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diff --git a/old/55120-0.txt b/old/55120-0.txt deleted file mode 100644 index 431d105..0000000 --- a/old/55120-0.txt +++ /dev/null @@ -1,2699 +0,0 @@ -The Project Gutenberg EBook of The Paper Currency of England -Dispassionately Considered, by John Haslam - -This eBook is for the use of anyone anywhere at no cost and with -almost no restrictions whatsoever. You may copy it, give it away or -re-use it under the terms of the Project Gutenberg License included -with this eBook or online at www.gutenberg.org/license - - -Title: The Paper Currency of England Dispassionately Considered - With Suggestions Towards a Practical Solution of the Difficulty - -Author: John Haslam - -Release Date: July 15, 2017 [EBook #55120] - -Language: English - -Character set encoding: UTF-8 - -*** START OF THIS PROJECT GUTENBERG EBOOK THE PAPER CURRENCY OF ENGLAND *** - - - - -Produced by Charlie Howard and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - - - - - THE - PAPER CURRENCY OF ENGLAND - - Dispassionately Considered. - - - WITH - - SUGGESTIONS TOWARDS A PRACTICAL SOLUTION OF - THE DIFFICULTY. - - - BY JOHN HASLAM, LATE “TURGOT.” - - - LONDON: - EFFINGHAM WILSON, ROYAL EXCHANGE. - DUBLIN: M‘GLASHEN AND GILL, 50, UPPER SACKVILLE-STREET. - 1856. - - - - - DUBLIN: PRINTED BY ROBERT CHAPMAN, - TEMPLE-LANE, DAME-ST. - - - - -PREFACE. - - -The following pamphlet was designed for insertion in a periodical -devoted to industrial and commercial purposes, which was to have -appeared on the 1st of January. As owing to unavoidable circumstances -the publication of this journal has been postponed, the writer -has thought it better to present his views to the public in their -original form, than to incur the delay that would be necessary if he -were to recast the essay and expand its scope so as to embrace the -consideration of the Scotch and Irish issues. He trusts that this -explanation will serve as an apology for the extreme compression which -he has been obliged to exercise in treating of several departments -of the subject, as well as for his having neglected to fortify his -reasoning by citations from other writers, in many instances in which -he might have done so with unquestionable advantage to the reader. - - 19, CULLENSWOOD-AVENUE, RANELAGH, - DUBLIN, Jan. 1856. - - - - -THE - -PAPER CURRENCY OF ENGLAND - -DISPASSIONATELY CONSIDERED, - -&c. - - -Amongst the many debatable clauses contained in the Bank Charter Act -of 1844, there is one at least the practical expediency of which will -scarcely be called in question. It is that which provides for the -redemption of the privileges enjoyed by the Bank of England, “at any -time upon twelve months’ notice, to be given after the first day of -August, 1855.” A similar provision had been inserted in the Act of -1833, so that the decennial expiration and revision of the Bank of -England Charter, may be regarded as a positive feature in the banking -system of Great Britain. The advantages resulting from this periodical -revision of our currency code with respect both to the public generally -and to bankers in particular are very considerable. The investigation -of the laws of monetary phenomena forms undoubtedly the most abstruse -and intricate department in the whole range of political economy. In -no other section of the science are the ultimate conclusions more -liable to be vitiated by any error in the leading principles, or any -false step in the process of deduction; and in no other is it more -difficult either to trace an error through all its mazes to its real -origin, or to present its refutation in a form adapted to the popular -intelligence. It not unfrequently happens, therefore, that some -plausible fallacy becomes generally accredited, and is adopted by our -statesmen as a basis for legislation, either before the materials have -been collected for its successful exposure, or before the knowledge -of such exposure has had time to circulate through all the channels -of the public mind. In such cases the experience of a few years’ -operation of the measure, suffices to explode the fallacy, and when, at -the succeeding expiration of the Bank of England Charter, the subject -is presented to parliament for reconsideration, our legislators are -enabled to disentangle themselves from the errors which had previously -misled them, and to bring their enactments into greater conformity with -the principles that should regulate a well conducted currency. And were -it not for this arrangement, there is great reason to apprehend that -our banking laws would present as many obstacles to their amelioration, -as now unfortunately oppose themselves to the reform of so many other -departments of our legislative system. - -There is a second beneficial purpose no less eminently subserved by -this arrangement. At present, the privilege of issuing paper money, -unrepresented by bullion, is a highly profitable and closely protected -bank monopoly. Now the undisturbed enjoyment of a monopoly, as is well -known, has sometimes the effect of impressing its possessors with a -conviction, that they hold their privilege by a sort of inalienable -right, irrespective of the public welfare. And were it not for the -provision which subjects our whole monetary system to a periodical -investigation and revision, the existing banks of issue might naturally -share in this feeling, and come to regard any interference with their -privilege, as an unwarrantable exercise of state prerogative. Under -the actual circumstances of the case, however, they can advance no -valid plea for the retention of the right of issue, any longer than -may be deemed consistent with the interests of the community at large. -For if the Bank of England, which has advanced eleven millions of its -capital to the nation, for fiscal purposes, is liable to have the -right of issue withdrawn upon the single condition of repayment of the -debt, with all arrears of interest, how much more is it incumbent upon -those banks which have rendered no such service to the State, to hold -themselves prepared for a similar surrender. And if they have neglected -to make any provision for such possible contingency, it has not been -for want of warning, that they do not enjoy their monopoly by any -indefeasible claim to its possession in perpetuity. - -We trust that the approaching session of Parliament will furnish a -striking exemplification of both these advantages. The Bank Charter Act -of 1844, is precisely one of those measures which have been based upon -a fallacious interpretation of the principles of monetary science. A -few of the more far-sighted of our economists and practical statesmen, -were fully cognizant of the fact at the time of its enactment; but -the principle on which it rested was extremely plausible, and a large -majority of our public men assented to its adoption. That measure has -now received its ten years’ ordeal, and it is time that the judgment -of the nation should be formally pronounced upon its merits. Nor can -there be much difficulty in arriving at that decision. Few measures -have ever been condemned by a more general verdict. It is true, that -the Committee of the House of Commons on Commercial Distress in 1848, -delivered a report in its favour, by a majority of two; but, if so, -that report was framed in deliberate opposition to the opinions of -nearly all the witnesses examined; while even of the remainder the -evidence, though intended to be affirmative was inadequate and self -contradictory. The Acts of 1845, for the regulation of the paper issues -of Scotland and Ireland, were supplementary to that of 1844, and more -or less participate in all its imperfections; but neither of them was -put to the crucial test, during the commercial difficulties of 1846-7; -and further than by occasional reference for the sake of comparison -and illustration, we shall not treat of them here, but shall confine -ourselves exclusively to the laws which affect the paper circulation -of England and Wales. It has long been desirable that all the United -Kingdom should be subject to a uniform currency code; nor do any -insurmountable obstacles appear to oppose the establishment of one -consistent system; but the subject is too extensive for discussion in -our limits; and, in any case, the pre-eminent importance of the English -circulation, would justify a separate and exclusive treatment. - -The leading provisions of the Act of 1844, are too well known to -require much elucidation. They may in general be arranged under two -divisions; those relating to the limitation of the right of issue, and -those assigning the conditions under which that right should alone -be exercised. The former have at least the merit of being extremely -simple. They merely continue the privilege to all the issuing banks -in existence at the passing of the Act, viz. about 250, and prohibit -the formation of any new banks of issue. The latter, so far as the -country banks of issue are concerned, are equally simple. They do no -more than assign a maximum limit to the issues of each--that maximum -being equal to the average issues, during a certain period, previous -to the enactment, and amounting to nearly £8,000,000 in the total. The -conditions imposed on the issues of the Bank of England, are more -complicated. Those issues are divided into two classes--the issues -on gold and silver, compactly denominated _bullion_ notes, and the -issues on the Government debt, and other securities; which, as they -are not represented by any gold or silver in the coffers of the Bank, -may properly be designated _unrepresented_ notes. Of the latter, -the authorized issue is limited to a maximum of £14,000,000, viz. -£11,015,100 on the Government debt, and £2,984,900 on other securities; -the bullion notes, on the other hand, are not restricted within fixed -limits, but are subject to the single condition that the Bank must -issue notes in exchange for all the gold (and a certain proportion of -silver, not to exceed one fourth of the gold) that may be presented for -purchase at the rate of £3 17s. 9d. per ounce, and must render gold -for all the notes that may be tendered for payment, at the rate of £3 -17s. 10½d. per ounce. Thus the total amount of unrepresented notes, -which the united banks of issue in England and Wales are authorised -to circulate, is about £22,000,000;[A] in addition to which, the Bank -of England is allowed to issue bullion notes for every £1 of treasure -which it may possess. - - [A] Perhaps we ought to mention that under one of the - provisions of the Act of 1844, in case any of the banks of - issue cease to issue their own notes after the passing of - the Act, the Bank of England may be empowered to increase - its securities and issue notes against them to an extent - not exceeding two-thirds of the amount so discontinued; - and that within the last few months the Bank of England - has been thus authorized to increase its unrepresented - issues by nearly £500,000. This increase, however, is only - intended to prevent the unrepresented issues from falling - much below the £22,000,000, and leads to no important - results. - -Of the preceding provisions, it is that which prescribes £14,000,000 -as the maximum of unrepresented notes, to be issued by the Bank of -England, that has chiefly awakened discussion since the passing of the -Act. The effect of this inflexible limitation during the commercial -pressure of October, 1847, was so disastrous that nearly every -authority of any eminence, except some few of the original promoters -of the measure, has fully admitted that, but for the interposition -of Government, and the temporary suspension of the bill, the Bank -of England would have been compelled to stop payment; and the whole -commercial system of the country would have been thrown into ruinous -confusion. The general course of trade since that period has been, on -the whole, so regular and prosperous, and our monetary system has been, -therefore, subjected to so slight a strain from disturbing forces, that -it is possible the impression produced on the public mind in 1847, may -have somewhat subsided; should this be the case, we must only hope that -the present heavy efflux of gold, required by our military operations -abroad, will again arouse the slumbering consciousness of the nation, -and that the occasion will not be lost of making some effort to remove -a restriction which, in the case of every unwonted commercial crisis, -is calculated to entail severe distress on every trading