return to the system of deposit-banks, such as formerly existed at Amsterdam and IHamburg. In that direction, says this school, lies the way, we will not say of progress (for it is in reality a retrogression), but of truth, respecting a credit currency. We shall endeavor, in this paper, to deduce from all See, on this branch of the subject, a learned review by M. Louis Wolowski, "Membre de l'Institut, and Depute de la Seine," in the Journal des Economistes for December, 1868, entitled " Les Mletaux Precieux et la Circulation Fiduciaire." See also " MXcanique de l'lchange," par M. Henri Cernuschi, Paris, 1865. " Theorie und Praxis des Zettelbankwesens," von Ph. Geyer, Munich, 1867. " The Science of Wealth," by Amasa Walker, Boston, 1867. (TR.) THE EXAMPLE OF FRANCE. 43 these conflicting theories what seem to us to be the true nature and functions of circulating notes payable to bearer, and what is to be expected of them in future; to point out, in short, what is to be learned about them, from the EXAMPLE OF FRANCE. WE need not enter at length into the reasons which led to the adoption of certain metals as instruments of exchange. It was necessary that these instruments should be easy to transport, and sufficiently ductile and malleable to be cut into the proper forms, and receive the desired impressions; they must also be not too susceptible to atmospheric influences, and hard enough to resist abrasion. The possession by gold and silver of all these qualities, led to their adoption as instruments of exchange. Later, as civilization advanced, it was perceived that if gold and silver were the true exchange mediums, the basis upon which transactions should rest, it was possible to make use of them otherwise than by keeping them always in hand, exposed to the danger of loss. It seemed simpler to deposit them in a public establishment, and to take receipts for them, circulating those receipts precisely as the coin itself would circulate. This led to the creation of deposit-banks, first at Venice, afterward at Amsterdam, and finally at Hamburg. It must be added that, besides the fear of losing the precious metals, if kept in hand, there was also the apprehension of having the coinage debased by act of the sovereign power; for the monarchs of that time did not scruple to diminish the quality or the weight of money, in order to increase their revenues. Banks of deposit were, accordingly, organized to escape this further danger. They issued receipts, carrying the right to demand a certain quantity of fine gold or silver; and it was agreed that business transactions should be liquidated by these receipts. In this way, the people escaped the debasement of money. Such was the beginning of credit circulation; if, indeed, that term can be properly applied to a species of paper based entirely on specie, and whose only credit element was the confidence reposed in the bank which received the specie, and issued receipts for it. It was, in fact, a metallic circulation, 44 THE EXAMPLE OF FRANCE. only that a method of using it was devised more convenient, and less hazardous than to circulate the coin itself. Later, observing the facility with which these receipts circulated, without any demand being made for reimbursement, they thought to go a step further. Why should the full equivalent of all the receipts in circulation be kept in specie? Experience showed that they were not all presented at the same time for redemption; it would only be necessary, therefore, to have on hand enough to meet all demands which might be made, and the residue could be applied to other uses serviceable to society. It was on this theory that the Bank of England was established in 1694, and this was the real origin of circulating notes payable to bearer, such as we now know them. The Bank of England was authorized to issue notes, on condition of always redeeming them in specie on demand; but, as it did not hold an equal amount of specie, the greater part of the notes had no other security than the proprietors' capital, all of which had been loaned to Government. The principles upon which a credit circulation ought to rest, were well laid down by Adam Smith. " The total volume of paper-money," he says, "which can circulate without injury in a country, can never exceed the value of the gold and silver money of which it takes the place, and which, if commerce remained the same, would circulate there, if there was no paper money in circulation." In short, paper-money is a substitute for the precious metals, more economical and more easily handled; but it is not specie itself, and has not the qualities of it; it cannot, therefore, be expected to take the place of it altogether. Metallic money is capital, because, independently of its usefulness, it is the product of labor more or less costly. Paper-money, on the contrary, is not capital, because it costs nothing, and can be multiplied at will. It is vain to talk of its usefulness, as imparting value. Water is. also highly useful; ranks, indeed, among the articles of highest utility to mankind; but it has not-generally any value, because it can be procured in great abundance and without labor. Paper-money is a very perfect instrument for circulating wealth, and it is nothing more; it is accepted, not because of any intrinsic value which it possesses, but because of what it promises, which is generally redemption in specie. In a word, it is a promise to pay, THE EXAMPLE OF FRANCE. 45 and not payment. This point is one very important to establish, for it indicates the error of those who consider papermoney as constituting a part of the public wealth. According to the definition of Adam Smith, paper-money ought never to exceed, other things being equal, what would have been the volume of gold and silver money, if the former did not exist. But by what practical method are we to ascertain the quantity of coined money which would be necessary, if there were no paper-money to take the place of it? It has been supposed that excessive emissions of paper-money would be prevented by providing that the notes should be always redeemable on demand, and that the public, having the matter thus under its control, would present the notes for redemption when the amount of them became excessive. M. de Sismondi has shown how little confidence can be placed in this safeguard. "If," said he, every man who receives and passes a bank-note were required to indorse it, like a bill of exchange, there would be little fear that any bank would outrun its metallic resources, without affording satisfactory security; but, inasmuch as the notes are payable to bearer, the receiver has so brief an interest in them, and is under so little responsibility to restrain an abuse of credit, that the nation, upon which this obligation rests as one of the highest consequence, cannot delegate to him its guardianship over the matter. It is a circumstance wholly deceptive, that the public receives the paper readily, and circulates it as if it were actually money. It finds it very convenient, has no doubt of its