Out of the continuous story of monetary experiment, which is English history, the text-books pick out one or two passing incidents and give us their account of them. Thus, after no word has been said about the management of the currency during the Middle Ages, a paragraph or two is usually devoted to the debasement of the coinage by Henry VIII for it is one of the few instances in history of an English King mismanaging the currency. After Henry VIII the river of money plunges underground again. The story of the sixteenth and seventeenth centuries is told as if their controversies were entirely political and religious. Take, for instance, such a book as Professor Neales Queen Elizabeth, which has recently been praised to the skies, or the work of Professor Trevelyan. For all that the painful student can understand there might have been no problems of money at all from Henry VIIIs day until, a volume later on, he finds that in George Is time there was something called the South Sea Bubble. It seems to be a working rule with writers of School Certificate text-books that one, and not more than one, monetary experiment may be referred to in each volume.
Now the South Sea Bubble, for all its prominence in the text-books, was not, philosophically speaking, of great original importance in English monetary history. All that happened, in the last analysis, was that a number of rich men told a number of lies to induce people to buy shares from them for more than they were worth. The politicians kept their mouths shut because they had been bribed. It was, as Bishop Berkeley put it(49) with characteristic carefulness of language, an attempt of men, easy in their fortunes and unprovoked by hardships of any sort, in cold blood to ruin their native country. Unfortunately such attempts are not sufficiently rare in history to deserve extended notice.
A lot of people lost money over the South Sea Bubble and a lot of people gained it. But nobody made money in the sense in which bankers make money that is to say, nobody made it up. The South Sea Bubble is only of ultimate importance for three reasons. In the first place Walpole emerged from it, the master both of an immense fortune and of sufficient evidence to blackmail all the other leaders of the Whig party. It was the foundation of his twenty years of power over England. In the second place the proved dishonesty of the politicians made much easier the later task of the bankers in persuading the public to prefer their bank-notes to a direct state-fiduciary issue. In the third place the South Sea Bubble gave the final blow to the prestige of the monarchy.
The Whigs had already made monarchy impotent. It was their next achievement to make it ridiculous. For such a purpose no candidate for the throne could have suited them better than George I. Not only could he not speak English, as the text-books tell us, but he was also guilty of the more serious crime of having procured the murder of his wifes lover and then of having had him baked in an oven. An historian as careful and restrained as Lord Acton has written(50) of him, Nobody doubted that Konigsmark had been made away with and that the author of the crime was the King of England, whose proper destination, therefore, should have been not St. Jamess but Newgate, and indeed not Newgate but Tyburn. There was little risk of a monarchical revival under such a monarch.
Walpole was astute enough to see that the best way of making quite certain that monarchy would never again put forward a claim to the control of monetary supply was to make the royal family, in its personal capacity, a beneficiary from the system of usury. He, therefore, saw to it that the Prince and Princess of Wales gained in pocket from the South Sea Bubble. One of his (Walpoles) great arts, writes Lady Cowper,(51) to please the Princess has been by making her a stock-jobber in the South Sea. They bought in for her the very morning before the great debate.... They subscribed at a hundred and fifty he twenty thousand, she ten. Walpole told them the moment to sell when the stock stood at about 1,000 and they thus made a large fortune out of the business. Indeed so completely was the future George II captured by the delights of this new life that he condescended to become the Governor of one of the many fraudulent companies which sprang up in this hysterical period the English Copper Company. The Lords Justices had to write to him, Their Excellencies sent a compliment to the Prince of Wales, that the Company of English Copper, of which His Royal Highness had been pleased to be chosen Governor, being illegal, they were forced to involve it in the said Order, which compliment His Royal Highness received very graciously,(52) as well he might, as, receiving warning of the coming crash, he had already sold out with a profit of £40,000.(53)
Yet there were others who were able to look upon the catastrophe of the South Sea Bubble with eyes very different from those of Walpole or George II, and to draw from it very different lessons. In 1721, the year after the Bubble, there returned to England from the Continent a young man, as then but little known but who was destined to leave behind him one of the most remarkable names in the history of English letters. Bishop Berkeley is to-day generally recognized as one of the few English metaphysicians of a quite first-rate importance; few would think it an extravagance to call him the greatest of English metaphysicians. But, besides metaphysics, he turned his versatile genius and extraordinary gift for the writing of lucid prose to numerous other topics to mathematics, to the virtues of tar-water, to the habits of the tides, to the necessity of sending Anglican missionaries to the Red Indians. It would be hard perhaps to name any other English writer possessed of so wide a versatility of interests until we come to the time of Mr. Hilaire Belloc. And it was not strange that the curiosity of such a man should have been aroused with desire to discover exactly why the South Sea Bubble had burst.