interest in -the country. - -It were much to be deplored, however, if the prominence of one defect -in the present system, should exclusively engross the attention of the -public, to the disregard of others which, although less disastrous in -their consequences, are not in the least degree more reconcilable with -correct principles of currency. Our monetary code, and especially the -Act of 1844, should be considered as an undivided whole, every one of -whose provisions should be brought into the closest possible conformity -with true principles. And when so regarded, it is undeniable that it -presents a most anomalous appearance, preserving no consistency in its -parts; or rather composing an irreconcilable medley of incongruous -elements, very few of which will admit of justification, on the -hypothesis that the remainder are correct. Thus while the Bank of -England, which possesses a bona fide capital of about £18,000,000, -is not allowed to issue unrepresented notes to within less than four -millions of that capital, the 250 country banks are authorized to issue -such notes, to the extent of their average issues in 1844, even though -that average should exceed their capital in the proportion of three -to one, and though, as the proceedings of the Bankruptcy Court have -subsequently brought to light, there have been some cases at least -in which it has actually far exceeded this proportion. On the other -hand while the country banks are prohibited from issuing a single note -in excess upon bullion, there is no limitation to the issue of such -notes by the Bank of England, farther than the rule which requires -the possession of actual treasure for every note so issued. Again, -while the present issuing banks are allowed to retain the privilege -without submitting to any test of qualification, no new bank that may -hereafter be formed, however extensive its capital, and no existing -non-issuing bank, however indisputable its security, must henceforth be -endowed with a similar prerogative. And again, though the population -of one district may rapidly increase in wealth and numbers, while -those of another may undergo as great a diminution, yet the law makes -no provision for such contingency, but prescribes the original issues -of 1844 as the inflexible rule in both cases, precisely as if no -alteration had occurred in the circumstances of either. Or, to regard -the limitation under a national aspect, although the banks of issue, -considered as a whole, are permitted to contract their unrepresented -issues, to whatever extent may seem desirable, at any period in which -commerce is stationary, or currency redundant; yet under the opposite -circumstances, when business is extremely active, and the demand for -accommodation proportionally great, they are absolutely prohibited -from increasing their issues to any extent beyond the limit to which -they are restricted during ordinary periods. It were easy to multiply -similar instances of inconsistency, but the preceding will suffice; -and it will be more instructive if we cast a rapid glance at some of -the principles which the Act of 1844 most flagrantly contravenes, and -point out in what respects our monetary system may now be brought into -greater consistency with all or any of those principles. - -The most prominent, and perhaps the most important of these is the -well established doctrine, that the issue of paper money should be -a function of the State, and should be exercised exclusively with a -view to public interests. This is a conclusion on the truth of which -the common sense of practical men, and the philosophic insight of the -best instructed authorities, are in perfect harmony. It has long been -undisputed that coining is a legitimate or rather essential function of -the State, and the reasons for comprehending the issue of notes under -the same prerogatives are not less forcible. There is no evil that may -befall the public from the circulation of base coin, that may not arise -to an equal, if not aggravated, extent from the issue of counterfeit -paper. Indeed the issue of paper money is liable to risks exclusively -its own and which require far more ingeniously devised safeguards than -the issue of coin. The person who receives gold or silver in payment -may sometimes be under the necessity of employing a few easy tests in -order to prove its genuineness, but if he apply these with the most -ordinary circumspection, he can successfully protect himself from -loss by imposition. Now, he who receives paper money, is often placed -under circumstances precisely the reverse. For, where the number of -banks of issue is considerable, and the varieties of paper money in -corresponding proportion, there are no valid tests within the reach of -an average capacity, by means of which he may verify the genuineness -of every note which he may happen to receive in the course of his -transactions with the public. But even if there were such tests, and -if he exercised the greatest possible care, in their application, -they would not suffice to protect him from losses, arising out of -the unexpected insolvency of some of the banks of issue. In order to -guard efficiently against risk of this description, he would require -an accurate acquaintance with the actual position and stability of -every bank whose paper may at any time come into his possession; and -in the case of nearly every private bank, this knowledge is obviously -unattainable. In the absence of this desideratum, his only means of -protection appear to consist in the prompt presentment or exchange of -every description of paper, on the perfect security of which he does -not possess some valid reasons for reliance. - -It must, we think, be conceded, that under the present point of -view, the state of the English paper issues is liable to very grave -objections. In Ireland, where the number of issuing banks is only -eight, all of which are public banks, the cases of forgery are -comparatively few, and a very high degree of confidence in the -currency, is entertained by the public generally. Even in Ireland, -however, that confidence is not so implicit or so universal as it -would unquestionably be, if there were only one description of paper. -A similar observation, though with some qualification, may be applied -to the issues of the banks in Scotland. But in England, where, as has -been said, the number of issuing banks amounts to about 250, and where -at least 150 of these are private banks, it is obviously impossible -that adequate safeguards can be provided against either the occasional -dissemination of fictitious paper, or the not unfrequent infliction of -severe pecuniary losses, through the failure of some of the banks of -issue. We are fully aware of the high reputation which a vast majority -of the country banks in England deservedly bear, both for stability -and integrity; but the failure of several issuing and non-issuing -banks, _since_ the passing of the Act as well as previously, suffices -to prove that this high character cannot be predicated of all of them -indiscriminately. And when a single bank of issue fails to meet its -liabilities, it always tends to throw a partial discredit over the -whole paper circulation of the kingdom. - -Whatever may be the other qualities desirable in a paper currency, it -appears to us to be almost axiomatic, that it should, if possible, be -rendered as secure as a currency purely metallic--as stable as the -Government itself. But this we contend can never be accomplished, so -long as the privilege of issue is conceded to any very considerable -number of separate banking companies. The evils requiring to be guarded -against, have been shown to be two-fold; the circulation of counterfeit -notes, and the insolvency of some of the banks of issue. The former -of these, in such a case, appears to admit of no infallible means of -prevention; the latter can only be provided for by the State’s becoming -the guarantee of all the paper money in the hands of the public. But -this is a course which few, even of the most sanguine advocates of a -plurality of issuers, would be bold enough to recommend. The amount -of evil which it would generate, through acting as a bonus upon every -species of mismanagement would be far greater than any which it could -remove. But the principle itself, involved in the adoption, would be -altogether inadmissible. It assuredly forms no part of the functions of -Government to guarantee the solvency of an indefinite number of banking -companies. At the same time, we consider it no less demonstrable, that -the Government has not the right to authorize the issue of notes, -without fully guaranteeing their payment in cases of insolvency. - -But if the issue of notes should be a function of the State, it is -equally evident that the profits derived from such issue should -be appropriated to the service of the nation generally. We do not -contend that the Government of the country, whatever may be the mode -of its formation, has the right to interfere with any legitimate -department of trade or manufacture; nor do we propose that banking -should be considered an exception to the general rule. But the issue -of unrepresented paper money is, in its nature, essentially distinct -from the ordinary operations of banking. The banker, in common with the -merchant or manufacturer, derives his profits from the reproductive -employment of his own capital, together with as much of the capital -of his customers, as he can induce them to entrust to his care. -But unrepresented paper money is not capital, and is no more the -property of the banker or his customers, than it is of the merchant -and manufacturer, or their respective customers. In effect however it -is equivalent to capital, and its employment is equally profitable; -any transfer, therefore, of the profits arising out of its issue to a -number of private individuals, is not only an act of injustice to all -the rest of the community, but is a real source of injury to every -banker or dealer in money, who is excluded from the enjoyment of the -privilege. For it is clearly impossible for one who is limited to the -employment of his capital and credit, to compete on equal terms with -rivals who are thus authorized to operate, not only on their capital -and credit combined, but also on a species of fictitious capital, which -they are permitted to create at pleasure. And the only mode in which -this injury can be successfully averted, is by securing the profits -arising out of the privilege of issue to the general body of the -community at large. - -In this respect, as in the preceding, the English monetary system -presents the spectacle of a very wide departure from principle. For not -only are the profits derivable from the issue of paper money, almost -entirely appropriated by private individuals, but that appropriation -has been made upon a most capricious method of selection. The case of -the Bank of England is indeed a partial exception to this statement. -It must not be overlooked, that, as the Government bank, it has -always rendered considerable service to the State, in return for the -privilege of trading upon £14,000,000 of fictitious capital. This -service is two-fold. In the first place, it has permanently lent the -Government £11,000,000 of its capital at 3 per cent. As this, however, -is the usual rate of interest paid by Government on its loans, the -value of the accommodation conferred by this advance, especially -when the security of the investment is taken into account, must not -be estimated as extremely high. But secondly, the Bank transacts the -banking business of the State, including that of the National Debt, -and for this service it may, perhaps, be thought that the £70,000 -per annum now allowed by Government, is an insufficient recompense. -According to the arrangement made in 1808 the Bank was to receive -£340 per million, on the first £600,000,000 of the debt, and £300 per -million on the remainder; or in all about £250,000. This was obviously -so exorbitant an allowance for the service rendered, that at each of -the recent renewals of the charter, the Government have stipulated -for a deduction; and in 1844 the abatement mutually agreed on was -£180,000. If this deduction should be considered too great, it must -be borne in mind, that as the Bank pays no interest on the Government -deposits, and as they frequently amount to several millions sterling, -the profit which it realizes from their loan, forms no insignificant -item to be added to the £70,000.