reimbursement, and does not, therefore, stop to consider the limits within which its issue should be confined." Thus it is that people are deceived, and come to the illogical conclusion that, after all, the circulating medium depends only on the confidence of the public. From the moment paper is accepted and taken in exchange for property of real value, as it has also an additional guarantee in the capital of the bank issuing it, why, it is asked, may it not'circulate without any metallic reserve whatsoever? This opinion is supposed to be singularly strengthened by what is taking place in France. Let us see, therefore, what the example of France really signifies. When war was declared in July, 1870, the cash in the Bank of France was 1,145,000,000 francs, and the bank-note circula 46 THE EXAMPLE OF FRANCE. tion 1,255,003,000. Three weeks afterward, on the 10th of August, the early events of the war having been unfavorable to us, the circulation had risen to 1,500,000,000 francs, and the reserve had fallen to less than 1,000,000,000. There was nothing alarming in this situation, but, as it was foreseen that there would be great calls for money, and as the demand on the Bank of France for redemption of the note was increasing, they were declared a legal tender,' and the amount of issue limited to 1,800,000,000 francs. This limit was soon exhausted, and a further extension of it made by the Government of National Defense, to 2,400,000,000. The circulation was limited at this point, when France recovered possession of Paris after the terrible events of the Commune. The first bank statement which was published after the war, in June, 1871, showed a circulation of 2,212,000,000 francs, and a cash reserve of 549,000,000; exchange on London was 25.30 to 25.40. A loan of 2,000,000,000 francs was contracted to meet the first payment of indemnity to Germany. Exchange soon rose to 25.75 and 25.80, and on the 3d of November of that year touched 26 francs. Exchange on Holland was 216, and on Berlin 383. These rates indicated a premium of 3 to 5 per cent. The depreciation of paper-money was shown by the premium on gold, then 21 per cent. Let us consider the cause of these premiums. In the first place, when we began to make the payments to Germany, France had not had time to reestablish her commercial situation. The country stood in want of every thing; it had to import raw materials and supplies of all sorts; this was an indispensable condition to the resumption of industry; now we had these imports to pay for, and, instead of having a balance of trade in our favor, as is generally the case, the country found itself a debtor on this head. Besides this, the Government was, as yet, without experience as to the best mode of meeting our debt to Germany, and, not knowing what resources to count upon, was unnecessarily hasty in providing itself with bills on other countries. It came thus, with its unusual demands, into competition with trade, and caused the exchanges to rise suddenly to high figures. Added to these causes was I The French designation " cours force," or "forced circulation," applied to notes which are inconvertible and a legal tender, is much more expressive than its English equivalent. (TR.) THE EXAMPLE OF FRANCE. 47 the speculation in the funds, which took place after the negotiation of the first loan of 2,000,000,000 francs, and which carried the price of it rapidly to 88 and 90 francs, and gave us much trouble.' It deprived us of the support of foreign capitalists who had been disposed to tale part in this loan. These parties, tempted by the immediate premium which the loan attained, hastened to realize their subscriptions, and we were thus compelled, not only to restore to them the first payment which they had made, but to pay them the profit out of our own pockets. All these circumstances caused us great embarrassment; we suffered the inconvenience to which rich men are often subjected, when compelled unexpectedly to meet a multiplicity of demands at the same time, for which they have not sufficiently provided. The situation in which we found ourselves in November, 1871, and which raised exchange on London to 26 francs, and led to the depreciation of 2- per cent. in paper-money, was, no doubt, partly due to the necessities of our position, and to the misfortunes which had overwhelmed us; but it was also, in part, attributable to faults of our own, which might have been avoided. With less haste and more system in the purchase of foreign bills, and with less speculation in the funds after negotiating the first loan, we might have prevented foreign exchange from rising as high as it did. At all events, the situation created some alarm; and when, at the end of 1871, it was proposed to raise the circulation of the Bank still higher, carrying it from 2,400,000,000 to 2,800,000,000 francs, the propriety of the measure was seriously questioned, and fears expressed that paper-money would be still more depreciated, and possibly an abyss opened, in which the public wealth would be engulfed as at the time of Law. But the increased issue was nevertheless authorized, and it was not followed by the fatal consequences feared. It should, however, be said, for the credit of the Government, and of the Bank of France, that they made a very moderate use of this privilege. The circulation, except for a short time in the month of February, when it was increased by l The Loan of 1871 was issued at a nominal price of 822, but it really produced to the Government only 794. See " Journal des Economistes," June and July, 1874, " L'Administration des Finances Publiques en France depuis 1870," par Gustave du Puyniode. (TR.) 48 THE EXAMPLE OF FRANCE. 50,000,000 francs, did not go above the former limit of 2,400,000,000; it fell again very speedily below it, and never afterward exceeded that amount, until the month of September, 1872, after the negotiation of the second loan of 3,000,000,000. In the mean time, the good effects of our commercial activity had made themselves felt; our exports exceeded our imports by a considerable amount, and we had again become the creditors of Europe. Moreover, we had sold a part of the foreign securities which had accumulated in our hands in more prosperous times. Competent authorities estimate the amount thus parted with at 1,500,000,000 francs. We should also notice the part taken by foreign capitalists in our loan of 3,000,000,000. In this instance, partly by means of the greater confidence felt in our credit, and partly through the exercise of more caution in advancing the price of the new loan, the capital thus raised remained longer invested in our funds, and gave us resources in the way of foreign exchange. An arrangement was finally made with a group of bankers, to furnish us bills at a fixed price. By all these measures the situation of our finances was entirely changed, and, in spite of the payments which we had still to make to Germany, in spite of what we had to expend in restoring our own losses, the foreign exchanges became once more favorable. It