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Title: The Paper Currency of England Dispassionately Considered - With Suggestions Towards a Practical Solution of the Difficulty
Author: Haslam, John
Language: English
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THE
PAPER CURRENCY OF ENGLAND
Dispassionately Considered.
WITH
SUGGESTIONS TOWARDS A PRACTICAL SOLUTION OF
THE DIFFICULTY.
BY JOHN HASLAM, LATE “TURGOT.”
LONDON:
EFFINGHAM WILSON, ROYAL EXCHANGE.
DUBLIN: M‘GLASHEN AND GILL, 50, UPPER SACKVILLE-STREET.
1856.
DUBLIN: PRINTED BY ROBERT CHAPMAN,
TEMPLE-LANE, DAME-ST.
PREFACE.
The following pamphlet was designed for insertion in a periodical
devoted to industrial and commercial purposes, which was to have
appeared on the 1st of January. As owing to unavoidable circumstances
the publication of this journal has been postponed, the writer
has thought it better to present his views to the public in their
original form, than to incur the delay that would be necessary if he
were to recast the essay and expand its scope so as to embrace the
consideration of the Scotch and Irish issues. He trusts that this
explanation will serve as an apology for the extreme compression which
he has been obliged to exercise in treating of several departments
of the subject, as well as for his having neglected to fortify his
reasoning by citations from other writers, in many instances in which
he might have done so with unquestionable advantage to the reader.
19, CULLENSWOOD-AVENUE, RANELAGH,
DUBLIN, Jan. 1856.
THE
PAPER CURRENCY OF ENGLAND
DISPASSIONATELY CONSIDERED,
&c.
Amongst the many debatable clauses contained in the Bank Charter Act
of 1844, there is one at least the practical expediency of which will
scarcely be called in question. It is that which provides for the
redemption of the privileges enjoyed by the Bank of England, “at any
time upon twelve months’ notice, to be given after the first day of
August, 1855.” A similar provision had been inserted in the Act of
1833, so that the decennial expiration and revision of the Bank of
England Charter, may be regarded as a positive feature in the banking
system of Great Britain. The advantages resulting from this periodical
revision of our currency code with respect both to the public generally
and to bankers in particular are very considerable. The investigation
of the laws of monetary phenomena forms undoubtedly the most abstruse
and intricate department in the whole range of political economy. In
no other section of the science are the ultimate conclusions more
liable to be vitiated by any error in the leading principles, or any
false step in the process of deduction; and in no other is it more
difficult either to trace an error through all its mazes to its real
origin, or to present its refutation in a form adapted to the popular
intelligence. It not unfrequently happens, therefore, that some
plausible fallacy becomes generally accredited, and is adopted by our
statesmen as a basis for legislation, either before the materials have
been collected for its successful exposure, or before the knowledge
of such exposure has had time to circulate through all the channels
of the public mind. In such cases the experience of a few years’
operation of the measure, suffices to explode the fallacy, and when, at
the succeeding expiration of the Bank of England Charter, the subject
is presented to parliament for reconsideration, our legislators are
enabled to disentangle themselves from the errors which had previously
misled them, and to bring their enactments into greater conformity with
the principles that should regulate a well conducted currency. And were
it not for this arrangement, there is great reason to apprehend that
our banking laws would present as many obstacles to their amelioration,
as now unfortunately oppose themselves to the reform of so many other
departments of our legislative system.
There is a second beneficial purpose no less eminently subserved by
this arrangement. At present, the privilege of issuing paper money,
unrepresented by bullion, is a highly profitable and closely protected
bank monopoly. Now the undisturbed enjoyment of a monopoly, as is well
known, has sometimes the effect of impressing its possessors with a
conviction, that they hold their privilege by a sort of inalienable
right, irrespective of the public welfare. And were it not for the
provision which subjects our whole monetary system to a periodical
investigation and revision, the existing banks of issue might naturally
share in this feeling, and come to regard any interference with their
privilege, as an unwarrantable exercise of state prerogative. Under
the actual circumstances of the case, however, they can advance no
valid plea for the retention of the right of issue, any longer than
may be deemed consistent with the interests of the community at large.
For if the Bank of England, which has advanced eleven millions of its
capital to the nation, for fiscal purposes, is liable to have the
right of issue withdrawn upon the single condition of repayment of the
debt, with all arrears of interest, how much more is it incumbent upon
those banks which have rendered no such service to the State, to hold
themselves prepared for a similar surrender. And if they have neglected
to make any provision for such possible contingency, it has not been
for want of warning, that they do not enjoy their monopoly by any
indefeasible claim to its possession in perpetuity.
We trust that the approaching session of Parliament will furnish a
striking exemplification of both these advantages. The Bank Charter Act
of 1844, is precisely one of those measures which have been based upon
a fallacious interpretation of the principles of monetary science. A
few of the more far-sighted of our economists and practical statesmen,
were fully cognizant of the fact at the time of its enactment; but
the principle on which it rested was extremely plausible, and a large
majority of our public men assented to its adoption. That measure has
now received its ten years’ ordeal, and it is time that the judgment
of the nation should be formally pronounced upon its merits. Nor can
there be much difficulty in arriving at that decision. Few measures
have ever been condemned by a more general verdict. It is true, that
the Committee of the House of Commons on Commercial Distress in 1848,
delivered a report in its favour, by a majority of two; but, if so,
that report was framed in deliberate opposition to the opinions of
nearly all the witnesses examined; while even of the remainder the
evidence, though intended to be affirmative was inadequate and self
contradictory. The Acts of 1845, for the regulation of the paper issues
of Scotland and Ireland, were supplementary to that of 1844, and more
or less participate in all its imperfections; but neither of them was
put to the crucial test, during the commercial difficulties of 1846-7;
and further than by occasional reference for the sake of comparison
and illustration, we shall not treat of them here, but shall confine
ourselves exclusively to the laws which affect the paper circulation
of England and Wales. It has long been desirable that all the United
Kingdom should be subject to a uniform currency code; nor do any
insurmountable obstacles appear to oppose the establishment of one
consistent system; but the subject is too extensive for discussion in
our limits; and, in any case, the pre-eminent importance of the English
circulation, would justify a separate and exclusive treatment.
The leading provisions of the Act of 1844, are too well known to
require much elucidation. They may in general be arranged under two
divisions; those relating to the limitation of the right of issue, and
those assigning the conditions under which that right should alone
be exercised. The former have at least the merit of being extremely
simple. They merely continue the privilege to all the issuing banks
in existence at the passing of the Act, viz. about 250, and prohibit
the formation of any new banks of issue. The latter, so far as the
country banks of issue are concerned, are equally simple. They do no
more than assign a maximum limit to the issues of each--that maximum
being equal to the average issues, during a certain period, previous
to the enactment, and amounting to nearly £8,000,000 in the total. The
conditions imposed on the issues of the Bank of England, are more
complicated. Those issues are divided into two classes--the issues
on gold and silver, compactly denominated _bullion_ notes, and the
issues on the Government debt, and other securities; which, as they
are not represented by any gold or silver in the coffers of the Bank,
may properly be designated _unrepresented_ notes. Of the latter,
the authorized issue is limited to a maximum of £14,000,000, viz.
£11,015,100 on the Government debt, and £2,984,900 on other securities;
the bullion notes, on the other hand, are not restricted within fixed
limits, but are subject to the single condition that the Bank must
issue notes in exchange for all the gold (and a certain proportion of
silver, not to exceed one fourth of the gold) that may be presented for
purchase at the rate of £3 17s. 9d. per ounce, and must render gold
for all the notes that may be tendered for payment, at the rate of £3
17s. 10½d. per ounce. Thus the total amount of unrepresented notes,
which the united banks of issue in England and Wales are authorised
to circulate, is about £22,000,000;[A] in addition to which, the Bank
of England is allowed to issue bullion notes for every £1 of treasure
which it may possess.
[A] Perhaps we ought to mention that under one of the
provisions of the Act of 1844, in case any of the banks of
issue cease to issue their own notes after the passing of
the Act, the Bank of England may be empowered to increase
its securities and issue notes against them to an extent
not exceeding two-thirds of the amount so discontinued;
and that within the last few months the Bank of England
has been thus authorized to increase its unrepresented
issues by nearly £500,000. This increase, however, is only
intended to prevent the unrepresented issues from falling
much below the £22,000,000, and leads to no important
results.
Of the preceding provisions, it is that which prescribes £14,000,000
as the maximum of unrepresented notes, to be issued by the Bank of
England, that has chiefly awakened discussion since the passing of the
Act. The effect of this inflexible limitation during the commercial
pressure of October, 1847, was so disastrous that nearly every
authority of any eminence, except some few of the original promoters
of the measure, has fully admitted that, but for the interposition
of Government, and the temporary suspension of the bill, the Bank
of England would have been compelled to stop payment; and the whole
commercial system of the country would have been thrown into ruinous
confusion. The general course of trade since that period has been, on
the whole, so regular and prosperous, and our monetary system has been,
therefore, subjected to so slight a strain from disturbing forces, that
it is possible the impression produced on the public mind in 1847, may
have somewhat subsided; should this be the case, we must only hope that
the present heavy efflux of gold, required by our military operations
abroad, will again arouse the slumbering consciousness of the nation,
and that the occasion will not be lost of making some effort to remove
a restriction which, in the case of every unwonted commercial crisis,
is calculated to entail severe distress on every trading interest in
the country.
It were much to be deplored, however, if the prominence of one defect
in the present system, should exclusively engross the attention of the
public, to the disregard of others which, although less disastrous in
their consequences, are not in the least degree more reconcilable with
correct principles of currency. Our monetary code, and especially the
Act of 1844, should be considered as an undivided whole, every one of
whose provisions should be brought into the closest possible conformity
with true principles. And when so regarded, it is undeniable that it
presents a most anomalous appearance, preserving no consistency in its
parts; or rather composing an irreconcilable medley of incongruous
elements, very few of which will admit of justification, on the
hypothesis that the remainder are correct. Thus while the Bank of
England, which possesses a bona fide capital of about £18,000,000,
is not allowed to issue unrepresented notes to within less than four
millions of that capital, the 250 country banks are authorized to issue
such notes, to the extent of their average issues in 1844, even though
that average should exceed their capital in the proportion of three
to one, and though, as the proceedings of the Bankruptcy Court have
subsequently brought to light, there have been some cases at least
in which it has actually far exceeded this proportion. On the other
hand while the country banks are prohibited from issuing a single note
in excess upon bullion, there is no limitation to the issue of such
notes by the Bank of England, farther than the rule which requires
the possession of actual treasure for every note so issued. Again,
while the present issuing banks are allowed to retain the privilege
without submitting to any test of qualification, no new bank that may
hereafter be formed, however extensive its capital, and no existing
non-issuing bank, however indisputable its security, must henceforth be
endowed with a similar prerogative. And again, though the population
of one district may rapidly increase in wealth and numbers, while
those of another may undergo as great a diminution, yet the law makes
no provision for such contingency, but prescribes the original issues
of 1844 as the inflexible rule in both cases, precisely as if no
alteration had occurred in the circumstances of either. Or, to regard
the limitation under a national aspect, although the banks of issue,
considered as a whole, are permitted to contract their unrepresented
issues, to whatever extent may seem desirable, at any period in which
commerce is stationary, or currency redundant; yet under the opposite
circumstances, when business is extremely active, and the demand for
accommodation proportionally great, they are absolutely prohibited
from increasing their issues to any extent beyond the limit to which
they are restricted during ordinary periods. It were easy to multiply
similar instances of inconsistency, but the preceding will suffice;
and it will be more instructive if we cast a rapid glance at some of
the principles which the Act of 1844 most flagrantly contravenes, and
point out in what respects our monetary system may now be brought into
greater consistency with all or any of those principles.
The most prominent, and perhaps the most important of these is the
well established doctrine, that the issue of paper money should be
a function of the State, and should be exercised exclusively with a
view to public interests. This is a conclusion on the truth of which
the common sense of practical men, and the philosophic insight of the
best instructed authorities, are in perfect harmony. It has long been
undisputed that coining is a legitimate or rather essential function of
the State, and the reasons for comprehending the issue of notes under
the same prerogatives are not less forcible. There is no evil that may
befall the public from the circulation of base coin, that may not arise
to an equal, if not aggravated, extent from the issue of counterfeit
paper. Indeed the issue of paper money is liable to risks exclusively
its own and which require far more ingeniously devised safeguards than
the issue of coin. The person who receives gold or silver in payment
may sometimes be under the necessity of employing a few easy tests in
order to prove its genuineness, but if he apply these with the most
ordinary circumspection, he can successfully protect himself from
loss by imposition. Now, he who receives paper money, is often placed
under circumstances precisely the reverse. For, where the number of
banks of issue is considerable, and the varieties of paper money in
corresponding proportion, there are no valid tests within the reach of
an average capacity, by means of which he may verify the genuineness
of every note which he may happen to receive in the course of his
transactions with the public. But even if there were such tests, and
if he exercised the greatest possible care, in their application,
they would not suffice to protect him from losses, arising out of
the unexpected insolvency of some of the banks of issue. In order to
guard efficiently against risk of this description, he would require
an accurate acquaintance with the actual position and stability of
every bank whose paper may at any time come into his possession; and
in the case of nearly every private bank, this knowledge is obviously
unattainable. In the absence of this desideratum, his only means of
protection appear to consist in the prompt presentment or exchange of
every description of paper, on the perfect security of which he does
not possess some valid reasons for reliance.
