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Ori be( the sic oth firs sioi or lh« sha Tir wh Ma diff ent beg T\gY reqi This item is filmed at the reduction ratio checked below/ Ce document est film* au taux de reduction indiqu6 ci-dessous. inv iiiv ^sy ^nw iwA fV/^ lO^ ^AA ' THE CAUSES AND CONSEQUENCES OF THE I.:.-:::'' ■-■'■■■''■> PRESSURE UPON THE MONEY-MARKET; WITH A STATEMENT OF THE ACTION OF THB- '^■ BANK OF ENGLAND \ ' FROM \9t October, 1833, to the 21th December, 1836. By J. HORSLEY PALMER, ESQ. I / I I !4 LONDON : PELHAM RICHARDSON, 23, CORNHILL. 1837. i >' i fi i iwui fm 7 g .U i.i.ya.>'> O >' r '-nf- •i/>^^ • ■. ■"'•: -* > (2?) :■•'=;• ..-V {< LONDON : PRtNTEt) BT W. MARCHANT, INOn AM-OOVRT, rBNCIIUROH'BTRKBT. /r 9^f^ » ^.> ( I " M 11^ • '>'f.''.i : THE CAUSES, ETC, ETC. I '.>. I There is no subject of inquiry more interesting and important to the whole community than that which relates to the due regulation of our monetary system, which has been for many years past in a continued state of fluctuation. The principle main- tained during the war ending in 1815 has been long since exploded, and we are not likely to see a second resolution of the House of Commons, declaring that a one-pound note and a shilling are equal in real value to a guinea of full weight, at a time when the paper-money of the country is de- preciated 12 or 13 per cent. So far have we ad- vanced in knowledge ; but some remarkable errors A 2 If have pervaded and still continue to influence the public mind as to the mode of maintaining the value of paper-money. Whether the period be now arrived for getting rid of these it may be diffi- cult to state ; the subject, however, is one of so much interest that the writer of the present obser- vations trusts he may stand excused in thus tres- passing upon public attention while he attempts to develope the principal facts bearing upon the sub- ject now under inquiry, that have occurred within his observation during the last three years. Some good may, perhaps, arise from their promulgation. He hopes that it may tend to the amendment of a system, which, if persisted in, can hardly fail of multiplying all the evils resulting from those varia- tions of the curreacy to which we have latterly been exposed. The conduct of the Bank of England from the year 1819 to the present time is before the public. The events which seemed to have led to the panic of 1825 were attempted to be explained, by the author of this tract, in evidence given before the Committee of the House of Commons upon the renewal of the Bank Charter in 1832 ; when he fur- ther endeavoured to shew that the almost total drain '. never was a measure more uncalled for by the wants of the community. The existing system was intimately connected with the prosperity of the country, and was good in all its parts, excepting the power of issuing paper-money ad libitum. The change in question laid the foundation of a new system to be brought into the field by com- petition in the issue of paper-money, the most prejudicial means that could be devised. A reluc- tant concession was obtained from the Bank ; and in order to place the whole subject before the public, the correspondence which then took place between the Government and the Bank is annexed to the present statement. Very little progress was made in the formation of those projected institutions prior to the year 1830, when a further application was made by Government to the Bank for conces- sions intended to have formed part of the con- ditions at that time for the renewal of the Charter. The opinion of the Bank remained unchanged as to the danger to be apprehended from the exten- sion of the system of Joint-Stock Banks, and this opinion was pressed upon the Government at that period. The Ministry under the Duke of Wellington having soon after been dissolved, no further discussion of the subject took place until the negotiation under the Government of Earl Grey, which terminated in the renewal of the Charter of the Bank in 1833. Pending the discussions which then took place the strongest representations were verbally made to Earl Spencer (then Chancellor of the Exchequer), of the necessity of placing Joint-Stock Banks of Issue under some regulations to be proposed by His Majesty's Government, which might tend to a prevention of excess in their issues of ppper-money. It is well known that that noble Lord was desirous of submitting such regulations for the considera- tion of Parliament ; but these he was prevented from carrying into effect. The system of Joint- Stock banking was further facilitated by permitting the formation of direct agencies in London ; and a declaratory clause was inserted in the Bank Char- ter Act authorizing the establishment of those bodies in the metropolis. It is conceived that the Bank had the more reason to complain of the Ministers' proceeding upon that occasion, it having been distinctly understood during the negotiation, that the law affecting the formation of Banks within sixty miles of London should remain untouched, and upon the faith of that understanding Earl Spencer - * ■ , • 10 undertook to bring the Bill into the House of Com- mons for the renewal of the Charter of the Bank. Having thus briefly stated the proceedings which have occurred in the establishment of Joint-Stock Banks prior to the renewal of the Charter of the Bank of England, it may, perhaps, be proper to state the periods of the increase of those of Issue from the year 1826 : they are as follow, taken from returns furnished by the Stamp-Office. IN ENGLAND AND WALES, 1 826, were established 3 1827, „ 4 1828, „ nil 1829, „ 7 1830, „ 1 1831, „ 8 1832, „ 7 1833, „ 10 1834, „ 11 1835, „ 9 1836, from 1st January to 26th November • • 42 Total 102 IN IRELAND There were formed prior to 1 834 3 In 1835 2 1836 8 Total 13 Until the year 1833 the action of the Banks, as already stated, appears to have been perfectly regular. From that period the increase in the 11 number of Joint-Stock Banks, in England and Wales, to the 26th November last, has been seventy- two, and in Ireland ten, making an aggregate of eiglity-two, exclusive of their innumerable branches formed in almost every town in the two kingdoms, which are, in fact, equivalent to so many additional banks. It next remains to be shewn what was the amount of paper-money in circulation in England and Wales, and Ireland, other than that issued by the Banks of England and Ireland. The average in England and Wales on the 29th March, 1834, was £10,200,000, and in June, 1836, £12,200,000. In Ireland the average in June, 1834, was £1,300,000, and in June, 1836, £2,300,000. In both cases the greatest extension took place within the last year. It thus appears that there was a total increase in this portion of the paper-money of the two king- doms, in 1836, over 1834, of no less than three miilionsj or more than 25 per cent. There was no material fluctuation in the circulation of the Bank of Ireland ; it therefore is only requisite to state the particulars of the issues of the Bank of England at the two periods referred to. The liabilities and assets of the Bank on the '#^ ■-m* 12 1st October, 1833, upon an average of the three preceding months were, — Circulation • • £19,800,000 I Securities £24,200,000 1 3,000,000 