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So constantly have the ideas currency and government been associated — so universal has been the control exercised by lawgivers over monetary systems — and so completely have men come to regard this control as a matter of course, that scarcely any one seems to inquire what would result were it abolished.[1] Perhaps in no case is the necessity of state-superintendence so generally assumed; and in no case will the denial of that necessity cause so much surprise. Yet must the denial be made.

That laws interfering with currency cannot be enacted without a reversal of state-duty is obvious; for to either forbid the issue or enforce the receipt of certain notes or coin in return for other things, is to infringe the right of exchange — is to prevent men making exchanges which they otherwise would have made, or to oblige them to make exchanges which they otherwise would not have made — is, therefore, to break the law of equal freedom in their persons.[2] If there be truth in our general principle, it must be impolitic as well as wrong to do this. Nor will those who infer as much be deceived; for it may be shown that all such dictation is not only needless, but necessarily injurious.

The monetary arrangements of any community are ultimately dependent, like most of its other arrangements, on the morality of its members. Amongst a people altogether dishonest, every mercantile transaction must be effected in coin or goods; for promises to pay cannot circulate at all, where, by the hypothesis, there is no probability that they will be redeemed. Conversely, amongst perfectly honest people paper alone will form the circulating medium; seeing that as no one of such will give promises to pay more than his assets will cover, there can exist no hesitation to receive promises to pay in all cases; and metallic money will be needless, save in nominal amount to supply a measure of value. Manifestly, therefore, during any intermediate state, in which men are neither altogether dishonest nor altogether honest, a mixed currency will exist; and the ratio of paper to coin will vary with the degree of trust individuals can place in each other. There seems no evading this conclusion. The greater the prevalence of fraud, the greater will be the number of transactions in which the seller will part with his goods only for an equivalent of intrinsic value; that is, the greater will be the number of transactions in which coin is required, and the more will the metallic currency preponderate. On the other hand, the more generally men find each other trustworthy, the more frequently will they take payment in notes, bills of exchange, and checks; the fewer will be the cases in which gold and silver are called for, and the smaller will be the quantity of gold and silver in circulation.

Thus, self-regulating as is a currency when let alone, laws cannot improve its arrangements, although they may, and continually do, derange them. That the state should compel every one who has given promises to pay, be he merchant, private banker, or shareholder in a joint-stock bank, duly to discharge the responsibilities he has incurred, is very true. To do this, however, is merely to maintain men’s rights — to administer justice; and therefore comes within the state’s normal function. But to do more than this — to restrict issues, or forbid notes below a certain denomination, is no less injurious than inequitable. For, limiting the paper in circulation to an amount smaller than it would otherwise reach, inevitably necessitates a corresponding increase of coin; and as coin is locked-up capital, on which the nation gets no interest, a needless increase of it is equivalent to an additional tax equal to the additional interest lost.[3]

Moreover, even under such restrictions, men must still depend mainly upon each other’s good faith and enlightened self-interest; seeing that only by requiring the banker to keep sufficient specie in his coffers to cash all the notes he has issued, can complete security be given to the holders of them; and to require as much is to destroy the motive for issuing notes. It should be remembered, too, that even now the greater part of our paper currency is wholly unguaranteed. Over the bills of exchange in circulation[4], which represent liabilities three times as great as are represented by notes, no control is exercised. For the honouring of these there exists no special security, and the multiplication of them is without any limit, save that natural one above mentioned — the credit men find it safe to give each other.

Lastly, we have experience completely to the point. Whilst in England banking has been perpetually controlled, now by privileging the Bank of England, now by limiting banking partnerships, now by prohibiting banks of issue within a specified circle, and now by restricting the amounts issued — whilst “we have never rested for many years together without some new laws, some new regulations, dictated by the fancy and theory fashionable at particular periods”[5] — and whilst “by constant interference we have prevented public opinion, and the experience of bankers themselves, adapting and moulding their business to the best and safest course”[6] — there has existed in Scotland for nearly two centuries a wholly uncontrolled system — a complete free-trade in currency. And what have been the comparative results? Scotland has had the advantage, both in security and economy. The gain in security is proved by the fact that the proportion of bank failures in Scotland has been far less than in England. Though “by law there has never been any restriction against any one issuing notes in Scotland; yet, in practice, it has ever been impossible for any unsound or unsafe paper to obtain currency.” And thus the natural guarantee in the one case has been more efficient than the legislative one in the other. The gain in economy is proved by the fact that Scotland has carried on its business with a circulation[7] of £3,500,000, whilst in England the circulation is from £50,000,000 to £60,000,000; or, allowing for difference of population, England has required a currency three times greater than Scotland.