It must, we think, be conceded, that under the present point of
view, the state of the English paper issues is liable to very grave
objections. In Ireland, where the number of issuing banks is only
eight, all of which are public banks, the cases of forgery are
comparatively few, and a very high degree of confidence in the
currency, is entertained by the public generally. Even in Ireland,
however, that confidence is not so implicit or so universal as it
would unquestionably be, if there were only one description of paper.
A similar observation, though with some qualification, may be applied
to the issues of the banks in Scotland. But in England, where, as has
been said, the number of issuing banks amounts to about 250, and where
at least 150 of these are private banks, it is obviously impossible
that adequate safeguards can be provided against either the occasional
dissemination of fictitious paper, or the not unfrequent infliction of
severe pecuniary losses, through the failure of some of the banks of
issue. We are fully aware of the high reputation which a vast majority
of the country banks in England deservedly bear, both for stability
and integrity; but the failure of several issuing and non-issuing
banks, _since_ the passing of the Act as well as previously, suffices
to prove that this high character cannot be predicated of all of them
indiscriminately. And when a single bank of issue fails to meet its
liabilities, it always tends to throw a partial discredit over the
whole paper circulation of the kingdom.
Whatever may be the other qualities desirable in a paper currency, it
appears to us to be almost axiomatic, that it should, if possible, be
rendered as secure as a currency purely metallic--as stable as the
Government itself. But this we contend can never be accomplished, so
long as the privilege of issue is conceded to any very considerable
number of separate banking companies. The evils requiring to be guarded
against, have been shown to be two-fold; the circulation of counterfeit
notes, and the insolvency of some of the banks of issue. The former
of these, in such a case, appears to admit of no infallible means of
prevention; the latter can only be provided for by the State’s becoming
the guarantee of all the paper money in the hands of the public. But
this is a course which few, even of the most sanguine advocates of a
plurality of issuers, would be bold enough to recommend. The amount
of evil which it would generate, through acting as a bonus upon every
species of mismanagement would be far greater than any which it could
remove. But the principle itself, involved in the adoption, would be
altogether inadmissible. It assuredly forms no part of the functions of
Government to guarantee the solvency of an indefinite number of banking
companies. At the same time, we consider it no less demonstrable, that
the Government has not the right to authorize the issue of notes,
without fully guaranteeing their payment in cases of insolvency.
But if the issue of notes should be a function of the State, it is
equally evident that the profits derived from such issue should
be appropriated to the service of the nation generally. We do not
contend that the Government of the country, whatever may be the mode
of its formation, has the right to interfere with any legitimate
department of trade or manufacture; nor do we propose that banking
should be considered an exception to the general rule. But the issue
of unrepresented paper money is, in its nature, essentially distinct
from the ordinary operations of banking. The banker, in common with the
merchant or manufacturer, derives his profits from the reproductive
employment of his own capital, together with as much of the capital
of his customers, as he can induce them to entrust to his care.
But unrepresented paper money is not capital, and is no more the
property of the banker or his customers, than it is of the merchant
and manufacturer, or their respective customers. In effect however it
is equivalent to capital, and its employment is equally profitable;
any transfer, therefore, of the profits arising out of its issue to a
number of private individuals, is not only an act of injustice to all
the rest of the community, but is a real source of injury to every
banker or dealer in money, who is excluded from the enjoyment of the
privilege. For it is clearly impossible for one who is limited to the
employment of his capital and credit, to compete on equal terms with
rivals who are thus authorized to operate, not only on their capital
and credit combined, but also on a species of fictitious capital, which
they are permitted to create at pleasure. And the only mode in which
this injury can be successfully averted, is by securing the profits
arising out of the privilege of issue to the general body of the
community at large.
In this respect, as in the preceding, the English monetary system
presents the spectacle of a very wide departure from principle. For not
only are the profits derivable from the issue of paper money, almost
entirely appropriated by private individuals, but that appropriation
has been made upon a most capricious method of selection. The case of
the Bank of England is indeed a partial exception to this statement.
It must not be overlooked, that, as the Government bank, it has
always rendered considerable service to the State, in return for the
privilege of trading upon £14,000,000 of fictitious capital. This
service is two-fold. In the first place, it has permanently lent the
Government £11,000,000 of its capital at 3 per cent. As this, however,
is the usual rate of interest paid by Government on its loans, the
value of the accommodation conferred by this advance, especially
when the security of the investment is taken into account, must not
be estimated as extremely high. But secondly, the Bank transacts the
banking business of the State, including that of the National Debt,
and for this service it may, perhaps, be thought that the £70,000
per annum now allowed by Government, is an insufficient recompense.
According to the arrangement made in 1808 the Bank was to receive
£340 per million, on the first £600,000,000 of the debt, and £300 per
million on the remainder; or in all about £250,000. This was obviously
so exorbitant an allowance for the service rendered, that at each of
the recent renewals of the charter, the Government have stipulated
for a deduction; and in 1844 the abatement mutually agreed on was
£180,000. If this deduction should be considered too great, it must
be borne in mind, that as the Bank pays no interest on the Government
deposits, and as they frequently amount to several millions sterling,
the profit which it realizes from their loan, forms no insignificant
item to be added to the £70,000.[B] It is also deserving of mention,
that by an improved system of accounts, introduced into the Bank some
few years since, the expense and trouble entailed by the management of
this department, have been reduced to about one half; so that it is not
altogether impossible that the £70,000, together with the employment
of the deposits, may amount to an equitable recompense for the present
value of the service. But whether this be so or not, it is undeniable
that neither in this respect, nor in the preceding, nor yet in the two
combined, does the Government receive an adequate equivalent for the
privilege of issuing £14,000,000 of notes unrepresented by bullion. For
a very slight calculation will suffice to show, that those £14,000,000,
if advanced in loans or under discount, at the rate of 4 per cent.,
which is about the average, would return a profit of more than half a
million annually; and although the Bank can never retain the whole of
those notes in circulation, yet this produces no essential difference
in the result, as the notes held in reserve are well known to be just
as profitable in increasing the efficiency of the deposits, as if they
had formed a part of the circulation itself.
[B] The interest occasionally paid to the Bank for its advances
on Deficiency Bills is too trifling in amount to require a
reference to it in the text.
The case of the country banks of issue is very different from that of
the Bank of England. The only equivalent which they render in return
for the privilege of issue, so far at least as we are aware, consists
in the payment of stamp duty, and composition in lieu thereof; and
the total amount derived from those imposts is less than £40,000 per
annum. Now, the employment of the £8,000,000 of country notes, in
loans and under discount, at the rate just assigned, would return an
annual profit of more than £300,000; and for this amount of profit the
payment of £40,000 in stamp duty, must be considered a very inadequate
compensation. In like manner, if we extend our view so as to embrace
the total authorized issues of unrepresented notes throughout the
United Kingdom, it will be seen that while the profits arising out of
those issues (which are more than £30,000,000) cannot fall short of one
million sterling, the principal equivalent rendered by the banks of
issue in the aggregate, consists of the two services just mentioned as
performed by the Bank of England, and two similar services performed
by the Bank of Ireland; the vast majority of those banks receiving the
full benefit of the right of issue, with the exception of a trivial
per-centage upon the annual profits. In this respect therefore, as
in the preceding, it is abundantly evident that our present monetary
system is very much in need of a comprehensive amendment.
There are several methods which might be adopted for rendering the
issue of unrepresented notes more decidedly profitable to the State.
One of these will readily suggest itself it is that of allowing all
the existing banks of issue to retain their privilege on condition
of paying Government a certain equitable rate of interest on the
amount of notes which they should hold in circulation. This plan would
undoubtedly possess the single advantage of producing as small a
dislocation in the movements of the commercial machinery of the country
generally, as is perhaps consistent with the introduction of any
important alteration. In nearly every other respect, however, it would
be equally objectionable with the present system. It would furnish no
additional guarantee either for the security of the genuine country
notes, or against the circulation of counterfeit notes; and these are
defects which would alone be sufficient to condemn any system in which
they were not satisfactorily provided for.
But there is another principle, not hitherto propounded, to which such
a system, as well as that at present in existence, would be just as
forcibly opposed as to those which have already been advanced. For
if it is clearly demonstrable, that the issue of paper money should
be a function of the State, and should be exercised exclusively with
a view to public interests, it is no less rigidly deducible from the
best established data of monetary science, and no less agreeable
to the spontaneous conclusions of common sense, that there should
only be a single bank of issue. If no other reason for this could
be adduced, save that already intimated, viz. that the existence of
various descriptions of paper money has the direct tendency to lead to
forgeries, this consideration alone would have sufficient weight to
prove our proposition. But indeed its truth has long been fully proved
on other grounds. It is a well known fact, that in the course of trade
there are certain periods when it is desirable that the currency should
expand to meet unusual requirements, and certain other periods when it
should contract, in order to prevent undue speculation. The former case
in general presents but little difficulty. At such times the rate of
interest is usually high; and as it is for the pecuniary advantage of
the banks of issue to enlarge their circulation as much as possible,
the desire to increase their profits will induce them to extend their
issues to the highest limits. In this case, therefore, the operation
of a plurality of issuing banks may not be injurious. But in the
opposite circumstances, when it is expedient that the circulation
should contract, the effect is precisely the reverse. During such
periods the rate of interest is generally low, and the profits made
by the banks proportionally small; so that it is only by retaining as
large a number of notes as they possibly can in circulation, that the
banks of issue can obtain their ordinary amount of profits. Whenever a
contingency of this sort arises, the momentary advantage of the banks
of issue, and the permanent interests of the community at large, are
brought into direct collision. For should some of the issuing banks
postpone their own advantage to that of the public, and contract their
issues, there will always be found some other banks, which, instead of
following their example, will embrace so favourable an opportunity of
enlarging their transactions at the expense of their more conscientious
rivals, and fill up the vacancy by an increased issue of their own
notes. And the ultimate effect of this course, is to compel the former,
in self defence, to again expand their issues in order to retain their
customers, who would otherwise transfer their accounts to the bank
which would make the largest advances at the lowest rate of interest.
Thus the existence of a plurality of issuers has the inevitable
tendency to throw obstacles in the way of a contraction of the
currency, at periods when the peculiar circumstances of the country,
may render such contraction a measure absolutely necessary for the
public welfare.
In applying this principle to the case of the existing system, it will
be seen that the limitation of the country issues to little more than
one half the authorized unrepresented issues of the Bank of England,
has greatly minimized the evils that would otherwise result from the
existence of so great a multitude of issuers. At the same time, by
throwing the whole responsibility of the management of the circulation
upon the Bank of England, it has practically conferred a very undue
advantage on the country banks. And on the other hand, it has
confessedly provided no machinery for producing a uniform contraction
of the issues, when desirable, in any districts, save the metropolitan,
and those where only Bank of England notes circulate. In every other
part of England and Wales, it lies completely within the power of
some one or two of the local banks to prevent the circulation from
contracting, no matter how essential may be such contraction to the
general prosperity of the district.
The natural inference to which the preceding data directly lead, is,
that either a State Bank should be formed for the issue of treasury
notes, or that the privilege of issue should be exclusively confined
to some one of the existing banks of issue. It may easily be shown
that no insuperable obstacles exist to prevent the establishment
of a State Bank. The only practical difficulty would arise out of
the necessity of paying off the eleven millions due to the Bank of
England; and this could readily be effected either by a direct sale
of the debt, or by the contraction of a new loan for the same amount,
neither of which operations need entail any considerable expense,
present or prospective. The management of the issues would demand no
greater degree of care than those of the Bank of England. A sufficient
portion of the notes issued might be retained for the payment of the
dividends, and for making any other necessary disbursements on account
of Government; and the remainder might be loaned at their market value
to such banks as might have valid securities to offer in exchange;
but no advances should be made to private individuals, or in any
way that would interfere with the ordinary business of the banks of
deposit and discount. The amount of profit that would be derived from
the notes advanced to the banks, would necessarily depend on both the
number of the notes and the rate at which they were loaned; but there
can be little doubt, that if the present issues of England and Wales
were entirely replaced, the nett profit would not be less than half a
million sterling.
To this plan, however, there is one cardinal objection, at least at
the present, and perhaps for many years to come; such a bank would
necessarily be directly or indirectly subject to the control of
whatever Government might happen to possess the seals of office. And
although it is to be hoped that no Ministry which is ever likely to
be entrusted with the executive in the United Kingdom, would so far
descend from the dignity of their high position, as to tamper with
the integrity of the monetary system of the country for any unworthy
purpose, whether party or personal, yet it is not so certain that
in the heat of parliamentary conflict, such tampering might not be
ascribed to the Government of the day; and even the suspicion of any
misdirection could not fail to be prejudicial to that feeling of public
confidence which is so essential to the well-being of every paper
currency. In these circumstances, therefore, it seems preferable that
the issue of paper money should be preserved entirely free from any
possible entanglement with the strife of party politics.
