Tuesday, July 1, 2008

Essay On Paper Currency___Proposing A New Method For Fixing Its Value, by Benjamin Franklin

To the Author of the General Magazine.

It appears by the Resolutions of the Honorable the House of Commons of Great Britain, that it is their Opinion, that the issuing Paper Currencies in the American Colonies hath been prejudicial to the Trade of Great Britain, by causing a Confusion in Dealings, and lessening of Credit in those parts, and that there is Reason to apprehend, that some Measures will be fallen upon, to hinder or restrain any future Emissions of such Currencies, when those that are now extant shall be called in and sunk. But if any Scheme could be formed, for fixing and ascertaining the Value of Paper Bills of Credit, in all future Emissions, it may be presumed such Restraints will be taken off, as the Confusion complained of in Dealings would thereby be avoided. Something of this Kind is here attempted, in hopes that it may be improved into a useful Project. But I shall first set down a few plain Remarks touching the Fluctuation of Exchange, and the Value of Gold and Silver in the Colonies; with some Observations on the Balance of Trade; in order to render what follows the more clear and intelligible.

I. Every particular Man, that is concerned in Trade, whose Imports and Exports are not exactly equal, must either draw Bills of Exchange on other Countries, or buy Bills to send abroad to balance his Accounts.
II. The Exports and Imports in any Colony, may be managed by different Hands, and the Number of those chiefly imployed in the latter may greatly exceed the Number of those imployed in the former.
Hence it is evident there may sometimes be many Buyers and few Sellers of Bills of Exchange, even whilst the Exports may exceed the Value of Imports; And it is easy to conceive, that in this Case, Exchange may rise.
III. The British Merchants, who trade to the Colonies, are often unacquainted with the Advantages that may be made by building of Ships there, or by the Commodities of those Colonies carried to the West-Indies, or the Foreign Markets; And for that Reason, frequently order all their Remittances in Bills of Exchange, tho’ less advantageous; which must encrease the Demand for Bills, and enhance the Price of them.
IV. A great Demand in Europe for any of the Commodities of the Colonies, and large Orders for those Commodities from the British Merchants to their Factors here, with Directions to draw for the Value, may occasion Exchange to fall for a Time, even tho’ the Imports should be greater than the Exports.
V. Hence it appears, that a sudden great Demand for Bills in the Colonies, may, at any time, advance the Exchange; and a sudden great Demand abroad for their Commodities may fall the Exchange.
VI. Gold and Silver will always rise and fall, very near in Proportion as Exchange rises and falls; being only wanted, in those Colonies that have a Paper Currency, for the same Use as Bills of Exchange, viz. for Remittances to England.
VII. When few People can draw on England, or furnish those who want Remittances with Gold or Silver, Paper Currency may fall with respect to Sterling-Money and Gold and Silver, (by which the British Merchants always judge of it) and yet keep up to its original Value in Respect to all other Things.
VIII. From all these Considerations, I think, it appears that the Rising or Falling of the Exchange can be no sure Rule for Discovering on which Side the Balance of Trade lies; because that Exchange may be affected by various Accidents independent thereof. But in order to determine this Point with more Certainty, it should be considered;
IX. That whatever is imported, must, first or last, be paid for in the Produce or Manufactures of the Country. If the Commodities exported in one Year be not sufficient to pay for what is imported, the Deficiency must be made up by exporting more in succeeding Years; otherwise the Colony becomes Debtor for so much as the Deficiency is; which at last must be discharged (if it is ever discharged) by their Lands.
X. If this has been the Case with any Colony; or if the Debt of the Colony to Great Britain has been increasing for several Years successively, it is a Demonstration that the Balance of Trade is against them: But on the Contrary, if the Debt to Great Britain is lessening yearly, or not increasing, it is as evident, that the Balance of Trade is not against them; not-withstanding the Currency of that Colony may be falling gradually all the while.
I shall now proceed to the Scheme for fixing the Value of a Paper Currency, viz.
XI. Let it be supposed, that in some one of the Colonies the Sum of 110,000 in Bills of Credit was proposed to be struck, and all other Currencies to be called in and destroyed; and that 133 l. 6 s. 8 d. in these Bills should be equivalent to 100 l. Sterling; which likewise would make the said Bills equal to Foreign Coins, at the Rates settled by the Act of Parliament made in the Sixth Year of Queen Anne. At which Rate, according to this Scheme, it may be as well settled as at any other.
