of the banking department about £3,500,000 to pay the
April dividends. The banking department, consequently,
for a while, limited their discounts; and even refused
to grant loans on Exchequer bills. Great pressure was
consequently felt, though it did not last for a long time.
Now it is alleged that if the Act of 1844 had not existed,
the Directors would have allowed the gold to be exported
without _immediately_ contracting the notes in circulation.
They would have lent the money required by the Government,
without refusing the loans and discounts to the public:
and the contraction of the circulation, by being extended
over one or two months, instead of a few weeks, might
have produced no inconvenience,”--_Practical Treatise on
Banking_, by J. W. Gilbart. F.R.S. Fifth Edition. Page 129.
[G] “Had the Act of 1844 not been in existence, the Bank of
England (as in the case of the West India loan, and of
previous loans) might have lent out the money before the
time of payment arrived, and no apprehensions would have
been entertained. The notes in circulation would have been
largely increased for a few days, and then again have
subsided to the former amount. As it was, the payment was
not made through any virtue in the Act; and had it been
required under different circumstances, or when the banking
department had a smaller reserve, it could not have been
made at all.”--_Practical Treatise on Banking_, by J. W.
Gilbart, F.R.S. Fifth Edition. Page 128.
Now very few words will suffice to show that our proposed system would
be as well adapted to the exigencies of those occasional advances, as
to the more normal requirements of the circulation. It must, we think,
be conceded, that if an advance be made for some definite individual
purpose, such as those referred to, the money so advanced will not
continue any length of time in circulation, but will return into the
Bank without producing a sensible effect on prices or on credit. But
this being granted, it clearly follows that a system which is only
intended to prevent such an over issue as would have the effect of
raising prices, ought not to interfere with some indispensable advance
which would necessarily be temporary, and would therefore exert no
influence on prices. Be that as it may, however, our system would
be equally applicable to both cases. For, if the advance be really
for a permanent purpose, its effect will be precisely similar to any
other advance of equal extent; if considerable, it will raise the
rate of interest and thereby diminish the amount of accommodation
required in other quarters; so that the currency in the hands of the
public will still be preserved at an expedient level. On the other
hand, if the advance be made for some individual application, the
governmental charge will only be imposed for the few days during
which the money will be actually in circulation, and will therefore
cause no sensible inconvenience to the Bank; while the necessary
effect of its imposition, will be either to recover the money at the
termination of that period, or else, by inducing the Bank to raise its
rate of interest, to produce a contraction equivalent to the amount
of expansion. In short, the operation of the proposed system, will be
such that unless the amount of notes advanced in such circumstances be
really required for the purpose of currency, they will not continue in
circulation, but will inevitably return to the Bank at the earliest
possible period.
It may be considered necessary that we should make a brief reference
to some of the schemes that have been recently proposed, for the
regulation of the currency. The only one of these that appears to
have met with much attention, is that suggested by Mr. Glyn, in his
examination before the Committee of the House of Lords on Commercial
Distress. His proposal was, that the whole responsibility of the
circulation should be left in the hands of the Bank of England, but
that the Bank Court should include certain persons appointed under
Act of Parliament, who should have, not an absolute veto upon the
proceedings of the Court, but the right, when they dissented from the
majority, to submit the reasons for that dissent in writing, or even
lay them before Parliament from time to time. To this he would not add
any regulations with respect to the management of the currency, with a
view to the exchanges, or to any other circumstances, but would leave
that entirely to the determination of the Court and the Commissioners.
As coming from a practical banker of such experience as Mr. Glyn,
this proposal is certainly entitled to an attentive and respectful
consideration. To us it appears, however, that several weighty
objections oppose themselves to its adoption. To one of these we
assign great practical influence, independently of all considerations
of principle. We apprehend that the adoption of such a measure would
almost inevitably establish very undesirable relations between the Bank
and the Parliament or Government of the day. It is not to be assumed
that Commissioners appointed by Act of Parliament, are necessarily more
likely to be infallible than Directors selected by the proprietors
of the Bank; but even if this were assumed as probable, it would not
still follow that it would be at all expedient that such Commissioners
should be invested with the power of becoming public accusers of the
Directors, on any occasion in which the latter might not assent to
their recommendations. The ultimate effect of such a measure could
hardly fail to be, that the Commissioners, if men of large abilities,
would come to be regarded in the light of dictators whose proposals
the Directors would often shrink from negativing, through a natural
aversion to have their proceedings investigated, and perhaps condemned,
by Parliament.
