Chapter 4

Years.Issues.Profits.1856£8,000,000£320,00018577,200,000288,00018586,400,000256,00018595,600,000224,00018604,800,000192,00018614,000,000160,00018623,200,000128,00018632,400,00096,00018641,600,00064,0001865800,00032,0001866000,00000,000£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 isto 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.CIn 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.

CAssuming the given circulation in the hands of the public to be thus composed:Gold, and bullion notes issued on gold, &c.,£50,000,000Silver,7,000,000Bank of England unrepresented notes11,000,000Country notes7,000,000£75,000,000a 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.

CAssuming the given circulation in the hands of the public to be thus composed:

Gold, and bullion notes issued on gold, &c.,£50,000,000Silver,7,000,000Bank of England unrepresented notes11,000,000Country notes7,000,000£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 beeffected. 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 muchover 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 asfollows:—

1856£000,0001857800,00018581,600,00018592,400,00018603,200,00018614,000,00018624,800,00018635,600,00018646,400,00018657,200,00018668,000,000

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 bullionnotes 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 page38will 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 amountto £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,4,800,00022,000,000”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 ofnotes 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 atotally different principle. The £22,000,000 already provided for constituting what we have called the extreme normal unrepresented circulation of the Bank, the rates imposed upon their issue should be such as would present no obstacle to the free expansion of the circulation to this extent, in conformity with the wants of trade. But any issue in excess of these £22,000,000 should be a very rare occurrence, to be justified only under urgent pressure; the rate to be imposed therefore should be such as would effectually prevent the circulation from ever exceeding its normal limits, except in cases of undoubted necessity, and for this purpose less than 4 per cent. could not be considered adequate. Indeed the Bank rate of interest so frequently rises higher than 4 per cent. that the imposition of any lower rate would present little barrier to the issue in excess of £22,000,000. The three rates therefore, the minimum, the medium, and the maximum, might very reasonably be fixed at 1, 2, and 4 per cent. respectively; in other words, the Bank should be authorized to issue the first £11,000,000 of its unrepresented notes at 1 per cent. the second £11,000,000 at 2 per cent. and any notes issued in excess of those £22,000,000 at 4 per cent.

There is one explanation, however, that must be made as to the method in which these rates should be imposed. We have said that the respective rates should be levied on the amount of notes that might be actually in the hands of the public. To this plan it may, perhaps, be objected, that inasmuch as a very considerable portion of the deposits in the Bank of England are well known to be as profitable to the Bank, and to operate as currency just as much as if they continued in the hands of the public; and that, as under our proposed system, the Bank will be enabled to re-loan their whole amount, and thereby derivea 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 interestsof 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.£110,0004,000,000 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 overthe 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 profitswith 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 requisitefor 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 deficiencyor 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. Andjust 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 mayverify 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 owncapitalists 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 wouldever 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 atwhich the Bank had been discounting in the previous months that produced the alarm, but solely the knowledge that the reserve of unrepresented notes was nearly exhausted, and that the provisions of the Act prohibited the extension of that reserve, no matter what rate of interest might be offered by the public for increased accommodation. The certainty, therefore, that whenever the rate of interest should materially exceed 4 per cent., the Bank would be placed in a position to afford any further accommodation that might be required by the public, would effectually prevent the recurrence of any apprehension as to the possible exhaustion of the Bank’s available resources.

We will now proceed to the case in which the deficiency of currency is produced by an actual drain of the precious metals. Such a drain may obviously arise from a variety of causes too numerous to specify. But there are three cases which are not only in themselves the most important, but which also serve as fair representatives of the remainder. These three are, first, a drain arising out of general high prices at home, originally produced by an excess of currency and great overtrading; secondly, the exportation of gold to pay for some staple article of food or manufacture, caused by the deficient supply of such article at home; and thirdly, the maintenance of a large military expenditure abroad during time of war. The first of these was the main cause of the crisis of 1825; the second was the chief, but not the exclusive, agent in producing the pressure of April, 1847; the third is now in operation, and should the war prove of long continuance, may possibly subject the present system to as severe a test as that of October, 1847, provided the Act should not in the mean time undergo amendment.