must not, however, be supposed that it had cost us nothing to reach this position. In the first place, we had parted with 1,500,000,000 francs of foreign securities, and the bankers who had combined to aid us did so at a very round price. The exact figures will be found under the head of the cost of negotiating the last loan.' But, however dearly rendered, we may congratiulate ourselves on having made use of their assistance, for it was of the greatest service. The first thing to be aimed at in the interest of our domestic and foreign trade, was to keep up the value of our note circulation. If we had had an unfavorable foreign exchange, this would have been seriously comproaised. In dealing with the bankers, who were earning a very 1 The cost of negotiating the several loans made by France during the war, is stated by M. Magne, in his report as Minister of Finance, as follows: Of the Imperial Loan, 750,000,000 francs, 18- of 1 per cent.; of the filorgan Loan, 250,000,000 francs, 31 per cent.; of the Loan of 1871, 2,000,000,000 francs, 2A{; per cent.; of the Loan of 1872, 3,000,000,000 francs, 3 7o per cent. (TR.) THE EXAMPLE OF FRANCE. 49 large commissions we made it for their interest to keep down the price of exchange; they labored assiduously to that end, and succeeded, by drawing their own bills on their correspondents, and putting them in funds at a later date. In this way, we had the benefit of a state of the exchanges somewhat artificial at first, but which soon became natural, as the means derived from the loan and from other sources came in, and enabled us to reimburse the bankers for their advances. It was il this manner that we reached the final payments of the indemnity, without disaster, and without having had to export any considerable quantity of the precious metals, maintaining throughout, at par, a credit currency which, at one time, amounted to 3,000,000,000 francs. Not only have we paid our indemnity, but we have been able, in great measure, to repair our fortunes, and to repurchase the larger part of our loans which had been taken in foreign countries.' The result is very remarkable, and does honor alike to the grandeur of our acquired wealth, to the power of our credit, to the elasticity of our trade, and, it must also be said, to the wisdom of the government of M. Thiers; but in it all there has been nothing inconsistent with the established laws of political economy. II. IN 1848 the circulation of the Bank of France, after some slight fluctuations, continued at par, in spite of the Legal-Tender Act of that year; its limit was fixed at 545,000,000 francs, and the metallic reserve was rapidly restored. It reached 241,00,000 in the month of December, 1848, and a year later, in 1849, it was 420,000,000; and when specie payments were resumed, it exceeded 500,000,000. We have now under consideration a circulation of bank-notes which rose to 3,000,000,000 francs, with a cash reserve of only 750,000,000. The proportions were altogether different at the two periods, but the economical condition of the country differed still more widely. In 1848, France was able to supply all her own.wants, and had a stock of the precious metals estimated at more than 3,000,000,000 francs; the I M. Say, in his official report on the Payment of the Indemnity, says that before the end of 1874 the whole of the 5,000,000,000 francs borrowed in the loans of 1871 and 1872 will have been reabsorbed by French capital. (TR.) 4 50 THE EXAMPLE OF FRANCE. bank-note circulation did not exceed an average of 350,000,000, and the volume of transactions of the Banki of France in 1847 amounted to only 1,200,000,000. In 1869, the year preceding the late war, the stock of coin and bullion was estimated at not less than 6,000,000,000 francs, and the bank-note circulation exceeded 1,200,000,000. Checks, an instrument of exchange quite unknown in 1848, had come into considerable use, and the volume of transactions of the Bank of France reached 8,325,000,000 francs. In a word, the monetary resources, or instruments of exchange, had more than doubled, in response to a trademovement three times as large as at the earlier period. When, therefore, it became necessary in 18TO and the subsequent years, as it had been after 1848, to replace with paper-money the coin which no longer circulated, in consequence of the LegalTender Act, an amount which had been sufficient twenty years before, was by no means adequate now; the less so because we had to satisfy, at the same time, the demands both of commerce and of the public treasury. The Bank of France was obliged to advance, in various forms, about 3,000,000,000 francs. We shall be told that this amount has no significance, when the value which the circulation is able to maintain comes to be considered. The notes issued by the Bank of England during the suspension of specie payments were just as fully employed as in our case, but this did not prevent them from losing 20 to 25 per cent. of their value in 1810. The paper-money circulating, at the present time, in Austria and Italy, serves a very useful purpose, but it is depreciated from 15 to 20 per cent. But the fact is, that the notes issued by the Bank of England went to replace the metallic money which had gone to other countries; the exchanges were unfavorable, and the course adopted by the bank was the very opposite of that laid down by Adam Smith, which required that the paper money should vary precisely as gold and silver would have done in its place. At a time when the Bank ought to have curtailed its issues, because the metallic money was diminished, it, in fact, enlarged it, to supply the insufficiency of coin. So at the present day, in Austria and Italy, specie goes out of those countries because of the adverse exchange, and, as the circulating medium has to be reenforced, they do it with papermoney. In France the case is wholly different: the exchanges THE EXAMPLE OF FRANCE, 5 are not unfavorable to us; specie does not go out of the country, but remains in it; and, although it has ceased to circulate, it remains in the pockets of the people. We know that it is here, and will some day reappear, and this certainty suffices to give the bank-notes which take the place of it a stability which they have not elsewhere possessed. In the discussions which took place in the Corps Legislatif, at the end of 1871, in reference to an increase of issue, the value of bank-notes was defended on the ground of their utility, of the need which commerce has of them, and of the operations which they subserve. These positions are far from satisfactory. The demands of trade are extremely deceptive; and if we were to rely on them to determine the quantity of circulating notes which could be maintained, we should expose ourselves to grave mistakes. There is one law in the commercial world which governs all else: it is as far as possible to regulate production by consumption. If production is insufficient, merchandise grows dearer, to the injury of the consumer, and of the well-being of the whole. If, on the other