[B] It is also deserving of mention, -that by an improved system of accounts, introduced into the Bank some -few years since, the expense and trouble entailed by the management of -this department, have been reduced to about one half; so that it is not -altogether impossible that the £70,000, together with the employment -of the deposits, may amount to an equitable recompense for the present -value of the service. But whether this be so or not, it is undeniable -that neither in this respect, nor in the preceding, nor yet in the two -combined, does the Government receive an adequate equivalent for the -privilege of issuing £14,000,000 of notes unrepresented by bullion. For -a very slight calculation will suffice to show, that those £14,000,000, -if advanced in loans or under discount, at the rate of 4 per cent., -which is about the average, would return a profit of more than half a -million annually; and although the Bank can never retain the whole of -those notes in circulation, yet this produces no essential difference -in the result, as the notes held in reserve are well known to be just -as profitable in increasing the efficiency of the deposits, as if they -had formed a part of the circulation itself. - - [B] The interest occasionally paid to the Bank for its advances - on Deficiency Bills is too trifling in amount to require a - reference to it in the text. - -The case of the country banks of issue is very different from that of -the Bank of England. The only equivalent which they render in return -for the privilege of issue, so far at least as we are aware, consists -in the payment of stamp duty, and composition in lieu thereof; and -the total amount derived from those imposts is less than £40,000 per -annum. Now, the employment of the £8,000,000 of country notes, in -loans and under discount, at the rate just assigned, would return an -annual profit of more than £300,000; and for this amount of profit the -payment of £40,000 in stamp duty, must be considered a very inadequate -compensation. In like manner, if we extend our view so as to embrace -the total authorized issues of unrepresented notes throughout the -United Kingdom, it will be seen that while the profits arising out of -those issues (which are more than £30,000,000) cannot fall short of one -million sterling, the principal equivalent rendered by the banks of -issue in the aggregate, consists of the two services just mentioned as -performed by the Bank of England, and two similar services performed -by the Bank of Ireland; the vast majority of those banks receiving the -full benefit of the right of issue, with the exception of a trivial -per-centage upon the annual profits. In this respect therefore, as -in the preceding, it is abundantly evident that our present monetary -system is very much in need of a comprehensive amendment. - -There are several methods which might be adopted for rendering the -issue of unrepresented notes more decidedly profitable to the State. -One of these will readily suggest itself it is that of allowing all -the existing banks of issue to retain their privilege on condition -of paying Government a certain equitable rate of interest on the -amount of notes which they should hold in circulation. This plan would -undoubtedly possess the single advantage of producing as small a -dislocation in the movements of the commercial machinery of the country -generally, as is perhaps consistent with the introduction of any -important alteration. In nearly every other respect, however, it would -be equally objectionable with the present system. It would furnish no -additional guarantee either for the security of the genuine country -notes, or against the circulation of counterfeit notes; and these are -defects which would alone be sufficient to condemn any system in which -they were not satisfactorily provided for. - -But there is another principle, not hitherto propounded, to which such -a system, as well as that at present in existence, would be just as -forcibly opposed as to those which have already been advanced. For -if it is clearly demonstrable, that the issue of paper money should -be a function of the State, and should be exercised exclusively with -a view to public interests, it is no less rigidly deducible from the -best established data of monetary science, and no less agreeable -to the spontaneous conclusions of common sense, that there should -only be a single bank of issue. If no other reason for this could -be adduced, save that already intimated, viz. that the existence of -various descriptions of paper money has the direct tendency to lead to -forgeries, this consideration alone would have sufficient weight to -prove our proposition. But indeed its truth has long been fully proved -on other grounds. It is a well known fact, that in the course of trade -there are certain periods when it is desirable that the currency should -expand to meet unusual requirements, and certain other periods when it -should contract, in order to prevent undue speculation. The former case -in general presents but little difficulty. At such times the rate of -interest is usually high; and as it is for the pecuniary advantage of -the banks of issue to enlarge their circulation as much as possible, -the desire to increase their profits will induce them to extend their -issues to the highest limits. In this case, therefore, the operation -of a plurality of issuing banks may not be injurious. But in the -opposite circumstances, when it is expedient that the circulation -should contract, the effect is precisely the reverse. During such -periods the rate of interest is generally low, and the profits made -by the banks proportionally small; so that it is only by retaining as -large a number of notes as they possibly can in circulation, that the -banks of issue can obtain their ordinary amount of profits. Whenever a -contingency of this sort arises, the momentary advantage of the banks -of issue, and the permanent interests of the community at large, are -brought into direct collision. For should some of the issuing banks -postpone their own advantage to that of the public, and contract their -issues, there will always be found some other banks, which, instead of -following their example, will embrace so favourable an opportunity of -enlarging their transactions at the expense of their more conscientious -rivals, and fill up the vacancy by an increased issue of their own -notes. And the ultimate effect of this course, is to compel the former, -in self defence, to again expand their issues in order to retain their -customers, who would otherwise transfer their accounts to the bank -which would make the largest advances at the lowest rate of interest. -Thus the existence of a plurality of issuers has the inevitable -tendency to throw obstacles in the way of a contraction of the -currency, at periods when the peculiar circumstances of the country, -may render such contraction a measure absolutely necessary for the -public welfare. - -In applying this principle to the case of the existing system, it will -be seen that the limitation of the country issues to little more than -one half the authorized unrepresented issues of the Bank of England, -has greatly minimized the evils that would otherwise result from the -existence of so great a multitude of issuers. At the same time, by -throwing the whole responsibility of the management of the circulation -upon the Bank of England, it has practically conferred a very undue -advantage on the country banks. And on the other hand, it has -confessedly provided no machinery for producing a uniform contraction -of the issues, when desirable, in any districts, save the metropolitan, -and those where only Bank of England notes circulate. In every other -part of England and Wales, it lies completely within the power of -some one or two of the local banks to prevent the circulation from -contracting, no matter how essential may be such contraction to the -general prosperity of the district. - -The natural inference to which the preceding data directly lead, is, -that either a State Bank should be formed for the issue of treasury -notes, or that the privilege of issue should be exclusively confined -to some one of the existing banks of issue. It may easily be shown -that no insuperable obstacles exist to prevent the establishment -of a State Bank. The only practical difficulty would arise out of -the necessity of paying off the eleven millions due to the Bank of -England; and this could readily be effected either by a direct sale -of the debt, or by the contraction of a new loan for the same amount, -neither of which operations need entail any considerable expense, -present or prospective. The management of the issues would demand no -greater degree of care than those of the Bank of England. A sufficient -portion of the notes issued might be retained for the payment of the -dividends, and for making any other necessary disbursements on account -of Government; and the remainder might be loaned at their market value -to such banks as might have valid securities to offer in exchange; -but no advances should be made to private individuals, or in any -way that would interfere with the ordinary business of the banks of -deposit and discount. The amount of profit that would be derived from -the notes advanced to the banks, would necessarily depend on both the -number of the notes and the rate at which they were loaned; but there -can be little doubt, that if the present issues of England and Wales -were entirely replaced, the nett profit would not be less than half a -million sterling. - -To this plan, however, there is one cardinal objection, at least at -the present, and perhaps for many years to come; such a bank would -necessarily be directly or indirectly subject to the control of -whatever Government might happen to possess the seals of office. And -although it is to be hoped that no Ministry which is ever likely to -be entrusted with the executive in the United Kingdom, would so far -descend from the dignity of their high position, as to tamper with -the integrity of the monetary system of the country for any unworthy -purpose, whether party or personal, yet it is not so certain that -in the heat of parliamentary conflict, such tampering might not be -ascribed to the Government of the day; and even the suspicion of any -misdirection could not fail to be prejudicial to that feeling of public -confidence which is so essential to the well-being of every paper -currency. In these circumstances, therefore, it seems preferable that -the issue of paper money should be preserved entirely free from any -possible entanglement with the strife of party politics. - -There remains, then, as the only alternative, the selection of -some one of the existing banks as the exclusive depository of the -privilege of issue. The qualifications required by such a bank, are -the possession of a capital sufficiently large to form the basis of at -least the present paper issues of England and Wales, together with a -long experience of business transactions, on a scale proportionally -extensive. Now both of these requisites are combined in the Bank of -England. Its commercial experience has been greater than that of any -other bank in the world. Its capital and rest united, amount to about -£18,000,000, and although £14,000,000 of this are permanently invested -in the loan to Government and other public securities, and are not -therefore available for banking purposes, yet the knowledge that they -can be relied on in the case of any possible disaster, has the same -effect in inspiring confidence, as if they formed a part of the working -capital of the Bank. Now, although the total authorized issue of -unrepresented notes in England and Wales amounts to £22,000,000, yet -the total average circulation of such notes is only about £15,000,000; -and according to the judgment of the best practical authorities, the -portion of the united capital and rest, which is not permanently -invested, would form a perfectly adequate basis for an average -unrepresented circulation of £15,000,000. And if the £3,000,000 that -are now permanently invested in public securities, distinct from the -Government debt, were set at liberty and employed as working capital, -it is equally well established, that the £7,000,000 of which that -working capital would then consist, upheld as they would still be, in -public confidence, by the £11,000,000 lent to Government, would be -quite sufficient as a basis for a circulation of unrepresented notes, -to the extent