When, therefore, we find á priori reason for concluding that in any given community the due balance between paper and coin will be spontaneously maintained — when we also find that three-fourths of our own paper circulation is self-regulated — that the restrictions on the other fourth entail a useless sinking of capital — and further, that facts prove a self-regulated system to be both safer and cheaper, we may fairly say, as above, that legislative interference is not only needless, but injurious.

If evil arises when the state takes upon itself to regulate currency, so also does evil arise when it turns banker. True, no direct breach of duty is committed in issuing notes; for the mere transfer of promises to pay to those who will take them, necessitates neither infringement of men’s rights nor the raising of taxes for illegitimate purposes. And did the state confine itself to this, no harm would result; but when, as in practice, it makes its notes, or, rather, those of its proxy, legal tender, it both violates the law of equal freedom and opens the door to abuses that were else impossible. Having enacted that its agent’s promises to pay shall be taken in discharge of all claims between man and man, there readily follows, when occasion calls, the further step of enacting that these promises to pay shall be taken in discharge of all claims on its agent. This done, further liabilities are incurred without difficulty, for they can be liquidated in paper. Paper continues to be issued without limit, and then comes depreciation; which depreciation is virtually an additional taxation, imposed without the popular consent — a taxation which, if directly imposed, would make men realize the extravagance of their national expenditure, and condemn the war necessitating it. Seeing, then, that there could never occur depreciation, and its concomitant evils, were there no notes made inconvertible by act of parliament — and seeing that there could never exist any motive to make notes legally inconvertible, save for purposes of state-banking — there is good reason to consider state-banking injurious. Should it be urged that, for the occasional evils it entails, state-banking more than compensates by the habitual supply of many millions’ worth of notes, whose place could not be supplied by other notes of equal credit, it is replied that had the Bank of England no alliance with the state[8], its notes would still circulate as extensively as now, provided its proprietors continued their solicitude (so constantly shown at the half-yearly meetings) to keep their assets more than three millions above their liabilities.

There is a third capacity in which a government usually stands related to the currency, viz., as a manufacturer of coins. That in theory a government may carry on the trade of stamping bullion without necessarily reversing its proper function is admitted. Practically, however, it never does so without collaterally transgressing. For the same causes which prevent it from profitably competing with private individuals in other trades, must prevent it from profitably competing with them in this — a truth which inquiry into the management of the mint will sufficiently enforce. And if so, a government can manufacture coins without loss, only by forbidding every one else to manufacture them. By doing this, however, it diminishes men’s liberty of action in the same way as by any other trade restriction — in short, does wrong. And, ultimately, the breach of the law of equal freedom thus committed results in society having to pay more for its metallic currency than would otherwise be necessary.

Perhaps to many it will seem that by a national mint alone can the extensive diffusion of spurious coinage be prevented. But those who suppose this, forget that under a natural system there would exist the same safeguards against such an evil as at present. The ease with which bad money is distinguished from good, is the ultimate guarantee for genuineness; and this guarantee would be as efficient then as now. Moreover, whatever additional security arises from the punishment of “smashers”[9] would still be afforded; seeing that to bring to justice those who by paying in base coin obtain goods “under false pretences,” comes within the state’s duty. Should it be urged that in the absence of legislative regulations there would be nothing to prevent makers from issuing new mintages of various denominations and degrees of fineness, the reply is that only when some obvious public advantage was to be obtained by it, could a coin differing from current ones get into circulation. Were private mints now permitted, the proprietors of them would be obliged to make their sovereigns like existing ones, because no others would be taken. For the size and weight — they would be tested by gauge and balance, as now (and for a while with great caution). For the fineness — it would be guaranteed by the scrutiny of other makers. Competing firms would assay each other’s issues whenever there appeared the least reason to think them below the established standard, and should their suspicions prove correct, would quickly find some mode of diffusing the information. Probably a single case of exposure and the consequent ruin would ever after prevent attempts to circulate coins of inferior fineness.[10][11]

It is not unlikely that many readers, though unprepared with definite replies to these reasonings, will still doubt their correctness. That the existing monetary system — an actual working system, seemingly kept going by the state — would be benefited by the withdrawal of state-control, is a belief which the strongest arguments will in most cases fail to instill. Custom will bias men in this case, much as in another case it does the vine-growers of France, who, having long been instructed by state-commissioned authorities when to commence the vintage, believe that such dictation is beneficial. So much more does a realized fact influence us than an imagined one, that had the baking and sale of bread been hitherto carried on by government-agents, probably the supply of bread by private enterprise would scarcely be conceived possible, much less advantageous. The philosophical free-trader, however, remembering this effect of habit over the convictions — remembering how innumerable have been the instances in which legislative control was erroneously thought necessary — remembering that in this very matter of currency men once considered it requisite “to use the most ferocious measures to bring as much foreign bullion as possible into the country, and to prevent any going out” — remembering how that interference, like others, proved not only needless but injurious — remembering thus much, the philosophical free-trader will infer that in the present instance also, legislative control is undesirable. Reasons for considering trade in money an exception to the general rule, will weigh but little with him; for he will recollect that similar reasons have been assigned for restricting various trades, and disproved by the results. Rather will he conclude that as, in spite of all prophecies and appearances to the contrary, entire freedom of exchange has been beneficial in other cases, so, despite similar prophecies and adverse appearances, will it be beneficial in this case.