hand, it is much in excess, there ceases to be an immediate outlet for products. They accumulate uselessly in the workshops and the storehouses, and finally decline in value; losses, more or less considerable, follow, and production is at last arrested. Production and consumption are like the two wheels of a carriage, which ought to move together, and at the same velocity; but, to make them move thus together, and to hasten or retard the motion of either, so as to bring it into harmony with the other, is a very difficult matter. It is easy enough when consumption leads the way, and we are made aware of it by an advance of prices; competition then ensues, and speedily fills the vacuum, being stimulated by the hope of profit. But if production is in advance, and this is maintained by speculation, as often happens, products being bought up to sell again after an interval, what evidence have we that there is an excess of production, and that the equilibrium is disturbed? So long as the manufacturer can sell, he continues to manufacture; so long as the speculator can borrow money with which to buy up products, he continues to buy; in this way we are speedily thrown out of the regular channels of commerce, and cannot easily stop. Why have we thus vent 52 THE EXAMPLE OF FRANCO, ured? Because all the operations of sale and purchase have been made by means of bank-paper, accepted as money, but which has no value in itself. It may, perhaps, be answered that it gets its value from the operations of trade which it subserves; but if those operations are artificial, and not responsive to actual demands, where is the value? Some day or other, a settlement will have to be made, and it will be found that there is too much paper-money. On the other hand, when business is carried on with metallic money, we have an infallible means of discovering whether transactions are on a sound footing, and whether they are kept within reasonable limits; it is the price of that money. As it has a value in itself, and cannot be increased at will, if it becomes scarce, it is a sure sign that the equilibrium is disturbed, and that speculation is playing an exaggerated part. Just as the thermometer marks the variations of temperature, so does the price of the precious metals indicate the state of commercial relations. England understands this; she is sometimes disturbed at having to pay dearly for money, but she never revolts against this necessity, but submits without complaining. With us, on the contrary, and in other countries, not only is there irritation when a rise in the price of money takes place, but an attempt is made to escape it, by resorting to expedients, such as paper-money.' This is like pushing up the pointer of the barometer, when it marks bad weather, to make it indicate better. The bad weather continues notwithstanding; and so, in the matter now under discussion, the expedients which are adopted to allay the crisis serve to make it worse. We can recall what took place in 1857, 18863, and 1864, the dates of the last commercial troubles through which we have passed: the cash reserves of the Bank of France declined with alarming rapidity. In 1863 there was very soon not more than 205,000,000 francs of specie, to respond to 807,000,000 of bank-notes, with1 The Commiission of Inquiry of 1855-'68 was primarily owing to a petition signed by three hundred merchants of Paris, addressed to the Emperor, complaining of the raising of the rate of interest by the Bank of France during the late crisis (1863-'64), and asking for a commission of inquiry, to ascertain facts and devise remedies for an evil which paralyzed business, arrested industry, and caused embarrassment to the entire commerce of the nation. The views of these petitioners will be found expressed by the committee of the dealers in tissues, in vol. i., p. 63, etc., of the " Report of the Commission." THE EXAMPLE OF FRANCE. 53 out counting the public and private deposits, which amounted to 218,000,000 more. The situation was a grave one, and the Bank was threatened with inability to continue specie payments. Was it its duty, under these circumstances, as was proposed by certain persons, conspicuous at that time, to go on and entirely exhaust the metallic reserve, and be driven to suspend specie payments, rather than resort to the step of materially advancing the rate of interest? We had, at that time, an unfavorable exchange, and the redemption of notes was demanded, not in consequence of any distrust of their soundness, but because it was necessary to export specie, and it could only be procured directly of the Bank. If, to avoid the inconvenience of redeeming the notes, recourse had been had to a legal-tender act, the Bank would have done the very opposite of its duty, and of what circumstances demanded. Why were the exchanges against us, and why was specie leaving the country Because we had gone to extremes in our commercial operations; because we had bought more than we could sell, and had to pay for the difference in specie. We had filled our warehouses with merchandise at prices at which it no longer found buyers. What had fed this speculation, and brought it to the point which it had reached? Precisely this: the ease with which discounts were procured. From this resulted an artificial state of things, and even an appearance of prosperity which deceived everybody. It was supposed that the rise of prices was dae to the growth of wealth, whereas, in fact, it was only the offspring of speculation. If we had continued in this course, kept the rate of discount where it was, and suspended specie payments, we should very soon have seen papermoney seriously depreciated, and a train of disasters follow. Fortunately, good sense triumphed in the end; the Bank of France, driven by necessity, decided to raise the rate of discount by rapid steps; the more rapid because it had already waited too long: it advanced the rate to 7, 8, and 10 per cent. Speculation- had to stop: it was no longer able, under the new conditions imposed on it, to sustain a purely artificial movement in trade. The price of merchandise fell, and the export trade was resumed. It is in respect of exports that speculation is particularly injurious. When these extremes of speculation occur in a country, they close the market for exports, and 54 THE EXAMPLE OF FRANCE. open it to imports. Prices are established which no longer correspond to those of other countries. We can no longer sell, by reason of the advance of price; and we continue to buy, because we can do so on better terms abroad than at home. Hence arises an unnatural state of things, which, acting on the exchanges, very soon raises them to excessive figures. Now, the situation is quite different; there has been no excessive speculation; nothing of what the English call "overtrading." Except for a short period in 1871, when, in consequence of unwise measures, the price of exchange was somewhat stimulated, it has been almost always in our favor; and, when the circulation of the Bank of France reached 3,000,000,000 