of from £20,000,000 to £30,000,000. - -And this brings us to the enquiry, whether the present note circulation -of England is as extensive as would be consistent with the stability of -our monetary system. It is generally well understood that it is for the -advantage of the nation that the unrepresented paper issues should be -carried as far as is compatible with their perfect convertibility and -security. Every note issued in lieu of gold is obviously equivalent to -the creation of so much additional capital; for as it withdraws a gold -coin from circulation it enables that coin to become capital, while -the note itself discharges the functions of a medium of exchange as -efficiently as the coin for which it has been substituted. And from -this it clearly follows that unrepresented notes should be issued for -every gold coin in the country, with the exception of what is actually -required for securing the convertibility of those notes. Whether this -point has or has not been reached in the case of the English issues, -will depend on the proportion that subsists between the total extent -of the gold currency and the amount required as a domestic and foreign -reserve. For making this comparison we have no precise data that can be -relied on for perfect accuracy, but we can make a rough approximation -that will answer our purpose sufficiently well. According to the -computation communicated by a late Governor of the Bank of England to -the Committee of the House of Commons on Commercial Distress, and which -received the sanction of his official approbation, the gold currency of -England and Wales may be estimated at from £40,000,000 to £60,000,000, -and the silver at £7,000,000 or £8,000,000. It may be observed, that -there does not seem to be any excess of silver, as the difficulty of -procuring a sufficient quantity for the payment of wages in most of -the large towns, is at particular seasons very considerable. On the -other hand, the extent of the gold currency, at first sight, appears -immoderately great. Assuming £50,000,000, or the medium estimate, to -be correct, the metallic currency would be more than three times the -amount of the average circulation of unrepresented notes; or even -taking £40,000,000 as the more reliable computation, the proportion -would still be very nearly three-fold. Or to present the same idea in -different words, an average circulation of £15,000,000 of unrepresented -notes, is a very small proportion of a total average currency of -£55,000,000. - -But a closer analysis will bring us to the same conclusion. There -are only three purposes for which a metallic currency is absolutely -requisite--the payment of small amounts, the discharge of foreign -liabilities, and the protection of the convertibility of the paper -issues. The first of these is provided for by the silver and copper -coin in the hands of the public. The second item is the more important -of the remaining two. For the foreign reserve must clearly contain -as much gold as is ever likely to be withdrawn from the country in -one continuous drain. This has been estimated by Mr. Tooke, a very -eminent practical authority, as about £12,000,000; but we think he -must have overlooked the possible concurrence of a failure in some -staple article of food, with the maintenance of a very heavy military -expenditure abroad. Should such a combination ever arise, it would -not be impossible that the drain might even exceed the limit of -£12,000,000. It is more prudent therefore to err on the safe side, -and assign £20,000,000 as the reserve to be maintained for such a -contingency. But when these £20,000,000 have been set apart as a -foreign reserve, there still remain at least a second £20,000,000 in -the hands of the public; and the question arises, what proportion of -these £20,000,000 is really required for securing the convertibility of -the paper issues. To this enquiry the answer given by eminent bankers -is, that £5,000,000 in gold would be more than sufficient to act as a -basis for the present average circulation of £15,000,000, and that if -that average were increased to £30,000,000, a gold basis of £10,000,000 -would still be sufficient to secure the convertibility of the whole. -And in confirmation of the truth of this view, the cases of Ireland -and Scotland may be referred to, as in both, the paper circulation is -considered to exceed the gold currency in about a three-fold ratio. -When this domestic reserve of £10,000,000, therefore, is added to the -foreign reserve of £20,000,000 there still remain at least £10,000,000 -of gold that serve no necessary purpose as currency, and which it would -be profitable to replace by paper. - -It cannot be denied, however, that there are obstacles which forbid -the immediate issue of unrepresented paper money to the extent of -these £10,000,000. The average unrepresented circulation of the Bank -of England is at present only about £8,000,000; and if the bank be -likewise entrusted with the issue of paper in lieu of the country -circulation, which forms an average of about £7,000,000 more, this -would very nearly double its average circulation of unrepresented -notes. Now, although, as has just been shown, the £4,000,000 of capital -and rest, which are not permanently invested in the loan to government -or otherwise, and which therefore form the actual working capital of -the Bank, are amply sufficient to act as a basis for securing the -convertibility of these £15,000,000; and although the conversion into -working capital of the £3,000,000 at present permanently invested in -public securities distinct from the government loan, should enable the -Bank with perfect security to increase its unrepresented circulation -by another £10,000,000, yet, it could hardly be regarded as a prudent -course to allow the Bank to extend that circulation in more than a -two-fold ratio without some gradual preparation for so great a change. -It seems a preferable plan therefore that the Bank should try the -experiment of replacing the country issues without any other important -increase of its unrepresented circulation for ten or twenty years to -come; and there can be little doubt, that after so much experience -in managing the enlarged issues, it might safely be entrusted with a -still further extension. Meanwhile we think it very desirable that the -£3,000,000 invested in public securities, should be withdrawn from the -bullion department and incorporated in the working capital. But in this -we anticipate. - -The circulation of unrepresented notes being thus disposed of, there -remains for consideration the expediency of an increase in the amount -of bullion notes issued by the Bank. And here, as in the case of the -unrepresented notes, it is generally well understood, that it is -profitable for the nation that the bullion notes should be extended as -widely as possible. There are two points of difference however in the -two cases. For every unrepresented note that can prudently be issued, -there is a clear addition of an equal amount to the productive capital -of the nation; while for every note issued on bullion, there is no -other saving than the wear and tear of the metal that is lodged in the -coffers of the Bank. But, on the other hand, while unrepresented notes -cannot prudently be issued so far as to infringe upon the metallic -reserve required for foreign and domestic purposes, there is no such -limit to the prudent issue of bullion notes; but the Bank may with -perfect security continue to issue notes on gold so long as the gold -is presented, even though the amount so presented should comprise -every sovereign that is now in the hands of the public. And the reason -for this is sufficiently obvious. For if every bullion note that is -issued, increases the liabilities of the Bank it likewise increases the -assets available for meeting those liabilities, and if £10,000,000 of -bullion are sufficient to meet a demand for the payment of £10,000,000 -of notes, £40,000,000 of bullion would be equally competent to -discharge £40,000,000 of notes. And if we include the £15,000,000 -of unrepresented notes amongst the liabilities, it will be seen at -once, that if the possession of £10,000,000 of bullion would inspire -confidence in the £25,000,000 of bullion notes and unrepresented notes -combined, there can be no doubt that the possession of £40,000,000 of -bullion would impart a still higher confidence in a total circulation, -consisting of £55,000,000 of both descriptions of notes combined. So -that from this point of view, it clearly follows that every increase of -the bullion notes must necessarily increase the public confidence in, -and therefore the security of, the unrepresented issues. - -We have just seen that the amount of gold employed in the currency, -cannot be estimated under £40,000,000. Now the average portion of -this gold which is retained in the Bank, and on which bullion notes -are issued, is not more than from £12,000,000 to £14,000,000. It -would follow therefore from the preceding, that this might safely -and profitably be increased to £20,000,000, £30,000,000, or even -£40,000,000. The possibility of effecting such an increase, however, -does not depend immediately upon the Bank of England, but upon the -public generally, as the Bank can only issue bullion notes on the -amount of gold that is presented in exchange for such notes. But it may -well be doubted whether any permanent increase can be effected so long -as the Bank is prohibited from issuing notes of a smaller denomination -than five pounds sterling. The principal reason why so large an -amount of treasure remains in the hands of the public, consists in the -fact that all small payments, including wages, varying from twenty -shillings to five pounds, must be made in gold, and that as a necessary -consequence, a very large proportion of the money that is held in the -possession of the working classes cannot possibly consist of any other -medium. Any considerable increase of bullion notes, therefore, would -require that that increase should be effected by means of paper of a -smaller denomination than five pounds. And accordingly we deem it a -matter of high expediency that the legal restriction upon such issues -should be at once removed. - -We are fully aware that some eminent public men in England have long -been, and perhaps still are, averse to the issue of small notes; but -we cannot discover much force in the reasons which they advance for -justifying their apprehensions. It is not unfrequently assumed, for -instance, that the issue of such notes would necessarily lead to a -great increase of forgeries; as they would be likely to pass into the -hands of persons who could not have much experience in the detection -of counterfeit paper. This objection owes its whole force to the -defectiveness of the present system. If all the present banks of issue -were allowed to issue small notes there can be little doubt that -such permission would lead to extensive forgeries, as the numberless -descriptions of such notes that would be in circulation, would be quite -sufficient to baffle the discernment of even the most experienced -persons. But if the privilege of issue were withdrawn from all its -present possessors except the Bank of England, and if the latter were -allowed to issue small notes, which would in that case be the only -small notes that could ever become disseminated amongst the public, -there is not the slightest reason to suppose that this would have any -other effect than that of reducing the attempts at forgery to the -very smallest minimum. It has likewise been objected, that inasmuch as -such notes would come into the possession of a lower class of persons -than those who can ever now receive paper money, a class liable to be -seized by panic in times of pressure, the effect would probably be to -increase the dangers of the Bank in periods of difficulty. Whatever -influence this consideration may have in respect to an increased issue -of unrepresented notes, it is altogether void of weight as opposed -to the extension of bullion notes. For as we have already seen, an -increase of bullion notes implies a corresponding increase of treasure -in the Bank, for the payment of those notes, and the invariable effect -of an increase of bullion is to augment the confidence of the public in -the Bank’s security. And even supposing the very improbable occurrence -of a run upon the Bank to the full extent of the additional bullion -notes that might have been sent into circulation, the only