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.