There remains, then, as the only alternative, the selection of
some one of the existing banks as the exclusive depository of the
privilege of issue. The qualifications required by such a bank, are
the possession of a capital sufficiently large to form the basis of at
least the present paper issues of England and Wales, together with a
long experience of business transactions, on a scale proportionally
extensive. Now both of these requisites are combined in the Bank of
England. Its commercial experience has been greater than that of any
other bank in the world. Its capital and rest united, amount to about
£18,000,000, and although £14,000,000 of this are permanently invested
in the loan to Government and other public securities, and are not
therefore available for banking purposes, yet the knowledge that they
can be relied on in the case of any possible disaster, has the same
effect in inspiring confidence, as if they formed a part of the working
capital of the Bank. Now, although the total authorized issue of
unrepresented notes in England and Wales amounts to £22,000,000, yet
the total average circulation of such notes is only about £15,000,000;
and according to the judgment of the best practical authorities, the
portion of the united capital and rest, which is not permanently
invested, would form a perfectly adequate basis for an average
unrepresented circulation of £15,000,000. And if the £3,000,000 that
are now permanently invested in public securities, distinct from the
Government debt, were set at liberty and employed as working capital,
it is equally well established, that the £7,000,000 of which that
working capital would then consist, upheld as they would still be, in
public confidence, by the £11,000,000 lent to Government, would be
quite sufficient as a basis for a circulation of unrepresented notes,
to the extent of from £20,000,000 to £30,000,000.
And this brings us to the enquiry, whether the present note circulation
of England is as extensive as would be consistent with the stability of
our monetary system. It is generally well understood that it is for the
advantage of the nation that the unrepresented paper issues should be
carried as far as is compatible with their perfect convertibility and
security. Every note issued in lieu of gold is obviously equivalent to
the creation of so much additional capital; for as it withdraws a gold
coin from circulation it enables that coin to become capital, while
the note itself discharges the functions of a medium of exchange as
efficiently as the coin for which it has been substituted. And from
this it clearly follows that unrepresented notes should be issued for
every gold coin in the country, with the exception of what is actually
required for securing the convertibility of those notes. Whether this
point has or has not been reached in the case of the English issues,
will depend on the proportion that subsists between the total extent
of the gold currency and the amount required as a domestic and foreign
reserve. For making this comparison we have no precise data that can be
relied on for perfect accuracy, but we can make a rough approximation
that will answer our purpose sufficiently well. According to the
computation communicated by a late Governor of the Bank of England to
the Committee of the House of Commons on Commercial Distress, and which
received the sanction of his official approbation, the gold currency of
England and Wales may be estimated at from £40,000,000 to £60,000,000,
and the silver at £7,000,000 or £8,000,000. It may be observed, that
there does not seem to be any excess of silver, as the difficulty of
procuring a sufficient quantity for the payment of wages in most of
the large towns, is at particular seasons very considerable. On the
other hand, the extent of the gold currency, at first sight, appears
immoderately great. Assuming £50,000,000, or the medium estimate, to
be correct, the metallic currency would be more than three times the
amount of the average circulation of unrepresented notes; or even
taking £40,000,000 as the more reliable computation, the proportion
would still be very nearly three-fold. Or to present the same idea in
different words, an average circulation of £15,000,000 of unrepresented
notes, is a very small proportion of a total average currency of
£55,000,000.
But a closer analysis will bring us to the same conclusion. There
are only three purposes for which a metallic currency is absolutely
requisite--the payment of small amounts, the discharge of foreign
liabilities, and the protection of the convertibility of the paper
issues. The first of these is provided for by the silver and copper
coin in the hands of the public. The second item is the more important
of the remaining two. For the foreign reserve must clearly contain
as much gold as is ever likely to be withdrawn from the country in
one continuous drain. This has been estimated by Mr. Tooke, a very
eminent practical authority, as about £12,000,000; but we think he
must have overlooked the possible concurrence of a failure in some
staple article of food, with the maintenance of a very heavy military
expenditure abroad. Should such a combination ever arise, it would
not be impossible that the drain might even exceed the limit of
£12,000,000. It is more prudent therefore to err on the safe side,
and assign £20,000,000 as the reserve to be maintained for such a
contingency. But when these £20,000,000 have been set apart as a
foreign reserve, there still remain at least a second £20,000,000 in
the hands of the public; and the question arises, what proportion of
these £20,000,000 is really required for securing the convertibility of
the paper issues. To this enquiry the answer given by eminent bankers
is, that £5,000,000 in gold would be more than sufficient to act as a
basis for the present average circulation of £15,000,000, and that if
that average were increased to £30,000,000, a gold basis of £10,000,000
would still be sufficient to secure the convertibility of the whole.
And in confirmation of the truth of this view, the cases of Ireland
and Scotland may be referred to, as in both, the paper circulation is
considered to exceed the gold currency in about a three-fold ratio.
When this domestic reserve of £10,000,000, therefore, is added to the
foreign reserve of £20,000,000 there still remain at least £10,000,000
of gold that serve no necessary purpose as currency, and which it would
be profitable to replace by paper.
It cannot be denied, however, that there are obstacles which forbid
the immediate issue of unrepresented paper money to the extent of
these £10,000,000. The average unrepresented circulation of the Bank
of England is at present only about £8,000,000; and if the bank be
likewise entrusted with the issue of paper in lieu of the country
circulation, which forms an average of about £7,000,000 more, this
would very nearly double its average circulation of unrepresented
notes. Now, although, as has just been shown, the £4,000,000 of capital
and rest, which are not permanently invested in the loan to government
or otherwise, and which therefore form the actual working capital of
the Bank, are amply sufficient to act as a basis for securing the
convertibility of these £15,000,000; and although the conversion into
working capital of the £3,000,000 at present permanently invested in
public securities distinct from the government loan, should enable the
Bank with perfect security to increase its unrepresented circulation
by another £10,000,000, yet, it could hardly be regarded as a prudent
course to allow the Bank to extend that circulation in more than a
two-fold ratio without some gradual preparation for so great a change.
It seems a preferable plan therefore that the Bank should try the
experiment of replacing the country issues without any other important
increase of its unrepresented circulation for ten or twenty years to
come; and there can be little doubt, that after so much experience
in managing the enlarged issues, it might safely be entrusted with a
still further extension. Meanwhile we think it very desirable that the
£3,000,000 invested in public securities, should be withdrawn from the
bullion department and incorporated in the working capital. But in this
we anticipate.
The circulation of unrepresented notes being thus disposed of, there
remains for consideration the expediency of an increase in the amount
of bullion notes issued by the Bank. And here, as in the case of the
unrepresented notes, it is generally well understood, that it is
profitable for the nation that the bullion notes should be extended as
widely as possible. There are two points of difference however in the
two cases. For every unrepresented note that can prudently be issued,
there is a clear addition of an equal amount to the productive capital
of the nation; while for every note issued on bullion, there is no
other saving than the wear and tear of the metal that is lodged in the
coffers of the Bank. But, on the other hand, while unrepresented notes
cannot prudently be issued so far as to infringe upon the metallic
reserve required for foreign and domestic purposes, there is no such
limit to the prudent issue of bullion notes; but the Bank may with
perfect security continue to issue notes on gold so long as the gold
is presented, even though the amount so presented should comprise
every sovereign that is now in the hands of the public. And the reason
for this is sufficiently obvious. For if every bullion note that is
issued, increases the liabilities of the Bank it likewise increases the
assets available for meeting those liabilities, and if £10,000,000 of
bullion are sufficient to meet a demand for the payment of £10,000,000
of notes, £40,000,000 of bullion would be equally competent to
discharge £40,000,000 of notes. And if we include the £15,000,000
of unrepresented notes amongst the liabilities, it will be seen at
once, that if the possession of £10,000,000 of bullion would inspire
confidence in the £25,000,000 of bullion notes and unrepresented notes
combined, there can be no doubt that the possession of £40,000,000 of
bullion would impart a still higher confidence in a total circulation,
consisting of £55,000,000 of both descriptions of notes combined. So
that from this point of view, it clearly follows that every increase of
the bullion notes must necessarily increase the public confidence in,
and therefore the security of, the unrepresented issues.
We have just seen that the amount of gold employed in the currency,
cannot be estimated under £40,000,000. Now the average portion of
this gold which is retained in the Bank, and on which bullion notes
are issued, is not more than from £12,000,000 to £14,000,000. It
would follow therefore from the preceding, that this might safely
and profitably be increased to £20,000,000, £30,000,000, or even
£40,000,000. The possibility of effecting such an increase, however,
does not depend immediately upon the Bank of England, but upon the
public generally, as the Bank can only issue bullion notes on the
amount of gold that is presented in exchange for such notes. But it may
well be doubted whether any permanent increase can be effected so long
as the Bank is prohibited from issuing notes of a smaller denomination
than five pounds sterling. The principal reason why so large an
amount of treasure remains in the hands of the public, consists in the
fact that all small payments, including wages, varying from twenty
shillings to five pounds, must be made in gold, and that as a necessary
consequence, a very large proportion of the money that is held in the
possession of the working classes cannot possibly consist of any other
medium. Any considerable increase of bullion notes, therefore, would
require that that increase should be effected by means of paper of a
smaller denomination than five pounds. And accordingly we deem it a
matter of high expediency that the legal restriction upon such issues
should be at once removed.
We are fully aware that some eminent public men in England have long
been, and perhaps still are, averse to the issue of small notes; but
we cannot discover much force in the reasons which they advance for
justifying their apprehensions. It is not unfrequently assumed, for
instance, that the issue of such notes would necessarily lead to a
great increase of forgeries; as they would be likely to pass into the
hands of persons who could not have much experience in the detection
of counterfeit paper. This objection owes its whole force to the
defectiveness of the present system. If all the present banks of issue
were allowed to issue small notes there can be little doubt that
such permission would lead to extensive forgeries, as the numberless
descriptions of such notes that would be in circulation, would be quite
sufficient to baffle the discernment of even the most experienced
persons. But if the privilege of issue were withdrawn from all its
present possessors except the Bank of England, and if the latter were
allowed to issue small notes, which would in that case be the only
small notes that could ever become disseminated amongst the public,
there is not the slightest reason to suppose that this would have any
other effect than that of reducing the attempts at forgery to the
very smallest minimum. It has likewise been objected, that inasmuch as
such notes would come into the possession of a lower class of persons
than those who can ever now receive paper money, a class liable to be
seized by panic in times of pressure, the effect would probably be to
increase the dangers of the Bank in periods of difficulty. Whatever
influence this consideration may have in respect to an increased issue
of unrepresented notes, it is altogether void of weight as opposed
to the extension of bullion notes. For as we have already seen, an
increase of bullion notes implies a corresponding increase of treasure
in the Bank, for the payment of those notes, and the invariable effect
of an increase of bullion is to augment the confidence of the public in
the Bank’s security. And even supposing the very improbable occurrence
of a run upon the Bank to the full extent of the additional bullion
notes that might have been sent into circulation, the only injurious
result that this could have, would be the reduction of the treasure
in the custody of the Bank to the same amount as it originally held
previously to making the extended issues. But lastly, it has also been
advanced, that inasmuch as small notes could be directly employed
in the payment of wages, any increase in their issue during periods
of speculation would exercise an injurious influence in stimulating
excessive production. Like the preceding, however, this objection is
exclusively applicable to the unrepresented issues. For, as bullion
notes are only the representatives of treasure that is actually
retained in the coffers of the Bank, and which either consists of or
is readily convertible into coin, those notes can exert no influence
different from that of the coins themselves, and cannot therefore be
held responsible for contributing in any degree to the extension of
undue speculation.
It may perhaps be retorted, that if small notes were allowed to
be issued, no practical distinction could be enforced between the
unrepresented issues and the bullion notes, and that therefore the
necessary effect of such permission would be to increase the former
as well as the latter. But this objection would involve a total
misconception, as the consideration of the present system will at
once make apparent. For, so long as the unrepresented issues of the
Bank of England are limited to £14,000,000, as under the Act of 1844,
they cannot possibly exceed those £14,000,000, whatever may be the
denomination of the notes so issued; and even though the restrictive
clauses of the Act should be repealed, and the Bank should be
allowed to replace the country issues, an arrangement can readily be
devised, as we shall presently show, which would at once permit of an
indiscriminate issue of notes of all denominations from one pound and
upwards, and yet preclude the possibility of the unrepresented issues
ever exceeding a safe and salutary maximum. If, however, it should
still be apprehended that any danger would result from the complete
abrogation of the prohibition of small notes, the expedient might be
adopted of allowing a certain maximum issue of such notes for the next
ten years, after which experiment, if the change proved beneficial, the
restriction might be removed unconditionally. But for rendering such
an experiment effectual a smaller issue than £5,000,000 to £10,000,000
would be of little service.
The preceding considerations have not tended to weaken, but rather to
confirm the force of our conclusion, that it is now desirable that the
whole paper issues of England and Wales should be entrusted to the
Bank of England, subject to the condition that the profits of such
issue should be equitably participated between the public and the Bank.
As has already been pointed out, the present banks of issue which would
be deprived of their privilege would have no ground for complaint on
the score of such deprivation, as they have long had reason to be
aware that they owe their privilege entirely to the favour of the
State, and that they are liable to have it withdrawn whenever it may
be found inconsistent with public interests. There is one case indeed
in which they might not unfairly consider themselves aggrieved, and
that is, if the privilege were withdrawn so suddenly as to cause any
serious depreciation in the value of their property. And in order to
avoid such a result, it would certainly be expedient that sufficient
time should be allowed them to contract their issues, and replace them
by Bank of England notes, with the smallest disadvantage both to the
public and themselves. For this purpose, a less period than ten years
would scarcely be sufficient. But there are several modes in which
the transition might be effected with very trifling dislocation. One
of these would be extremely simple as well as feasible. The country
banks might be permitted to issue their own notes for the next ten
years on condition of contracting the amount of their authorized
issues by one-tenth annually. An arrangement might at the same time
be made which would induce the Bank of England to increase its issues
in a corresponding proportion, so that the total amount of currency
in the possession of the public need undergo no actual diminution;
while both to the country banks and the Bank of England, the change
from the present system would be so gradual as to produce no serious
inconvenience to either. Should this plan be adopted, and we know of
no practical difficulty to oppose it, the authorized maximum of the
country issues during the next ten years, together with the maximum
profit derived therefrom, at an average rate of 4 per cent., would, in
round numbers, diminish according to the following series:--
Years. Issues. Profits.