But there are higher considerations than even this, on which we should
mistrust the expediency of such a plan. It does not appear, so far as
we recollect, whether Mr. Glyn would repeal the provisions requiring
the Bank to purchase all gold which may be presented at £3 17s. 9d.
per ounce, and recur entirely to the measure of 1819; but we cannot
see why, if the Bank Court are to have the sole responsibility of the
amount of unrepresented notes to be held in circulation, they might
not also be entrusted with the complete management of the issues
on bullion, and, therefore, why the above provisions might not be
altogether repealed. Now, whatever may be the defects of the Act of
1844, it is, we believe, disputed by few whose opinions are entitled
to respect, that the operation of this part of the system has been in
the main beneficial, and that on the whole the measure of 1844 has
been a very great advance upon that of 1819. If however, Mr. Glyn only
contemplated the issue of unrepresented notes, when he recommended
entrusting the whole responsibility to the Bank Court, there still
appear very serious objections to his proposal, taken even with this
limitation. Amongst others we may again repeat what we have already
strenuously insisted on, that it is time that the Bank of England
should render some better equivalent than at present for the privilege
of issue. But independently of this consideration, we do not consider
that the course which the Bank Court has adopted at various periods
throughout the past half century, has been sufficiently judicious to
justify our entrusting so unfettered a capacity for good or evil to its
care, even though guided in its decisions by the advice of any number
of Commissioners appointed under Act of Parliament. A very considerable
discretionary power must undoubtedly be confided to the Bank Directors,
but we cannot perceive that past experience would justify the extension
of that discretion to the absolute control either of the unrepresented
issues or of the rate of interest. Thus, while we would place no
absolute restriction upon the Bank, either with regard to the amount
of its issues or to its rate of interest, we would certainly endeavour
to devise such measures as would prevent the Bank, on the one hand,
from exerting itself to keep too large an amount of unrepresented notes
in circulation, and on the other, from loaning and discounting at too
low a rate of interest, and thereby directly contributing to stimulate
excessive speculation. And both of these objects we believe would be
completely and judiciously effected through the adoption of the scale
of charges already described; as the imposition of the minimum rate
would necessarily prevent the rate of interest from falling too low in
speculative periods, while the operation of the three ascending rates,
as a whole, would produce a rise in the rate of interest directly
proportionate to the efflux of gold and the increased demand for
accommodation in times of pressure.
We are far from certain, however, that Mr. Glyn intended to express
himself so forcibly against the adoption of any regulations, as the
tenor of his language might appear to indicate. In several other parts
of his evidence before the same Committee, we may very fairly refer to
him in striking corroboration of our views. For, not only does he unite
with us in reprobating the effect of the low rate of interest at which
the Bank accommodates the public when money is abundant, in stimulating
excessive speculation, and not only does he advocate the essential
importance of maintaining a more equable rate of interest than has
hitherto been the case, but he even expresses his entire approval of
the plan of imposing a governmental charge upon the £3,000,000 of
unrepresented notes which the Bank is allowed to issue on securities.
“I am not aware of the terms upon which it is advanced to the Bank of
England, but my idea was, that the additional three millions ought not
to have been advanced to the Bank of England by the issue department,
except upon such a rate of interest as would have regulated the amount
of notes out; that whenever money was worth only 3½ per cent. they
should not have had the whole of that three millions issued; thus
acting upon the circulation and lowering the value of money.” Now,
in this important passage is contained the most essential feature of
the system we propose; the only difference of any moment consisting
in this, that the principle which Mr. Glyn would apply to a certain
portion of the circulation, we should desire to see extended, with
the necessary modifications, to the total amount of the unrepresented
issues.
We are strongly disposed to think that Mr. Glyn, Mr. Tooke, and several
other leading opponents of the Act of 1844, have been carried too far
in their objection to any system of regulations, through witnessing
the mischievous effects of the inflexible restrictive clauses of that
Act. So far as Mr. Tooke, however, is concerned, while shrinking from
prescribing any absolute regulations on the subject of the currency, he
has not omitted to offer some valuable suggestions as to the principles
by which the Court of Directors should be guided in its management. He
recommends that the average amount of bullion should be £12,000,000,
the maximum being £18,000,000, and the minimum £6,000,000; and assuming
4 per cent. to be the average rate of interest, he supposes a drain to
set in while the bullion is at its maximum. In such circumstances he
would suffer the drain to reduce the gold to £12,000,000, and would
then raise the rate of interest to 6 per cent., at which he would
maintain it until the gold had fallen to £6,000,000, below which
amount he does not consider it probable that the efflux would ever be
likely to descend. In case it should exceed that point, however, he
would then allow the Bank to take measures for its own security, by
restricting its discounts or otherwise; but as soon as the bullion
again amounted to £6,000,000, he would recur to the rate of 6 per cent.
and would adhere to the same until the treasure should again attain its
maximum of £18,000,000.