injurious -result that this could have, would be the reduction of the treasure -in the custody of the Bank to the same amount as it originally held -previously to making the extended issues. But lastly, it has also been -advanced, that inasmuch as small notes could be directly employed -in the payment of wages, any increase in their issue during periods -of speculation would exercise an injurious influence in stimulating -excessive production. Like the preceding, however, this objection is -exclusively applicable to the unrepresented issues. For, as bullion -notes are only the representatives of treasure that is actually -retained in the coffers of the Bank, and which either consists of or -is readily convertible into coin, those notes can exert no influence -different from that of the coins themselves, and cannot therefore be -held responsible for contributing in any degree to the extension of -undue speculation. - -It may perhaps be retorted, that if small notes were allowed to -be issued, no practical distinction could be enforced between the -unrepresented issues and the bullion notes, and that therefore the -necessary effect of such permission would be to increase the former -as well as the latter. But this objection would involve a total -misconception, as the consideration of the present system will at -once make apparent. For, so long as the unrepresented issues of the -Bank of England are limited to £14,000,000, as under the Act of 1844, -they cannot possibly exceed those £14,000,000, whatever may be the -denomination of the notes so issued; and even though the restrictive -clauses of the Act should be repealed, and the Bank should be -allowed to replace the country issues, an arrangement can readily be -devised, as we shall presently show, which would at once permit of an -indiscriminate issue of notes of all denominations from one pound and -upwards, and yet preclude the possibility of the unrepresented issues -ever exceeding a safe and salutary maximum. If, however, it should -still be apprehended that any danger would result from the complete -abrogation of the prohibition of small notes, the expedient might be -adopted of allowing a certain maximum issue of such notes for the next -ten years, after which experiment, if the change proved beneficial, the -restriction might be removed unconditionally. But for rendering such -an experiment effectual a smaller issue than £5,000,000 to £10,000,000 -would be of little service. - -The preceding considerations have not tended to weaken, but rather to -confirm the force of our conclusion, that it is now desirable that the -whole paper issues of England and Wales should be entrusted to the -Bank of England, subject to the condition that the profits of such -issue should be equitably participated between the public and the Bank. -As has already been pointed out, the present banks of issue which would -be deprived of their privilege would have no ground for complaint on -the score of such deprivation, as they have long had reason to be -aware that they owe their privilege entirely to the favour of the -State, and that they are liable to have it withdrawn whenever it may -be found inconsistent with public interests. There is one case indeed -in which they might not unfairly consider themselves aggrieved, and -that is, if the privilege were withdrawn so suddenly as to cause any -serious depreciation in the value of their property. And in order to -avoid such a result, it would certainly be expedient that sufficient -time should be allowed them to contract their issues, and replace them -by Bank of England notes, with the smallest disadvantage both to the -public and themselves. For this purpose, a less period than ten years -would scarcely be sufficient. But there are several modes in which -the transition might be effected with very trifling dislocation. One -of these would be extremely simple as well as feasible. The country -banks might be permitted to issue their own notes for the next ten -years on condition of contracting the amount of their authorized -issues by one-tenth annually. An arrangement might at the same time -be made which would induce the Bank of England to increase its issues -in a corresponding proportion, so that the total amount of currency -in the possession of the public need undergo no actual diminution; -while both to the country banks and the Bank of England, the change -from the present system would be so gradual as to produce no serious -inconvenience to either. Should this plan be adopted, and we know of -no practical difficulty to oppose it, the authorized maximum of the -country issues during the next ten years, together with the maximum -profit derived therefrom, at an average rate of 4 per cent., would, in -round numbers, diminish according to the following series:-- - - Years. Issues. Profits. - - 1856 £8,000,000 £320,000 - 1857 7,200,000 288,000 - 1858 6,400,000 256,000 - 1859 5,600,000 224,000 - 1860 4,800,000 192,000 - 1861 4,000,000 160,000 - 1862 3,200,000 128,000 - 1863 2,400,000 96,000 - 1864 1,600,000 64,000 - 1865 800,000 32,000 - 1866 000,000 00,000 - --------- - £1,760,000 - -thus allowing the country banks a total profit of £1,760,000, or -nearly two millions out of the privilege of issue before their entire -surrender of it. And this appears to us as liberal an arrangement as -they could have any reason to expect. - -We are now almost in a position to determine on what system the Bank of -England should be expected to render an equivalent for the exclusive -issue of paper money in England and Wales. Prior, however, to entering -upon this consideration, it will be necessary to refer to another -principle, which the present system infringes no less remarkably -than those already instanced. With the exception of a very limited -section of currency theorists, it is now universally admitted that -a paper currency ought to be so regulated as to contract and expand -in conformity with the requirements of commerce; that is to say, to -contract whenever trade is stationary and the supply of commodities -in the market small, and to expand whenever trade becomes active and -the supply of marketable commodities undergoes an increase. By the -currency theorists it is still maintained that a paper currency ought -to contract and expand exactly as a currency purely metallic would -do in the like circumstances. But this is palpably equivalent to -asserting, that whatever evils are inseparable from a metallic currency -ought to be, not avoided, but perpetuated in a mixed currency. One of -the chief defects of a purely metallic currency consists in the very -circumstance that it does not contract and expand with the decrease -and increase of marketable commodities requiring to be exchanged for -each other, but that, on the contrary, through the operation of an -influx or efflux of gold, it not unfrequently contracts or expands in -a far greater proportion than the state of the markets would justify, -thereby producing an excessive depreciation or appreciation in general -prices; while sometimes it even expands when the state of the markets -would require a contraction, and vice versa. And accordingly, this is -the evil against which common sense would desire to contrive peculiar -safeguards in a mixed currency. The present system however has most -carefully perpetuated the evil. For in the case of every considerable -efflux of gold, the circulation--that is the amount of circulating -medium, paper and metallic, in the hands of the public--must contract -not merely in the proportion required for correcting the unfavourable -exchange, but in a much higher proportion; and in every case in -which such a drain commences at a period when the Bank’s reserve of -unemployed notes is at or near the minimum, the circulating medium -must actually contract to an extent precisely equal to the amount of -coin exported. Thus supposing the drain to commence when the reserve -of notes is at the average of about £6,000,000, an exportation of -£10,000,000 of gold would not only reduce this reserve to its lowest -prudent minimum of about £3,000,000 but would also contract the amount -of gold and bullion notes in the possession of the public by about -£7,000,000; while, supposing the reserve to have been already at the -minimum of £3,000,000, the exportation of the £10,000,000 of gold would -fall entirely on the circulating medium which it would reduce in the -proportion of nearly 15 per cent.[C] In addition, therefore, to the -measures already proposed, the restrictive clause that limits the Bank -of England to any inflexible maximum, must be repealed and the Bank -must be allowed to issue unrepresented notes, not only to the extent -at present authorized, viz. £14,000,000 together with an additional -£8,000,000, as a substitute for the country issues, but also to any -necessary amount in excess of those £22,000,000, subject however to -certain conditions, required for preventing any possible over-issue -beyond the actual wants of the public. - - [C] Assuming the given circulation in the hands of the public - to be thus composed: - - Gold, and bullion notes issued on gold, &c., £50,000,000 - Silver, 7,000,000 - Bank of England unrepresented notes 11,000,000 - Country notes 7,000,000 - ----------- - £75,000,000 - - a drain of £10,000,000 of gold would obviously produce a - contraction of more than 13 per cent.; while, if the silver be - excluded from the computation, the amount of the reduction would - be within a fraction of 15 per cent. - -We shall now proceed to the consideration of those conditions. It has -already been seen that the Bank of England should not be allowed to -issue unrepresented notes without participating its profits with the -State, from which it derives the privilege of issue. Now there are -several methods in which this participation might be effected. For -instance, a computation might be made of the probable amount of annual -profit that would be derived from the privilege; and the Bank might -be required to pay annually into the Treasury, whatever proportion -of this profit might be considered equitable. This plan, however, is -liable to the fatal objection, that it could hardly fail to operate -as a bonus on excessive issue. For, as in this case, the profits of -the Bank would rapidly increase in proportion to the greater number -of notes that could be kept in circulation, the Directors would be -exposed to the continual temptation of resorting to imprudent means for -extending their issues. A single illustration will show the force of -this. For, supposing that the proportion of the profits set apart for -the State, should amount to the total profit arising out of the issue -of say some £10,000,000 of notes, then all the profits derived from the -issue of notes in excess of those £10,000,000 would go undivided into -the coffers of the Bank, so that the Bank would be directly interested -in extending the issues as much beyond the £10,000,000 as would be -practicable. And the experience of the whole past history of the Bank -has proved that such a system as this would be inconsistent with the -highest interests of the commercial public. It has been proposed again -by some eminent authorities, that the Bank should be allowed to supply -the whole paper issues of the country on condition of lending some -fifteen or twenty millions of its notes to the Government without -interest, which would necessarily give the same pecuniary advantage to -the State as if it issued an equal number of its own notes. But this -plan would be liable to the same objection as the former. It would make -the profits of the Bank depend directly on the amount of unrepresented -notes retained in circulation; and under such circumstances the Bank -could hardly fail at times to extend its issues beyond the limits which -the condition of trade would render advantageous. - -It may, therefore, we think, be laid down as an important practical -rule, that the Bank should be required to render the equivalent -on the principle of proportioning its payment to the amount of -unrepresented notes in circulation, and that the rate imposed should -increase as that circulation increased. The only difficulty appears -to consist in devising a simple natural plan for accomplishing this -result; a plan that would be readily comprehended by the public, and -that would involve no very complicated system of calculations on -the part of the Bank. Now, it so happens that this difficulty can -be easily surmounted as will appear from the following explanation. -The