Chapter 2n

Bank Notes vs Promissory Notes Icon

January 1, 2020

The Increase in Bank Notes does not increase inflation

95 A paper money made up of bank notes is equal in value to gold and silver money when it is:

  • issued by people of undoubted credit,
  • payable on demand without any condition,
  • always readily paid as soon as presented, and
  • equal in value to gold and silver, since gold and silver money can be had for it at any time.

96 The increase of paper money is said to:

  • increase the money price of commodities.

In reality, paper money does not necessarily increase the amount of currency, because the gold and silver removed from the currency is always equal to the paper added to it.

From the start of the 17th century to 1776, provisions were cheapest in Scotland in 1759.

  • In 1759, there was more paper money than now, from the circulation of 10 and 5 shilling bank notes.

But the proportion between food prices in Scotland and England is the same now as before the great multiplication of banks in Scotland [in 1749].

  • In addition, wheat is fully as cheap in England as in France even if there is more paper money in England and scarce any in France.

In 1751 and 1752 after the great multiplication of paper money in Scotland, the price of provisions rose probably due to the badness of the seasons.

It was not from the multiplication of paper money.

The Increase in Personal Debt increases inflation

97 It would be otherwise with a paper money consisting in promissory notes, of which the immediate payment=

  • depended on the goodwill of its issuers,
  • depended on a condition which the holder of the notes might not always be able to fulfill, and
  • could only be made after a certain number of years and bore no interest in the meantime.

Paper money in promissory notes would fall below the value of gold and silver according to=

  • the difficulty or uncertainty of obtaining immediate payment, and
  • the length of time at which payment could be made.

98 Some years ago, the Scottish banks inserted an optional clause into their bank notes. They promised payment to the bearer=

  • as soon as the note should be presented, or
  • six months after such presentment, with 6-month interest.

Some bank directors took advantage of this optional clause. They sometimes threatened those who demanded gold and silver for their notes, that the demanders should be content with just a part of what they demanded.

At that time, the bank’s promissory made up most of Scottish currency.

  • This uncertainty of payment degraded the currency below the value of gold and silver money.
  • This abuse occurred chiefly from 1762-1764.
  • Back then, the exchange between London and Carlisle, Scotland was at par.

The exchange between London and Dumfries, Scotland would sometimes be 4% against Dumfries, even though Dumfries was less than 30 miles away from Carlisle.

  • At Carlisle, bills were paid in gold and silver.
  • At Dumfries, bills were paid in Scotch bank notes.

The uncertainty of getting those bank notes exchanged for gold and silver coin degraded them 4% below the value of that coin.

The same Act of Parliament which suppressed 10 and 5 shilling bank notes also suppressed this optional clause.

  • It restored the exchange between England and Scotland to its natural rate, or to what the course of trade and remittances might make.