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 But if the privilege of issue were withdrawn from all its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.