I Bullion 1 0,900,000 On the 27th December, 1836, the bullion upon a similar average was £4,300,000, shewing a re- duction of £6,600,000. The circulation was then £17,300,000, and the deposits, excluding those of a temporary character (4| millions), were £9,200,000; the diminution of the two, taken together, having been £6,300,000, the difference between this amount and the loss of bullion being found in the increase of securities held by the Bank. In every quarter succeeding the 1st October, 1833, with two very trifling exceptions not worth notice, the reduction in the circulation and deposits was larger than the progressive diminution of bullion required. It may here perhaps be as well to explain the nature of what are termed extra deposits, in order to shew that they are independent of the regular working of the Bank. They have consisted of money belonging either to Government or the East India Company, altogether independent of ■»^ 13 their ordinary transactions. The first arose out of the contract for the West India Loan, upon which a discount was allowed for prompt payment higher than the market rate of interest; and as the prompt payments thus made were not required for issue to the West India claimants for several months afterwards, it became necessary, in order to preserve the currency in the same state as if the payments for the loan had not taken place, and to prevent its undue contraction, to re-issue the money to the public. This was done by contract with the money -dealers, so as to ensure its return to the Bank at the time of the adjustment being made with the claimants by the Commissioners. It ought further to be borne in mind, that during the whole period of those loans the foreign exchanges were high, increasing the quantity of gold in the coffers of the Bank to a considerable extent — a circum- stance which would have rendered it quite unjusti- fiable for the Bank to have permitted a contraction of the currency by the prompt payments on account of the Loan, and an advance in the rate of interest to have been thus unnecessarily and forcibly effected to the detriment of the commerce of the country. The second case was that of the East-India 14 Company realizing their commercial assets to an extent far exceeding their ordinary wants for pay- ment. Upon the commencement of the accumula- tion, to the extent of £600,000 or £700,000 above their ordinary balances, an application was made to the Bank to ascertain whether it would undertake the risk of lending the money, paying to the Company a given rate of interest ; if declined, the Company were prepared to lend it themselves, having re- ceived offers from some of the principal money- dealers to take it. The question, therefore, simply was, whether the notes should be paid away by the East-India Company or the Bank ? It never could be expected that the Bank should be required to pay a rate of interest for notes or bullion belonging to others, merely for the sake of keeping them unem- ployed : having at the same time no excess beyond the 241 millions of securities, which the ordinary working deposits and circulation entitled that body to hold. Hence it is evident, that in the first case the Bank was, for the benefit of commerce, re- quired to reissue the monies received on account of the West-India Loan, and that in the second, if the Bank had not consented to advance the money, the East-India Company would have lent it themselves. The only point, therefore, was one of management, viz. to keep the currency from undue fluctuation, and to insure the return of the notes from the market at the periods when the Government and the Company required them for issue in the same direction, which was effected to the letter. The contraction of Bank-notes, exhibited in the comparative statement, between October, 1833, and December, 1836, applies to the aggregate circu- lation of the Bank, both in London and the country ^ whereas that of London alone ought to be brought under review. It will appear, from the following account, that the contraction has been in London three millions from the amount in circulation in October, 1 833, which with the deposits makes the actual reduction of the London liabilities £200,000 more than the diminution of Bullion exhibited in the quarter ending December last. The sub- joined statement embraces the separate issues in London and the Branch Banks every quarter, from October, 1833, to December, 1836, each return being calculated upon the average of the thirteen preceding weeks. It will be thus seen that the increase of the Branch Bank issues was virtually so much withdrawn from London, the Bank not having A <■•-:■■ s*^ increased its amount of securities previously exist- ing until the quarter ending 27th September last, when the pressure was commencing consequent upon the advance in the rate of interest. The object of this account is to shew that every means were taken by the Bank to prevent its being charge- able with an over-issue. On the contrary, the increase of issue by the Branch Banks having been occasioned by agreements, substituting their notes for those of Country Banks withdrawn, shews, that to that extent an earlier contraction was effected in London than would otherwise have taken place. It further shews that the amount of Country Bank issues withdrawn, places the excess of the other issuing bodies in a still more unfavourable light by very nearly half a million. ISSUES OF THE BANK OF ENGLAND. 1833. Oct. 1. London 16,500,000 Branch Banks 3,300,000 19,800,000 Dec.31. London 15,000,000 Branch Banks 3,200,000 18,200,000 1834. ' Apr. 1. London 15,800,000 Branch Banks 3,200,000 19,000,000 July 1. Sept. 30. Dec. 30. 1835. Mar. 31. June 30. Sept 29. Dec. 29. 1836. Mar. 29. June 28. Sept 27. Dec. 27. 17 London 15,700,000 Branch Banks 3,200,000 London 15,800,000 Branch Banks 3,300,000 London 14,800,000 Branch Banks 3,300,000 London 15,200,000 Bnmch Banks 3,300,000 London 15,000,000 Branch Banks 3,300,000 London 14,900,000 Branch Banks 3,300,000 London 13,800,000 Branch Banks 3,400,000 London 14,400,000 Branch Banks 3,600,000 London 14,200,000 Branch Banks 3,700,000 London 14,500,000 Branch Banks 3,600,000 London 13,500,000 Branch Banks 3,800,000 18,900,000 19.100,000 18,100,000 18,500,000 18,300,000 18,200,000 17,200,000 18,000,000 17,900,000 18,100,000 17,300.000 B sjn^f^'- .,**?