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lived through the period of the bank restriction when the notes of the Bank of England were made inconvertible, and he had this experience to test his reasonings. Two sentences bring out very clearly Ricardo's conception of a standard and of the limitations imposed by a standard on the expansion (or inflation) of paper money. " In the present state of the law [he is referring to the bank restriction on the conversion of paper into gold] the bank directors have the power of increasing or reducing the circulation in any degree they think proper: a power which should neither be entrusted to the State nor to anybody in it " (Ricardo's works, McCulloch's edition, p. 406). The second text is: " The only use of a standard is to regulate the quantity, and by the quantity the value of the currency and without a standard it would be exposed to all the fluctuations to which the ignorance or the interests of the issuers might subject it."

In other words the use of a standard is to provide safeguards against the dangers of inflation. The best and most effective safeguard is convertibility. All the forms of currency and of bankers' credit ought to be convertible into one another and into gold without let or hindrance. Such convertibility is only guaranteed when the principle of limitation is applied in each case in a way effective according to the circumstances of the case. In some parts of the system the limitation is applied in a very rigid manner, as for example with the token coins. The essence of " Gresham's law-" in the case of token coins is that only by limitation can the nominal value be kept up. In the United Kingdom it used to be thought that to support this limitation effectively the legal tender ought also to be limited. Experience (as observed by Prof. Cannan) has shown that the limitation may be secured in other ways. In the case of bank- notes, whether issued by the State or by banks with delegated powers, the principle of limitation has been applied in different ways. In the United Kingdom before the war the limitation of the issues of bank-notes was far more stringent than in any other country. The Bank Act of 1844 came to be known as the cast-iron system. The essence of it was that, after a point, no notes could be issued unless in exchange for an equivalent amount of gold. In normal times there was no elasticity. In times of crisis elasticity was provided by the suspension of the Act. Other countries had other methods of regulating the issues of their paper money. When Jevons wrote his book on Money in 1875 he was able to describe in his Chapter XIV. on " Methods of Regulating Paper Currency " no less than 14 different methods, and since that time other important varieties have been intro- duced. In these different systems the elasticity in normal and in abnormal times varies, but it is only in the case of inconverti- ble notes that the principle of limitation by reference to the metallic standard is abandoned altogether, and even in that case there is in general some kind of hope deferred that some time or other the link with gold will be restored.

During the World War, in all the belligerent countries except the United States and Japan, the connexion of the notes with gold, that is to say the effective convertibility, was abandoned in practice. No other effective method of limitation was dis- covered or applied. Instead of limitation there was expansion, in order to make the Government loans effective in monetary purchasing power. The greater the expenditure by the State, so much greater became the volume of the forms of purchasing power, and the issues of notes had to conform to other increases if recurrent banking crises were to be avoided.

Historical Examples. Before the World War there were three notable outstanding cases of inflation in connexion with issues of inconvertible paper. They throw light on the processes and consequences of the inflation after 1014.

The assignats of the French Revolution long formed the classi- cal example in the text-books of the dangers of inconvertible paper. The issues began on what appeared to be, having regard to the circumstance of the time, a reasonable basis. The confiscated lands were more than sufficient in estimated value to meet the deficits of former years and to provide a sur- plus for the immediate budgets. In Dec. 1789 the Assembly issued assignats of 1,000 livres (40) each, bearing interest at

5 %, to be accepted from purchasers of the nationalized lands. These notes were part of the floating debt, and were, to begin with, not legal tender. It may be observed that the first notes of the Bank of England (1694) were for high denominations and bore interest. In the course of time the interest on the assig- nats was abolished, the denomination was lowered, the notes were made legal tender as currency, and any pretence of " rep- resenting " lands or any other assets was abandoned. In brief, all effective limitation ceased, and the depreciation both specific and general became excessive. In spite of severe penalties against dealings in specie, culminating at last in the death penalty, in the course of time the notes were refused, and by

1796 had become practically worthless. Attempts had been made to substitute other notes mandats or promises of mandats, but there was no effective withdrawal and no real limitation, and the mandats followed the lead of the assignats. In Feb.

1797 all the paper money was demonetized, the mandats being receivable for taxes or land purchase at i % of their face- value.

The refusal of the paper money began in the French provinces and the circulation was most effective and prolonged in Paris. The analogy with Bolshevist Russia is instructive. There the refusal of the paper money began with the peasants. It is indeed remarkable that the leaders of the Russian Revolution took no warning from the example of revolutionary France. In fact, they advanced more rapidly to monetary destruction. And in Russia there do not seem to have been any of the com- pensating temporary advantages of inflation. " It is worthy of remark," says a recent writer (R. G. Hawtrey), " that so long as the Paris workmen were ordinarily paid in assignats there were no complaints of unemployment; the high prices attributed to the knavery of speculators were the principal grievance." In Russia unemployment increased with the inflation.

The next great example of inconvertible paper and inflation is furnished by the Bank Restriction in England which began in the year in which inconvertible paper was abandoned in France (1797). The contrast with France is remarkable, and, to begin with, confirms on the positive side the effectiveness of the fact of limitation even when the actual practice is not based on any reasoned principle. The notes of the Bank of England, though inconvertible, were > not made legal tender until 1812. They were at first simply debts due by the Bank of England which the bank was not allowed to pay in legal currency. But the notes were accepted by the Government in payment of taxes, and also by the bankers and merchants under a formal agree- ment amongst themselves. In 1811 Lord King demanded pay- ment of his rents in coin (not paper), and an Act was passed forbidding any differentiation between coin and paper that is, making illegal the quotation of two prices. Full legal tender was only granted to the notes the next year (1812).

The specific depreciation of the Bank of England notes began in 1800. At this time (and practically up to 1873) gold and silver were ranked equally as precious metals, and the variations in the ratio of their values never departed widely from 152 to i. From 1797 to 1818 at Hamburg the highest ratio is 16-25 in 1813 and the lowest 15-04 in 1814. The maximum specific depreciation of the notes in 1813 compared with gold was 136-4, and with silver 134-7 (see table in Hawtrey's Currency and Credit, p. 269). By 1816 the specific depreciation relative to the precious metals had practically disappeared. As measured by the exchange on Hamburg the depreciation reached a maxi- mum in 1811 and was about par by 1816.

It is more difficult to estimate the general depreciation as compared with commodities. In 1801 the index number of prices, calculated by Jevons, based on a standard taken as 100 in 1782, had risen from no in 1797 to 153 in 1801, after which there was a fluctuating fall followed by a rise to the maximum of 164 in 1810. It is impossible to say how much of this general rise in prices is to be attributed to the inconvertible paper and how much to causes primarily affecting demand and supply of the commodities taken as the basis of the index num- bers. The great argument of Tooke (History of Prices) was intended to show, by examining the actual records of the circu-