1856 £8,000,000 £320,000
1857 7,200,000 288,000
1858 6,400,000 256,000
1859 5,600,000 224,000
1860 4,800,000 192,000
1861 4,000,000 160,000
1862 3,200,000 128,000
1863 2,400,000 96,000
1864 1,600,000 64,000
1865 800,000 32,000
1866 000,000 00,000
---------
£1,760,000
thus allowing the country banks a total profit of £1,760,000, or
nearly two millions out of the privilege of issue before their entire
surrender of it. And this appears to us as liberal an arrangement as
they could have any reason to expect.
We are now almost in a position to determine on what system the Bank of
England should be expected to render an equivalent for the exclusive
issue of paper money in England and Wales. Prior, however, to entering
upon this consideration, it will be necessary to refer to another
principle, which the present system infringes no less remarkably
than those already instanced. With the exception of a very limited
section of currency theorists, it is now universally admitted that
a paper currency ought to be so regulated as to contract and expand
in conformity with the requirements of commerce; that is to say, to
contract whenever trade is stationary and the supply of commodities
in the market small, and to expand whenever trade becomes active and
the supply of marketable commodities undergoes an increase. By the
currency theorists it is still maintained that a paper currency ought
to contract and expand exactly as a currency purely metallic would
do in the like circumstances. But this is palpably equivalent to
asserting, that whatever evils are inseparable from a metallic currency
ought to be, not avoided, but perpetuated in a mixed currency. One of
the chief defects of a purely metallic currency consists in the very
circumstance that it does not contract and expand with the decrease
and increase of marketable commodities requiring to be exchanged for
each other, but that, on the contrary, through the operation of an
influx or efflux of gold, it not unfrequently contracts or expands in
a far greater proportion than the state of the markets would justify,
thereby producing an excessive depreciation or appreciation in general
prices; while sometimes it even expands when the state of the markets
would require a contraction, and vice versa. And accordingly, this is
the evil against which common sense would desire to contrive peculiar
safeguards in a mixed currency. The present system however has most
carefully perpetuated the evil. For in the case of every considerable
efflux of gold, the circulation--that is the amount of circulating
medium, paper and metallic, in the hands of the public--must contract
not merely in the proportion required for correcting the unfavourable
exchange, but in a much higher proportion; and in every case in
which such a drain commences at a period when the Bank’s reserve of
unemployed notes is at or near the minimum, the circulating medium
must actually contract to an extent precisely equal to the amount of
coin exported. Thus supposing the drain to commence when the reserve
of notes is at the average of about £6,000,000, an exportation of
£10,000,000 of gold would not only reduce this reserve to its lowest
prudent minimum of about £3,000,000 but would also contract the amount
of gold and bullion notes in the possession of the public by about
£7,000,000; while, supposing the reserve to have been already at the
minimum of £3,000,000, the exportation of the £10,000,000 of gold would
fall entirely on the circulating medium which it would reduce in the
proportion of nearly 15 per cent.[C] In addition, therefore, to the
measures already proposed, the restrictive clause that limits the Bank
of England to any inflexible maximum, must be repealed and the Bank
must be allowed to issue unrepresented notes, not only to the extent
at present authorized, viz. £14,000,000 together with an additional
£8,000,000, as a substitute for the country issues, but also to any
necessary amount in excess of those £22,000,000, subject however to
certain conditions, required for preventing any possible over-issue
beyond the actual wants of the public.
[C] Assuming the given circulation in the hands of the public
to be thus composed:
Gold, and bullion notes issued on gold, &c., £50,000,000
Silver, 7,000,000
Bank of England unrepresented notes 11,000,000
Country notes 7,000,000
-----------
£75,000,000
a drain of £10,000,000 of gold would obviously produce a
contraction of more than 13 per cent.; while, if the silver be
excluded from the computation, the amount of the reduction would
be within a fraction of 15 per cent.
We shall now proceed to the consideration of those conditions. It has
already been seen that the Bank of England should not be allowed to
issue unrepresented notes without participating its profits with the
State, from which it derives the privilege of issue. Now there are
several methods in which this participation might be effected. For
instance, a computation might be made of the probable amount of annual
profit that would be derived from the privilege; and the Bank might
be required to pay annually into the Treasury, whatever proportion
of this profit might be considered equitable. This plan, however, is
liable to the fatal objection, that it could hardly fail to operate
as a bonus on excessive issue. For, as in this case, the profits of
the Bank would rapidly increase in proportion to the greater number
of notes that could be kept in circulation, the Directors would be
exposed to the continual temptation of resorting to imprudent means for
extending their issues. A single illustration will show the force of
this. For, supposing that the proportion of the profits set apart for
the State, should amount to the total profit arising out of the issue
of say some £10,000,000 of notes, then all the profits derived from the
issue of notes in excess of those £10,000,000 would go undivided into
the coffers of the Bank, so that the Bank would be directly interested
in extending the issues as much beyond the £10,000,000 as would be
practicable. And the experience of the whole past history of the Bank
has proved that such a system as this would be inconsistent with the
highest interests of the commercial public. It has been proposed again
by some eminent authorities, that the Bank should be allowed to supply
the whole paper issues of the country on condition of lending some
fifteen or twenty millions of its notes to the Government without
interest, which would necessarily give the same pecuniary advantage to
the State as if it issued an equal number of its own notes. But this
plan would be liable to the same objection as the former. It would make
the profits of the Bank depend directly on the amount of unrepresented
notes retained in circulation; and under such circumstances the Bank
could hardly fail at times to extend its issues beyond the limits which
the condition of trade would render advantageous.
It may, therefore, we think, be laid down as an important practical
rule, that the Bank should be required to render the equivalent
on the principle of proportioning its payment to the amount of
unrepresented notes in circulation, and that the rate imposed should
increase as that circulation increased. The only difficulty appears
to consist in devising a simple natural plan for accomplishing this
result; a plan that would be readily comprehended by the public, and
that would involve no very complicated system of calculations on
the part of the Bank. Now, it so happens that this difficulty can
be easily surmounted as will appear from the following explanation.
The authorized circulation of unrepresented notes has already been
shown to consist of two parts, viz. about £11,000,000 issued upon the
Government debt, and £3,000,000 issued upon other public securities.
Upon the £11,000,000 lent to Government the Bank receives interest at
the rate of 3 per cent.; and there can be no question that this is not
so great a profit as the Bank could obtain from those £11,000,000 if
employed in ordinary banking operations It may fairly be considered
therefore that the Bank is entitled to derive a higher share of profit
out of those £11,000,000 than out of the other £3,000,000, which have
not been lent to Government, and which, as pointed out above, the Bank
should be set at liberty to withdraw from the issue department, and
incorporate amongst the working capital. In like manner, when the Bank
is allowed to increase its unrepresented issues, for the purpose of
replacing the country notes, the additional notes so issued, as well
as the £3,000,000 just mentioned, being so much over and above the
£11,000,000 lent to Government, and the Bank therefore rendering no
actual service to the State in return for the privilege of issuing
them, it would be perfectly legitimate that the State should require
something like an equitable participation of the profits derivable from
their issue. During the next ten years, under the operation of the plan
proposed, these additional notes would increase annually, according as
the country notes diminished, viz as follows:--
1856 £000,000
1857 800,000
1858 1,600,000
1859 2,400,000
1860 3,200,000
1861 4,000,000
1862 4,800,000
1863 5,600,000
1864 6,400,000
1865 7,200,000
1866 8,000,000
so that at the expiration of the ten years the country issues would
be entirely replaced, and we should have an authorized issue of
£11,000,000 upon the Government debt, to be issued at a moderate
charge, and a second £11,000,000, either issued or allowed to be issued
at an equitable charge. These £22,000,000 are the maximum amount of
unrepresented notes, which can be issued in any circumstances under
the operation of the Act of 1844; they may therefore be assumed to
constitute the present normal requirements of the country, and any
issue of unrepresented notes in excess of these, might very fairly be
charged with so high a rate as would render the recourse to them an
extremely exceptional case, to be resorted to exclusively in periods
of grave necessity. This plan therefore would provide a gradation of
three advancing rates of charges: a minimum rate upon the £11,000,000
of unrepresented notes, allowed to be issued in consideration of the
loan to Government; a medium rate on the amount of notes required for
completing the total normal issues of £22,000,000; and a maximum rate
on whatever notes might at any time be required in excess of those
£22,000,000.
Now to this plan of regulating the issues of the Bank of England we
are altogether unable to foresee any valid objection, practical or
theoretical. There are certainly very conclusive reasons why the Bank
of England should be allowed to issue £11,000,000 of unrepresented
notes on the £11,000,000 lent to Government at a lower rate than the
second £11,000,000, for which otherwise the Bank would render no
equivalent; and there are no less forcible considerations why the Bank
should be charged a lower rate upon the second £11,000,000 which form
a part of the normal requirements of the public, than upon the notes
which might at any time be issued in excess of the total £22,000,000.
Nor can there be any difficulty in the practical application of such a
principle. For, if an account be kept from day to day, or from week to
week, of the total number of notes, both represented and unrepresented,
in actual circulation, and if the number of bullion notes in
circulation be deducted from this gross amount, the remainder will be
the total amount of unrepresented notes; and whatever may be the number
of these, the first £11,000,000 will be charged with the minimum rate,
the second £11,000,000 with the medium rate, and the remainder, if any
such there be, will be subject to the maximum rate. Thus, supposing the
gross circulation to consist of £30,000,000, and the bullion notes to
comprise £14,000,000 of these, the rates would be imposed as follows:
Issued on bullion, £14,000,000
” at the minimum rate, 11,000,000
” at the medium rate, 5,000,000
-----------
£30,000,000
or, supposing the gross circulation to be £40,000,000, the bullion
notes remaining as before, there would be
Issued on bullion, £14,000,000
” at the minimum rate, 11,000,000
” at the medium rate, 11,000,000
” at the maximum rate, 4,000,000
-----------
£40,000,000
but this, as we shall see hereafter, is a case that would be very
unlikely to occur under any ordinary circumstances.
During the operation of the ten years’ arrangement with the country
banks, the system would necessarily undergo a slight alteration with
each successive year, and would not therefore be altogether so simple
as the preceding; but it would present no very peculiar complexity.
For, a reference to page 38 will show the number of notes which the
Bank would be allowed to issue in addition to the £3,000,000 at the
medium rate, together with the first £11,000,000 to be issued at the
minimum rate; and if the Bank should at any time exceed the total of
these three items, whatever notes might be issued in excess would
be liable to the maximum rate. For example, in the year 1860 the
number of notes allowed to be issued at the medium rate would be
£3,200,000, added to £3,000,000, together £6,200,000; if, therefore,
the gross circulation in that year should at any given time amount to
£33,000,000, the bullion notes being £14,000,000, the unrepresented
notes would be charged in this way:
Issued on bullion, £14,000,000
” at the minimum rate, 11,000,000
” at the medium rate, 6,200,000
” at the maximum rate, 1,800,000
----------
£33,000,000
and if we include the country issues, so as to present a view of the
total circulation of the country in such a case, we shall have
Issued on bullion, £14,000,000
” at the minimum rate, £11,000,000
” at the medium rate, 6,200,000
” by the country banks, 4,800,000
----------
22,000,000
” at the maximum rate, 1,800,000
-----------
£37,800,000
and in like manner in 1861 the number of notes allowed to be issued at
the medium rate, would be £7,000,000; and so on until, in 1865, the
medium rate would reach its permanent limit of £11,000,000. And, with
this explanation, we shall hereafter confine ourselves exclusively to
the permanent arrangement that would come into complete operation in
1866.
We are far from deeming it our function to determine on the exact rates
which ought to be charged in these three cases, as this is a question
of arrangement between the Government and the Directors of the Bank of
England; nevertheless as without some estimate of this sort it would
be difficult if not impossible to enter upon any close examination of
the probable working of such a system, we shall now proceed to consider
what rates would appear to us most equitable. And first, to take the
minimum rate to be charged on the £11,000,000 of notes issued on the
loan to Government. On these £11,000,000, as has been more than once
observed, the Bank receives 3 per cent. from Government in addition to
the profit which it derives from operating on the notes issued in lieu
thereof. Assuming therefore, as a not unreasonable rule, that the Bank
and the State should share this extra 3 per cent. on equal terms, it
would follow that 1½ per cent. to each would be a fair participation
of the profits; and if we allow the Bank an additional ½ per cent.
as a sort of equivalent for the expense and trouble required in the
management of the issues, it will hardly admit of dispute that the
remaining 1 per cent. will form an extremely moderate governmental
charge on the first £11,000,000. The same principle will be no less
applicable to the medium rate to be changed on the second £11,000,000.