•*'*'' Nl Having thus stated the action of the different bodies through which the extension and contraction of the paper money of England and Ireland have been effected from the year 1833 to the present time, it may be now expedient to shew the causes which appear to have occasioned the reduction in the cir- culation of the Bank of England. It is the more important to submit these causes to the notice of the public, as they seem in no degree to have arisen from overtrading or any undue speculative advance in commercial prices : oocurrenoes of that nature tend to produce an unfavourable foreign exchange, an evil only to be remedied by that contraction of the circulation which eventually restores prices and currency to a level with those existing in foreign countries. If, therefore, upon reference being made to the state of the foreign exchanges during the period to which the inquiry relates, it be found that no material derangement existed, our attention is naturally directed to the consideration of the other causes that have occasioned the demand upon our metallic currency. In order to establish the position that the commercial exchanges were not against England, it may be right to refer to the increase or decrease of gold at the I t a 19 Bank, from which alone any correct inferences are to be drawn as to the state of our currency in com- parison with that of foreign countries. The first period may be taken from October 1 833, to April 1835, during almost the whole of which time there was a continued purchase of gold by the Bank, at £3 : 17 :9 per oz. ; the exchange on Paris never fell below 25.35 for short paper, and the premium upon gold remained in Paris at about 9 per mille, thus shewing that during that period there was no demand upon the Bank for bar-gold, and no profit upon the export of that metal or the gold coin of the realm. The second period was from April 1835 to April 1836, during the whole of which time the foreign exchanges were considerably higher than during the preceding eighteen months, and conse- quently the influx of gold correspondingly in- creased at the Bank. The third and last period is that from April to December of the past y';ar, during the whole of which time the foreign exchange on Paris was seldom under 25.35 ; the premium upon gold, however, was for a short time as high as 13 and 14 per mille, which occasioned a loss of about B 2 20 M. £100,000 of the Bank's stock of gold bullion, an amount too trifling to establish the fact of an unfa- vourable commercial rate of exchange. With this statement of the actual bearing of the foreign exchanges upon the gold currency of the country, it may perhaps excite some surprise as to the mode in which the large reduction in the bullion held by the Bank was effected, and which in its consequences, from that body having been governed by the principle laid down in the evidence of 1832, ought to have had the same effect upon the general currency of the empire, as if the reduc- tion had been occasioned by any cause other than that from which it is believed to have arisen. The principle referred to was stated to be the retention, so far as practicable, of a fixed amount of secu- rities ; and in proof of such having been the course pursued, the following account will shew that the securities which stood at about twenty-four millions and a quarter in October 1833, upon an average of the three preceding months, did not subsequently exceed that amount until the recent pressure com- menced upon the money-market, which was further increased by the discredit in Ireland causing a demand upon the Bank, direct and indirect, for nearly a million of sovereigns. /, 21 . The securities in possession of the Bank, ex- cluding those held temporarily with the extra deposits, were upon the average of the quarters ending 1833.— let October ...- £24,200,000 ,, 31st December 23,600,000 1834.— l8t April 23,500,000 „ IstJuly 22,600,000 „ 30th September 24,900,000* „ 30th December 23,400,000 1835.— 3l8t March 25,100,000* „ 30th June 23,800,000 „ 29th September 22,900,000 „ 29th December 22,000,000 1 836. -29th March 24,000,000 „ 28th June 22,600,000 „ 27th September 24,800,000 ,, 27th December 25,000,000 The publication of the liabilities and assets of the Bank in January, and those which will follow in February, will shew a further increase of secu- rities (excluding those appertaining to the extra deposits), and according to the principle laid down in the evidence referred to, the rate of interest • The excess in these two quarters was occasioned by an in- crease in the deficiency Bills. #■ . Z?"^. ^.f^: ougiit iea waiting a demand for employment, and belongiug to London bankers and others. Whether, there- fore, these notes remain for a time in the posses- sion of the Bank, or whether they remain in the possession of the parties to whom they belong, is really the same thing, the only difference being in the mode of stating the account. As nearly as can be ascertained the amount of deposits coming under the description here alluded to, may vary from three to four millions. But we are not, as has some- times been done, to confound this portion of the deposits with the other and much larger portion that is lodged with the Bank for security only, and without being intended to be speedily withdrawn or to be operated on by checks or otherwise. To contend that this portion of the deposits should be considered as currency is equivalent to contending that the bills and bonds belonging to individuals and locked up in their strong box are part and parcel of the circulation. They may be money in possCf but they are not money in esse, and have no more influence over the currency than the gold or silver buried in the bowels of Mexico. But to return : — 3G Adverting to the excess ol' the country issues, and looking to the race running with in- creased violence in Ireland as well as England, . the Bank was fully justified in attempting to arrest the evil which might attend a continuance of the export of bullion from the redundancy of money, by making an advance in the rate of interest in London and at the Branch Banks. In fact, the only ques- tion about which there can be any real difficulty is whether she ought not to have taken this step somewhat earlier. To have acted, however, in anticipation of events likely to occur, would have been in direct violation of that principle upon which the Bank professed to be guided, and which Parlia- ment had tacitly sanctioned. It would moreover have established a precedent and imposed future responsibilities upon the Directors, which it is questionable whether they should ever incur, either upon their own account or that of the pub- lic. The Bank acted precisely as any Board of Commissioners empowered solely to issue notes for bullion would have done, ana can in no way be chargeable with the consequences. The large amount of money deposited at interest with the Bank by tlie East-India Company for a 37 limited period, and which was lent to the money-dea- lers in London, afforded considerable facilities for rendering the rise in the rate of interest immediately effective ; the object was not one of profit to the Bank, but to enforce that contraction and to esta- blish that general rate of interest, which, but for the undue increase of the issues of the Joint-Stock Banks and others in England and Ireland, should have followed the export of bullion. The course thus taken by the Bank was, in the first instance, coun- teracted by the other issuers of paper-money in Eng- land, Ireland, and Scotland. The demand for bul- lion continuing, the Bank further advanced the rate of interest in August to £5 per cent, per annum, which forced additional securities upon many of those country-banks that adhered to a lower rate. Their surplus funds in London being soon absorbed, they all eventually adopted the rate of interest established in London. There was, however, an effect created by this act on the part of the Bank far more powerful than the actual advance in the value of money. It was a moral apprehension in all prudent minds that there was mischief abroad ; and those who had been promoting and applauding the action of the Joint-Stock Banks