Superphysics
Chapter 2f

# The Dangers of Overcirculation

##### 7 minutes  • 1485 words

49 A bank’s common expenses are:

• the cost of house-rent
• wages of servants, clerks, accountants, etc.

It also spends to keep a large amount at all times in its coffers for answering the occasional demands of the holders of its notes.

• This amount pays no interest.
• The expence of replenishing those coffers as fast as they are emptied when answering those occasional demands.

50 Let us say that:

• a bank issues more paper than can be employed in the country, and
• this excess is continually returning to the bank for payment.

In this case, the bank should increase the gold and silver in its coffers in a much greater proportion to this excessive paper circulation, because the excess paper will return to the bank much faster than before.

Such a bank should increase their first expence of keeping precious metals, in a much greater proportion to this forced increase of their business.

51 The coffers of such a bank should be filled much fuller because they will empty themselves much faster.

They will need a more violent and more constant expence to replenish them. The coin would also be drawn in large amounts continually from their coffers. It cannot be employed in the country’s circulation because paper already does all the circulation. But the coin will not be allowed to lie idle.

It will be sent abroad* to find profitable employment that it cannot find at home. This continual exportation of gold and silver further increases the bank’s expence in finding new gold and silver to replenish those rapidly-emptying coffers. Such a bank must increase its second expence still more than the first expence, proportional to this forced increase of their business.

*Superphysics Note: As capital flight

52 Let us say that all the paper of a bank which the national circulation can easily employ was exactly £40,000.

For answering occasional demands, it is obliged to keep £10,000 in gold and silver at all times. If it circulates £44,000, the £4,000 above the national circulation, will return to the bank as fast as they are issued.

For answering occasional demands, this bank should keep £14,000 in reserve, not £11,000 only. It will gain nothing by the interest of the £4,000 excessive circulation. It will lose the expence of continually collecting £4,000 in gold and silver. This £4,000 will be continually going out of its coffers as fast as it enters.

53 Had every bank always understood its own interest, the circulation could never have been overstocked with paper money.

But every bank has not always understood its own interest and so the circulation has frequently been overstocked with paper money.

54 By issuing too much paper, the excess continually returned to the bank to be exchanged for gold and silver.

For many years, the Bank of England was obliged to coin gold at an average of around £850,000 per year.

It was frequently obliged to buy gold bullion at the high price of 960 pence an ounce because of:

• this great coinage, and
• the degraded state of the gold coin a few years ago.

It then converted bullion into coin at 934.5 pence an ounce.

It lost between 2.5-3.0% on the coinage of such a large sum. [(960 - 934.5)/960]

The Bank of England paid no seignorage. The government paid the coinage cost. But this did not prevent the expence of the bank.

55 All the Scotch banks were also obliged to constantly employ agents in London to collect money at a cost seldom below 1.5-2%.

This money was sent by wagon and insured by the carriers at an additional cost of 0.75%. Those agents were not always able to replenish the coffers of the Scotch banks as fast as they were emptied. The banks had to draw bills of exchange on their London correspondents to the fill the discrepancy. When those correspondents collected payment for those bills with interest and commission, some of the Scotch banks had to draw a second set of bills.

In this way, the bills for the same sum would make more than 2-3 journeys. The debtor Scottish bank would always pay the interest and commission on the accumulated total. Even the more prudent Scotch banks were sometimes obliged to employ ruinous bills of exchange. This distress was caused by the excessive circulation of Scottish bank notes.

56 The gold coin paid out by the Bank of England or the Scotch banks for their paper which was in excess of the circulation needed by the country, was also itself in excess of the national circulation.

It was sometimes:

• sent abroad in coin, or
• melted down and sent abroad as bullion.

It was sometimes melted down and sold to the Bank of England at the high price of 960 pence an ounce. It was only the newest, heaviest, and best pieces which were carefully picked out of the coin and sent abroad or melted down.

While those heavy pieces remained in coin at home, they were of no more value than the light pieces. They were more valuable abroad or when melted down into bullion at home. The Bank of England found to their astonishment that every year had the same scarcity of coin as the year before, despite their great coinage.

They found every year the more degraded state of the coin despite the great amount of good new coins they issued. Every year, they found themselves needing to coin nearly the same amount of gold as the year before. Every year, they found the cost of coinage becoming higher due to the continual rise in the price of gold bullion. This rise was due to the continual wearing and clipping of the coin.

By supplying its own coffers with coin, the Bank of England is indirectly obliged to supply the whole kingdom. Its coin is continually flowing from its coffers in many ways.

The Bank of England was obliged to supply:

• whatever coin was wanted to support this excessive circulation of Scotch and English paper money, and
• whatever lack this excessive circulation created in the kingdom’s coin.

All the Scotch banks paid very dearly for their own imprudence and inattention.

But the Bank of England paid very dearly:

• for its own imprudence, and
• for the much greater imprudence of almost all Scotch banks.

57 The overtrading of some bold entrepreneurs in England and Scotland was the original cause of this excessive circulation of paper money.

58 A bank can properly lend to a merchant the capital that he needs to answer occasional demands. But it should not lend all or any big part of the capital that the merchant needs. If the paper money that the bank lends never exceeds this value, it can never exceed the value of the gold and silver circulating in the country if there were no paper money. It would never exceed the amount needed by the national circulation.

59 A bank only lends to the merchant the ready money that he needs for answering occasional demands when:

• the bank discounts a real bill of exchange to a real merchant, and
• the real merchant pays it to the bank as soon as it becomes due.

The payment of the bill returns to the bank the value it had lent, with interest.

When the bank deals with real customers, its coffers resemble a pond. The stream from the pond continually runs out while another is continually running in. The amount running in is equal to what runs out. Without any further care or attention, the pond is always full. Little or no expence is needed to replenish the bank’s coffers.

60 Without overtrading, a merchant may frequently need ready money, even when he has no bills to discount.

A bank entirely frees the merchant from needing to keep ready money unemployed for answering occasional demands, when:

• it discounts his bills,
• advances him a cash account, and
• accepts a piecemeal repayment on easy terms.

When the merchant actually gets such demands, he can answer them from his cash account. The bank should check whether the sum of the repayments is equal to the lending given to its customers within 4-8 months.

It may safely continue to deal with them if the repayments are equal to the lending within such short periods. The stream continually running out from its coffers may be very large. But the stream continually running in must be at least equally large.

Those coffers will be likely equally full, without further attention. It would not need any extraordinary cost to replenish them.

On the contrary, if the sum of the repayments falls commonly very short of the loan amount, it cannot safely continue to deal with such customers in this way.

The stream running out from its coffers is much larger than the stream running in. Unless they are replenished by some great and continual expence, those coffers must soon be exhausted.