If taken merely as a rough outline of the mode in which the Bank
Directors should control their issues, we see little to object to in
this plan of Mr Tooke’s, but in its specific details it would hardly
bear a close examination. Its principal defect, perhaps, regarded
under this aspect, consists in its appearing to recommend a series of
violent transitions. We ran hardly think that its eminent proposer
would suddenly raise the rate of interest from 4 to 6 per cent. at any
particular stage in the efflux of bullion, or vice versa, or that he
intended the preceding as other than an approximate statement of the
mode in which the rate of interest ought to be raised in proportion
as the drain proceeded. But apart from this consideration it seems
somewhat inconsistent that, while he would strongly recommend the
adoption of some such plan by the Directors, he would refrain from
enacting any regulations that would have the tendency to ensure their
practical adherence to it. Now, in this respect, we must, although
reluctantly, dissent from the views of Mr. Tooke. We should not feel
satisfied with merely advising the Bank Court as to the proper course
to be pursued, and leaving the whole responsibility of so doing in
their hands, but we would adopt such regulations as, while leaving them
their own sphere of action sufficiently unfettered, would still impart
a very sensible stimulus to their adoption of the proper course. For,
while we admit that the Government has not the right to determine on
the rate at which the Bank of England should grant accommodation, we
strenuously maintain that it has the right to impose an equitable rate
of interest on the amount of unrepresented notes which it allows the
Bank to issue, and that it has an equal right to adopt the ascending
principle, as a means of inducing the Bank to adhere to a similar rule
in making its advances to the public.
There is one conclusion, however, as we have already observed, on
which a large majority of the highest authorities, scientific and
practical, are fully agreed, viz., that the present system of currency
is extremely defective, and ought to be amended in the ensuing session
of Parliament. The restrictive clauses of the Act of 1844 are, we
think, likely to be repealed whenever the subject is presented for
reconsideration. But if the remedial measures are confined to the mere
repeal of those provisions; there will be little practical difference
between the new system and that established by the law of 1819. We must
once more repeat, that neither experience nor sound principle would
justify the placing so serious a responsibility as the unrestricted
issue of notes unrepresented by bullion, under the uncontrolled
direction of the Bank of England. And if this be admitted, the question
at once presents itself what is the nature of the control which the
State ought to exercise over such issue. It must not consist of the
simple limitation of the number of notes issued; for either that would
be ineffectual, or would repeat the error of the Act of 1844. Nor must
it consist of the legislative enactment of certain rates of interest
at which the Bank should accommodate the public; for that would be an
unwarrantable interference with the functions of the Bank. We know of
no other legitimate course, therefore, save that already propounded,
viz. the imposition of certain rates of interest on the amount of
notes which the State may authorize the Bank to issue, and which the
latter would not issue unless it derived a profit from the transaction.
The adoption of this course would not involve the assumption of any
undue prerogatives on the part of the Government; for if the State
consents to transfer the privilege of issuing paper money from itself
to any banking company, it unquestionably possesses the right to
require an adequate equivalent for the exercise of the privilege thus
transferred. And if the principle be once admitted, that the State
has the right to impose certain equitable rates of interest upon the
unrepresented issues of the Bank of England, we think it follows
indisputably, on grounds which we need not here repeat, that the mode
in which those rates should be assigned, should be that of an ascending
principle.
To proceed still further, we think it no less expedient that whenever
our currency system shall undergo revision, that revision shall be made
as complete as practicable. And if so, we do not see how the subject of
the country banks of issue can escape consideration. The advantages of
having a single bank of issue are now so generally admitted that the
chief, if not the only difficulty which would be likely to obstruct the
question would be that relating to the mode of protecting the country
banks from any unnecessary loss arising from the deprivation of their
privilege. And of several methods in which this might be accomplished,
we think by far the best and simplest would be that of allowing the
present banks of issue to retain the privilege for a certain equitable
number of years, on the single condition of gradually diminishing
their issues, on such a plan that they would altogether cease at the
expiration of the stipulated period. The question of the number of
years that should be allowed is a matter of detail; but, for our part,
we consider that ten would be amply sufficient for this purpose. The
gradual substitution of Bank of England paper for the notes withdrawn
would present no difficulty; as all that would be necessary is, that
the Bank of England should be permitted to increase its normal issues
on equitable conditions in proportion as the country notes diminished,
until, at the expiration of the stipulated period, the former would
have totally replaced the latter. We see no objection, therefore,
either of principle or of practice, to any of the leading features of
the plan we have just propounded: and so far as the minuter details are
concerned, we think they might safely be entrusted to the care of any
intelligent body of public men who would honestly endeavour to carry
the principles themselves into execution.
THE END.
Transcriber’s Notes
Punctuation and spelling were made consistent when a predominant
preference was found in this book; otherwise they were not changed.
Simple typographical errors were corrected; occasional unbalanced
quotation marks retained.
Ambiguous hyphens at the ends of lines were retained; occurrences of
inconsistent hyphenation have not been changed.
A vertical white blemish near the left margin partly-obscured the
text of many page images. Transcribers were able to reconstruct the
affected words, but the line also went through the second digit of some
numbers, particularly in multiple occurrences of what was judged to be
“£11,000,000”. It is possible that the correct value for some of those
was “£14,000,000”.