Whatever profit the Bank would derive from the circulation of these
notes would be entirely owing to the privilege of issue delegated by
the State; it would be equitable therefore that the Bank should share
the whole of this profit in equal proportions with the Government. Now,
as a general rule it would only be when increased banking accommodation
would be required by the public, and when the rate of interest would be
proportionally high, that the Bank would ever be likely to circulate
any considerable proportion of these second £11,000,000; so that the
gross profit derived from their issue would not be less than 4 to 6
per cent. On the principle just laid down, therefore, 2½ per cent.
to each would be an equal participation of the profits; and if we
again allow the Bank an additional ½ per cent. to cover the expense
of management, the remaining 2 per cent. will certainly appear a very
moderate governmental charge. There still remains the maximum rate,
and that should be determined on a totally different principle. The
£22,000,000 already provided for constituting what we have called
the extreme normal unrepresented circulation of the Bank, the rates
imposed upon their issue should be such as would present no obstacle
to the free expansion of the circulation to this extent, in conformity
with the wants of trade. But any issue in excess of these £22,000,000
should be a very rare occurrence, to be justified only under urgent
pressure; the rate to be imposed therefore should be such as would
effectually prevent the circulation from ever exceeding its normal
limits, except in cases of undoubted necessity, and for this purpose
less than 4 per cent. could not be considered adequate. Indeed the Bank
rate of interest so frequently rises higher than 4 per cent. that the
imposition of any lower rate would present little barrier to the issue
in excess of £22,000,000. The three rates therefore, the minimum, the
medium, and the maximum, might very reasonably be fixed at 1, 2, and 4
per cent. respectively; in other words, the Bank should be authorized
to issue the first £11,000,000 of its unrepresented notes at 1 per
cent. the second £11,000,000 at 2 per cent. and any notes issued in
excess of those £22,000,000 at 4 per cent.
There is one explanation, however, that must be made as to the
method in which these rates should be imposed. We have said that the
respective rates should be levied on the amount of notes that might
be actually in the hands of the public. To this plan it may, perhaps,
be objected, that inasmuch as a very considerable portion of the
deposits in the Bank of England are well known to be as profitable to
the Bank, and to operate as currency just as much as if they continued
in the hands of the public; and that, as under our proposed system,
the Bank will be enabled to re-loan their whole amount, and thereby
derive a two-fold profit upon a large proportion of the notes in
actual circulation--that, therefore, consistency would require that
the notes in deposit should be considered chargeable just the same as
if they had never been deposited. Now, it must be conceded, that this
objection is not altogether void of force; but there is an overruling
consideration on the other side of the question. For it must not be
forgotten that the Bank of England, in common with other banks, is
necessarily a bank of deposit, and has its legitimate functions as
such; a very considerable part of the profit, therefore, derived from
the re-issue of the notes deposited, is exclusively the result of the
constitutional exercise of its functions, and lies entirely beyond
the sphere of Governmental jurisdiction. It might not, perhaps, be
impossible to devise a test for distinguishing between these profits
and those arising more directly out of the privilege of issue; but
such a distinction would be far too minute to serve as a basis for
legislation; and on the other hand, any indiscriminate charge upon the
deposits, as a whole, would not only be extremely vexatious, but would
even place the Bank of England at a serious disadvantage as compared
with every other bank of deposit. It follows, therefore, that while
the rule already laid down, of confining the operation of the rates to
the actual amount of notes in the hands of the public, may not attain
to absolute theoretical perfection, yet in practice it is clearly
preferable to any regulation that would either discriminate between two
classes of profits derived from the deposits, or impose the rates upon
their total amount.
It will be seen from this, that while we are anxious to maintain in its
integrity the right of the State to receive an equitable proportion
of the profits derived from the issue of unrepresented notes, we
have no desire to stretch this right so as to bear oppressively upon
the interests of the Bank of England. But a closer examination will
conclusively show, that the effect of our proposed arrangement, as a
whole, would be to leave the present profits of the Bank altogether
intact, as the profits arising out of the additional notes which
the Bank would be authorized to circulate, would amply cover the
governmental charges on the total circulation. The simplest method of
establishing this point, will be to compare the actual circulation
of unrepresented notes under the Act of 1844 with the probable
circulation under the proposed arrangement. And first, to take the
average circulation as the standard of comparison. The present average
circulation has been shown to be about £8,000,000, and the profits
derived from these, at 4 per cent., would be £320,000 annually. Now,
under our plan the average circulation would be at least £15,000,000,
the gross profit upon which, at 4 per cent., would be £600,000 while
the governmental charges would be
£11,000,000 at 1 per cent. £110,000
4,000,000 at 2 per cent. 80,000
--------
£190,000
or a total of £190,000 which, deducted from £600,000, would leave
a nett profit of £410,000, or considerably more than the present
profit on the £8,000,000. A comparison of the maximum circulation of
unrepresented notes, again, will fully establish the same conclusion.
The present maximum can never exceed about £12,000,000 without
imperilling the safety of the Bank; and these £12,000,000, if advanced
at 8 per cent., to which the rate of discount under the Act of 1844 has
sometimes advanced, would return a profit at the rate of £960,000 per
annum. Under the proposed arrangement, on the other hand, the maximum
would not improbably, in a case of extreme pressure, be £22,000,000,
or even £24,000,000; and the gross profit on £24,000,000, at the same
rate, viz., 8 per cent., would be at the rate of £1,920,000 per annum.
On these the governmental charges would be
£11,000,000 at 1 per cent., £110,000.
11,000,000 at 2 per cent., 220,000.
2,000,000 at 4 per cent., 80,000.
----------- ---------
£24,000,000 £410,000
which, deducted from £1,920,000, would leave £1,510,000 as compared
with £960,000 under the present system. This, however, is an
exaggerated estimate, as we shall presently show that the rate of
interest would not be likely to exceed from 6 to 7 per cent. Taking
6 per cent., then, as the more probable rate, the gross profit
on £24,000,000, advanced at 6 per cent., would be at the rate of
£1,440,000 per annum; from which, if we deduct the governmental charge
of £410,000, there will still remain £1,030,000 as compared with
£960,000 under the present system. While one effect of our arrangement,
therefore, would be to augment the national income by from £190,000 to
£410,000 per annum; this advantage evidently would not be purchased by
appropriating any portion of the present profits of the Bank of England.
Before proceeding any further with our inquiry, it will now be
desirable to take a rapid survey of the ground already traversed.
We found at starting, that according to one of the best established
doctrines of monetary science, the issue of paper money is essentially
a function of the State, and should be exercised exclusively for
the promotion of public interests. To the immediate establishment
of a State bank of issue, however, there appeared to be one cogent
practical objection, arising out of a political necessity which is
very generally recognised, that the Government of the day should
have no direct control over the monetary system. In lieu of a State
Bank, therefore, we were obliged to go in search of the best possible
substitute; and guided by the well-grounded principle, that there
should only be a single bank of issue, we arrived at the conclusion
that, under existing circumstances, the safest and most consistent
course would be to entrust the whole circulation of England and Wales
to the Bank of England, on condition that the Bank should equitably
share its profits with the public treasury. The general subject of
the extent of the paper circulation next passed under review; and
while it did not seem prudent that the unrepresented issues should at
present undergo any considerable increase beyond the £22,000,000 which
are now the statutable limit, it yet appeared very necessary that the
absolute prohibition of any issue in excess of that limit should be
removed, and that the Bank of England should be allowed to expand its
unrepresented issues in conformity with the wants of trade, subject
only to certain regulations required for their due adjustment. On the
other hand, we found it manifestly desirable that the Bank should be
encouraged freely to increase its issues on bullion, and that, in order
to accomplish this, it should at once be permitted to issue at least
from £5,000,000 to £10,000,000 of notes under five pounds sterling.
Returning, then, to the country banks of issue, it was shown to be a
matter of justice, that they should be granted sufficient time for the
gradual withdrawal of their issues, and the substitution of Bank of
England paper. We, therefore, proposed that they should contract their
authorized circulation by one-tenth annually, for the next ten years,
the Bank of England as gradually supplying the vacancy according as the
notes should be withdrawn. We then proceeded to consider the mode in
which the Bank of England should be required to share its profits with
the public, and found upon examination that the most advantageous plan
would be that of imposing an annual rate on the amount of unrepresented
notes retained in circulation, or, rather, a series of rates arranged
upon an ascending principle, viz.--a minimum rate on the £11,000,000
of notes issued in consideration of the loan to Government; a medium
rate on whatever notes might be required to increase the total
unrepresented circulation of the country to £22,000,000 (the amount
varying from £3,000,000 at present to £11,000,000 at the expiration
of the ten years’ arrangement with the country banks), and a maximum
rate on whatever notes might at any time be issued in excess of the
total £22,000,000. And, on further consideration, it appeared that 1,
2, and 4 per cent. would form a not unreasonable scale for the three
respective charges.
In embracing so extensive a field as the preceding, in the compass of
a single paper, we have necessarily omitted any reference to several
important branches of the subject. The expediency of the separation of
the banking from the issuing department in the Bank of England has been
sometimes canvassed, but the best authorities are agreed in regarding
the separation simply as a matter of account. Should the alterations we
have suggested be adopted, some corresponding changes would be required
in the weekly returns of the assets and liabilities of the Bank, but
no peculiar difficulty would arise out of this necessity. Another and
a more important feature in the present system, has sometimes been
assailed, but as appears to us on a very nugatory grounds. We refer to
the provisions by which the Bank is required to purchase all the gold
that may be presented, at £3 17s. 9d. per ounce, and to render gold
for all the notes that may be tendered for payment, at £3 17s. 10½d.
per ounce. As one of these provisions is absolutely requisite for
securing the convertibility of the issues, and as the other is equally
indispensible for preserving an adequate stock of bullion, we are not
aware of any valid reason for objecting to either. We may also remark
that it is now the opinion of some of the most influential bankers,
and of Mr. Gurney amongst the rest, that the proportion of silver on
which the Bank may issue bullion notes as compared with gold, might
judiciously be increased to one-third. So far as we know, this appears
a very judicious proposition; at the same time we think that the
permission to issue small notes, if conceded, would in great measure
remove the necessity for its adoption.
There now remains for consideration the probable effect of the measures
we have proposed, in meeting and providing for those great commercial
crises, which have hitherto invariably produced severe disasters, and
the periodical recurrence of which, under the existing system, can be
predicted with almost scientific certainty. We have indeed already in
part anticipated this inquiry, but its pre-eminent importance to the
pecuniary interests of the whole trading community, demands an ampler
treatment at our hands. And if it should be found that the system we
propose would not be calculated to alleviate the evils produced by such
calamities, or if at least it cannot be shown that it would prevent
their unnecessary aggravation, we shall be perfectly willing to abandon
it as unworthy of adoption. For we fully unite with those who maintain
that the merits of a system of currency are not to be tested by its
operation during the ordinary course of trade, but by its adaptibility
to those periods of convulsion when the machinery of commerce is
subjected to the severest dislocations.
Now we think it will be generally admitted, that nearly every
monetary crisis arises either out of some deficiency or excess in
the circulating medium, or else out of some circumstance that is
intimately connected with such deficiency or excess. And if this
be admitted, it will clearly follow that the principal object that
ought to be kept in view in the regulation of a system of currency,
is the prevention of any undue increase or diminution in the amount
of the circulating medium, and the immediate restoration of a state
of equilibrium, wherever the balance may have been, through whatever
cause, disturbed. Unfortunately, however, it is the peculiarity of the
present system, that whenever the money market is tending either to an
excess or a deficiency, the inevitable effect of the Act of 1844 is to
aggravate and not to neutralize the tendency. It may at first sight
appear extraordinary, if not incredible, that the same system should at
different periods produce results apparently so opposed to each other;
but a little consideration will show that this is undoubtedly the fact.
And we shall first take the case in which the tendency is towards an
excess of circulating medium.
It is a well understood circumstance, that whenever any unusual
stimulus is imparted to the work of production, and the export trade
proceeds with more than ordinary activity, the necessary consequence
is, that the exports exceed the imports, and that gold flows into the
country from those nations which have purchased more largely of our
commodities, than they have paid for in their own. Now, whether this
gold is converted into coin, and is directly expended in the purchase
of commodities or the payment of wages, or whether it is taken to the
Bank of England and exchanged for paper, in either case it immediately
increases the amount of circulating medium in the possession of the
public; in the one case in the form of metal, in the other in the form
of bullion notes. And just in proportion as money becomes abundant,
prices rise, and the rate of discount falls in a corresponding ratio.
This in itself, although in some degree inevitable, is nevertheless
a serious evil. But unfortunately, the tendency of the present
currency system, instead of alleviating, is to aggravate it. For, as
money becomes abundant with the commercial public, it simultaneously
increases with those who usually deposit in the Bank of England, and
they immediately enlarge the amount of their deposits. Now every
addition to the deposits, is really an addition to the unemployed
reserve of unrepresented notes in the Bank; in proportion, therefore,
as money becomes abundant with the public, the Bank reserve increases;
so that it very speedily exceeds the amount which the ordinary rules of
sound banking would hold to be necessary for discharging the functions
of a reserve. In such circumstances it becomes the immediate interest
of the Bank to force the superabundant notes of the reserve again
into circulation; and this it can only do by entering keenly into
the competition of the loan and discount market, and by proffering
advances on more advantageous terms than those allowed by other
banks and capitalists. And as the superabundance of money must have
already produced a considerable decline in the rate of interest, and
a corresponding rise in the scale of general prices, and must have
thereby given an impetus to the spirit of undue speculation, so this
disastrous competition of the Bank of England for an extended share of
business, must not only induce a still further depreciation in the one
case and enhancement in the other, but must inevitably impart a very
powerful incentive to the rapid progress of speculation.