francs, bills on England were at 25.35, or at a point when the export of specie ceases. Three thousand million francs of paper-money is certainly a very high figure, compared with the 800,000,000 of the crisis of 1863 and 1864; it is not, however, the amount of the circulation only, which we must take into consideration, but rather the whole situation. In this later period, we have not issued paper-money to take the place of specie which has left the country, nor have we endeavored to create an instrument of speculation; we have simply replaced the specie which still exists among us, but which no longer shows itself. In this aspect of the case, on a careful consideration of the circumstances of the time, with the quantity of gold and silver still remaining in France, which, according to the most trustworthy authorities, is not less than 5,00,000,000, and is possibly 6,000,000,000 francs, the credit circulation resembles, in some sort, that of the deposit-banks of former times. It is based upon a metallic reserve more than equal to it, only that reserve, instead of being in the vaults of the bank (where, however, it is beginning to accumulate),' is diffused through the country; but it is immobilized, and at present does not perform its ordinary functions. Thus we find, on one side, a perfectly sound condition of trade; and, on the other, a large stock of the precious metals, which have never left the country. It is owing to these two facts that paper-money has been able to maintain itself steadily at par, in spite of the large proportions which it has attained. Those who would argue from the 3,000,000,000 1 On the 10th of December, 1874, the specie in the Bank of France was 1,318,000,000 francs, against a circulation of 2,547,000,000, or more than 52 per cent. THE EXAMPLE OF FRANCE. 55 of yesterday, and the 2,500,000,000 of to-day, that we might safely have exceeded the limit of 800,000,000 in 1863, and that henceforth there will be nothing to fear if we enlarge the circulation, rather than raise the price of money, would be altogether wrong, and would mistake a mirage for a reality. As to the proper amount of credit currency which a country may maintain, no decisive rule can be laid down. It depends entirely on circumstances; this is the lesson which the experience of France teaches. When the exchanges are against a country, for whatever reason, whether because of excessive speculations, such as we had in 1857 and 1863, or because it is indebted to other countries for loans contracted or held abroad, or by reason of some other financial operations, as is the case with Italy, Austria, Russia, and the United States, great care should be used in the emission of paper-money. The true criterion is that laid down in the Bullion Report of 1810-the state of the exchanges; it is that which fixes the limits which cannot safely be passed over. In France, with 600,000,000 in 1857, and 800,000,000 in 1863, we had reached that limit; if we had ventured to pass over it, we should very soon have been driven to suspend specie payments, and paper-money would have depreciated. It was of no use to offer, as a remedy to the situation, the furnishing of a better security to the notes, by enlarging the capital of the bank, or by obliging it to buy specie to a greater or less amount:' these remedies were superficial, and would have accomplished nothing. Additional security would not have corrected an adverse exchange, nor satisfied the demands of bill-holders who wanted specie; and the project of buying gold and silver to check a drain of those metals, would have been like pouring water into a sieve. Gold and silver thus obtained would have disappeared instantly, and the crisis would have been aggravated by the false impression to which the purchase would have given 1 These were the remedies proposed by the opponents of the system pursued by the Bank of France, notably by the Messrs. Pereire, founders and managers of the Credit Mobilier. See the following pamphlets: "Reorganisation du Systeme des Banques-Banque de France-Banque de Savoie" (1863). "'Reorganisation des Banques, Legalite et Urgence d'une Reforme" (1864). " Discussion sur les Banques d'Amission, d I'Academie des Sciences, Morales et Politiques" (1864). The same (1865). "Principes de la Constitution des Banques et de I'Organisation du Credit, par M'. Isaac Pereire" (1865). (TR.) 56 THE EXAMPLE OF FRANCE. rise. There was, in short, no effectual remedy but to raise the rate of discount. Unfortunately, we have not yet learned in this country to recognize this truth. Although the paper circulation is still 2,500,000,000 francs, people are already complaining of the excessive rate of discount. It was lately 5 per cent.; they have had to reduce it to 4, and no doubt there are those who think it should go still lower. It would be a great mistake, we think, to yield to this opinion. We must not forget that the Legal-Tender Act ("; Cours Force ") is still in force, and it would not be prudent to repeal it, until the debt of the Government to the Bank is materially reduced. The necessary corollary of a system of legal tender is a higher rate of discount than would be necessary if the currency were in a normal condition. When paper-money is redeemable in specie on demand, we can judge somewhat of the commercial and financial situation, by the demands made for its redemption. If those demands are not made, the rate of discount may properly be reduced, on condition that it is to be raised again, when the demand for specie is resumed. unt, when a legal-tender law is in force, and the notes are inconvertible, how are we to know when there is too much paper in circulation? If we compare the situation to-day with that of a year ago, it would appear that we have a margin on which we might safely reduce the rate of interest. Let us consider the consequences of so doing. As a general rule, reducing the rate of interest gives a certain stimulus both to business and to speculation. Now, suppose that the speculation becomes excessive, as it almost always does, it would be far more difficult to remedy the evil with a credit currency of 2,500,000,000 francs, and with a cash reserve even of 1,000,000,000, than if the circulation were only 800,000,000 francs, and the reserve 200,000,000. In the first case, the amount uncovered would be 1,500,000,000 francs, and in the second only 600,000,000. It may be said that the metallic reserve is more than onethird of the circulation, and that this proportion will meet all probable exigencies. But this is a serious mistake. Precisely as there is no normal figure for the issue, so there is no normal figure for the reserve. The proportion of a third has been supposed to be sufficient under ordinary circumstances; but it is an arbitrary figure, and has no meaning in a time of crisis. Se THE EXAMPLE OF FRANCE. 