authorized circulation of unrepresented notes has already been -shown to consist of two parts, viz. about £11,000,000 issued upon the -Government debt, and £3,000,000 issued upon other public securities. -Upon the £11,000,000 lent to Government the Bank receives interest at -the rate of 3 per cent.; and there can be no question that this is not -so great a profit as the Bank could obtain from those £11,000,000 if -employed in ordinary banking operations It may fairly be considered -therefore that the Bank is entitled to derive a higher share of profit -out of those £11,000,000 than out of the other £3,000,000, which have -not been lent to Government, and which, as pointed out above, the Bank -should be set at liberty to withdraw from the issue department, and -incorporate amongst the working capital. In like manner, when the Bank -is allowed to increase its unrepresented issues, for the purpose of -replacing the country notes, the additional notes so issued, as well -as the £3,000,000 just mentioned, being so much over and above the -£11,000,000 lent to Government, and the Bank therefore rendering no -actual service to the State in return for the privilege of issuing -them, it would be perfectly legitimate that the State should require -something like an equitable participation of the profits derivable from -their issue. During the next ten years, under the operation of the plan -proposed, these additional notes would increase annually, according as -the country notes diminished, viz as follows:-- - - 1856 £000,000 - 1857 800,000 - 1858 1,600,000 - 1859 2,400,000 - 1860 3,200,000 - 1861 4,000,000 - 1862 4,800,000 - 1863 5,600,000 - 1864 6,400,000 - 1865 7,200,000 - 1866 8,000,000 - -so that at the expiration of the ten years the country issues would -be entirely replaced, and we should have an authorized issue of -£11,000,000 upon the Government debt, to be issued at a moderate -charge, and a second £11,000,000, either issued or allowed to be issued -at an equitable charge. These £22,000,000 are the maximum amount of -unrepresented notes, which can be issued in any circumstances under -the operation of the Act of 1844; they may therefore be assumed to -constitute the present normal requirements of the country, and any -issue of unrepresented notes in excess of these, might very fairly be -charged with so high a rate as would render the recourse to them an -extremely exceptional case, to be resorted to exclusively in periods -of grave necessity. This plan therefore would provide a gradation of -three advancing rates of charges: a minimum rate upon the £11,000,000 -of unrepresented notes, allowed to be issued in consideration of the -loan to Government; a medium rate on the amount of notes required for -completing the total normal issues of £22,000,000; and a maximum rate -on whatever notes might at any time be required in excess of those -£22,000,000. - -Now to this plan of regulating the issues of the Bank of England we -are altogether unable to foresee any valid objection, practical or -theoretical. There are certainly very conclusive reasons why the Bank -of England should be allowed to issue £11,000,000 of unrepresented -notes on the £11,000,000 lent to Government at a lower rate than the -second £11,000,000, for which otherwise the Bank would render no -equivalent; and there are no less forcible considerations why the Bank -should be charged a lower rate upon the second £11,000,000 which form -a part of the normal requirements of the public, than upon the notes -which might at any time be issued in excess of the total £22,000,000. -Nor can there be any difficulty in the practical application of such a -principle. For, if an account be kept from day to day, or from week to -week, of the total number of notes, both represented and unrepresented, -in actual circulation, and if the number of bullion notes in -circulation be deducted from this gross amount, the remainder will be -the total amount of unrepresented notes; and whatever may be the number -of these, the first £11,000,000 will be charged with the minimum rate, -the second £11,000,000 with the medium rate, and the remainder, if any -such there be, will be subject to the maximum rate. Thus, supposing the -gross circulation to consist of £30,000,000, and the bullion notes to -comprise £14,000,000 of these, the rates would be imposed as follows: - - Issued on bullion, £14,000,000 - ” at the minimum rate, 11,000,000 - ” at the medium rate, 5,000,000 - ----------- - £30,000,000 - -or, supposing the gross circulation to be £40,000,000, the bullion -notes remaining as before, there would be - - Issued on bullion, £14,000,000 - ” at the minimum rate, 11,000,000 - ” at the medium rate, 11,000,000 - ” at the maximum rate, 4,000,000 - ----------- - £40,000,000 - -but this, as we shall see hereafter, is a case that would be very -unlikely to occur under any ordinary circumstances. - -During the operation of the ten years’ arrangement with the country -banks, the system would necessarily undergo a slight alteration with -each successive year, and would not therefore be altogether so simple -as the preceding; but it would present no very peculiar complexity. -For, a reference to page 38 will show the number of notes which the -Bank would be allowed to issue in addition to the £3,000,000 at the -medium rate, together with the first £11,000,000 to be issued at the -minimum rate; and if the Bank should at any time exceed the total of -these three items, whatever notes might be issued in excess would -be liable to the maximum rate. For example, in the year 1860 the -number of notes allowed to be issued at the medium rate would be -£3,200,000, added to £3,000,000, together £6,200,000; if, therefore, -the gross circulation in that year should at any given time amount to -£33,000,000, the bullion notes being £14,000,000, the unrepresented -notes would be charged in this way: - - Issued on bullion, £14,000,000 - ” at the minimum rate, 11,000,000 - ” at the medium rate, 6,200,000 - ” at the maximum rate, 1,800,000 - ---------- - £33,000,000 - -and if we include the country issues, so as to present a view of the -total circulation of the country in such a case, we shall have - - Issued on bullion, £14,000,000 - ” at the minimum rate, £11,000,000 - ” at the medium rate, 6,200,000 - ” by the country banks, 4,800,000 - ---------- - 22,000,000 - ” at the maximum rate, 1,800,000 - ----------- - £37,800,000 - -and in like manner in 1861 the number of notes allowed to be issued at -the medium rate, would be £7,000,000; and so on until, in 1865, the -medium rate would reach its permanent limit of £11,000,000. And, with -this explanation, we shall hereafter confine ourselves exclusively to -the permanent arrangement that would come into complete operation in -1866. - -We are far from deeming it our function to determine on the exact rates -which ought to be charged in these three cases, as this is a question -of arrangement between the Government and the Directors of the Bank of -England; nevertheless as without some estimate of this sort it would -be difficult if not impossible to enter upon any close examination of -the probable working of such a system, we shall now proceed to consider -what rates would appear to us most equitable. And first, to take the -minimum rate to be charged on the £11,000,000 of notes issued on the -loan to Government. On these £11,000,000, as has been more than once -observed, the Bank receives 3 per cent. from Government in addition to -the profit which it derives from operating on the notes issued in lieu -thereof. Assuming therefore, as a not unreasonable rule, that the Bank -and the State should share this extra 3 per cent. on equal terms, it -would follow that 1½ per cent. to each would be a fair participation -of the profits; and if we allow the Bank an additional ½ per cent. -as a sort of equivalent for the expense and trouble required in the -management of the issues, it will hardly admit of dispute that the -remaining 1 per cent. will form an extremely moderate governmental -charge on the first £11,000,000. The same principle will be no less -applicable to the medium rate to be changed on the second £11,000,000. -Whatever profit the Bank would derive from the circulation of these -notes would be entirely owing to the privilege of issue delegated by -the State; it would be equitable therefore that the Bank should share -the whole of this profit in equal proportions with the Government. Now, -as a general rule it would only be when increased banking accommodation -would be required by the public, and when the rate of interest would be -proportionally high, that the Bank would ever be likely to circulate -any considerable proportion of these second £11,000,000; so that the -gross profit derived from their issue would not be less than 4 to 6 -per cent. On the principle just laid down, therefore, 2½ per cent. -to each would be an equal participation of the profits; and if we -again allow the Bank an additional ½ per cent. to cover the expense -of management, the remaining 2 per cent. will certainly appear a very -moderate governmental charge. There still remains the maximum rate, -and that should be determined on a totally different principle. The -£22,000,000 already provided for constituting what we have called -the extreme normal unrepresented circulation of the Bank, the rates -imposed upon their issue should be such as would present no obstacle -to the free expansion of the circulation to this extent, in conformity -with the wants of trade. But any issue in excess of these £22,000,000 -should be a very rare occurrence, to be justified only under urgent -pressure; the rate to be imposed therefore should be such as would -effectually prevent the circulation from ever exceeding its normal -limits, except in cases of undoubted necessity, and for this purpose -less than 4 per cent. could not be considered adequate. Indeed the Bank -rate of interest so frequently rises higher than 4 per cent. that the -imposition of any lower rate would present little barrier to the issue -in excess of £22,000,000. The three rates therefore, the minimum, the -medium, and the maximum, might very reasonably be fixed at 1, 2, and 4 -per cent. respectively; in other words, the Bank should be authorized -to issue the first £11,000,000 of its unrepresented notes at 1 per -cent. the second £11,000,000 at 2 per cent. and any notes issued in -excess of those £22,000,000 at 4 per cent. - -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 -derive a two-fold profit upon a large proportion of the notes in -actual circulation--that, therefore, consistency would require that -the notes in deposit should be considered chargeable just the same as -if they had never been deposited. Now, it must be conceded, that this -objection is not altogether void of force; but there is an overruling -consideration on the other side of the question. For it must not be -forgotten that the Bank of England, in common with other banks, is -necessarily a bank of deposit, and has its legitimate functions as -such; a very considerable part of the profit, therefore, derived from -the re-issue of the notes deposited, is exclusively the result of the -constitutional exercise of its functions, and lies entirely beyond -the sphere of Governmental jurisdiction. It might not, perhaps, be -impossible to devise a test for distinguishing between these profits -and those arising more directly out of the privilege of issue; but -such a distinction would be far too minute to serve as a basis for -legislation; and on the other hand, any indiscriminate charge upon the -deposits, as a whole, would not only be extremely vexatious, but would -even place the Bank of England at a serious disadvantage as compared -with every other bank of deposit. It follows, therefore, that while -the rule already laid down, of confining the operation of the rates to -the actual amount of notes in the hands of the public, may not attain -to absolute theoretical perfection, yet in practice it is clearly -preferable to any regulation that would either discriminate between two -classes of profits derived from the deposits, or impose the rates upon -their total amount. - -It will be seen from this, that while we are anxious to maintain in its -integrity the right of the State to receive an equitable proportion -of the profits derived from the issue of unrepresented notes, we -have no desire to stretch this right so as to bear oppressively upon -the interests of the Bank of England. But a closer examination will -conclusively show, that