We are not now dealing with mere surmises, but with well ascertained
facts which every intelligent reader may verify from his own
experience. That the liberty to issue £14,000,000 of unrepresented
notes free of charge, does actually induce the Bank of England, when
money is abundant, to make advances at an injuriously low rate of
discount is a matter of common observation. For a glaring illustration
of this we need only refer to the year 1844, when, a few months after
the passing of the Act, so ardent was the competition of the Bank
Directors for an increased share of discounts, that they even forced
accommodation on the public at 1¾ and 2 per cent. And that the effect
of this course was extremely mischievous is now a matter of universal
agreement. We have indeed the testimony of the Committee of the House
of Lords on Commercial Distress--a testimony fully sustained by the
witnesses examined before the Committees of both Houses--to the fact
that the operation of this low rate of discount, in imparting an active
stimulus to speculations of every kind, was to contribute in no small
degree to the severity of the crisis in 1846-7. The mode in which it
produces such a result is readily intelligible. It does so in two ways.
In the first place, the rise of prices at home, unless it should happen
by an extraordinary coincidence to be accompanied by a corresponding
rise of prices in all the foreign countries with which we trade, must
necessarily have the two-fold effect of putting a check to the export
of our own commodities to the foreign markets, and of encouraging
an increased importation from those foreign markets to our own. And
in the second place, the decline in the rate of interest produces a
proportionate rise in the price of public securities; and this rise
in the price of securities, unless accompanied by a simultaneous
enhancement in the price of foreign securities, has the two-fold effect
of preventing foreign capitalists from purchasing our securities and
of inducing our own capitalists to sell out their securities at home
and purchase in the foreign market. Now, the effect of both of these
operations--the one on the relation between our imports and exports,
and the other between domestic and foreign securities is to necessitate
the transmission of the unfavourable balance in treasure to those
foreign countries from which we have obtained the increased securities
and imports. The ultimate result therefore of the low rate of interest
is in both respects an exportation of gold, and this exportation of
gold is so serious an evil that it becomes an essential object, in
currency legislation, to adopt every possible precaution against any
occurrence that might unnecessarily induce or aggravate it.
Now in this most important particular the superiority of our proposed
measures over the present system must be at once apparent. It is
unquestionable that the Bank of England could never have been induced
to force its notes upon the money market, at so low a rate of interest
as 1¾ and 2 per cent. if it had not been allowed the privilege of
issuing, for the purpose of loans, at no expense to itself. If a
certain rate of interest had been charged upon the issue of all its
unrepresented notes, that rate would have sufficed to prevent its
loaning or discounting on such terms. And, supposing 1¾ per cent. to
be the lowest rate at which the Directors might consider it profitable
to advance money to the public, when the notes were perfectly free
of charge, it is only a legitimate conclusion, that if a certain
rate should be imposed on the issue of the notes, they would then be
restrained from making advances on lower terms than the sum of that
rate, added to the 1¾ per cent. supposed to be the present minimum.
Now, the rate we have proposed to be levied on the first £11,000,000 of
the unrepresented issues, being 1 per cent., there is no probability,
according to this principle, that they would ever make loans on
securities at a lower rate than 2¾, or discount lower than 3 per cent.
In practise, indeed, it is not likely that they would ever descend so
low as this, as it is highly improbable that the unrepresented issues
would not at all times exceed £11,000,000, and, in that case, the
imposition of the 2 per cent. upon the notes in excess of the first
£11,000,000, would inevitably keep the rates of interest and discount
about 1 per cent. higher than if the issues were ever to consist
entirely of notes that would be subject to no higher charge than 1 per
cent. On our plan, therefore, there appears no probability that the
Bank rate of discount would ever fall, for any considerable period,
below 3½ to 4 per cent. And, if this be correct, then whatever evils
are admitted to arise from the encouragement of undue speculation, and
the ultimate aggravation of a drain of the precious metals, through the
low rate of discount at times adopted by the Bank of England, it must
be conceded that our scheme of currency possesses this one advantage
in addition to those already described, that it would, in very great
measure, provide an adequate safeguard against such aggravation.
So far with respect to the operation of the present system in
augmenting the evils arising out of an excess of circulating medium,
together with our provision for preventing that augmentation. We have
still to justify our assertion that the present system also aggravates
the evils arising out of a deficiency of circulating medium, and
that our proposed system provides a remedy for this as well as the
former evil. And here the subject will demand a greater degree of
amplification. For a deficiency of circulating medium may arise out
of several different causes, each of which will require a special
consideration. To treat of them generally, in the first place, they
may be disposed of under two cases, the one proceeding from an actual
drain of the precious metals, the other arising out of the hoarding
of currency by merchants and bankers, through the dread of monetary
pressure. In point of fact, these two cases are not always kept
distinct; indeed the former is not unfrequently accompanied by the
latter. But it will be more convenient to treat of them separately, and
to dispose of the latter before proceeding with the former.
The principal instance of a domestic drain, that is of a scarcity of
money produced by domestic hoarding, which has occurred in recent
years, was that which took place in October, 1847. In this case, as is
well known, there was no actual deficiency of currency in the country
at the moment of pressure. There was no unfavourable exchange; on the
contrary, gold was steadily returning after the drain of the previous
twelve months. The apparent deficiency, therefore, as compared with the
pressure of the preceding April, originated solely in the accumulation
of currency by the merchants and bankers. And this accumulation is
admitted to have been caused exclusively by the knowledge that the
Bank of England was rapidly drawing towards the end of its resources,
under the law that limits the unrepresented issues to £14,000,000;
and the truth of this is clearly demonstrated by the fact, that the
temporary suspension of the Act of 1844, at once removed the panic
without requiring the issue of a single note beyond the statutable
limitation. Now, we contend that our provision for allowing the Bank of
England to issue unrepresented notes, beyond the £22,000,000 at present
allowed to be issued by the whole united banks of England and Wales,
subject to the charge of 4 per cent., would entirely preclude the
possible recurrence of any similar panic. For it was not the rate of
interest at which the Bank had been discounting in the previous months
that produced the alarm, but solely the knowledge that the reserve of
unrepresented notes was nearly exhausted, and that the provisions of
the Act prohibited the extension of that reserve, no matter what rate
of interest might be offered by the public for increased accommodation.
The certainty, therefore, that whenever the rate of interest should
materially exceed 4 per cent., the Bank would be placed in a position
to afford any further accommodation that might be required by the
public, would effectually prevent the recurrence of any apprehension as
to the possible exhaustion of the Bank’s available resources.
We will now proceed to the case in which the deficiency of currency
is produced by an actual drain of the precious metals. Such a drain
may obviously arise from a variety of causes too numerous to specify.
But there are three cases which are not only in themselves the most
important, but which also serve as fair representatives of the
remainder. These three are, first, a drain arising out of general high
prices at home, originally produced by an excess of currency and great
overtrading; secondly, the exportation of gold to pay for some staple
article of food or manufacture, caused by the deficient supply of such
article at home; and thirdly, the maintenance of a large military
expenditure abroad during time of war. The first of these was the main
cause of the crisis of 1825; the second was the chief, but not the
exclusive, agent in producing the pressure of April, 1847; the third
is now in operation, and should the war prove of long continuance, may
possibly subject the present system to as severe a test as that of
October, 1847, provided the Act should not in the mean time undergo
amendment.
To take the case of a drain produced by over speculation first. We
have already seen that one operation of the present currency system
is, either directly to produce a drain whenever money is redundant,
or else materially to aggravate it if produced by other agencies. We
have now to consider the effect of another part of the same system,
which comes into operation when the drain has taken place, and money
is deficient. It is a generally admitted principle, that in such a
case as this, in which the drain has been occasioned by a low rate of
interest and high prices, there is nothing but a rise in the rate of
interest, and a fall in prices, that can remedy the evil and recover
the exported treasure. But it by no means follows that prices must
necessarily fall as much below, as they had previously risen above
their average, or that the rate of interest must rise as much above,
as it had previously fallen below its average; as, in this case, the
evil produced would be fully equal to that which it was designed to
cure. For it must be remembered that the exported treasure will, in its
turn, produce an excess of currency in the countries which receive it;
and that that excess will necessarily lead to a rise in prices and a
fall in the rate of interest, precisely commensurate with the amount
received. It will not be necessary, therefore, that prices should fall
much below the average at home, in order to stimulate an increased
export of commodities to those countries in which prices have risen;
nor that the rate of interest should much exceed the average, in order
to encourage the purchase of our securities on account of the same
countries; both of which operations will have the effect of recovering
the treasure. But secondly, there is no necessity for our regaining
the gold as rapidly as we have previously parted with it; as the less
violent is the reaction, the less severe are the concomitant evils.
And thirdly, if indeed it should not have taken the first place, it
has been repeatedly proved to demonstration, that a rapid fall in
prices, instead of stimulating exportation, has the inevitable effect
of paralyzing industry, and thereby retarding the production of those
very commodities of which a more than ordinary quantity is required.
Now, in each of these respects, the effect of the present system is
to aggravate the severity of the reaction in every case in which the
reserve of unrepresented notes in the Bank of England, is not at the
very highest point when the drain begins to operate. For, supposing the
gold exported considerably to exceed the amount of this reserve, which
is invariably the case in every extensive drain which commences while
the reserve is either at or below its ordinary average, the amount of
circulating medium in the hands of the public must contract, at least
by the difference between the amount of the available reserve and
that of the exported treasure. Now this contraction in itself would
alone suffice to cause a serious fall in general prices, and could
hardly fail to put a sensible check upon the operations of productive
industry. But long before the contraction would have reached its
climax, and indeed before the available reserve of the Bank would
have been exhausted, the Bank would be compelled, in self defence, to
raise the rate of discount so high as completely to arrest the demand
for increased accommodation consequent on the drain. In addition,
therefore, to the contraction in the amount of circulating medium
operating directly upon prices, we have a rapid and excessive rise in
the rate of interest, proceeding step by step with that contraction,
till, ultimately, as the Bank reserve approaches to the verge of
exhaustion, a state of general discredit arises; the hoarding of
currency at once ensues, a still more ruinous decline in prices is the
consequence, and nothing but the suspension of the Act can avert the
spread of universal panic.
But, secondly, a drain may be produced by the failure of some staple
article of food or manufacture, and the consequent importation of an
adequate substitute. The most calamitous case of this kind which has
occurred in recent times, was the general failure of the potato crop
in 1846, which necessitated the transmission of more than £8,000,000
of treasure in payment for bread-stuffs, chiefly to America. In this
and similar cases the efflux of gold is not produced by any excess
of circulating medium, with its attendant rise in prices and fall in
the rate of interest; the recovery of the gold, therefore, should be
effected with the smallest possible diminution of currency, reduction
of prices, or enhancement of the rate of interest, and any unnecessary
aggravation of either of these is a perfectly gratuitous evil. Yet
here, as in the previous case, the provisions of the Act of 1844
require that the circulating medium should contract, at least by the
difference between the amount of the available reserve and that of
the exported gold. For example, should the drain commence when the
available reserve should amount to only £4,000,000, which is about the
average, and should it extend to six, eight, or even ten millions, the
amount of the circulating medium must inevitably contract, at the very
least by two, four, or six millions. And yet, there can be little doubt
that in such a case as this, a contraction of one or two millions would
be amply sufficient for the recovery of the treasure.
But the remaining case is still more glaring in its character. For,
should the war be protracted for several years in succession, it will
necessitate, not merely a single drain of gold to the extent of some
£8,000,000 or £10,000,000, but a continued series of annual drains,
every one of which may extend to that amount. In this case, therefore,
under the Act of 1844, the currency will be subjected either to one
continuous strain throughout the whole duration of the war, or else to
a succession of violent oscillations from deficiency to excess, and
from excess to deficiency, according as the bullion imported exceeds
that exported, as would probably be the case during the winter months;
and as the bullion exported may exceed that imported, as would probably
be the case during the summer months. Should the amount of bullion
received during the winter be equal to the amount exported during the
previous summer, we should then have an excess of currency with high
prices, and a low rate of interest in every spring, followed by a
deficiency of currency with low prices, and excessively high interest
in every autumn, except so far as this rule might be interfered
with in the case of those commodities, the supply of which would be
diminished through the rupture of our commercial relations with the
hostile country. But should the influx of gold during the winter, fall
short of the previous efflux, the effect would be, that the currency
would be subjected to a permanent deficiency; and we should only have
to look forward to low prices and enormous interest throughout the
whole continuance of the war, with the not improbable contingency of
the spread of general panic at every period of unusual pressure. And
to this it must be added, that should any serious deficiency in some
staple article of domestic consumption occur in the meantime, requiring
the importation of an adequate substitute from abroad, the additional
efflux of treasure which this would necessitate, might not only lead to
a suspension of cash payments by the Bank of England, but be the means
of throwing the whole commercial affairs of the nation into extreme,
if not irreparable, disorder.
