by Thomas Allen

In 1938, Charles Rist  (1874-1955) wrote History of Monetary and Credit Theory from John Law to the Present Day (translated by Jane Degras, New York: Augustus M. Kelly Publishers, 1966) in which he reviews Count Mollien’s ideas about bank notes. Rist was a French economist, who was of the Banking School as opposed to the Currency School. [Under the gold standard, banking philosophies generally fell into either the banking school or the currency school. The banking school “holds that as long as a bank maintains the convertibility of its bank notes into specie (gold), for which it should keep ‘adequate’ reserves, it is impossible for it to over issue its bank notes against sound commercial paper with fixed short term (90 days or less) maturities.”[1] Its position is also called the “Banking Principle” or “Principle of Fullerton.” To the banking school, bank notes are merely circulating credit instruments. Although they can be exchanged for gold, they are not intended to be warehouse receipts for gold. The currency school “maintains that all . . . changes in the nation’s quantity of money should correspond precisely with changes in the nation’s holdings of monetary metal. . . .”[2] Its position is also called the “currency doctrine.” To the currency school, bank notes are merely warehouse receipts and, therefore, should be backed 100 percent by specie. To the banking school, bank notes are claims for new merchandise offered for sale in the markets. Under the currency school, bank notes are claims for gold. Under the currency school philosophy, an elastic currency does not exist; under the banking school, it does.] My comments are in brackets. Referenced page numbers enclosed in parentheses are to Rist’s book.

Nicolas François, Count Mollien (1758-1850) was a French financier. He worked in the Ministry of Finance from 1774 to 1791 and went to England in 1796 and studied the Bank of England. In 1799, he return to France and again entered the Ministry of Finance. Napoleon frequently consulted him and made him a councillor of state in 1804. In 1814, he retired from public service. Later, he was appointed to the Chamber of Peers. His major writing, which contains his views on money and banking, is Mémoires d’un Ministre du Trésor Public, published in four volumes between 1780 and 1815.

When Mollien returned to France, he was determined to revamp the French credit system using the English system as his model (p. 92). Mollien wanted to protect the Bank of France from the government, which “was always short of money and anxious to subordinate everything to its political ends” (p. 93). Also, he wanted to protect the bank from its managers, “who were too easily tempted to use it in their own interests” (p. 93).

Mollien argued that “[a] banking issue should only discount good commercial paper” (p. 93). With the strict enforcement of this restriction, the bank would “avoid the requests of a government always in search of treasury advances, and the cash facilities which the bank directors might ask for their personal affairs” (p. 93). Moreover, “the bank should avoid all speculative paper, all ‘friendly accommodation,’ all ‘fraudulent paper’ or ‘collusive securities’ which do not represent real commercial transactions, and the payment of which is not guaranteed by ‘the share in real money with which each consumer should directly or indirectly furnish it’” (p. 93). Furthermore, the bank should fervently avoid treasury advances of the government because they do not arise out of the ordinary requirements of trade and would return to the bank for repayment (p. 93). That is, bank notes issued to the government for treasury bills are in excess of that needed for commerce, and would, thus, return to the bank for gold. [Today’s governments and banks avoid this problem by making bank notes inconvertible.]

The essence of Mollien’s concept of the bank note was merely substituting one currency instrument for another already in existence. His concept is correct. When a bank note is issued against good short-term, self-liquidating paper, the bank note is merely substituted for another form of currency. Thus, he held that “[i]f notes are issued against sound bills of exchange, they only substitute a more convenient paper, with all the characteristics of money, for maturities created in the course of trade” (p. 94). His “idea that the note is merely a substitute for commercial money spontaneously created in the course of trade is correct” (p. 94). [Commercial money is short-term {less than 91 days} self-liquidating {the consumer pays the bill with his purchase} real bill of exchange {a bill that represents goods in the process of being sold to the final consumer}. Some economists reject the notion that bills of exchange are money; most of these economists accept bank notes as money like gold coin.]

However, Mollien believed in the quantity theory of money. If too many bank notes are issued, they declined in value (p. 94). [Presumably, he believed that this is true even if all bank notes are issued against real bills of exchange and gold coin.]

One significant difference between the Bank of England and the Bank of France as envisioned by Mollien was that the Bank of England held its gold reserves primarily for payments abroad. The Bank of France held its gold reserves primarily to redeem its bank notes (p. 95).

In addition to bills of exchange that the bank had converted to bank notes, the bank also needed to maintain a reserve of gold coins for the redemption of its notes when redemption is demanded. However, its notes need not and should not be 100 percent backed by gold. Mollien writes:

“But it would obviously be an exaggeration of caution to the point of absurdity to ask that the reserve of coin should be equal to the sum of the notes that a bank puts into circulation; if, in addition to the security for the bank-notes represented in the bills of exchange which the bank has discounted, it were to keep in its repositories a sum in coin equal to the notes, the bank’s existence would be both impossible and useless, for it could only form this reserve by keeping in a state of stagnation at the very least the capital of its shareholders” (p. 95).

He maintains, “The reserve of coin which a bank holds should therefore be measured against the number and the nature of the causes which can make repayments more frequent” (p. 95).

Rist notes, “It did not occur to Mollien that the note is only a means of making the coin deposited beforehand in the bank circulate” (p. 96). Also, Mollien failed to consider the primary purpose of the gold reserve. “Whereas the gold reserve is the foundation on which the entire activity of the bank is created, Mollien considered it as a way of guaranteeing the convertibility of its notes” (p. 96).

“Mollien considered notes useful because they economised the use of money” (p. 96). However, this idea conflicted with some of his other ideas. “He thought of the note as a substitute for bills held by the bank; but bills are an addition to metallic money; they are a commercial money spontaneously created to supplement the circulation of coin. In acting as a substitute for bills, notes play the same part as bills: they are an addition to, not a substitute for, the coin in circulation” (p. 96).

Moreover, Mollien had difficulty in distinguishing between credit used as money and money itself. To him, bank notes were money like gold coin or inconvertible government notes. However, their issue was limited by the quantity of bills of exchange that they replaced (p. 96). [When a debt is paid with credit used as money, that credit money discharges the debt by passing it to another, the person or entity responsible or obligated for the credit money. The debt is not extinguished until the credit money is converted to something that is no one else obligation, such as gold or silver. Therefore, a bank note is credit money that discharges debt by passing it to the issuing bank. That debt is not extinguished until the bank retires the note by converting it to a commodity money like gold or silver.]

Endnotes

[1]. Percy L. Greaves, Jr., Understanding the Dollar Crisis (Belmont, Massachusetts: Western Islands, 1973), p. 8.

[1]. Ibid., p. 28.

[1]. Percy L. Greaves, Jr., Understanding the Dollar Crisis (Belmont, Massachusetts: Western Islands, 1973), p. 8.

[2]. Ibid., p. 28.