the effect of our proposed arrangement, as a -whole, would be to leave the present profits of the Bank altogether -intact, as the profits arising out of the additional notes which -the Bank would be authorized to circulate, would amply cover the -governmental charges on the total circulation. The simplest method of -establishing this point, will be to compare the actual circulation -of unrepresented notes under the Act of 1844 with the probable -circulation under the proposed arrangement. And first, to take the -average circulation as the standard of comparison. The present average -circulation has been shown to be about £8,000,000, and the profits -derived from these, at 4 per cent., would be £320,000 annually. Now, -under our plan the average circulation would be at least £15,000,000, -the gross profit upon which, at 4 per cent., would be £600,000 while -the governmental charges would be - - £11,000,000 at 1 per cent. £110,000 - 4,000,000 at 2 per cent. 80,000 - -------- - £190,000 - -or a total of £190,000 which, deducted from £600,000, would leave -a nett profit of £410,000, or considerably more than the present -profit on the £8,000,000. A comparison of the maximum circulation of -unrepresented notes, again, will fully establish the same conclusion. -The present maximum can never exceed about £12,000,000 without -imperilling the safety of the Bank; and these £12,000,000, if advanced -at 8 per cent., to which the rate of discount under the Act of 1844 has -sometimes advanced, would return a profit at the rate of £960,000 per -annum. Under the proposed arrangement, on the other hand, the maximum -would not improbably, in a case of extreme pressure, be £22,000,000, -or even £24,000,000; and the gross profit on £24,000,000, at the same -rate, viz., 8 per cent., would be at the rate of £1,920,000 per annum. -On these the governmental charges would be - - £11,000,000 at 1 per cent., £110,000. - 11,000,000 at 2 per cent., 220,000. - 2,000,000 at 4 per cent., 80,000. - ----------- --------- - £24,000,000 £410,000 - -which, deducted from £1,920,000, would leave £1,510,000 as compared -with £960,000 under the present system. This, however, is an -exaggerated estimate, as we shall presently show that the rate of -interest would not be likely to exceed from 6 to 7 per cent. Taking -6 per cent., then, as the more probable rate, the gross profit -on £24,000,000, advanced at 6 per cent., would be at the rate of -£1,440,000 per annum; from which, if we deduct the governmental charge -of £410,000, there will still remain £1,030,000 as compared with -£960,000 under the present system. While one effect of our arrangement, -therefore, would be to augment the national income by from £190,000 to -£410,000 per annum; this advantage evidently would not be purchased by -appropriating any portion of the present profits of the Bank of England. - -Before proceeding any further with our inquiry, it will now be -desirable to take a rapid survey of the ground already traversed. -We found at starting, that according to one of the best established -doctrines of monetary science, the issue of paper money is essentially -a function of the State, and should be exercised exclusively for -the promotion of public interests. To the immediate establishment -of a State bank of issue, however, there appeared to be one cogent -practical objection, arising out of a political necessity which is -very generally recognised, that the Government of the day should -have no direct control over the monetary system. In lieu of a State -Bank, therefore, we were obliged to go in search of the best possible -substitute; and guided by the well-grounded principle, that there -should only be a single bank of issue, we arrived at the conclusion -that, under existing circumstances, the safest and most consistent -course would be to entrust the whole circulation of England and Wales -to the Bank of England, on condition that the Bank should equitably -share its profits with the public treasury. The general subject of -the extent of the paper circulation next passed under review; and -while it did not seem prudent that the unrepresented issues should at -present undergo any considerable increase beyond the £22,000,000 which -are now the statutable limit, it yet appeared very necessary that the -absolute prohibition of any issue in excess of that limit should be -removed, and that the Bank of England should be allowed to expand its -unrepresented issues in conformity with the wants of trade, subject -only to certain regulations required for their due adjustment. On the -other hand, we found it manifestly desirable that the Bank should be -encouraged freely to increase its issues on bullion, and that, in order -to accomplish this, it should at once be permitted to issue at least -from £5,000,000 to £10,000,000 of notes under five pounds sterling. -Returning, then, to the country banks of issue, it was shown to be a -matter of justice, that they should be granted sufficient time for the -gradual withdrawal of their issues, and the substitution of Bank of -England paper. We, therefore, proposed that they should contract their -authorized circulation by one-tenth annually, for the next ten years, -the Bank of England as gradually supplying the vacancy according as the -notes should be withdrawn. We then proceeded to consider the mode in -which the Bank of England should be required to share its profits with -the public, and found upon examination that the most advantageous plan -would be that of imposing an annual rate on the amount of unrepresented -notes retained in circulation, or, rather, a series of rates arranged -upon an ascending principle, viz.--a minimum rate on the £11,000,000 -of notes issued in consideration of the loan to Government; a medium -rate on whatever notes might be required to increase the total -unrepresented circulation of the country to £22,000,000 (the amount -varying from £3,000,000 at present to £11,000,000 at the expiration -of the ten years’ arrangement with the country banks), and a maximum -rate on whatever notes might at any time be issued in excess of the -total £22,000,000. And, on further consideration, it appeared that 1, -2, and 4 per cent. would form a not unreasonable scale for the three -respective charges. - -In embracing so extensive a field as the preceding, in the compass of -a single paper, we have necessarily omitted any reference to several -important branches of the subject. The expediency of the separation of -the banking from the issuing department in the Bank of England has been -sometimes canvassed, but the best authorities are agreed in regarding -the separation simply as a matter of account. Should the alterations we -have suggested be adopted, some corresponding changes would be required -in the weekly returns of the assets and liabilities of the Bank, but -no peculiar difficulty would arise out of this necessity. Another and -a more important feature in the present system, has sometimes been -assailed, but as appears to us on a very nugatory grounds. We refer to -the provisions by which the Bank is required to purchase all the gold -that may be presented, at £3 17s. 9d. per ounce, and to render gold -for all the notes that may be tendered for payment, at £3 17s. 10½d. -per ounce. As one of these provisions is absolutely requisite for -securing the convertibility of the issues, and as the other is equally -indispensible for preserving an adequate stock of bullion, we are not -aware of any valid reason for objecting to either. We may also remark -that it is now the opinion of some of the most influential bankers, -and of Mr. Gurney amongst the rest, that the proportion of silver on -which the Bank may issue bullion notes as compared with gold, might -judiciously be increased to one-third. So far as we know, this appears -a very judicious proposition; at the same time we think that the -permission to issue small notes, if conceded, would in great measure -remove the necessity for its adoption. - -There now remains for consideration the probable effect of the measures -we have proposed, in meeting and providing for those great commercial -crises, which have hitherto invariably produced severe disasters, and -the periodical recurrence of which, under the existing system, can be -predicted with almost scientific certainty. We have indeed already in -part anticipated this inquiry, but its pre-eminent importance to the -pecuniary interests of the whole trading community, demands an ampler -treatment at our hands. And if it should be found that the system we -propose would not be calculated to alleviate the evils produced by such -calamities, or if at least it cannot be shown that it would prevent -their unnecessary aggravation, we shall be perfectly willing to abandon -it as unworthy of adoption. For we fully unite with those who maintain -that the merits of a system of currency are not to be tested by its -operation during the ordinary course of trade, but by its adaptibility -to those periods of convulsion when the machinery of commerce is -subjected to the severest dislocations. - -Now we think it will be generally admitted, that nearly every -monetary crisis arises either out of some deficiency or excess in -the circulating medium, or else out of some circumstance that is -intimately connected with such deficiency or excess. And if this -be admitted, it will clearly follow that the principal object that -ought to be kept in view in the regulation of a system of currency, -is the prevention of any undue increase or diminution in the amount -of the circulating medium, and the immediate restoration of a state -of equilibrium, wherever the balance may have been, through whatever -cause, disturbed. Unfortunately, however, it is the peculiarity of the -present system, that whenever the money market is tending either to an -excess or a deficiency, the inevitable effect of the Act of 1844 is to -aggravate and not to neutralize the tendency. It may at first sight -appear extraordinary, if not incredible, that the same system should at -different periods produce results apparently so opposed to each other; -but a little consideration will show that this is undoubtedly the fact. -And we shall first take the case in which the tendency is towards an -excess of circulating medium. - -It is a well understood circumstance, that whenever any unusual -stimulus is imparted to the work of production, and the export trade -proceeds with more than ordinary activity, the necessary consequence -is, that the exports exceed the imports, and that gold flows into the -country from those nations which have purchased more largely of our -commodities, than they have paid for in their own. Now, whether this -gold is converted into coin, and is directly expended in the purchase -of commodities or the payment of wages, or whether it is taken to the -Bank of England and exchanged for paper, in either case it immediately -increases the amount of circulating medium in the possession of the -public; in the one case in the form of metal, in the other in the form -of bullion notes. And just in proportion as money becomes abundant, -prices rise, and the rate of discount falls in a corresponding ratio. -This in itself, although in some degree inevitable, is nevertheless -a serious evil. But unfortunately, the tendency of the present -currency system, instead of alleviating, is to aggravate it. For, as -money becomes abundant with the commercial public, it simultaneously -increases with those who usually deposit in the Bank of England, and -they immediately enlarge the amount of their deposits. Now every -addition to the deposits, is really an addition to the unemployed -reserve of unrepresented notes in the Bank; in proportion, therefore, -as money becomes abundant with the public, the Bank reserve increases; -so that it very speedily exceeds the amount which the ordinary rules of -sound banking would hold to be necessary for discharging the functions -of a reserve. In such circumstances it becomes the immediate interest -of the Bank to force the superabundant notes of the reserve again -into circulation; and this it can only do by entering keenly into -the competition of the loan and discount market, and by proffering -advances on more advantageous terms than those allowed by other -banks and capitalists. And as the superabundance of money must have -already produced a considerable decline in the rate of interest, and -a corresponding rise in the scale of general prices, and must have -thereby given an impetus to the spirit of undue