began to doubt 38 the solidity of the system. The feeling so created was probably further extended by the publication of the evidence already alluded to. The conse- quence of this altered state of confidence was first shewn in Ireland, where the competition had assumed a more violent character than in England ; a run upon all the Joint-Stock Banks in that part of the Empire ensued, which terminated in the stoppage of the Agricultural. The direct effect of that dis- credit upon the Irish banks was an immediate drain upon the Bank of England and its branches of nearly one million of sovereigns, obtained by the return of notes to that amount. None of these banks having been previously provided with coin or the direct means of obtaining it, the only mode of getting possession of it was by forced sales of securities in London. A moment's reflection will shew the derangement in the London circulation, necessarily consequent on such proceedings, as well as the difficulty under which the Bank is placed by the total want of coin or bank-notes on the part of issuing banks, to uphold the credit of their circula- tion. It may be assumed as a fact that profit is their only object, and that not a single issuing bank in England, Ireland, or even Scotland has ever ♦ * 39 been provided with bank-notes or coin adequate to meet a demand upon their respective liabilities. Their assets beyond the ordinary wants of their customers are all vested in securities bearing interest, trusting to the realization of those securi- ties in bank-notes in case of need, which, thus abstracted from the public market, either inflicts a most inconvenient pressure upon London, or, in order to prevent that pressure, the Bank is required to re-issue the amount of notes, so cancelled, with- out reference to the bullion in its possession. It is perfectly immaterial whether banks of issue retain their just proportion of reserves in Bank of Eng- land notes or coin, but one or the other it is sub- mitted that they ought to be compelled to retain with reference to their liabilities, or to abandon the issue of notes, the upholding of which, under dis- credit, becomes a source of difficulty and danger to the public at large, as well as to the Bank of England. In the late instance the discredit fortu- nately extended no farther than Ireland, but the apprehension of what might ensue in England occasioned a considerable abstraction of bank paper from London by the issuing banks of the country, which to that extent so far encreased the pressure S« - X. Ct 40 of contraction — and was the principal cause of the pressure upon the money-market, which is the first head of the present enquiry. In such times it is not only the contraction of money which constitutes the evil, but the consequence which invariably ensues of timidity on the part of bankers generally, to grant their customary accom- modation, and of those situated in the more distant parts of the country accumulating and locking up reserves three or four times greater than they retain under ordinary circumstances. Much has been said and written by parties con- nected with a portion of the daily press as to the impossibility of maintaining a paper-money circu- lation convertible into gold coin of a given standard. There is no intention of entering at present upon the discussion as to whether silver or gold would origi- nally have been the better metal to adopt as our standard of value. Gold was determined upon, and that is the only question we have now to deal with. It may be true, though there is no evidence of the fact, that gold fluctuates more in value than silver ; but there does not appear to be any diffi- culty in maintaining it as our standard, subject at times to some temporary inconvenience in rela- ■m 41 iffi- ect ela- tion to the currencies of other countries, pro- vided the issue of paper-money be duly regu- lated. Under the system which now exists, em- bracing a total amount of bank-paper circulation in Great Britain and Ireland of about forty-five mil- lions, the half of which may be assumed to be un- protected by an adequate reserve of either Bank of England notes or coin, it certainly is impossible to insure the convertibility of paper even for foreign payment; nothing can guard against the effects of mismanagement and consequent excess by such a numerous mass of issuing bodies as overspread the empire. If, however, the amount of paper-money be limited, and it be issued by one body, with an ade- quate reserve of bullion expanding and contracting as the currency may fluctuate in value with refe- rence to foreign countries, there could be no difficulty in preserving it against depreciation for all pur- poses of foreign payment. If paper-money ever become discredited by any internal political convul- sion, it can then only be upheld by the power of Government — and in such times it becomes the duty of the Ministers of the Crown to undertake the responsibility of upholding public credit. For relief against commercial discredit the issuing body 42 should be so formed as to be able to afford protection. . . > -> .m With reference to the past action of the Bank there is no reason to doubt that the value of the currency would have been maintained without oc- casioning any severe pressure upon the money- market had the countervailing issues by other bodies not occurred ; still if there exist any well-founded reasons for supposing that the principle explained in the evidence of 1832, and acted upon by the Bank, is not sound — or that the proportion of one- third of bullion with reference to the liabilities of the Bank at the period of a full currency be not sufficient, it merely remains for Parliament to express an opinion upon either of those points, and there can be no question but that the Bank will immediately regulate its course accordingly. The principle referred to was never intended to apply under any extraordinary events that might arise. In such times it would be- come the duty of the Bank to reduce their securities without delay, and thus to increase the relative proportion of bullion to their liabilities prior to the commencement of a foreign demand, which in such altered state of circumstances might be expected to occur. 