It is now admitted by the best authorities, both practical and
theoretical, that what is really wanted in such cases as those just
described, is the adoption of some system that would recover the
exported treasure, with the smallest possible interference with the
amount of circulating medium, and the general prices of commodities. It
is likewise admitted that a rise in the rate of interest, accompanied
by a very moderate contraction of the currency, would be quite
sufficient to recover the exported treasure, without inflicting any
serious injury on the commercial public. For example, Mr. J. S. Mill,
who is perhaps the most eminent of living economists, in the chapter
on the Regulation of the Currency, thus expresses himself: “In the
first place, the gold might be brought back, not by a fall of prices,
but by the much more rapid and convenient medium of a rise of the
rate of interest, involving no fall of any prices except the prices
of securities. Either English securities would be bought on account
of foreigners, or foreign securities held in England, would be sent
abroad for sale, both which operations took place largely during the
mercantile difficulties of 1847, and not only checked the efflux
of gold, but turned the tide and brought the metal back.” And in
confirmation of this statement, we have the evidence of Mr. Morris,
late Governor of the Bank, before the Committee of the House of
Commons on Commercial Distress, to the fact, that a rise in the rate
of discount to 6 per cent. sufficed to recover the gold from Russia
and other continental countries--“Parties were importing gold during
the time that we were discounting at 6 and 7 per cent., but latterly,
when gold became scarce, they exerted themselves still more to bring
it.” But the testimony of Mr. J. Horsley Palmer, who has passed the
Bank Chair, is still more decisive. He was asked, “May not a favourable
exchange be maintained by the rate of interest being higher in this
country than on the Continent?” His answer is emphatic: “It is the only
mode, in my judgment, for correcting the foreign exchanges.”
Now this is the precise mode in which our proposed system would operate
in the case of every drain of bullion. The immediate effect of any
drain, from whatever cause produced, would be, not a contraction of
the circulating medium, but a gradual rise in the rate of interest. If
the drain were not very great, this rise in the rate of interest would
be sufficient to turn the exchanges in the manner described by Mr.
J. S. Mill. If the drain were more severe, the rate of interest would
rise still higher, till it would ultimately affect the public demand
for loans and discounts, at which point it would begin to produce a
very gradual contraction of the circulation. With this contraction
would proceed a slight reduction in prices sufficient to stimulate an
increased exportation, but not to paralyze domestic industry; and the
united operation of the rise in the rate of interest and the moderate
fall in prices, would recover the exported treasure, without involving
any serious convulsion in the commercial system.
As this is a matter of more than ordinary importance, it will be best
to enter somewhat more minutely into the mode of operation. We have
already observed that the present average amount of bullion held by the
Bank of England is about £14,000,000. Should the Bank, as we propose,
be allowed to issue some £10,000,000 of small notes, the average amount
of bullion would probably be thereby increased to about £24,000,000. We
have also shown that the present average issue of unrepresented notes
by the Bank is about £8,000,000, and that if it were allowed to replace
the country issues, the average would probably be thereby increased to
£15,000,000. We shall now suppose that a drain of bullion commences
when the amount both of the bullion and the unrepresented issues is at
this estimated average. In such a case the total issues of the Bank of
England would be thus composed:
Issued on bullion £24,000,000
” at 1 per cent. 11,000,000
” at 2 per cent. 4,000,000
-----------
£39,000,000
the Bank having still a reserve of £7,000,000 of unrepresented notes,
which it might issue at 2 per cent. before the issues at 4 per cent.
would be called into requisition. We shall also assume that the rate
of interest is at its ordinary average of about 4 per cent. In these
circumstances, then, we shall suppose that a drain originates from
any of the preceding causes to the extent of say £4,000,000;[D] the
effect will be as follows:--According as each million of bullion is
withdrawn from the Bank, for exportation, the amount of bullion notes,
and therefore of circulating medium in the possession of the public,
will suffer a corresponding diminution: an increased demand for banking
accommodation will therefore arise; but as this can only be accorded
by the Bank of England, through a further extension of the issues at 2
per cent., and as any considerable issue of such notes would require
a higher rate of interest than 4 per cent. to render it adequately
profitable, the effect of this increased demand for accommodation will
probably be a rise in the rate of interest from 4 to 4½ or, perhaps,
5 per cent. It is possible that this rise in the rate of discount
might not produce any effect upon the demand for accommodation, but
the probability is, that it would have some sensible influence, though
not very considerable. We shall estimate it, therefore, as likely to
diminish the amount of the currency by £1,000,000 of the £4,000,000
exported. The total issues would then have undergone the following
change:--
Issued on bullion £20,000,000
” at 1 per cent. 11,000,000
” at 2 per cent. 7,000,000
----------
£38,000,000
[D] In order to guard against misapprehension, it may be
necessary to observe, that when speaking of the amount of
any drain of bullion, we invariably mean the excess of
the treasure exported over that imported during the given
period. For example, should the efflux amount to £6,000,000
and the influx to only £2,000,000, the effect would be
the same as if there had been an efflux of £4,000,000
and no simultaneous influx: we should, therefore, assign
£4,000,000 and not £6,000.000, as the actual drain in such
a case.
and we should have a rise in the rate of interest to 4½ or perhaps 5
per cent., accompanied by a contraction in the total circulation to the
extent of £1,000,000, as a means of correcting the exchanges, which
there is little doubt it would suffice to do, if the drain were one of
only slight severity.
The drain of 1847, however, was much more severe than this--and in
order to show the operation in a somewhat analogous case, we shall
suppose the efflux of bullion to proceed to the extent of a second
£4,000,000. The effect would necessarily be very similar to that
just described, except that it would be more strongly marked in its
features. According as the demand for accommodation would increase,
and as the Bank would approach the exhaustion of the £11,000,000 of
unrepresented notes allowed to be issued at 2 per cent., it would be
obliged to raise the rate of discount still higher, so that, by the
time that the efflux of the second £4,000,000 would be complete, the
rate of discount would probably be not less than 5½ or 6 per cent., and
as this rise would undoubtedly have considerable effect in checking
the increased demand for accommodation, we may confidently assume the
consequent contraction of the circulation to be at least one million of
the four. The total issues therefore would have assumed this position:--
Issued on bullion £16,000,000
” at 1 per cent. 11,000,000
” at 2 per cent. 10,000,000
-----------
£37,000,000
exhibiting a rise in the rate of discount, from 4 to 5½ or 6 per cent.,
and a decrease of £2,000,000 in the amount of circulating medium, as
the total effect produced by a drain of £8,000,000 of bullion. And
should the drain proceed no further, we have ample data both in theory
and practise, for assuming that this rise in the rate of interest
would draw over foreign capital in the purchase of securities--that
this contraction in the currency would lower prices sufficiently to
stimulate the export of commodities, without paralyzing industry--and
that through the combined operation of the two agencies, the bullion
would be slowly but certainly recovered, with the smallest possible
detriment to commercial interests.
The case of a drain arising out of military expenditure presents no
peculiar feature of difficulty, as compared with the preceding. Should
the loss of gold continue to the extent of another £4,000,000, making
£12,000,000 altogether, the chief point of difference would be, that
the exhaustion of the £11,000,000 of unrepresented notes allowed to be
issued at 2 per cent., would necessitate a recourse to the issues at 4
per cent.; and that this would require a proportionate rise in the rate
of discount, in order to render such issue adequately profitable to the
Bank. But a rise in the rate of discount to 6 or 6½ per cent., would
allow the Bank a profit of 2 or 2½ per cent. out of such issue, over
and above the governmental charge; we may, therefore, assume that such
a rise would suffice as an inducement for the Bank to draw on those
issues. And supposing that a rise to 6 or 6½ per cent. would produce
a contraction in the demand for accommodation of a single million, as
before, the total operation on the issues would be as follows:--
Issued on bullion £12,000,000
” at 1 per cent. 11,000,000
” at 2 per cent. 11,000,000
” at 4 per cent. 2,000,000
----------
£36,000,000
the efflux of £12,000,000 of bullion having raised the rate of interest
from 4 to suppose 6 or 6½ per cent., and having reduced the total
issues of bullion notes and unrepresented notes from £39,000,000 to
£36,000,000; that is, by £3,000,000 out of £39,000,000. Now, in order
to convey an adequate conception of the advantages derived from such
a plan as this, we must contrast it more closely with the operation
of the present system in a similar case. We will suppose, therefore,
that a drain of £12,000,000 of bullion commences under the present
system, at a time when the bullion notes and unrepresented notes of
the Bank are both about their ordinary average, viz. £14,000,000 and
£8,000,000 respectively, making a total of £22,000,000. Now, bearing in
mind that the reserve of unrepresented notes can never practically be
reduced below £2,000,000, it will be at once apparent that a drain of
£12,000,000 in such a case would produce the following change:--
Issued on gold £2,000,000
” on securities 12,000,000
----------
£14,000,000
thereby effecting a reduction in the total circulation of the Bank
of £8,000,000 out of £22,000,000, while raising the rate of discount
in some fabulous proportion in order to keep down the demand for
accommodation, and at the same time placing in imminent jeopardy the
convertibility of the issues, if not the solvency of the Bank.
We should not be doing justice to our proposed system if we did not
subject it to a test still more severe than any of the preceding, and
one which could not arise under the present currency laws without
entailing upon the nation a very serious difficulty in meeting its
engagements. We refer to the very possible contingency already alluded
to, of our being obliged to discharge some heavy foreign liabilities
through the failure of some important article of domestic consumption,
or through any other cause, while already embarrassed by an excessive
military outlay. The events of the past twelve months, indeed, have
indubitably proved that it lies within the competency of a foreign
country at any time, when the bullion is at a minimum, to buy up all
the marketable English bills on the Continent at a trifling monetary
sacrifice, and by transmitting them for discount, entail so sudden a
demand for gold upon the Bank as may completely exhaust the treasure in
the coffers of that establishment. Now, it can be readily shown that
the provisions which we have proposed would altogether preclude the
possible occurrence of such a calamity as this. For, supposing such an
operation to be effected at a time when the bullion had been already
reduced, as just now supposed, to £12,000,000, and supposing £4,000,000
to be the highest probable limit of such a demand, the effect of this
sudden drain of an additional £4,000,000 might possibly be to raise the
rate of discount momentarily to perhaps 7 per cent., and might thereby
produce a contraction in the actual circulation of £1,000,000 or
£2,000,000, yet the result upon the issues could hardly be more violent
than to reduce them as follows:--
Issued on bullion £8,000,000
” at 1 per cent. 11,000,000
” at 2 per cent. 11,000,000
” at 4 per cent. 4,000,000
-----------
£34,000,000
and as the bullion withdrawn by such an operation should be rapidly
recovered, the additional pressure would be very soon relieved, and
would pass over without entailing any abatement of confidence in the
perfect security of the unrepresented issues[E].
[E] We have not alluded in the text to the effect of our
proposed system, in reducing the enormous fluctuations
in the rate of discount produced by the operation of the
Act of 1844; but this is a feature of the question too
important to be altogether passed over without reference.
In his examination before the Committee of the House of
Lords on Commercial Distress, Mr. J. H. Palmer, a very
competent authority, declared, that in his whole experience
he had never known such vicissitudes in the rates of
interest and discount as since the passing of the Act;
and the greater number of the witnesses were unanimous in
deploring the excessive injury inflicted on the community
by those vicissitudes. Now, one essential part of the
operation of the governmental charges of 1, 2, and 4 per
cent. would be the reduction of those violent oscillations
within more salutary limits; as we have just now seen that
3½ to 4 per cent. would be the probable minimum, and 6 to
7 per cent. the probable maximum, at which the Bank of
England would ever grant accommodation, and that moreover
it would only be in extraordinary cases that the range of
variation would exceed from 4 to 6 per cent.
We have now contrasted the operation of the present and the proposed
systems, in the cases in which there is an excess and in which there
is a deficiency of circulating medium. But the contrast would not be
complete if we did not consider a third case, somewhat intermediary
to the other two; viz. that in which an occasional or only temporary
expansion of the circulation is required by the domestic transactions
of the country. The principal case in which this occurs, is at the
payment of the dividends. At such times, whenever the reserve in the
banking department happens to be small, through a low stock of bullion
or through some degree of pressure, the effect of the restrictive
clauses of the Act of 1844 is to render the payment of the dividends a
matter of considerable difficulty, except at the expense of a serious
temporary contraction in the amount of accommodation afforded to the
public. In both the cases of April and October, 1847, already referred
to, this was one of the circumstances which contributed to aggravate
the pressure.[F] But other cases not unfrequently arise, in which
advances are requisite for some temporary purpose, and which the Act of
1844 has rendered almost impracticable. A striking illustration of this
occurred in the beginning of the year 1846, when Parliament required
that all Railway companies which intended applying for an Act, should
lodge 10 per cent. upon their capital, within fifteen days after the
meeting of Parliament. It may well be doubted whether, if Government
had been fully enlightened as regards the difficulty of performing such
a condition, this measure would have been insisted on; but however
that may be, it is indisputable that had the reserve in the banking
department been small at that period, or had not the Bank lent out the
notes as fast as they were received, the effect of the restrictive
clauses of the Act of 1844 was such, that the lodgments could not
possibly have been made at all; and even as it was, the difficulty of
effecting then occasioned great anxiety in the public mind.[G] And
similar cases may at any time arise, in which the operation of the Act
must necessarily produce considerable inconvenience to the public.
[F] “About the same time the Government had occasion to borrow
of the banking department about £3,500,000 to pay the
April dividends. The banking department, consequently,
for a while, limited their discounts; and even refused
to grant loans on Exchequer bills. Great pressure was
consequently felt, though it did not last for a long time.
Now it is alleged that if the Act of 1844 had not existed,
the Directors would have allowed the gold to be exported
without _immediately_ contracting the notes in circulation.
They would have lent the money required by the Government,
without refusing the loans and discounts to the public:
and the contraction of the circulation, by being extended
over one or two months, instead of a few weeks, might
have produced no inconvenience,”--_Practical Treatise on
Banking_, by J. W. Gilbart. F.R.S. Fifth Edition. Page 129.