speculation, so this -disastrous competition of the Bank of England for an extended share of -business, must not only induce a still further depreciation in the one -case and enhancement in the other, but must inevitably impart a very -powerful incentive to the rapid progress of speculation. - -We are not now dealing with mere surmises, but with well ascertained -facts which every intelligent reader may verify from his own -experience. That the liberty to issue £14,000,000 of unrepresented -notes free of charge, does actually induce the Bank of England, when -money is abundant, to make advances at an injuriously low rate of -discount is a matter of common observation. For a glaring illustration -of this we need only refer to the year 1844, when, a few months after -the passing of the Act, so ardent was the competition of the Bank -Directors for an increased share of discounts, that they even forced -accommodation on the public at 1¾ and 2 per cent. And that the effect -of this course was extremely mischievous is now a matter of universal -agreement. We have indeed the testimony of the Committee of the House -of Lords on Commercial Distress--a testimony fully sustained by the -witnesses examined before the Committees of both Houses--to the fact -that the operation of this low rate of discount, in imparting an active -stimulus to speculations of every kind, was to contribute in no small -degree to the severity of the crisis in 1846-7. The mode in which it -produces such a result is readily intelligible. It does so in two ways. -In the first place, the rise of prices at home, unless it should happen -by an extraordinary coincidence to be accompanied by a corresponding -rise of prices in all the foreign countries with which we trade, must -necessarily have the two-fold effect of putting a check to the export -of our own commodities to the foreign markets, and of encouraging -an increased importation from those foreign markets to our own. And -in the second place, the decline in the rate of interest produces a -proportionate rise in the price of public securities; and this rise -in the price of securities, unless accompanied by a simultaneous -enhancement in the price of foreign securities, has the two-fold effect -of preventing foreign capitalists from purchasing our securities and -of inducing our own capitalists to sell out their securities at home -and purchase in the foreign market. Now, the effect of both of these -operations--the one on the relation between our imports and exports, -and the other between domestic and foreign securities is to necessitate -the transmission of the unfavourable balance in treasure to those -foreign countries from which we have obtained the increased securities -and imports. The ultimate result therefore of the low rate of interest -is in both respects an exportation of gold, and this exportation of -gold is so serious an evil that it becomes an essential object, in -currency legislation, to adopt every possible precaution against any -occurrence that might unnecessarily induce or aggravate it. - -Now in this most important particular the superiority of our proposed -measures over the present system must be at once apparent. It is -unquestionable that the Bank of England could never have been induced -to force its notes upon the money market, at so low a rate of interest -as 1¾ and 2 per cent. if it had not been allowed the privilege of -issuing, for the purpose of loans, at no expense to itself. If a -certain rate of interest had been charged upon the issue of all its -unrepresented notes, that rate would have sufficed to prevent its -loaning or discounting on such terms. And, supposing 1¾ per cent. to -be the lowest rate at which the Directors might consider it profitable -to advance money to the public, when the notes were perfectly free -of charge, it is only a legitimate conclusion, that if a certain -rate should be imposed on the issue of the notes, they would then be -restrained from making advances on lower terms than the sum of that -rate, added to the 1¾ per cent. supposed to be the present minimum. -Now, the rate we have proposed to be levied on the first £11,000,000 of -the unrepresented issues, being 1 per cent., there is no probability, -according to this principle, that they would ever make loans on -securities at a lower rate than 2¾, or discount lower than 3 per cent. -In practise, indeed, it is not likely that they would ever descend so -low as this, as it is highly improbable that the unrepresented issues -would not at all times exceed £11,000,000, and, in that case, the -imposition of the 2 per cent. upon the notes in excess of the first -£11,000,000, would inevitably keep the rates of interest and discount -about 1 per cent. higher than if the issues were ever to consist -entirely of notes that would be subject to no higher charge than 1 per -cent. On our plan, therefore, there appears no probability that the -Bank rate of discount would ever fall, for any considerable period, -below 3½ to 4 per cent. And, if this be correct, then whatever evils -are admitted to arise from the encouragement of undue speculation, and -the ultimate aggravation of a drain of the precious metals, through the -low rate of discount at times adopted by the Bank of England, it must -be conceded that our scheme of currency possesses this one advantage -in addition to those already described, that it would, in very great -measure, provide an adequate safeguard against such aggravation. - -So far with respect to the operation of the present system in -augmenting the evils arising out of an excess of circulating medium, -together with our provision for preventing that augmentation. We have -still to justify our assertion that the present system also aggravates -the evils arising out of a deficiency of circulating medium, and -that our proposed system provides a remedy for this as well as the -former evil. And here the subject will demand a greater degree of -amplification. For a deficiency of circulating medium may arise out -of several different causes, each of which will require a special -consideration. To treat of them generally, in the first place, they -may be disposed of under two cases, the one proceeding from an actual -drain of the precious metals, the other arising out of the hoarding -of currency by merchants and bankers, through the dread of monetary -pressure. In point of fact, these two cases are not always kept -distinct; indeed the former is not unfrequently accompanied by the -latter. But it will be more convenient to treat of them separately, and -to dispose of the latter before proceeding with the former. - -The principal instance of a domestic drain, that is of a scarcity of -money produced by domestic hoarding, which has occurred in recent -years, was that which took place in October, 1847. In this case, as is -well known, there was no actual deficiency of currency in the country -at the moment of pressure. There was no unfavourable exchange; on the -contrary, gold was steadily returning after the drain of the previous -twelve months. The apparent deficiency, therefore, as compared with the -pressure of the preceding April, originated solely in the accumulation -of currency by the merchants and bankers. And this accumulation is -admitted to have been caused exclusively by the knowledge that the -Bank of England was rapidly drawing towards the end of its resources, -under the law that limits the unrepresented issues to £14,000,000; -and the truth of this is clearly demonstrated by the fact, that the -temporary suspension of the Act of 1844, at once removed the panic -without requiring the issue of a single note beyond the statutable -limitation. Now, we contend that our provision for allowing the Bank of -England to issue unrepresented notes, beyond the £22,000,000 at present -allowed to be issued by the whole united banks of England and Wales, -subject to the charge of 4 per cent., would entirely preclude the -possible recurrence of any similar panic. For it was not the rate of -interest at which the Bank had been discounting in the previous months -that produced the alarm, but solely the knowledge that the reserve of -unrepresented notes was nearly exhausted, and that the provisions of -the Act prohibited the extension of that reserve, no matter what rate -of interest might be offered by the public for increased accommodation. -The certainty, therefore, that whenever the rate of interest should -materially exceed 4 per cent., the Bank would be placed in a position -to afford any further accommodation that might be required by the -public, would effectually prevent the recurrence of any apprehension as -to the possible exhaustion of the Bank’s available resources. - -We will now proceed to the case in which the deficiency of currency -is produced by an actual drain of the precious metals. Such a drain -may obviously arise from a variety of causes too numerous to specify. -But there are three cases which are not only in themselves the most -important, but which also serve as fair representatives of the -remainder. These three are, first, a drain arising out of general high -prices at home, originally produced by an excess of currency and great -overtrading; secondly, the exportation of gold to pay for some staple -article of food or manufacture, caused by the deficient supply of such -article at home; and thirdly, the maintenance of a large military -expenditure abroad during time of war. The first of these was the main -cause of the crisis of 1825; the second was the chief, but not the -exclusive, agent in producing the pressure of April, 1847; the third -is now in operation, and should the war prove of long continuance, may -possibly subject the present system to as severe a test as that of -October, 1847, provided the Act should not in the mean time undergo -amendment. - -To take the case of a drain produced by over speculation first. 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 not have 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 the -consequence, 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 drain of 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 the whole 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 unrepresented notes -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: - - 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;[D] the -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 as any 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 following -change:-- - - Issued on bullion £20,000,000 - ” at 1 per cent. 11,000,000 - ” at 2 per cent. 7,000,000 - ---------- - £38,000,000 - - [D] In 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 to raise 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 this position:-- - - 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 a recourse 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 as follows:-- - - 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 once apparent that a drain of -£12,000,000 in such a case would produce the following change:-- - - Issued on gold £2,000,000 - ” on securities 12,000,000 - ---------- - £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 bullion had 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 as follows:-- - - 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 issues[E]. - - [E] We 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 is an 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.[F] But 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 doubted whether, 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.[G] And -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 - 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”. - - - - - -End of the Project Gutenberg EBook of The Paper Currency of England -Dispassionately Considered, by John Haslam - -*** END OF THIS PROJECT GUTENBERG EBOOK THE PAPER CURRENCY OF ENGLAND *** - -***** This file should be named 55120-0.txt or 55120-0.zip ***** -This and all associated files of various formats will be found in: - http://www.gutenberg.org/5/5/1/2/55120/ - -Produced by Charlie Howard and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - -Updated editions will replace the previous one--the old editions -will be renamed. - -Creating the works from public domain print editions means that no -one owns a United States copyright in these works, so the Foundation -(and you!) can copy and distribute it in the United States without -permission and without paying copyright royalties. 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