He, therefore, wrote in 1721 what he called an Essay Towards Preventing the Ruin of Great Britain. The essay contains a number of reflections, true but a little trite, such as that it is better for a countrys citizens to be honest rather than dishonest and that consumption is not possible until there has first been production. Yet, just as the calamity of 1931 aroused the interest in monetary matters of many people who had not before much attended to them, so did the South Sea Bubble arouse Berkeleys interest. His curiosity was not satisfied by his own essay. Therefore in the years, 1735, 1736, and 1737, Berkeley, by then the Bishop of Cloyne, published in three parts his Queries Proposed to the Consideration of the Public, in which he put forward the monetary and economic reforms which were in his opinion necessary to prevent such catastrophes as that of the South Sea Bubble and to bring prosperity to Ireland for it was with Ireland that he was then concerned. Of this most remarkable work Sir James Mackintosh a hundred years ago wrote(54) that Perhaps the Querist contains more hints, then original, still unapplied, in legislation and political economy than are to be found in any equal space. This could be said with as large a truth to-day as in Mackintoshs time.
The arrangement of the work consisting of a large number of unrelated questions, some on monetary, some on general social, matters is not a happy one. But, if one may throw the general lesson of the queries into a coherent narrative, the argument of the Querist is as follows:
The fundamental service which a monetary system can render to a society is to provide a sufficiency of counters to enable such goods as the producers wish to sell and buyers to buy to change hands. The business of the Government is to see that the general price-level remains stable. One article, through the demand for it increasing, may go up in price and another come down. But the price of articles in general must neither increase nor decrease. Any such general increase or decrease, such arbitrary changing the denomination of coin, is, he says,(55) a public cheat.
All monetary systems are then judged by the efficiency with which they perform this function of keeping prices stable. A metallic monetary system, for instance, is chosen not because there is a magic virtue in gold or silver but because it is thought whether rightly or wrongly that it is more probable that prices will remain stable when the monetary supply is kept tolerably stable by the fact that money consists of metals that cannot be created at will than when it consists of something intrinsically valueless that can be manufactured at will in unlimited quantities.
The function of a monetary system then being admitted, it remains to consider what system will best perform that function. But first he stops to explain what system performs it worst. The system that performs it worst is the system of double-money, which, with the privileges of the Bank of England, was then in its infancy and by which the affairs of England and of other countries have been ruled ever since Berkeleys day the system by which a large proportion of the nations business is done by one sort of money which can at demand be converted into another sort of money by notes which can be converted into gold as in Berkeleys day, by cheques which can be converted into notes as to-day. Under such a system a violent alternation of slumps and booms was inevitable. For the very conditions that create prosperity are also the conditions that infallibly kill it.
Let us understand his argument.
The bank, he says, issues its bank-notes, and it says, You need not be afraid to accept these notes. You are quite safe because you can at will convert them into cash. Now, suppose that some trivial rumour, true or false, should get abroad about the integrity of a particular bank. If but a tenth of that banks depositors hear that rumour and demand their deposits out in cash, it is unable to satisfy those demands. It may indeed stave off disaster for a time by borrowing cash from another bank. But that other bank also has issued ten times as many bank-notes as it can convert into cash. If it lends some of its cash to its neighbour in distress, it is dangerously, perhaps fatally, weakening its own position. The attempt to save the one bank may easily bring the whole financial system crashing into ruin.