XII. Let One Hundred Thousand Pounds be emitted on Loan, upon good Securities, either in Land or Plate, according to the Method used in Pensylvania, the Borrowers to pay Five per Cent per Annum Interest, together with a Twentieth Part of the Principal, which would give the Government an Opportunity of sinking it by Degrees, if any Alteration in the Circumstances of the Province should make it necessary; But if no such Necessity appeared, so much of the Principal as should be paid in, might be re-emitted on the same Terms as before.
XIII. The other Ten Thousand Pounds to be laid out in such Commodities as should be most likely to yield a Profit at Foreign Markets, to be ship’d off on Account of the Colony, in order to raise a Fund or Bank in England: Which Sum, so laid out, would in two Years time, be returned into the Office again by the Interest Money.
XIV. The Trustees or Managers of this Bank to be impowered and directed to supply all Persons that should apply to them, with Bills of Exchange, to be drawn on the Colony’s Banker in London, at the aforesaid Rate of 133 l. 6 s. 8 d. of the said Bills of Credit for 100 l. Sterling. The Monies thus brought in, to be laid out again as before, and replaced in England in the said Bank with all convenient Speed: And as these provincial Bills would have, at least, as good a Credit as those of any private Person; every Man, who had occasion to draw, would, of Course, be obliged to dispose of his Bills at the same Rate.
XV. It is by Means of this Bank, that it is proposed to regulate the Rate of Exchange; and therefore it would be necessary to make it so large, or procure the Trustees such a Credit in London, as should discourage and prevent any mischievous Combinations for draining it and rendering the Design useless. I know of no Inconvenience that could arise by allotting double the proposed Sum for that Service, but that the annual Interest would be lessen’d; which in some Governments has been found a useful Engine for defraying the publick Expence. But if only a Credit should be thought needful, over and above the said Sum, and upon some Emergency Recourse should be had to it, the Interest-Money would soon afford sufficient Means for answering that Credit.
XVI. The Trustees might further be impowered and directed, to take in Foreign Coins, at the Rates prescribed by the Act of Parliament, from those who wanted to change them for Paper Currency, and to exchange for those who wanted Gold and Silver. This, it is imagined, might reduce those Coins again to a Currency, which now are only bought and sold as a Commodity. Or, if it should be judged more advantageous to the Credit of the Paper-Currency, Part of the Proceeds of what should be sent abroad, might be returned to the Province in Gold and Silver, for creating a Fund here.
XVII. I hope it will appear upon examining into the Circumstances of the Paper-Money-Colonies, by the Rule proposed above, that the Balance of Trade has not been so much against them as is commonly imagined; but that the Fall of their Currencies, with Respect to Sterling, and to Gold and Silver, has been chiefly occasioned either by some such Accidents as are above shewed to influence it; which by this Scheme will be all prevented: Or to their being issued without any good Foundation for supporting their Credit, such as a Land Security, etc. However that be, I think, there can be no room, upon our Plan, to fear, that the Credit of the Paper-Currency can be injur’d, even though the Balance of trade were against the Colony, while their Bank in London can be duely supported.
From the sad Consequence of a losing Trade, viz. that of having the Property of the Lands transferr’d to another country, it appears absolutely necessary for every colony, that finds or suspects that to be its own Case, to think timely of all proper Means for preventing it; such as encouraging Iron-Works, Ship-building, raising and manufacturing of Hemp and Flax, and all other Manufactures not prohibited by their Mother Country. They might likewise save considerable Sums, which are now sent to England, by setting up and establishing an Insurance-Office. This, I think, might effectually be done by an Act of Assembly for impowering the Trustees of the Loan-Office to subscribe all Policies that should be brought to them, on such Terms as should be settled by the said Trustees jointly with a Committee of Assembly, at a Meeting for that Purpose, once a Month, or oftner if necessary. Besides the saving to the Country in the Article of Trade, it would probably yield a considerable yearly Income towards the Support of Government; it being evident, that most prudent Insurers are great Gainers upon the Whole of their Insurances, after all losses are deducted.
Upon the Execution of this Scheme, I am persuaded, two very great Advantages must accrue; First, That the Export would be increased, and consequently bring the Balance of Trade more in favour of the Province: And, Secondly, that the Rate of Exchange would be fixed and ascertained; which, `tis hoped, would effectually remove the Prejudices which the Merchants in England seem to have conceived against a Paper Currency in the Colonies.
The General Magazine, February, 1741

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