Agio

¹⁰³ The paper of each colony was used to pay the provincial taxes at its original value.

This gave it some additional value over and above the length of time for its final redemption.

• This additional value depended on whether the amount of paper issued was in excess of what could be used to pay taxes.
• In all the colonies, the amount of paper was very much in excess.

¹⁰⁴ A prince who orders that taxes be paid in a paper money, might give a certain value to this paper money, even if the terms of its final redemption depends entirely on the prince.

If the issuing bank kept this quantity of paper always below what was needed to pay taxes:

• the demand for paper might cause it to even bear a premium, and
• the paper could have more value in the market than the gold or silver currency it was issued for.

This is the idea for the Agio of the bank of Amsterdam.

The Agio is the superiority of bank money over current money even if this bank money cannot be taken out at the owner’s will.

• Most foreign bills of exchange must be paid in this bank money.
• It must be paid by a transfer in the books of the bank.

The Bank of Amsterdam alleges that its directors are careful to keep the total bank money always below the demand.

• This is why they say that its bank money sells for a premium, or bears an agio of 4-5% above the same nominal sum of the country’s gold and silver currency.

However, this account of the bank of Amsterdam is mostly imaginary.

¹⁰⁵ A paper currency which falls below the value of gold and silver coin does not sink the value of those metals.

• It does not cause equal quantities of them to exchange for fewer goods.

The proportion between the value of gold and silver and the value of goods depends on the fertility of the gold and silver mines.

• It does not depend on the amount of any paper money.

It depends on the proportion between the amount of labour needed:

• to bring gold and silver to market, and
• to bring a certain quantity of goods.

Free Banking Is Based on Precious Metals and Not on Fiat Debt

¹⁰⁶ Banks are considered perfectly free if:

• Their trade is done with safety to the public.
• Its bankers are:
  • restrained from issuing any bank notes for less than a certain sum, and
  • obliged to pay immediate and unconditionally for bank notes when they are presented.

The recent multiplication of banking companies in the United Kingdom has alarmed many people.

Their free competition actually increases the security of the public by:

• obliging all banks to be more circumspect in their own conduct
  • This prevents them from extending their currency beyond its due proportion to their cash.
    • This guards themselves against those malicious runs caused by their competitors.
• restraining the circulation of each bank within a narrower circle.
  • This makes their circulating notes fewer.
  • By dividing the circulation into more parts, the failure of any company becomes of less consequence to the public.
    • Company failures must sometimes happen in the course of things.
• obliging all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away.

Generally, a trade or division of labour that is advantageous to the public will be more advantageous the freer and more general the competition in it is.