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.