Even if somehow the panic is allayed and major calamity averted, the smallest increased demand for cash, he argues, cannot but have disastrous effects. Suppose that it is only a tenth of the depositors who go to the first bank and the bank is unable to satisfy their demands. It can only satisfy them by calling in all its outstanding loans and refusing to make any new ones. By so doing it reduces the sum total of money in circulation in the country at large. Therefore, since there is less money with which to purchase the same amount of goods, all prices fall. Therefore the producer who has incurred his costs of production and his debts at the higher price-level can only sell his article at the lower price-level. Therefore he loses money, turns off hands, ceases to produce, perhaps goes bankrupt. Poverty, unemployment, stagnation, and all the other familiar symptoms of the slump appear.
It should clearly be the object of any sane monetary system to narrow as far as possible the area within which any loss of confidence has its effect. The double-money system instead insanely and unnecessarily widens that area until to-day, as we know to our cost, the whole world suffers for some trifling miscalculation or act of folly in a single bank. Whether a few mishaps to particular persons may not throw this nation into the utmost confusion? asks Berkeley.(56) Indeed, as readers of Dr. McNair Wilsons Promise to Pay will agree, not even miscalculation nor an act of folly is necessary to throw the monetary machine out of gear. Mere prosperity is by itself sufficient. In order to create a boom the banks have lent up to their full capacity. But the mere arrival of prosperity causes people in the lightness of their hearts to ask for a slightly larger proportion of their possessions in cash, just as we read every year how there is an increased demand for cash from the banks as the holiday seasons come round. Whereas before they demanded only a tenth of their deposits, they demand in prosperity, say, an eighth. The banks can only supply that demand for an eighth by refusing to renew some of their loans, and thus they inevitably reduce the price-level and destroy that very prosperity which created the increased demand. The politicians are for ever telling us that there is a good time coming. But we are like Tantalus. Prosperity comes, but, when we put the cup of it to our lips to enjoy it, it vanishes away.
You exaggerate, says the objector. The financial system does not collapse, because the Government steps in with special measures to prevent the final calamity. Exactly, answered the Bishop, in effect, and do you not see what that proves ? It proves that the bank is lending money to the community not, as is pretended, on the credit of the bank but rather on the credit of the community itself. Whether the opinion of men, and their industry consequent thereupon, be not the true wealth of Holland, he asks [Query 44], and not the silver supposed to be deposited in the bank at Amsterdam? and Whether there is in truth any such treasure lying dead ? And whether it be of consequence to the public that it be real rather than notional? [Query 45.]
What paper money is to be issued should therefore be frankly issued by public authority. It should be inconvertible. The check on it should be that the public authority should be forbidden to issue any new supplies of it, when it was seen that those new supplies were resulting not in an increased production of goods but merely in rising prices. Whether counters be not referred to other things, which, so long as they keep pace and proportion with the counters, it must be owned the counters are useful? [Query 290.]
The only argument in favour of a metallic monetary system is that people are accustomed to it. They think that metals have an intrinsic value equal to their monetary value. This is certainly untrue. The industrial demand for gold and silver is small, and, if the demand for them were merely industrial, their price would certainly be very much less than it now is. It is the fact that Governments use the precious metals for monetary purposes that makes them precious. Nevertheless people think that the metals have an intrinsic value, so it is not unreasonable to pay some respect to their prejudice and, if it is possible, to have all the countrys business transacted in metallic money. But, if that is not possible, if in order to keep prices stable, it is necessary to issue paper-money, then it is madness to let any other than a public authority issue that money, or to make it convertible. It is indeed better to have a sufficient monetary supply, even privately issued, than an insufficient supply. He asks, Whether without private banks what little business and industry there is would not stagnate? [Query 290] but that does not prevent him from also asking, Whether it be not a mighty privilege for a private person to be able to create a hundred pounds with a dash of his pen? [Ibid.]