48 Having thus endeavoured to show the rise and progress of the contraction in the circulation of the Bank of England, which has terminated in the pressure upon the money-market, it remains to be considered what are the consequences likely here- after to ensue from a continuance of the present system. Assuming that the main cause of the pressure was occasioned by the counteracting effect of the issues by other bodies, promoted in no common degree by the inordinate multiplication and compe- tition of the Joint-Stock Banks throughout England and Ireland, it may be worth while to allude to what may be supposed to have led to the opinions formed in 1825 by the Government of that day in favour of those institutions. The consideration of the Joint-Stock system had been, for some time prior lo the year 1825, forced upon public attention by the many failures which had taken place subsequently to 1810 in private banking establishments, amounting to more than one hundred and fifty : and as about eighty private banks suspended their payments in 1825, the Government thought themselves then called upon 44 without further delay to endeavour to change the system altogether — a sound system of banking being an object of the highest imoortance to the whole community. The view taken by Government was strengthened by observing the little comparative derangement sustained by Scotland under the Joiat- Stock Banks, by which the monetary concerns of that part of the kingdom have been almost exclu- sively conducted. Looking to that country as an example, it was perhaps natural to conclude that what afforded evidence of advantag ^ in one part of the kingdom would be equally good for all the rest. There is no intention to criticize the Scotch system of banking, but were it narrowly examined, it might not appear so perfect in all its parts as its many warm advocates are inclined to believe. Suffice it to say, that it has produced great benefit to Scotland, which is a sufficient reason for leaving it untouched so long as it commands public confidence. In precipitating a change in England Ministers seem not to have given sufficient attention to the real causes which occasioned the failures in this country, or the peculiar origin aud state of the of 45 lie irs to in the banking interest in Scotland. — Tlie evil of the system in England had grown up during the period of the restriction upon cash payments, and espe- cially during the depreciation of the currency from 1810 to 1819, when the issues of paper- money were governed solely by the extent of the demand upon approved securities; and as every bank not having more than six part- ners had the privilege of issuing notes without limit, it is not to be wondered, while such an unsound principle of issue was generally approved, that ^Snking establishments should have multiplied in all parts of the country merely for the profit to be obtained from their respective paper mints, without paying much, if any, regard to security for the eventual payment of their notes either in paper of the Bank of England or coin. As the period of return to cash payments approached, these ephemeral establishments began to disappear, and the banking business of the interior assumed a more substantial character; the principal evil suffered to remain was the continuance of the privilege to the country banks of issuing one and two-pound notes after they had been withdrawn by the Bank of England. This rendered coin the only means of 4G upholding that description of circulation ; and this coin, in the event of discredit, could only be obtained from the Bank in London. . < Such was the state of the provincial banking interest when overtaken by the universal panic of 1825. During that eventful period it is true, as already stated, that nearly eighty private banks suspended their payments ; but it is equally true, and perhaps no stronger proof could be afforded of the really substantial state of the country banks at that time, that a very small portion (il is believed not ten) proceeded to bankruptcy. If, therefore, due attention had been given by Lord Liverpool's administration to the causes which occasioned the insolvencies prior to the resumption of cash pay- ments, and a little more time had been taken to inquire into the real state of the country banks in 1825, it is probable that the discredit so unjustly thrown upon the system of private banking in the annexed correspondence would never have been heard of. So far as the opinions then expressed were based upon the example .of Scotland, it is maintained that they were founded in error. The two systems were different in origin and principle. That of England had 47 been formed upon the Bank of England and private establishments precluded by Parliament frrt»" embracing more than six partners, while the system of joint- stock banks had ever been the main support of the circulation of ScotlanH. Both systems existed with equal advantage to the several districts where established — a change in either could only be accomplished by competition endan- gering the credit and currency of the country. In making these observations upon what appears to have been an injudicious encouragement given to the formation of Joint-Stock Banks in England, where adequate banking institutions already existed, there is no intention of questioning the propriety of sanctioning such establishments in a country dif- ferently situated. Banking is one of the principal means for promoting the prosperity of a nation, and it must consequently always command the vigilant attention of a Government anxious to for- ward the welfare of the various branches of the community. As a general principle, it may be stated that Joint-Stock Societies are only deserving of encouragement when individual capital and en^ terprise are found deficient. They are peculiarly applicable to banking business in an early stage of 48 accumulation of property, and before private credit is extensively created. Such was the case in Scot- land at the time when Joint-Stock Banks began to be established in it ; such was also the situation of America, and such, too, is now the situation of the Canadas. In the interior of Ireland the first attempt was made to conduct banking business by private capital, supported by the Bank of Ire- land, in the same way as in England. The situa- tion of the two countries was, however, widely different, and consequently the private banks of Ireland almost totally failed ; which, leaving the field open to other agency, occasioned the formation of Joint-Stock Banks in their place. In all the instances here alluded to, those institutions, if their issues of paper and credits be duly regulated, with- out which their respective currencies cannot fail to be in a frequent state of inconvenient and even dan- gerous fluctuation, will continue to prosper; and with their own prosperity will tend to promote the public and private interests dependent upon them. Adverting, therefore, to the mischief which ap- pears to have attended the uncalled-for encourage- ment given to Joint-Stock Banks in England, while the advantage of those bodies is admitted in coun- iredit Scot- ;an to on of on of » first siness f Ire- sit ua- ividely iks of ig the mation ill the their with- 'ail to n dan- id with jublic ;h ap- urage- while coun- ) 49 tries differently situated, it !)ecomes the duty of Government to bring the subject under the consideration of Parliament, and ti- propose such regulations as may check the unlimited formation of such institutions hereafter, in places where banks already exist, affording every security and accommodation which the district may require. And further, to regulate the future management of those now in existence, in order to guard against a recurrence of that excess in the circulating me- dium, which on the late occasion neutralized the influence of the contraction of the circulation of the Bank of England, and occasioned a serious, it may be said ruinous, pressure upon the money- market. Unless measures, having those objects in view, be adopted with firmness on the part of the Government, i. repetition of the pressure will no doubt recur with increased violence. Earl Spen- cer, when Chancellor of the Exchequer, was fully aware of the danger to be apprehended from the present system ; and the attempt made