To take the case of a drain produced by over speculationfirst. We have already seen that one operation of the present currency system is, either directly to produce a drain whenever money is redundant, or else materially to aggravate it if produced by other agencies. We have now to consider the effect of another part of the same system, which comes into operation when the drain has taken place, and money is deficient. It is a generally admitted principle, that in such a case as this, in which the drain has been occasioned by a low rate of interest and high prices, there is nothing but a rise in the rate of interest, and a fall in prices, that can remedy the evil and recover the exported treasure. But it by no means follows that prices must necessarily fall as much below, as they had previously risen above their average, or that the rate of interest must rise as much above, as it had previously fallen below its average; as, in this case, the evil produced would be fully equal to that which it was designed to cure. For it must be remembered that the exported treasure will, in its turn, produce an excess of currency in the countries which receive it; and that that excess will necessarily lead to a rise in prices and a fall in the rate of interest, precisely commensurate with the amount received. It will not be necessary, therefore, that prices should fall much below the average at home, in order to stimulate an increased export of commodities to those countries in which prices have risen; nor that the rate of interest should much exceed the average, in order to encourage the purchase of our securities on account of the same countries; both of which operations will have the effect of recovering the treasure. But secondly, there is no necessity for our regaining the gold as rapidly as we have previously parted with it; as the less violent is the reaction, the less severe are the concomitant evils. And thirdly, if indeed it should nothave taken the first place, it has been repeatedly proved to demonstration, that a rapid fall in prices, instead of stimulating exportation, has the inevitable effect of paralyzing industry, and thereby retarding the production of those very commodities of which a more than ordinary quantity is required. Now, in each of these respects, the effect of the present system is to aggravate the severity of the reaction in every case in which the reserve of unrepresented notes in the Bank of England, is not at the very highest point when the drain begins to operate. For, supposing the gold exported considerably to exceed the amount of this reserve, which is invariably the case in every extensive drain which commences while the reserve is either at or below its ordinary average, the amount of circulating medium in the hands of the public must contract, at least by the difference between the amount of the available reserve and that of the exported treasure. Now this contraction in itself would alone suffice to cause a serious fall in general prices, and could hardly fail to put a sensible check upon the operations of productive industry. But long before the contraction would have reached its climax, and indeed before the available reserve of the Bank would have been exhausted, the Bank would be compelled, in self defence, to raise the rate of discount so high as completely to arrest the demand for increased accommodation consequent on the drain. In addition, therefore, to the contraction in the amount of circulating medium operating directly upon prices, we have a rapid and excessive rise in the rate of interest, proceeding step by step with that contraction, till, ultimately, as the Bank reserve approaches to the verge of exhaustion, a state of general discredit arises; the hoarding of currency at once ensues, a still more ruinous decline in prices is theconsequence, and nothing but the suspension of the Act can avert the spread of universal panic.

But, secondly, a drain may be produced by the failure of some staple article of food or manufacture, and the consequent importation of an adequate substitute. The most calamitous case of this kind which has occurred in recent times, was the general failure of the potato crop in 1846, which necessitated the transmission of more than £8,000,000 of treasure in payment for bread-stuffs, chiefly to America. In this and similar cases the efflux of gold is not produced by any excess of circulating medium, with its attendant rise in prices and fall in the rate of interest; the recovery of the gold, therefore, should be effected with the smallest possible diminution of currency, reduction of prices, or enhancement of the rate of interest, and any unnecessary aggravation of either of these is a perfectly gratuitous evil. Yet here, as in the previous case, the provisions of the Act of 1844 require that the circulating medium should contract, at least by the difference between the amount of the available reserve and that of the exported gold. For example, should the drain commence when the available reserve should amount to only £4,000,000, which is about the average, and should it extend to six, eight, or even ten millions, the amount of the circulating medium must inevitably contract, at the very least by two, four, or six millions. And yet, there can be little doubt that in such a case as this, a contraction of one or two millions would be amply sufficient for the recovery of the treasure.