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[1] [Although few arguments were heard either before or after Spencer’s time for the privatization of coinage, many economists before him, and some afterwards, had argued against government monopolization of paper currency and in favor of free banking. For a general survey of these debates see Vera Smith’s The Rationale of Central Banking. — Ed.]

[2] [The “Law of Equal Freedom,” also known as the “Law of Equal Liberty,” is a fundamental principle of classical liberal thought, an early statement of which can be found in Locke’s Second Treatise on Government. In chapter 4 of Social Statics Spencer defines it as the principle “that every man may claim the fullest liberty to exercise his faculties compatible with the possession of like liberty to every other man.” — Ed.]

[3] [In this passage Spencer draws on Adam Smith’s famous discussion of the advantages of paper currency, in Book II, chapter 2 of The Wealth of Nations, in order to argue against Smith’s arguments in favor of laws prohibiting banks from issuing smaller-denomination banknotes, including Scotland’s 1765 ban on notes of less than £1. For a recent, critical assessment of that ban, see Tyler Goodspeed’s superb book, Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772. According to Hugh Rockoff, Goodspeed “shows convincingly” that the ban defended by Smith but opposed by Spencer was “pushed by the largest Scottish banks with the goal of reducing competition from smaller competitors,” and that by doing so it “encouraged the larger banks to pursue riskier investments, making the system less stable.” — Ed.]

[4] Though not literally currency, bills of exchange, serving in many cases to effect mercantile transactions which would otherwise be effected in money, to that extent perform its function. [For more on the use of “inland” bills of exchange as currency see T.S. Ashton’s classic article, “The Bill of Exchange and Private Banks in Lancashire, 1790–1830.” — Ed.]

[5] Capital, Currency, and Banking. By James Wilson, Esq., M.P. [James Wilson was the founder and first Chief editor of The Economist. His oldest daughter married Walter Bagehot, who took over the magazine when Wilson departed for India in 1859. — Ed.]

[6] Ibid.

[7] Ibid. [For further details concerning Scotland’s unregulated and competitive or “free” banking and currency system bearing out all the virtues Spencer claims for it see Larry White’s Free Banking in Britain:Theory, Experience and Debate, 1800–1845. A quick survey, also by Larry, of various free banking episodes can be read here on Alt‑M. — Ed.]

[8] The alliance consists in this, that on the credit of a standing debt of £14,000,000, due from the Government to the Bank, the Bank is allowed to issue notes to that amount (besides further notes on other security), and hence to the extent of this debt the notes have practically a Government guarantee.

[9] [“Smasher” is Victorian slang for anyone who passes counterfeit coin. — Ed.]

[10] Whilst these sheets are passing through the press, facts, which he is not now at liberty to quote, have been communicated to the writer, conclusively proving the superior economy of a coin-manufacture conducted by private individuals; together with other facts suggesting the obvious truth that the debasement of coinage, from which our forefathers suffered so much, was made possible only by legal compulsion — would never have been possible had the currency been left to itself. [Spencer here is almost certainly referring to a coinage contract recently struck between the Royal Mint and Heaton and Son, a private mint that had only recently been established in Birmingham using equipment auctioned off from the former Soho Mint. Heaton and Son’s, which later became the Birmingham Mint, continued making coins for the British and other governments until 2001, when the Royal Mint forced it out of business by breaking a long-standing agreement to negotiate foreign coin contracts for it and several other private mints in return for their help in supplying Great Britain itself with coins. — Ed.]

[11] [Although Spencer’s claims about the advantages of private coinage may be especially controversial, available evidence fully supports them. Consider, for example, his claims that “Were private mints now permitted, the proprietors of them would be obliged to make their sovereigns like existing ones, because no others would be taken” and that “Competing firms would assay each other’s issues whenever there appeared the least reason to think them below the established standard, and should their suspicions prove correct, would quickly find some mode of diffusing the information.” It happens that, as Spencer was speculating thus, precisely what he claimed would happen in a private coinage system was happening in fact in California, where in the absence of any Federal mint a number of private mints were established to meet the needs of the gold mining industry. For details see Brian Summers 1976 Freeman article, “Private Coinage in America.” — Ed.]