57 rious trouble has often arisen, at such periods, with a larger reserve than one-third. In January, 1848, the metallic reserve of the Bank of France was 107,000,000 francs, not counting that of the branches, and the circulation was 233,000,000; three months afterward, under the influence of events, the Bank was obliged to suspend specie payments. Nor is it necessary that there should be a political revolution to bring about this result; a simple commercial and financial crisis is enough. During the year 1857, the reserve of the Bank was always an average of 240,000,000 francs, against 600,000,000 of circulation, and at the height of the crisis, when the regents of the Bank, with a singular want of prudence, applied to the Emperor for leave to suspend specie payments, the reserve was still 189,000,000 francs, against 580,000,000 of notes in circulation; showing that even then the proportion of one-third was nearly maintained. Nevertheless, the financial world was at its wits' end: it had to resort to the most vigorous measures, and raise the rate of interest to an extreme height, to escape danger. The proportion of one-third is, therefore, by no means decisive, and cannot, under all circumstances, be considered a sufficient security. Banks of issue have, moreover, not only to redeem their notes, but they generally also receive deposits payable on demand, and have nothing with which to respond to them except their cash in hand. If this amounts to no more than a third of the circulation, it will not be more than a quarter, or a fifth, of the notes and deposits combined; but even if it amounted to a third of this aggregate, it might still be inadequate. In all cases, the liability increases in proportion as the figures of the account increase. Thus it would not be so easy to reimburse 3,000,000,000 francs of notes and deposits with 1,000,000,000 of specie, as 800,000,000 francs with 200,000,000 of specie. At the present time, the credit circulation of 2,500,000,000 francs is perfectly secured, and the public accept it with confidence, for the reasons which we have already indicated. Does it therefore follow that this will always be the case, and that we can hereafter consider a circulation of this magnitude as nearly normal? By no manner of means! In proportion as metallic money shall reappear, and accumulate in the Bank, it will give a greater apparent solidity to the circulation. Nevertheless, the paper-money must be re 58 THE EXAMPLE OF FRANCE. duced; and, indeed, the reduction is already beginning. If it were to remain at its present high figure, it would, with the reappearance and use of coin, double the amount of available currency. The medium of exchange would thus become superabundant, and would depreciate; and the portion of it which has intrinsic value the world over would flow out to other countries where that value was unimpaired. At the present day, more than ever heretofore, with cheapened transportation, and greater facilities of intercourse, all the money-markets of the world are bound together by close ties. From those which have an excess of the precious metals, they flow out to those which have a scarcity, until the equilibrium is restored nearly everywhere; that is to say, an equilibrium of price; for there may be a great difference in the quantity, in different countries, while the value would remain the same. This migration of monetary capital, according to the price which it bears, in one country or another, is taking place every day, and upon it is founded the law of exchange. Why, then, it will be asked, do 5,000,000,000 or 6,000,000,000 francs of specie remain in France, conjointly with 2,500,000,000 of paper-money? Simply because the specie is not in circulation, and does not come into competition with the paper; consequently it does not suffer the depreciation which would drive it out of the country. This point cannot be too much insisted on; it is vital to the question, and deserves to be carefully considered, if we would arrive at a correct understanding of what has already taken place, and of what may take place in future. Given the volume of trade of any country, and its usages in respect of credit, and there will be necessary a certain quantity of the instruments of exchange. If these are not had in sufficient abundance, there is embarrassment; capital becomes dear, and is not obtained without difficulty. It may be said, indeed, that the instrument of exchange, even when it is metallic, does not constitute all the capital of a country; that, in fact, it represents a very small portion of it. This is true, but it is the medium through which we are put in possession of all other capital. We may compare it to railways, which are not, indeed, all the wealth of a country; but, as they transport the larger portion of its productions, and bring them within the THE EXAMPLE OF FRANCE. 59 reach of consumers, if they are not sufficiently numerous or extended to fulfill the office which is expected of them, products become dearer in consequence. Last year, capital was very dear in England, because of a scarcity of gold in that country: yet Great Britain had entered into no speculations, it had realized its usual savings, and the tendency should have been toward cheapness rather than toward dearness of capital; but it had to meet a counter-influence in the payment of our indemnity, and in troubles existing in other countries. It was obliged to furnish specie to countries in need of it-first to Germany, and afterward to America, where a crisis was in progress; and as it was embarrassed to meet all these demands, and as its metallic stock sensibly diminished, the price of capital rose accordingly, and the monetary situation became difficult. It is necessary, therefore, to have a sufficient quantity of the precious metals to carry on the business of a country in the usual way, but more than enough for this purpose is not desirable, for the value of it will then decline, like that of any other merchandise of which there is a surplus. What would be the result if we should keep up a credit circulation of 2,500,000,000 francs after resuming specie payments? The papermoney would be presented for redemption, the bank reserves would be exhausted, and we should be driven into a new suspension, with an adverse exchange, and under worse conditions than in 1848 and 1870. We should be obliged, in that case, to issue more paper, not to take the place of specie which had hidden itself at home, as in the two previous cases, but of that which had gone out of the country, which is quite a different matter. It is evident that the existing circulation of 2,500,000,000 francs must be materially reduced, but at what point the reduction will stop, it is difficult to predict. It will depend on many considerations, and first of all, on the kind of coin which is to circulate. If it is silver, which for the purposes of coinage is inconvenient, and, not in harmony with the demands of modern civilization, a great deal of it will be suffered to lie in bank, and its place will be supplied by bank-notes. If gold, on the contrary, should be the monetary agent, we shall have less need of paper, the small denominations of it would disappear, and the amount of credit-money would be materially