by his Lord- ship at the time of the renewal of the Bank Charter to establish regulations for the conduct of Joint- Sto^k Banks of Issue, sufficiently proves that at least one member of Government was convinced of the D 50 necessity of protection bcin^ afforded to the public njjfainst its abuse. So 'dangerous docs the system appear, as it now stands, that it becomes question- able whether the Bank of England and the bodies in (juestion can permanentli/ c.vist together. , < If Ministers be disposed to bring forward reme- dial measures, the state of the foreign stock-market should not be overlooked. It may perhaps be diffi- cult to put any effectual check upon speculative and time-bargains in foreign securities, but there can be no reason why they should not be declared illegal, and penalties imposed upon such transactions. And further, while the transfer of almost every spe- cies of property in Great Britain (with the exception of the public debt) is subject to a duty, it is but equitable that every contract or bargain made for passing foreign securities should be chargeable with a stamp-duty, and be liable to heavy penalties for evasion. The Government of France were long since apprised of the dangerous consequences of the time-bargains upon the Bourse at Paris, and have avoided them by regulations which tend almost effectually to put them down. In submitting the foregoing facts and obser- vations for public consideration, the writer, though intimately connected with tlic manngomcnt of the Bank of England, has no intention to claim any undue portion of credit or to evade his fair share of the responsibility for the proceedings of that body. The Bank has endeavoured to pursue, in difficult times and amid conflicting interests, a steady course, regardless of the abuse put forth by certain writers in the daily press, whose ignorance or wilful misrepresentation would be unworthy of notice, except for its influence over a portion of the public unacquainted with such subjects. Whether the Bank of England, as now constituted, be the establishment most capable of upholding public and private credit, or whether its spher? of action should be extended or contracted, are public ques- tions. The interest of the public only is to be con- sidered ; and decisions taken in that view, and with a full knowledge of all the facts and principles bearing upon such complicated and diffi ult sub jects, will be sure to meet with the concurrence of every individual coniuv led with the Bank, as they ought to do with that of every well-wisher to his country. P.S. — Since the foregoing was written, a Letter !) 2 has been published, addressed by Colonel Torrens to Lord Melbourne. The conclusions having been drawn from erroneous premises, they are not deser- ving of much notice. It may be sufficient to state that the average amount of the circulation of the Bank on the 28th December, 1833, was £18,200,000, and not £17,469,000, as stated in the Letter; and further, that the conclusions ought to have had reference to the period when the drain of bullion com- menced — the 1st October, 1833, when the average circulation was £19,800,000, and the bullion £10,900,000. With respect to the observations made upon the deposits of the Bank, it is evident that Colonel Torrens does not understand the nature of that portion of them which bears the character of Circulation. Having already said every thing which appears requisite by way of explanation upon that subject in the present tract> it is unnecessary to offer any further observations upon it. Copy of the communications from the Treasury to the Bank of England in the year 1826, and of the Answer of the Bank thereto, relating to the provi- sions of the LHlj then in progress through Parlia- ment^ for the Regulation of Banking Companies in England, At a Court of Directors at the Bank, Friday, 20th Janu- ary, 1826. The Governor laid before the Court the following Letter from the First Lord of the Treasury and the Chancellor of the Ex- chequer, with the Paper therein referred to, viz. : — ** Fife- House f « \Zth January, 1826, " Gentlemen, " We have the honor of transmitting to you herewith a paper containing our views upon the present state of the Banking system of this Country, with our suggestions there- upon, which we request you will lay before the Court of Directors of the Bank of England for their consideration. " We have the honor, &c. (Signed) " Liverpool, " Fred. John Robinson." To the Governor and Deputy -Governor " of the Bank oj Emjiand," " The Panic in the money-market having subsided, and the pecuniary transactions of the country having reverted to their accustomed course, it becomes important to lose no time in considering* whether any measures can be adopted to prevent the recurrence in future of such evils as we have recently expe- rienced. *• However much the recent distress may have been aggravated in the judgment of some by incidental circumslances and parti- cular measures, there can be no doubt that the principal source of it is to be found in the rash spirit of speculation which has pervaded the country for some time, supported, fostered, and encouraged by the Country Banks. ** The remedy therefore for this evil in future must be found in an improvement in the circulation of country-paper ; and the first measure which has suggested itself to most of those who have considered the subject, is a recurrence to a gold circulati.; throughout the country, as well as in the metropolis and its nei" o bourbood, by a repeal of the Act which permits Country Banks to issue One and Two Pound notes until the year 1833, and by the immediate enactment of a prohibition of any such issues at the expiration of two or three years from the present period. " It appears to us to be quite clear that such a measure would be productive of much good ; that it would operate as some check upon the spirit of speculation and upon the issues of Country Banks ; and whilst, on the one hand, it would diminish the pressure upon the Bank and the metropolis, incident to an unfavourable state of the exchnnges, by spreading it over a wider surface, on the other hand it would cause such pressure to be earlier felt, and thereby insure an earlier and more general adop- tion of the precautionary measures necessary for counteracting the inconveniences incident to an export of the precious metals. But though a recurrence to a gold circulation in the country, for the reasons already stated, niiglit be productive of some good, it would by no means go to tiic root of the evil. m " Wc have abundant proof of the truth of this position in the events which took place in the spring of 1793, when a convul- sion occurred in the money-transactions and circulation of the coun- try more extensive than that which we have recently experienced. At that period nearly a hundred Country Banks were obliged to stop payment, and Parliament was induced to grant an issue of Exchequer-Bills to relieve the distress; yet in the year 1793 there were no One or Two Pound notes in circulation in England either by Country Banks or by the Bank of England. '* We have a further proof of the truth of what has been advanced in the experience of Scotland, which has escaped all the convulsions which have occurred in the money-market