Chapter 5

Issued on bullion£24,000,000”at 1 per cent.11,000,000”at 2 per cent.4,000,000£39,000,000

the Bank having still a reserve of £7,000,000 of unrepresented notes, which it might issue at 2 per cent. before the issues at 4 per cent. would be called into requisition. We shall also assume that the rate of interest is at its ordinary average of about 4 per cent. In these circumstances, then, we shall suppose that a drain originates from any of the preceding causes to the extent of say £4,000,000;Dthe effect will be as follows:—According as each million of bullion is withdrawn from the Bank, for exportation, the amount of bullion notes, and therefore of circulating medium in the possession of the public, will suffer a corresponding diminution: an increased demand for banking accommodation will therefore arise; but as this can only be accorded by the Bank of England, through a further extension of the issues at 2 per cent., and asany considerable issue of such notes would require a higher rate of interest than 4 per cent. to render it adequately profitable, the effect of this increased demand for accommodation will probably be a rise in the rate of interest from 4 to 4½ or, perhaps, 5 per cent. It is possible that this rise in the rate of discount might not produce any effect upon the demand for accommodation, but the probability is, that it would have some sensible influence, though not very considerable. We shall estimate it, therefore, as likely to diminish the amount of the currency by £1,000,000 of the £4,000,000 exported. The total issues would then have undergone the followingchange:—

Issued on bullion£20,000,000”at 1 per cent.11,000,000”at 2 per cent.7,000,000£38,000,000

DIn order to guard against misapprehension, it may be necessary to observe, that when speaking of the amount of any drain of bullion, we invariably mean the excess of the treasure exported over that imported during the given period. For example, should the efflux amount to £6,000,000 and the influx to only £2,000,000, the effect would be the same as if there had been an efflux of £4,000,000 and no simultaneous influx: we should, therefore, assign £4,000,000 and not £6,000.000, as the actual drain in such a case.

and we should have a rise in the rate of interest to 4½ or perhaps 5 per cent., accompanied by a contraction in the total circulation to the extent of £1,000,000, as a means of correcting the exchanges, which there is little doubt it would suffice to do, if the drain were one of only slight severity.

The drain of 1847, however, was much more severe than this—and in order to show the operation in a somewhat analogous case, we shall suppose the efflux of bullion to proceed to the extent of a second £4,000,000. The effect would necessarily be very similar to that just described, except that it would be more strongly marked in its features. According as the demand for accommodation would increase, and as the Bank would approach the exhaustion of the £11,000,000 of unrepresented notes allowed to be issued at 2 per cent., it would be obliged toraise the rate of discount still higher, so that, by the time that the efflux of the second £4,000,000 would be complete, the rate of discount would probably be not less than 5½ or 6 per cent., and as this rise would undoubtedly have considerable effect in checking the increased demand for accommodation, we may confidently assume the consequent contraction of the circulation to be at least one million of the four. The total issues therefore would have assumed thisposition:—

Issued on bullion£16,000,000”at 1 per cent.11,000,000”at 2 per cent.10,000,000£37,000,000

exhibiting a rise in the rate of discount, from 4 to 5½ or 6 per cent., and a decrease of £2,000,000 in the amount of circulating medium, as the total effect produced by a drain of £8,000,000 of bullion. And should the drain proceed no further, we have ample data both in theory and practise, for assuming that this rise in the rate of interest would draw over foreign capital in the purchase of securities—that this contraction in the currency would lower prices sufficiently to stimulate the export of commodities, without paralyzing industry—and that through the combined operation of the two agencies, the bullion would be slowly but certainly recovered, with the smallest possible detriment to commercial interests.

The case of a drain arising out of military expenditure presents no peculiar feature of difficulty, as compared with the preceding. Should the loss of gold continue to the extent of another £4,000,000, making £12,000,000 altogether, the chief point of difference would be, that the exhaustion of the £11,000,000 of unrepresented notes allowed to be issued at 2 per cent., would necessitate arecourse to the issues at 4 per cent.; and that this would require a proportionate rise in the rate of discount, in order to render such issue adequately profitable to the Bank. But a rise in the rate of discount to 6 or 6½ per cent., would allow the Bank a profit of 2 or 2½ per cent. out of such issue, over and above the governmental charge; we may, therefore, assume that such a rise would suffice as an inducement for the Bank to draw on those issues. And supposing that a rise to 6 or 6½ per cent. would produce a contraction in the demand for accommodation of a single million, as before, the total operation on the issues would be asfollows:—

Issued on bullion£12,000,000”at 1 per cent.11,000,000”at 2 per cent.11,000,000”at 4 per cent.2,000,000£36,000,000

the efflux of £12,000,000 of bullion having raised the rate of interest from 4 to suppose 6 or 6½ per cent., and having reduced the total issues of bullion notes and unrepresented notes from £39,000,000 to £36,000,000; that is, by £3,000,000 out of £39,000,000. Now, in order to convey an adequate conception of the advantages derived from such a plan as this, we must contrast it more closely with the operation of the present system in a similar case. We will suppose, therefore, that a drain of £12,000,000 of bullion commences under the present system, at a time when the bullion notes and unrepresented notes of the Bank are both about their ordinary average, viz. £14,000,000 and £8,000,000 respectively, making a total of £22,000,000. Now, bearing in mind that the reserve of unrepresented notes can never practically be reduced below £2,000,000, it will be at onceapparent that a drain of £12,000,000 in such a case would produce the followingchange:—

Issued on gold£2,000,000”on securities12,000,000£14,000,000

thereby effecting a reduction in the total circulation of the Bank of £8,000,000 out of £22,000,000, while raising the rate of discount in some fabulous proportion in order to keep down the demand for accommodation, and at the same time placing in imminent jeopardy the convertibility of the issues, if not the solvency of the Bank.