But the remaining case is still more glaring in its character. For, should the war be protracted for several years in succession, it will necessitate, not merely a single drainof gold to the extent of some £8,000,000 or £10,000,000, but a continued series of annual drains, every one of which may extend to that amount. In this case, therefore, under the Act of 1844, the currency will be subjected either to one continuous strain throughout the whole duration of the war, or else to a succession of violent oscillations from deficiency to excess, and from excess to deficiency, according as the bullion imported exceeds that exported, as would probably be the case during the winter months; and as the bullion exported may exceed that imported, as would probably be the case during the summer months. Should the amount of bullion received during the winter be equal to the amount exported during the previous summer, we should then have an excess of currency with high prices, and a low rate of interest in every spring, followed by a deficiency of currency with low prices, and excessively high interest in every autumn, except so far as this rule might be interfered with in the case of those commodities, the supply of which would be diminished through the rupture of our commercial relations with the hostile country. But should the influx of gold during the winter, fall short of the previous efflux, the effect would be, that the currency would be subjected to a permanent deficiency; and we should only have to look forward to low prices and enormous interest throughout the whole continuance of the war, with the not improbable contingency of the spread of general panic at every period of unusual pressure. And to this it must be added, that should any serious deficiency in some staple article of domestic consumption occur in the meantime, requiring the importation of an adequate substitute from abroad, the additional efflux of treasure which this would necessitate, might not only lead to a suspension of cash payments by the Bank of England, but be the means of throwing thewhole commercial affairs of the nation into extreme, if not irreparable, disorder.

It is now admitted by the best authorities, both practical and theoretical, that what is really wanted in such cases as those just described, is the adoption of some system that would recover the exported treasure, with the smallest possible interference with the amount of circulating medium, and the general prices of commodities. It is likewise admitted that a rise in the rate of interest, accompanied by a very moderate contraction of the currency, would be quite sufficient to recover the exported treasure, without inflicting any serious injury on the commercial public. For example, Mr. J. S. Mill, who is perhaps the most eminent of living economists, in the chapter on the Regulation of the Currency, thus expresses himself: “In the first place, the gold might be brought back, not by a fall of prices, but by the much more rapid and convenient medium of a rise of the rate of interest, involving no fall of any prices except the prices of securities. Either English securities would be bought on account of foreigners, or foreign securities held in England, would be sent abroad for sale, both which operations took place largely during the mercantile difficulties of 1847, and not only checked the efflux of gold, but turned the tide and brought the metal back.” And in confirmation of this statement, we have the evidence of Mr. Morris, late Governor of the Bank, before the Committee of the House of Commons on Commercial Distress, to the fact, that a rise in the rate of discount to 6 per cent. sufficed to recover the gold from Russia and other continental countries—“Parties were importing gold during the time that we were discounting at 6 and 7 per cent., but latterly, when gold became scarce, they exerted themselves still more to bring it.” But the testimony of Mr. J.Horsley Palmer, who has passed the Bank Chair, is still more decisive. He was asked, “May not a favourable exchange be maintained by the rate of interest being higher in this country than on the Continent?” His answer is emphatic: “It is the only mode, in my judgment, for correcting the foreign exchanges.”

Now this is the precise mode in which our proposed system would operate in the case of every drain of bullion. The immediate effect of any drain, from whatever cause produced, would be, not a contraction of the circulating medium, but a gradual rise in the rate of interest. If the drain were not very great, this rise in the rate of interest would be sufficient to turn the exchanges in the manner described by Mr. J. S. Mill. If the drain were more severe, the rate of interest would rise still higher, till it would ultimately affect the public demand for loans and discounts, at which point it would begin to produce a very gradual contraction of the circulation. With this contraction would proceed a slight reduction in prices sufficient to stimulate an increased exportation, but not to paralyze domestic industry; and the united operation of the rise in the rate of interest and the moderate fall in prices, would recover the exported treasure, without involving any serious convulsion in the commercial system.

As this is a matter of more than ordinary importance, it will be best to enter somewhat more minutely into the mode of operation. We have already observed that the present average amount of bullion held by the Bank of England is about £14,000,000. Should the Bank, as we propose, be allowed to issue some £10,000,000 of small notes, the average amount of bullion would probably be thereby increased to about £24,000,000. We have also shown that the present average issue of unrepresentednotes by the Bank is about £8,000,000, and that if it were allowed to replace the country issues, the average would probably be thereby increased to £15,000,000. We shall now suppose that a drain of bullion commences when the amount both of the bullion and the unrepresented issues is at this estimated average. In such a case the total issues of the Bank of England would be thus composed:

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