[G] “Had the Act of 1844 not been in existence, the Bank of
England (as in the case of the West India loan, and of
previous loans) might have lent out the money before the
time of payment arrived, and no apprehensions would have
been entertained. The notes in circulation would have been
largely increased for a few days, and then again have
subsided to the former amount. As it was, the payment was
not made through any virtue in the Act; and had it been
required under different circumstances, or when the banking
department had a smaller reserve, it could not have been
made at all.”--_Practical Treatise on Banking_, by J. W.
Gilbart, F.R.S. Fifth Edition. Page 128.
Now very few words will suffice to show that our proposed system would
be as well adapted to the exigencies of those occasional advances, as
to the more normal requirements of the circulation. It must, we think,
be conceded, that if an advance be made for some definite individual
purpose, such as those referred to, the money so advanced will not
continue any length of time in circulation, but will return into the
Bank without producing a sensible effect on prices or on credit. But
this being granted, it clearly follows that a system which is only
intended to prevent such an over issue as would have the effect of
raising prices, ought not to interfere with some indispensable advance
which would necessarily be temporary, and would therefore exert no
influence on prices. Be that as it may, however, our system would
be equally applicable to both cases. For, if the advance be really
for a permanent purpose, its effect will be precisely similar to any
other advance of equal extent; if considerable, it will raise the
rate of interest and thereby diminish the amount of accommodation
required in other quarters; so that the currency in the hands of the
public will still be preserved at an expedient level. On the other
hand, if the advance be made for some individual application, the
governmental charge will only be imposed for the few days during
which the money will be actually in circulation, and will therefore
cause no sensible inconvenience to the Bank; while the necessary
effect of its imposition, will be either to recover the money at the
termination of that period, or else, by inducing the Bank to raise its
rate of interest, to produce a contraction equivalent to the amount
of expansion. In short, the operation of the proposed system, will be
such that unless the amount of notes advanced in such circumstances be
really required for the purpose of currency, they will not continue in
circulation, but will inevitably return to the Bank at the earliest
possible period.
It may be considered necessary that we should make a brief reference
to some of the schemes that have been recently proposed, for the
regulation of the currency. The only one of these that appears to
have met with much attention, is that suggested by Mr. Glyn, in his
examination before the Committee of the House of Lords on Commercial
Distress. His proposal was, that the whole responsibility of the
circulation should be left in the hands of the Bank of England, but
that the Bank Court should include certain persons appointed under
Act of Parliament, who should have, not an absolute veto upon the
proceedings of the Court, but the right, when they dissented from the
majority, to submit the reasons for that dissent in writing, or even
lay them before Parliament from time to time. To this he would not add
any regulations with respect to the management of the currency, with a
view to the exchanges, or to any other circumstances, but would leave
that entirely to the determination of the Court and the Commissioners.
As coming from a practical banker of such experience as Mr. Glyn,
this proposal is certainly entitled to an attentive and respectful
consideration. To us it appears, however, that several weighty
objections oppose themselves to its adoption. To one of these we
assign great practical influence, independently of all considerations
of principle. We apprehend that the adoption of such a measure would
almost inevitably establish very undesirable relations between the Bank
and the Parliament or Government of the day. It is not to be assumed
that Commissioners appointed by Act of Parliament, are necessarily more
likely to be infallible than Directors selected by the proprietors
of the Bank; but even if this were assumed as probable, it would not
still follow that it would be at all expedient that such Commissioners
should be invested with the power of becoming public accusers of the
Directors, on any occasion in which the latter might not assent to
their recommendations. The ultimate effect of such a measure could
hardly fail to be, that the Commissioners, if men of large abilities,
would come to be regarded in the light of dictators whose proposals
the Directors would often shrink from negativing, through a natural
aversion to have their proceedings investigated, and perhaps condemned,
by Parliament.
But there are higher considerations than even this, on which we should
mistrust the expediency of such a plan. It does not appear, so far as
we recollect, whether Mr. Glyn would repeal the provisions requiring
the Bank to purchase all gold which may be presented at £3 17s. 9d.
per ounce, and recur entirely to the measure of 1819; but we cannot
see why, if the Bank Court are to have the sole responsibility of the
amount of unrepresented notes to be held in circulation, they might
not also be entrusted with the complete management of the issues
on bullion, and, therefore, why the above provisions might not be
altogether repealed. Now, whatever may be the defects of the Act of
1844, it is, we believe, disputed by few whose opinions are entitled
to respect, that the operation of this part of the system has been in
the main beneficial, and that on the whole the measure of 1844 has
been a very great advance upon that of 1819. If however, Mr. Glyn only
contemplated the issue of unrepresented notes, when he recommended
entrusting the whole responsibility to the Bank Court, there still
appear very serious objections to his proposal, taken even with this
limitation. Amongst others we may again repeat what we have already
strenuously insisted on, that it is time that the Bank of England
should render some better equivalent than at present for the privilege
of issue. But independently of this consideration, we do not consider
that the course which the Bank Court has adopted at various periods
throughout the past half century, has been sufficiently judicious to
justify our entrusting so unfettered a capacity for good or evil to its
care, even though guided in its decisions by the advice of any number
of Commissioners appointed under Act of Parliament. A very considerable
discretionary power must undoubtedly be confided to the Bank Directors,
but we cannot perceive that past experience would justify the extension
of that discretion to the absolute control either of the unrepresented
issues or of the rate of interest. Thus, while we would place no
absolute restriction upon the Bank, either with regard to the amount
of its issues or to its rate of interest, we would certainly endeavour
to devise such measures as would prevent the Bank, on the one hand,
from exerting itself to keep too large an amount of unrepresented notes
in circulation, and on the other, from loaning and discounting at too
low a rate of interest, and thereby directly contributing to stimulate
excessive speculation. And both of these objects we believe would be
completely and judiciously effected through the adoption of the scale
of charges already described; as the imposition of the minimum rate
would necessarily prevent the rate of interest from falling too low in
speculative periods, while the operation of the three ascending rates,
as a whole, would produce a rise in the rate of interest directly
proportionate to the efflux of gold and the increased demand for
accommodation in times of pressure.
We are far from certain, however, that Mr. Glyn intended to express
himself so forcibly against the adoption of any regulations, as the
tenor of his language might appear to indicate. In several other parts
of his evidence before the same Committee, we may very fairly refer to
him in striking corroboration of our views. For, not only does he unite
with us in reprobating the effect of the low rate of interest at which
the Bank accommodates the public when money is abundant, in stimulating
excessive speculation, and not only does he advocate the essential
importance of maintaining a more equable rate of interest than has
hitherto been the case, but he even expresses his entire approval of
the plan of imposing a governmental charge upon the £3,000,000 of
unrepresented notes which the Bank is allowed to issue on securities.
“I am not aware of the terms upon which it is advanced to the Bank of
England, but my idea was, that the additional three millions ought not
to have been advanced to the Bank of England by the issue department,
except upon such a rate of interest as would have regulated the amount
of notes out; that whenever money was worth only 3½ per cent. they
should not have had the whole of that three millions issued; thus
acting upon the circulation and lowering the value of money.” Now,
in this important passage is contained the most essential feature of
the system we propose; the only difference of any moment consisting
in this, that the principle which Mr. Glyn would apply to a certain
portion of the circulation, we should desire to see extended, with
the necessary modifications, to the total amount of the unrepresented
issues.
We are strongly disposed to think that Mr. Glyn, Mr. Tooke, and several
other leading opponents of the Act of 1844, have been carried too far
in their objection to any system of regulations, through witnessing
the mischievous effects of the inflexible restrictive clauses of that
Act. So far as Mr. Tooke, however, is concerned, while shrinking from
prescribing any absolute regulations on the subject of the currency, he
has not omitted to offer some valuable suggestions as to the principles
by which the Court of Directors should be guided in its management. He
recommends that the average amount of bullion should be £12,000,000,
the maximum being £18,000,000, and the minimum £6,000,000; and assuming
4 per cent. to be the average rate of interest, he supposes a drain to
set in while the bullion is at its maximum. In such circumstances he
would suffer the drain to reduce the gold to £12,000,000, and would
then raise the rate of interest to 6 per cent., at which he would
maintain it until the gold had fallen to £6,000,000, below which
amount he does not consider it probable that the efflux would ever be
likely to descend. In case it should exceed that point, however, he
would then allow the Bank to take measures for its own security, by
restricting its discounts or otherwise; but as soon as the bullion
again amounted to £6,000,000, he would recur to the rate of 6 per cent.
and would adhere to the same until the treasure should again attain its
maximum of £18,000,000.
If taken merely as a rough outline of the mode in which the Bank
Directors should control their issues, we see little to object to in
this plan of Mr Tooke’s, but in its specific details it would hardly
bear a close examination. Its principal defect, perhaps, regarded
under this aspect, consists in its appearing to recommend a series of
violent transitions. We ran hardly think that its eminent proposer
would suddenly raise the rate of interest from 4 to 6 per cent. at any
particular stage in the efflux of bullion, or vice versa, or that he
intended the preceding as other than an approximate statement of the
mode in which the rate of interest ought to be raised in proportion
as the drain proceeded. But apart from this consideration it seems
somewhat inconsistent that, while he would strongly recommend the
adoption of some such plan by the Directors, he would refrain from
enacting any regulations that would have the tendency to ensure their
practical adherence to it. Now, in this respect, we must, although
reluctantly, dissent from the views of Mr. Tooke. We should not feel
satisfied with merely advising the Bank Court as to the proper course
to be pursued, and leaving the whole responsibility of so doing in
their hands, but we would adopt such regulations as, while leaving them
their own sphere of action sufficiently unfettered, would still impart
a very sensible stimulus to their adoption of the proper course. For,
while we admit that the Government has not the right to determine on
the rate at which the Bank of England should grant accommodation, we
strenuously maintain that it has the right to impose an equitable rate
of interest on the amount of unrepresented notes which it allows the
Bank to issue, and that it has an equal right to adopt the ascending
principle, as a means of inducing the Bank to adhere to a similar rule
in making its advances to the public.
There is one conclusion, however, as we have already observed, on
which a large majority of the highest authorities, scientific and
practical, are fully agreed, viz., that the present system of currency
is extremely defective, and ought to be amended in the ensuing session
of Parliament. The restrictive clauses of the Act of 1844 are, we
think, likely to be repealed whenever the subject is presented for
reconsideration. But if the remedial measures are confined to the mere
repeal of those provisions; there will be little practical difference
between the new system and that established by the law of 1819. We must
once more repeat, that neither experience nor sound principle would
justify the placing so serious a responsibility as the unrestricted
issue of notes unrepresented by bullion, under the uncontrolled
direction of the Bank of England. And if this be admitted, the question
at once presents itself what is the nature of the control which the
State ought to exercise over such issue. It must not consist of the
simple limitation of the number of notes issued; for either that would
be ineffectual, or would repeat the error of the Act of 1844. Nor must
it consist of the legislative enactment of certain rates of interest
at which the Bank should accommodate the public; for that would be an
unwarrantable interference with the functions of the Bank. We know of
no other legitimate course, therefore, save that already propounded,
viz. the imposition of certain rates of interest on the amount of
notes which the State may authorize the Bank to issue, and which the
latter would not issue unless it derived a profit from the transaction.
The adoption of this course would not involve the assumption of any
undue prerogatives on the part of the Government; for if the State
consents to transfer the privilege of issuing paper money from itself
to any banking company, it unquestionably possesses the right to
require an adequate equivalent for the exercise of the privilege thus
transferred. And if the principle be once admitted, that the State
has the right to impose certain equitable rates of interest upon the
unrepresented issues of the Bank of England, we think it follows
indisputably, on grounds which we need not here repeat, that the mode
in which those rates should be assigned, should be that of an ascending
principle.
To proceed still further, we think it no less expedient that whenever
our currency system shall undergo revision, that revision shall be made
as complete as practicable. And if so, we do not see how the subject of
the country banks of issue can escape consideration. The advantages of
having a single bank of issue are now so generally admitted that the
chief, if not the only difficulty which would be likely to obstruct the
question would be that relating to the mode of protecting the country
banks from any unnecessary loss arising from the deprivation of their
privilege. And of several methods in which this might be accomplished,
we think by far the best and simplest would be that of allowing the
present banks of issue to retain the privilege for a certain equitable
number of years, on the single condition of gradually diminishing
their issues, on such a plan that they would altogether cease at the
expiration of the stipulated period. The question of the number of
years that should be allowed is a matter of detail; but, for our part,
we consider that ten would be amply sufficient for this purpose. The
gradual substitution of Bank of England paper for the notes withdrawn
would present no difficulty; as all that would be necessary is, that
the Bank of England should be permitted to increase its normal issues
on equitable conditions in proportion as the country notes diminished,
until, at the expiration of the stipulated period, the former would
have totally replaced the latter. We see no objection, therefore,
either of principle or of practice, to any of the leading features of
the plan we have just propounded: and so far as the minuter details are
concerned, we think they might safely be entrusted to the care of any
intelligent body of public men who would honestly endeavour to carry
the principles themselves into execution.
THE END.
Transcriber’s Notes
Punctuation and spelling were made consistent when a predominant
preference was found in this book; otherwise they were not changed.
Simple typographical errors were corrected; occasional unbalanced
quotation marks retained.
Ambiguous hyphens at the ends of lines were retained; occurrences of
inconsistent hyphenation have not been changed.
A vertical white blemish near the left margin partly-obscured the
text of many page images. Transcribers were able to reconstruct the
affected words, but the line also went through the second digit of some
numbers, particularly in multiple occurrences of what was judged to be
“£11,000,000”. It is possible that the correct value for some of those
was “£14,000,000”.
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