We should not be doing justice to our proposed system if we did not subject it to a test still more severe than any of the preceding, and one which could not arise under the present currency laws without entailing upon the nation a very serious difficulty in meeting its engagements. We refer to the very possible contingency already alluded to, of our being obliged to discharge some heavy foreign liabilities through the failure of some important article of domestic consumption, or through any other cause, while already embarrassed by an excessive military outlay. The events of the past twelve months, indeed, have indubitably proved that it lies within the competency of a foreign country at any time, when the bullion is at a minimum, to buy up all the marketable English bills on the Continent at a trifling monetary sacrifice, and by transmitting them for discount, entail so sudden a demand for gold upon the Bank as may completely exhaust the treasure in the coffers of that establishment. Now, it can be readily shown that the provisions which we have proposed would altogether preclude the possible occurrence of such a calamity as this. For, supposing such an operation to be effected at a time when the bullionhad been already reduced, as just now supposed, to £12,000,000, and supposing £4,000,000 to be the highest probable limit of such a demand, the effect of this sudden drain of an additional £4,000,000 might possibly be to raise the rate of discount momentarily to perhaps 7 per cent., and might thereby produce a contraction in the actual circulation of £1,000,000 or £2,000,000, yet the result upon the issues could hardly be more violent than to reduce them asfollows:—

Issued on bullion£8,000,000”at 1 per cent.11,000,000”at 2 per cent.11,000,000”at 4 per cent.4,000,000£34,000,000

and as the bullion withdrawn by such an operation should be rapidly recovered, the additional pressure would be very soon relieved, and would pass over without entailing any abatement of confidence in the perfect security of the unrepresented issuesE.

EWe have not alluded in the text to the effect of our proposed system, in reducing the enormous fluctuations in the rate of discount produced by the operation of the Act of 1844; but this is a feature of the question too important to be altogether passed over without reference. In his examination before the Committee of the House of Lords on Commercial Distress, Mr. J. H. Palmer, a very competent authority, declared, that in his whole experience he had never known such vicissitudes in the rates of interest and discount as since the passing of the Act; and the greater number of the witnesses were unanimous in deploring the excessive injury inflicted on the community by those vicissitudes. Now, one essential part of the operation of the governmental charges of 1, 2, and 4 per cent. would be the reduction of those violent oscillations within more salutary limits; as we have just now seen that 3½ to 4 per cent. would be the probable minimum, and 6 to 7 per cent. the probable maximum, at which the Bank of England would ever grant accommodation, and that moreover it would only be in extraordinary cases that the range of variation would exceed from 4 to 6 per cent.

We have now contrasted the operation of the present and the proposed systems, in the cases in which there isan excess and in which there is a deficiency of circulating medium. But the contrast would not be complete if we did not consider a third case, somewhat intermediary to the other two; viz. that in which an occasional or only temporary expansion of the circulation is required by the domestic transactions of the country. The principal case in which this occurs, is at the payment of the dividends. At such times, whenever the reserve in the banking department happens to be small, through a low stock of bullion or through some degree of pressure, the effect of the restrictive clauses of the Act of 1844 is to render the payment of the dividends a matter of considerable difficulty, except at the expense of a serious temporary contraction in the amount of accommodation afforded to the public. In both the cases of April and October, 1847, already referred to, this was one of the circumstances which contributed to aggravate the pressure.FBut other cases not unfrequently arise, in which advances are requisite for some temporary purpose, and which the Act of 1844 has rendered almost impracticable. A striking illustration of this occurred in the beginning of the year 1846, when Parliament required that all Railway companies which intended applying for an Act, should lodge 10 per cent. upon their capital, within fifteen days after the meeting of Parliament. It may well be doubtedwhether, if Government had been fully enlightened as regards the difficulty of performing such a condition, this measure would have been insisted on; but however that may be, it is indisputable that had the reserve in the banking department been small at that period, or had not the Bank lent out the notes as fast as they were received, the effect of the restrictive clauses of the Act of 1844 was such, that the lodgments could not possibly have been made at all; and even as it was, the difficulty of effecting then occasioned great anxiety in the public mind.GAnd similar cases may at any time arise, in which the operation of the Act must necessarily produce considerable inconvenience to the public.

F“About the same time the Government had occasion to borrow 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 withoutimmediatelycontracting 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.

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 fromthe 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 wewould 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 threemillions 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 Bankof 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 ofinterest 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 shouldbe 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.

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