He considered in some detail the experiment of Law which had a little before met with failure in France. The blunder, he insisted, was not that paper-money had been issued but that so much of it had been issued that prices had inevitably risen. Yet, though creditors must necessarily have suffered from that rise, people could in time have adjusted themselves to this new higher price-level. The fatal blow from which Laws experiment could never recover was the alteration by the Regent of the metallic value of the bank-bills, Whether, notwithstanding all the above-mentioned extraordinary measures, the bank-bills did not still pass at par with gold and silver to May, 1720, when the French king thought fit by a new act of council to make a restriction of their value, which proved a fatal blow? [Query 98.] Had he kept the bills as inconvertible legal tender money, all would in the end have adjusted itself.
Paper-money was, argued Berkeley, the simplest and most straightforward of all forms of money, for with it all men could see, what is in any event always the truth, that the credit behind the money was the credit of the community. Whether all circulation be not alike a circulation of credit, whatsoever medium (metal or paper) is employed, and whether gold be any more than credit for so much power? he had asked. [Query 426.] Nor did he agree that a stock of gold and silver was necessary even for foreign trade. Whether it be not evident that we may maintain a much greater inward and outward commerce, and be five times richer than we are, nay, and our bills abroad be of far greater credit, though we had not one ounce of gold or silver in the whole island? [Query 450.] Foreign trade at the least the only sort of foreign trade that was desirable was an exchange of goods either against immediate goods or at least against the hope of goods in the future. Whether trade, he asked [Query 172], be not on a right foot when foreign commodities are imported in exchange only for domestic superfluities? and he followed up this query with a further one which showed that he understood as well as any modern monetary reformer the difference between real and effective demand. Whether the quantities of beef, butter, wool and leather, exported from this island, can be reckoned the superfluities of a country, where there are so many natives naked and famished ? [Query 173.] Whether we are not in fact the only people what may be said to starve in the midst of plenty? he asked [Query 446], anticipating, perhaps creating, a phrase now on the lips of every currency-reformer. Now this exchange of goods, he argued, is not helped by the presence of gold or silver in the exchanging countries. On the contrary it is, as modern experience has taught, greatly hindered if that gold is moved about in quantity from one country to another. It is true that gold is to-day useful for adjusting short-term balances but, if all the gold and silver in the world were thrown into the sea, they could be adjusted just as well by book-entries. So far from being possessed of an intrinsic value, gold is of all the metals, as Thomas More told us in Utopia, the one that is most nearly valueless.
In fact the best way, argued Bishop Berkeley, is the simplest way. The convertibility of notes, the use of metallic money, every other monetary dodge what are they but somewhat clumsy and ill-working schemes for compelling the Government to keep the price-level stable ? Why not cut out these dodges and simply put the Government under direct obligation to keep the price-level stable ? Give them authority to issue sufficient money to keep prices up and make it an offence for them to issue either less or more ? It is idle to argue that politicians are corrupt. If, he said, politicians are not honest enough to do their duty nor public opinion widely enough awake to compel them to do it, then any monetary system will collapse. Under Berkeleys system doubtless the politician would issue too many or too few notes, but under a metallic system he would debase the coinage; under the double-money system he would play tricks by suspending and resuming cash-payments to suit his convenience or that of his friends. Did the fact that the high prerogative of issuing money had been wrested from the king prevent the South Sea Bubble ? Where, he asks, is it most reasonable to expect wise and punctual dealing, whether in a secret, impenetrable recess, where credit depends on secrecy, or in a public management regulated and inspected by Parliament?(57)
With similarly characteristic common sense he tackled the problem of poverty. The first business of a countrys economic system is to give to its citizens the necessities of life. Does our system do this ? It does not. Why not ? Because there are not enough goods ? No, but because the poor have not enough money. Then give them more money. So long as there was on the one hand the labour, the raw material, and the skill to produce the new goods, on the other hand the desire to consume them when produced, for so long would the provision of money, sufficient to make that demand effective, do good to everybody and harm to nobody. Whether to provide plentifully for the poor be not feeding the root, the substance whereof will shoot upwards into the branches and cause the top to flourish ? he asked [Query 59], and Whether a country inhabited by a people well fed, clothed, and lodged would not become every day more populous ? And whether a numerous stock of people in such circumstances would not constitute a flourishing nation? and how far the product of our own country may suffice for compassing this end ? [Query 62.] What was the alternative ? A congeries of starving nations, exporting the necessities of life and fighting against one another for the export markets.