CO THE EXAMPLE OF FRANCE. diminished. The extent of the circulation will also depend somewhat on the progress which may be made in the matter of credit. The use of deposits, bank-accounts, and checks, is still in its infancy in this country. They are very little used even in the great cities, while in the rest of France they are completely unknown. It is, however, to be hoped that they will be more employed hereafter, and that here, as in England and the United States, payments will be more generally made through the medium of bankers, and by transfers in account current. If this should be the case, we shall economize both in the use of specie and of bank-notes; for it is to be observed that the use of bank-notes does not reach its fullest development, except in countries where the keeping of bank-accounts is unusual, as is evident by comparing France, in this respect, with England. It is, therefore, difficult to say to what point we can reduce the credit circulation; but, whatever that point may be, a paper currency will never be sound, unless it is based on a very considerable reserve of specie, nor unless it is accompanied by a favorable state of the exchanges. The fact that we have lately had a paper circulation of 3,000,000,000 francs, without depreciation, does not militate against this assertion. This result was accomplished by means of a large reserve of specie, and a favorable state of the foreign exchanges. It succeeded perfectly, and we may fairly assert that, financially speaking, it saved France. Nevertheless, we ran great risks: if trade had not revived immediately after the Commune; if foreigners had not shown confidence in the future of France, by subscribing to our loans; if we had been obliged to export a large amount of specie to pay the Prussian indemnity; in a word, if the exchanges had continued very unfavorable to us, as they were for a brief period at the end of 1871, our paper-money would very quickly have fallen in value, and its downward progress would have been rapid-much more rapid than the increase in its amount. Fortunately for us, the con1 M. Pinard, manager of the Comnptoir d'Escompte, testified, before the Commission of Inquiry, that the greatest efforts had been made by that institution to induce French merchants and shopkeepers to adopt English habits in respect to the use of checks, and the keeping of bank-accounts, but in vain; their prejudices were invincible: " It was no use reasoning with them, they would not do it, because they would not."-" Report of Commission," vol. i., p. 170. (Ta.) THE EXAMPLE OF FRANCE 61 trary of all this has happened; but let us not draw any false inferences for the future from this happy concurrence of circumstances. We may be sure that the principles which regulate a credit currency are precisely the same in 1874 as they were prior to 1870, and that a condition of legal tender, and suspeided specie payments, is always a misfortune. We submit to it when it is inevitable, but we should hasten to get out of it as soon as we have the means. Noow, in reply to those who, in an opposite sense, insist that a credit currency, even when it rests on a metallic basis supposed to be sufficient, is a sort of false money, which changes the relations of trade, and ought not, therefore, to exist at all, we are bound to assert that their proposition is an exaggeration of another sort. The bank-note has its proper function, and it cannot be wholly replaced by the use of checks and of bank-accounts. The check is certainly a most efficient and perfected instrument of exchange: by means of it we are able to effect large payments by a simple transfer in account, almost without the use of money. Bank-accounts also enable us to utilize all the resources of a country, and place them at the disposal of commerce; but checks cannot fill the place of bank-notes, first because they are of limited circulation, and only available between persons acquainted with each other, and do not enjoy the general confidence of the public. Moreover, they are accepted only provisionally, on condition of being paid on presentation; till so paid, the settlement effected by them is not final, and the amount can always be demanded of the drawer, if the bank on which they are drawn should refuse to pay. The bank-note, on the contrary, completes the payment. From the moment it is accepted, there is no reclamation, even though the bank which issued it should fail. This distinction between the two is vital; for it is this quality which gives to the bank-note its character of money, a character which the check does not possess. It also explains why, in all countries, banks are privileged institutions, and are placed under the supervision of the Government. It is because they exercise a. sovereign finction-that of creating money. It is claimed, in favor of the check, that it represents a saving already made, a capital realized; while the bank-note is only a draft drawn upon the future. This distinction is not so real as ^6 age)THE EXAMPLE OF FRANCE. is supposed. Without doubt the check represents realized capital; but the bank which has received that capital in deposit, and which pays interest on it, does not leave it unproductive; it uses it in some way or other; and when the depositor wishes to make some other use of it, how is the bank to reimburse him? The same capital cannot be used for two purposes at the same time, for the purposes of discount and for the payment of checks; consequently, if the two uses of it confiict, one only can be satisfied. Now, upon what is the security of the check founded T Upon this, that all the deposits will not be withdrawn at the same time; that a certain portion of them will constantly remain. It will be sufficient to answer the ordinary demand, if there is a reserve of cash large enough to meet all which may probably be called for. It is with checks, therefore, exactly as with bank-notes which exceed the amount of coin reserve. We cannot be sure, on the one hand, that the deposits will always remain at a given figure, nor, on the other hand, that such and such a metallic reserve will always be enough to meet the notes. In this view, therefore, there is no greater security for the check than for the note; the first is, indeed, liable to encounter a greater deficit than the second. On the authority of a note which we borrow from a work highly esteemed in England, "The Money lfarke t" of Mr.Walter Bagehot, there were in London in 1872, in the principal banks, deposits amounting to 3,000,000,000 francs (~120,000000), and the cash reserve to meet them was only 337,000,000 francs (~12,350,000); that is to say, about 11 per cent.; and it was exclusively held by the Bank of England. Now in France, and in the countries where there are more notes in circulation, and smaller deposits, the reserve kept to meet the two combined is always 25 or 30 per cent. at a minimum. Will it be asserted that deposits are less liable to vary in a time of crisis? This is a great mistake. In the United States, in 1857, they fell in a few