V (iiiO.i'i-vhliinilLl^MlJJKii 'jaa.'vimi-jn-^ ''aujliVJdu ' "aujlivj-ju ^OajAirillJ\A>- "C ; .i\;^' ^r. ...^ ^ l. lis. I0\d. It is to be re- gretted that any notice should be taken of silver coins and copper coins. If it had been said that the pound troy of standard gold should be coined into sovereigns and fractions of a sovereign — into 46|§ sovereigns — the money would have been more clearly understood to be all gold, without any allusion to silver or copper. Writers who have treated professedly on the standard of value have fallen into the error of sup- posing that we have a silver price, and that gold could have a price in our coinage or standard. In a pamphlet " On the Standard of Yalue and the Circulating Medium of this Country," by W. Debo- naire Haggard, F.S.A., F.R.A.S., London, 1840, he reasons in the following manner (page 9.) : — " The common consent of all the world has fixed upon the precious metals as the representative of all commodities, so that any discrepancies in commerce may be rectified by them at such rates as the demand and supply may govern. In England alo7ie is this advantage lost sight of by fixing a price for the purchase and sale of gold, both without limitation. Let us now see how tliese fixed prices appear to work, in a more familiar shape. Suppose A, to agree to purchase wheat at 1/. 19^. \\d. per quarter, in any quantity and at all times, without reference to demand and supply ; and compelled to sell the same in any quantity and at all times at 21. per quarter ; must not A, of necessity be a victim in both 1? 4 8 COINS AKD CURRENCY. cases ? While wheat could be grown or imported at a less price than 1/. 19s. lid. per quarter, A. would be overwhelmed with an article for whicli he had no demand. Again, as soon as the price of wheat exceeded that of 21. per quarter, he would, with equal certainty, be called upon to supply the article, and perhaps a demand made for a quantity beyond his ability to meet, and for the sake only of profit to individuals. These fixed prices make us the storekeepers of gold for all the world." The correct statement would be — " Suppose A. to agree to purchase (receive) wheat at the rate of 479 bushels for 60 quarters, in any quantity and at all times, without reference to demand and supply, and compelled to sell (deliver) the same in any quantity and at all times at the rate of 480 bushels for 60 quarters ; must not A. be a victim in both cases ? " It is a question simply of quantity : the one bushel retained may be considered as a charge for storage, as the Id. on the 1/. 195. lid. may be considered as a charge for coinage. There is no question of price. The 60 quarters of wheat would be always equal to 480 bushels of wheat of the same quality ; as the two sovereigns in gold would be always equal to the same quantity of gold bullion of equal fineness. They who think it unreasonable and inexpedient that gold should have a fixed price, that it should be invariable in its nominal value ; who think that it should be purchased by those who want it at a price varying, like that of other commodities, according to the supply and demand, are misled by the supposition that gold can have any price., where gold is the stand- ard or measure of value ; or that silver can have any price, where silver is the standard or measure of value. This Avould be measuring value by itself, which is not possible. Money can have no price. Very erroneous opinions have prevailed respecting money. The opinion of M. de Montesquieu is worth recording: " De I'Esprit des Loix*," liv. 22. c. vii. — " L'argent est le prix des marchandises ou denrees," &c. &c. " Money is the price of merchandise or of commodities, but how shall this price be fixed ? that is, by what quantity of money * De I'Esprit dos Loix. par M. de Montesquieu. 4 tomes, Londres, 1769. M. DE MONTESQUIEU ON MONEY AND PRICE. 9 shall each thing be represented ? If the entire mass of gold and silver which is in the world be compared with the mass of mer- chandise which is in it, it is certain tliat each article or commodity in particular may be compared to a certain portion of the entire mass of gold and silver : as the total of the one is to the total of the other, a portion of the one will be to a portion of the other. Let us suppose that there is only one merchandise or commodity in the world, or that there is only one that is bought, and that it is divided like the money ; this portion of this merchandise will answer to a portion of the mass of money, — the half of the total of the one to a half of the total of the other ; the tenth, the one- hundredth, the thousandth of the one, to the tenth, the hundredth, the thou- sandth of the other. But as that which constitutes property among men is not all at the same time (datis le commerce) in traffic, and that the metals or monies which are the signs of it are also not in traffic either at the same time, the price will be fixed in a ratio composed of the total of things with the total of signs, and of that of the total of those things which are in commerce with the total of the signs which are also in it ; and as the things which are not in commerce or traffic to-day may be there to-morrow ; and as the signs which are not in it to-day may, in like manner, be in it to-morrow, the fixing of the price of things depends always, fundamentally, upon the proportion that the total of things bears to the total of signs." This notion of an abstract value in coins or money considered as signs, independently of their value as merchandise, is the source of nnich erroneous reason- ing. Those Avho wish to promote commerce frequently talk of increasing the quantity of money or coins, as a means of doing it. The increase of money or coins is rather a consequence, than a cause, of the increase of commerce : the circulation offers a market in com- mon with the demand from the jewellers for gold and silver ; and this market, like the other, will be sup- plied according to the demand. The precious metals, whether in the form of coin or of plate, are mer- chandise, and rise and fall in price in the market of the world ; that is, exchange Avith a greater or less portion of other commodities, according to the sup- ply and demand, and the labour and difficulty of pro- curing them. Gold and silver, or money, are considered by M. Montesquieu as having only a representative character, denoting, by the (juantity of these metals in existence 10 COINS AND CURRENCY. at any one