Berkeleys proposals failed of acceptance, in truth, not because of the openings that they gave to corruption but because of the difficulties that they put in its way. Whether it were just to insinuate that gentlemen would be against any proposal they could not turn into a job? he asked.(58) Unfortunately it was perfectly just. His proposal of an Irish national bank, to keep stable the Irish price-level, would have been not to the disadvantage but to the advantage of the Irish gentry. But they were too stupid to see it so to see that they were now but playing fly to usurys spider and that their petty and short-sighted greed was the bait by which they were taken. Whether, he asked [Query 15] sadly, an uneducated gentry be not the greatest of national evils?
In the seventeenth century, as has been explained, England was an importer of capital from Holland. At the turn of the century London established itself as all that Amsterdam was, and England became instead an exporter of capital. Or, to put the truth with more exact accuracy, an international gang, which had up till then operated from Amsterdam, found it more convenient to operate from London instead. Thorold Rogers in his History of Holland [p. 223] comments on the high proportion of Dutchmen among the early directors of the Bank of England. Among other countries to which capital had been exported was Ireland. It was the necessity of paying rents to absentee landlords, interest on mortgages from English bankers, etc., which caused that export of beef, butter, wool, and leather [Query 173] from the starving island, of which Berkeley complained. Now he did not advocate any repudiation of foreign debt, but he did advocate that it should be paid off as quickly as possible. Nor was there any reason to doubt that under his scheme it could have been paid off within quite a short period of time. Had it been so, one of the deepest causes of all the murder and misery of the last two hundred years of Anglo-Irish relations would have been removed at a stroke.
The English usurer however, did not want it to be paid off at all. What he wanted was a permanent lien on Irish land. Now, as long as the Irish were dependent upon metallic money, they never could get out of debt. Ireland herself produced neither gold nor silver nor other metals. Therefore, as productivity increased, she had to import them from England. Either she must buy them with goods or else receive them on loan. She could not buy them with goods because the export surplus in those limited articles that she was allowed to produce was already ear-marked for past debts. Yet if she did not increase her monetary supply the effect would be deflationary, prices would fall, and her productivity be destroyed. Therefore inevitably she had to plunge further and further into debt, compelled to accept the English metal at cheat-prices with the brutal threat, as Swift put it in the Drapiers Letters, that we must either take those halfpences or eat our brogues. Berkeleys suggestion was that gold and silver and copper should be allowed to look after themselves and their deficiencies made up by Irish-issued inconvertible paper-money. Along that road lay a chance of emergence from debt.
His project of a national bank was so little understood that he dropped the passages advocating it out of the edition of his collected works, which it may be time enough to take in hand, he wrote,(59) when the public shall seem disposed to make use of such an expedient. So completely successful was what Cobbett would have called the Thing of eighteenth and nineteenth century England in suppressing this scheme of one of the greatest of English thinkers that, when in the middle of the last century Fraser was preparing his great edition of the collected works of Berkeley, he was unable for a long time to discover a single copy of the original version of the Querist. It was only at the last moment that he struck on a copy just in time to include it in an appendix.
49. An Essay Towards Preventing the Ruin of Great Britain, Berkeleys Works (ed. Fraser), iii, 206.
50. Lectures on Modern History, p. 267.
51. Quoted by Stirling Taylor, Walpole, p. 203.
52. South Sea Bubble, Erleigh, p. 109.
53. Ibid., p. 80.
54. Footnote to Berkeleys Collected Works, vol. iii, p. 355.
55. Query 28.
56. Original Edition, part ii, Query 7.
57. Original Edition, part iii, Query 32.
58. Original Edition, part iii, Query 47.
59. Introduction to the Querist.