months more than 50 per cent. They decline very much also in England, when there is any financial embarrassment; but such a decline is not seriously felt at the Bank of England, and for this reason, that other financial institutions are obliged, for their own reputation, to keep a certain reserve in the Bank of England, and, if they diminish it too much, their credit suffers. What, then, do they do, in a time of crisis? They call THE EXAMPLE OF FRANCE, 63 upon the Bank to advance to them, in the form of discounts, what they are compelled to realize by a withdrawal of deposits. To'speak only of the latest crisis, that of 1866, the Bank of England in a single week, from the 9th to the 16th of May, enlarged its discounts by the sum of 200,000,000 francs (~8,000,000). By this means the deposits were not diminished; on the contrary, they rather increased; but the result was the same, the reserve was exhausted, and it is that reserve which constitutes the only available resource. HIence we conclude that the credit which is based upon deposits, is no more solid than that which rests upon bank-notes; indeed, it is rather less so, since it is possible to leave a greater portion of the former uncovered, than of the latter. When crises happen, with a run upon deposits, they assume an extraordinary violence, and the least accident sets them going. In 1866, the failure of a single banking-house, that of Overend, Gurney & Co., sufficed to bring the whole credit system of Great Britain into danger: the panic was so great that the day on which it broke out is remembered under the name of " Black7 Fridacy." On that day, there were no longer any checks in circulation; no longer any confidence in any one; and if people had refused to accept bank-notes also, the life of trade, in so far as it depends on credit, would have been suspended, and business could only have been transacted with coin. It is said that the bank-note is a draft upon the future, the discount of an expectation; this is true, but if commerce is in a sound state, the expectation will certainly be realized. Are we, then, forbidden to discount the future? We engage every day in speculations which can only terminate after a time. Railway companies which borrow capital to construct their roads, factories which are erected by the issue of shares or obligations, do nothing more than discount the future. All the labor of society is based on expectations. We sow, in order that we may reap; otherwise there would be no progress in public wealth. Paper-money is dangerous, if it exist in too great quantity, so as to give rise to hazardous speculations; but if it is confined within prudent limits, if it encourages only regular business transactions, and at short dates, it renders an indisputable service. What has taken place since banks of issue were first established? Before that time, silver was scarce and com 64 THE EXAMPLE OF FRANCE. manded a high price; it at once became more abundant and cheaper. And for what reason? Because there were institutions which had the right to discount the future by means of bank-notes, accepted as a kind of capital, which, although artificial, renders, for the time being, the same services as real capital. When a credit circulation is not too much extended, as compared with the metallic reserve on which it rests, and when the bank which issues it keeps a strict watch over the foreign exchanges, we are acting under normal conditions, and the risks which we run are the smallest possible. In conclusion, two inferences are to be drawn from this essay: First, that the example of France cannot be invoked to justify the assumption that legal-tender notes can be hereafter considered as devoid of danger. The steadiness of our bank-notes, in spite of their being a legal tender, and the amount of them exceptionally large, is owing to circumstances wholly exceptional, to efforts which have been made, and which have been successful, to maintain a favorable condition of the exchanges; and, finally, to the large stock of the precious metals which has never ceased to remain in the country. All these circumstances have not thus coexisted in countries where the paper-money has depreciated, such as Austria, Italy, etc. The second lesson which we have sought to inculcate, in answer to the exaggerated views of those who would reject the use of bank-notes altogether, seeking to supply their place with checks, is, that what they propose would not put an end to crises and financial embarrassments; that, on the contrary, it would stimulate them, by increasing the amount of demand liabilities uncovered by specie. We have the proof of this in what has often taken place in England and in the United States. It is with bank-notes, therefore, as with all other forms of credit: the hl e e itht a they should be used without absig them. If we abuse them, we expose ourselves to great dangers, and build our commercial edifice on an unsound foundation; but, if we use them prudently, we have an instrument of exchange very convenient, entirely in harmony with the demands of civilization, and which serves as a check to prevent an excessive rate of interest. THE END. THE (Established ll~ay, 1872,) Comnducted by Prof. E. L. YOUMAJIS. THE POPULAR SCIENCE MONTHLY was started to promote the diffusion of valuable scientific knowledge, in a readable and attractive form, among all classes of the community, ant lias thus far met a want supplied by no other periodical in the United States. Tile gr eat feature of the magazine is, that its contents are not what science was ten Sor nore years since, but what it is to-day, fresh from the study, the laboratory, and the exelimlent: clothled in the language of the authors, inventors, and scientists themselves, wli\ich comprise the leading minds of England, France, Germany, and the United States. A ollng popular articles, covering the whole range of NATURAL SCIENCE, we have the latest tholughts and words of Ilerbert Spencer, and Professors Huxley, Tyndall, andlR. A. Proctor. Since the start, it lias proved a gratifying success to every friend of scientific progress and universal education; and those who believed that science could not be InmIde any thlin but dry study, are disappointed. Tlhe press all over tle land is warmly commending it. We subjoin a few encomiums from tlose recently given: "That there is a place for TIIu POPULAR SCTNCE " This is a highly-auspicious beginning of a uselMONTHi.Y, no0 one can doubt who has watched the fill and imuch-needed enterprise in the way of pubste:adt increase of interest in scientificinvestigation lication, for which the public owe a special debt of an'iiilested in this country, not only by a select obligation to Messrs. D. Appleton & Co."-Boston, class, but by the entire coimmunity." —New York CGaette. 7'lines. "This new enterprise appeals to all who are inA; journlal whiich promises to be of eminent terested in thef landable effort of cilfusing that inforvalue to the cause of popular education in this tion w h is best calculated to expand the nind esountrvy."-iV7