of England for the last thirty-five years, though Scotland during the whole of that time has had a circulation of One Pound notes ; and the small pecuniary transactions of that part of the United Kingdom have been carried on exclusively by the means of such notes. ** The issue of small notes, though it be an aggravation, cannot therefore be the sole, or even the main cause of the evil in England. " The failures which have occurred in England, unaccompanied as they have been by the same occurrences in Scotland, tend to prove that there must have been an unsolid and delusive system of banking in one part of Great Britain, and a solid and substantial one in the other. •* It would be entirely at variance with our deliberate opinion, not to do full justice to the Bank of England as the great centre of circulation and commercial credit. " We believe that much of the prosperity of the country for the last century is to be ascribed to the general wisdom, justice, and fairness of all its deaHngs ; — and we further think that during a great part of that time it may have been in itself and by itself fully equal to all the important duties and operations confided to 'JS. 56 it ; but the progress of the country during the last thirty or forty years in every branch of industry, in agriculture, manufacture" commerce, and navigation, has been so rapid and extensive, as to make it no reflection upon the Bank of England to say that the instrument which hy itself whb fully adequate to former transac- tions, is no longer sufficient without new aids to meet the de- mands of the present times. ** We have to a considerable degree, the proof of this position in the very establishment of so many Country Banks. '* Within the memory of many living, and even of some of those now engaged in public affairs, there were no Country Banks except in a few of the great commercial towns. ** The money iransacticus of the country were carried on by supplies of coin and bank-notes from London. " The extent of the business of the country and the improve- ment made from time to time in the mode of conducting our increased commercial transactions, founded on pecuniary credit, rendered such a system no longer adequate, and Country Banks must liave arisen, as in fact they did arise, from the increased wealth and new wants of the country. " The matter of regret is, not that Country Banks have been suffered to exist, but that they have been suffered so long to exist without controul or limitation, or without the adoption of provisions calculated to counteract the evils resulting from their improvidence or excels. " It would be vain to suppose that we could now by any act of the Legislature extinguish the existing Country Banks, even if it were desirable, but it may be within our power gradually at least to establish a sound system of banking throughout the coun- try, and if such a system could be formed, there can be little doubt that it would ultimately extinguish and absorb all that is objectionable and dangerous in the present banking establishments. '* There appear to be two modes of attaining this object. 57 of leir *< First — That the Bank of England should establish branches of its own body in di£ferent parts of the country. ** Secondly — That the Bank of England should give up its exclusive privilege as to the number of partners engaged in banking, except within a certain distance of the metropolis. '* It has always appeared to us, that it would have been very desirable that the Bank should liave tried the first of these plans — that of establishing Branch Banks upon a limited scale. " But we are not insensible to the difficulties which would have attended such an experiment, and we are quite satisfied that it would be impossible for the Bank under present circumstances to carry into execution such a system to the extent necessary for providing for the wants of the country. '* There remains therefore only the other plan — the surrender by the Bank of their exclusive privilege as to the number of partners beyond a certain distance from the metropolis. '* The effect of such a measure would be the gradual establish- ment of extensive and respectable banks in different parts of the country, some perhaps with charters from the Crown, under certain qualifications, and some without. " Here we ha\e again the advantage of the experience of Scot- land. ** In England there are said to be between eight and nine hun- dred Country-Banks, and it is no exaggeration to suppose that a great proportion of them have not been conducted with a due attention to those precautions which are necessary for the safety of all banking establishments, even where their property is more ample. When such banks stop, their creditors may ultimately be paid the whole of their demands, but the delay and shock to credit may in the meantime involve them in the same difficulty, and is always attended with the greater! injury and suffering in the districts where such stoppages occur. If this be the case 5D " In point of profit, would they io8e anything by it for which tliey are entit^ '1 to demand compenimtion ? !► «i v v^tl ^r. - •' < " It is notorious that at the present time their Notes circulate in no part of England beyond the metropolis and its neighbour- hood, except in Lancashire, and perhaps for that district some special provision might be made. i ;; " But as it is the interest, so it has been and ever will be the endeavour of the Country Banks to keep the Bank of England Notes out of circulation in those parts of the kingdom where their o\,.i circulation prevails. In this they must always be suc- cessful whilst public credit continues in its ordinary state and the exchanges not unfavourable to this country. The consequences are, that in such times the Bank of England becomes in a man- ner the sole depositary for gold, and in times of an opposite tendency the sole resort for obtaining it : that at one period their legitimate profit is curtailed by an accumulation of treasure be- yond what would be required by a due attention to their own and private safety as a Banking Establishment ; and at another period they are exposed to demands which endanger that safety and baffle all the ordinary calculations of foresight and prudence. '* If then the Bank of England has no country circulation, except in the county above-named, the only question for them to consider is, whether on the ground of profit as well as security to themselves, the existing country circulation shall or shall not be improved. •* With respect to the extension of the term of their exclusive privileges in the metropolis and its neighbourhood, it is obvious from what passed before, that Parliament will never agree to it. " Such privileges are out of fashion, and what expectation can the Bank under present circumstances entertain that theirs will be renewed. But there is no reason why the Bank of England should look at this consequence with dismay. They will remain a chartered corporation for carrying on the business of banking. 58 where the solidity of the bank is unquestionable, what must it be, as too often happens, when they rest on no solid foundation ? " In Scotland there are not more than thirty banks, and these banits have stood firm amidst all the convulsions in the money- market in England, i 1 amidst all the distresses to which the manufacturing and agricultural interests in Scotland as well as in England have occasionally been subject. ■ . . ^ ■ ** Banks of this description must necessarily be conducted upon the general, understood, and approved principles of banking. " Individuals are from the nature of the institutions pre- cluded from speculating in the manner in which persons engaged in Country and even London Banks speculate in England. " If the concerns of the country could be carried on without any other bank than the Bank of England, there might be somo reason for not interfering with their exclusive privileges ; but the effect of the law at present is to permit every description of bank- ing, except that which is solid and secure. •" Let the Bank of England reflect on the dangers to which it has been recently subject, and let its Directors and Proprietors then say, whether for their own interest such an improvement as is suggested in the banking system is not desirable and even necessary. " The Bank of England may, perhaps, propose, as they did upon a former occasion, the extension of the term of their ex- clusive privileges as to the metropolis and its neighbourhood beyond the year 1833, as the price of their concession. " It would be very much to be regretted that they should re- quire any such condition. •' It is clear that in point of security, they would gain by the concession proposed to them, inasmuch as their own safety is now necessarily endangered by all such convulsions in the country circulation as we have lately and formerly witnessed. #. GO # In that character they will, we trust, always continue to be the sole Bankers of the State ; and with these advantfiges, so long as they conduct their affairs wisely and prudently, they always must be the great centre of banking and circulation. ** Theirs is the only establishment at which the dividends due to the public creditor can by law be paid. " It is to be hoped, therefore, that the Bank will make no difficulty in giving up their exclusive privileges, in respect to the number of partners engaged in banking as to any district miles from the metropolis. *' Should the Bank be disposed to consent to a measure of this nature in tintn to enable the Government to announce such a concession at the opening of Parliament, it would afford great facilities to the arrangement which they may have to propose for insuring the stability of private credit on which the support of public credit and the maintenance of public prosperity is ma- terially and closely involved." The Court having taken into consideration the important paper received from the First Lord of the Treasury and the Chancellor of the Exchequer, Resolved, That, however essentially they may differ on certain views and sentiments therein laid down and expressed, it is not for the Court, at the present moment, to offer any opinions of their own, the paper appearing to be intended as declaratory of the grounds on which His Majesty's Ministers have come to the determination to require the Bank to give up its exclusive privilege as to the 61 number of partners engaged in banking, except within a certain distance of the metropolis. It cannot, however, be considered inconsistent with this for- bearance to state the apprehensions of the G>urt of Directors, that confidence is not so fully restored as Lord Liverpool and the Chancellor of the Exchequer seem to imagine. Though the Panic has subsided, credit, both public and private, remains in a very uncertain and anxious state. That the country circulation is in many parts extremely de- fective cannot be controverted, and the Bank would very reluc- tantly oppose Htself to any measures tending to ameliorate it, but would be glad to promote that object either by fresh exertions on their part, should such be founc' applicable, or by any reason- able sacrifice. Under the uncertainty in which the Court of Directors find th'^mselves with respect to the details of the plans of Govern- ment, and the effect which they may have on the interests of the Bank, this Tourt cannot feel themselves justified in recom- mending to their proprietors to give up the privilege which they now enjoy, sanctioned and confirmed as it is by the solemn Acts of the Legislature. At a Court of Directors at the Bank, on Wednesday, 25th January, 1826. The Governor laid before the Court the following paper from the First Lord of the Treasury and the Chancellor of the Exche- quer, viz. : — '* The First Lord of the Treasury and the Chancellor of the 3 G2 " Excliequor Iinvo duly considorod the nntwor of tho Bnnk, of " tho 20th inst. , .,, . '* They cannot but regret that the Court of Directors should " have declined to recommend to the Ck)urt of Proprietors, the " consideration of the paper delivered by tho First Lord of the " Treasury and the Chancellor of the Exchequer to the Governor " and Deputy Governor of tho Bank, on the 1 3th inst. " The statement contained in that paper appears to the First " Lord of the Treasury and the Chancellor of the Exchequer so " full and explicit on all the points to which it relates, that they " have nothing further to add —although they would have been, as '* they still arc, ready to answer, as far as possible, any specific " questions whicn might be put for the purpose of removing " ' the uncertainty in which the Court of Directors " ' state themselves to be with respect to the details of " ' the plan suggested in that paper.' " After all, the simple question for the Bank to consider is, " whether they are willing to relinquish their exclusive privilege " as to the number of partners engaged in banking, at a certain '* distance from the metropolis. " The First Lord of the Treasury and the Chancellor of the " Excho'^uer are satisfied that the profits of the Bank would in " no degree be affected by their consenting to such a proposal. *' Convinced of this, and that its adoption by the Bank is as im- " portant to their own security as to that of the public, it does not " appear that the Bank can be equitably entitled to claim any " compensation for the surrender of this privilege of their ** Charter. " Against any proposition for such compensation the First Lord '* of the Treasury and the Chancellor of the Exchequer formally " protest, but if the Bank should be of opinion that this conces- ' sion should be accompanied with other conditions, and that it •t G3 " ought not to be mailo without them, it id for the Bank to bring " forward such conditions. ** Fife House, i - . . , . / «' 23rrf7anMary, 1826." , t I Thursday, 26 65 «« cies of the country, but they are so far from wUhinsr to dis- " courage the establishment of such branches that they are " decidedly of opinion that the formation of them under proper " regulations would be highly advantageous both to the Bank and " to the community. " Fife House, " 29th of January, 1826." Resolved, That this Court is of opinion, after the fullest considera* tion, that it is advisable to accede to the proposition contained in the papers laid before the Court on the 25th and 26th instant, and this day, and now read, in case the san>:' shall meet with the approbation of the Court of Proprietors. THE END. MABCHANT, PUINTER, INGRAM-COURT, FENCUURCH-STnEET. *l»! .#y