time, the value or price of the commo- dities existing at the same time. They are con- sidered simply as signs : as the proportion of the total of signs compared to the total of things becomes greater, prices fall ; and as this proportion becomes less, prices advance. A value is attributed to the gold and silver money as signs independently of their value as merchandise : no allusion is made to what determines the prices, or exchangeable value of gold and silver, with commodities except the considera- tion of their abundance or rarity relatively to the mass of property. Gold and silver in coin are themselves merchandise of a certain and determinate character: they find in coin an appropriate use, — appropriate from their fitness to answer this pur- pose. The value of gold and silver fell to one third of their former value after the discovery of the American mines, and the prices of commodities ad- vanced to perhaps treble or more of their former price ; not altogether because there was three times the quantity of gold and silver raised from the mines, but because the precious metals could be procured with less lahou7', and in greater abundance or supply relatively to the demand : agreeably to the doctrine of Adam Smith, vol. i. b. 1. c. ii. p. 258., " Labour, it must always be remembered, and not any particular commodity or set of commodities, is the real measure of the value both of silver, and of all other commodi- ties." The decreased value of the precious metals may liave borne no definable proportion to the increased mass of each in the world, or to the mass of merchan- dise ; a more general use may have been found for the gold and silver in the more general use of plate, and a larger quantity may have been required by the in- creased activity given to commerce and manufactures by the opening of new markets. As commodities become cheaper, their use and consumption extend in a much greater ratio than the difference of price : the lower price introduces a new description of consumers M. DE MONTESQUIEU ON MONEY AND PRICE. 11 and purchasers, which becomes more numerous as the commodity becomes less costly. It is so with gold and silver, or money. As money becomes cheaper, the use of it extends through a more numerous and less wealthy class. Those wlio consumed the mer- chandise and used the money, consume and use more ; but a much more numerous class use and consume now, who before did not use or consume at all. M. de Montesquieu relates something very extra- ordinary on the subject of money, Liv. 22. chap, viii. : — " ' Les noirs de la cote d'Afrique ont un signe des valeurs sans monnoie,' &c. ' The negroes on the coast of Africa have a sign of value without money ; it is a sign purely ideal, founded upon the degree of estimation which they attach in their mind to each article of merchandise, in proportion to their want of it. A certain article of merchandise is worth three macutes ; another six ma- cutes, another ten macutes ; it is as though they said simply, three, six, ten.' The price is fixed by the comparison they make of all the articles of merchandise among themselves ; then there is no particular money, but each portion of merchandise is money for the other. * " Let us transfer for a moment to ourselves this mode of valuing tilings, and let us join it to our mode. All the merchandise and goods of the world, or at least all the merchandise and goods of one state in particular, considered as separated from all the others, will be worth a certain number of macutes ; and dividing the money of this state in so many parts as there are macutes, one separate part of this money will be the sign of one macute. " If we suppose the money of a state is double, for one macute thei'e must be double the quantity of money ; but if in doubling the money you double also the macutes, the proportion will remain such as it was before the doubling of one or the other." On what part of the coast of Africa this mode of calculating the cost of merchandise prevailed, M. de Montesquieu has not informed us, nor by what mental process the negroes arrived at a comparison of the worth of each article compared with the worth of every other article; at a comparison of the want of one article compared with the want of every other article. We are reminded of the definition of the standard of value quoted and ridiculed by Sir R. Peel * : — " The * Sir Robert Peel's Speeches on the Renewal of the Bank Charter and on the Laws of Currency and Banking, p. 10. 12 COINS AND CURRENCY. standard is neither gold nor silver, but it is some- thing set up in the imagination, to be regulated by l)ublic opinion." We may be assured that the macute did not exist in the imagination only, but that it had reference to a substantial and tangible article in general estimation ; and on reference to the " Diet, de Bazinghen," I find a more rational explanation, of which I annex a copy below, by which it appears that the slave was made the basis of calculation ; that the slave, for instance, was valued at 350 macutes or 3500, and every other article had its valuation in macutes. Two knives were valued at one macute ; a copper basin, three macutes ; and other articles "were then valued on this basis, till the valuation reached 350 macutes. This, therefore, was a species of barter.* * In the " Traite des Monnoies," par M. Abot de Bazinghen, is the following notice of the macoute (vol. ii. p. 3.) : — " Macoute : espece de monnoie de compte, ou maniere de compter en usage parmi les negres dans quelques endroits de la cote de I'Afrique, particulierement sur la cote d'AngoIe. " La macoute vaut dix ; il en ftiut dix pour faire le cent, qui est aussi parmi cette nation une autre sorte de monnoie de compte. "Pour faire revaluation de leurs achats et de leurs ventes, ou plutot de leurs echanges, les negres fixent le nombre des macoutes qu'ils veulent avoir ; par exemple, pour un negre, piece d'Inde d'un cote et de I'autre, pour combien de macoutes lis consentent recevoir chaque espece de marchandises qu'ils desirent avoir pour ce negre. " Suppose done qu'ils ayent fixe leur esclave a trois mille cinq cens, ce qui revient a trois cens cinq' (sic) macoutes, pour faire ce nombre de macoutes en marchandises, chaque espece de mar- chandise a son pi-ix aussi en macoutes ; par exem2:)le, deux couteaux se comptent une macoute ; un bassin de cuivre de deux livres pesant et de douze pouces de diaraetre trois macoutes, &c., en suite de quoi ils prennent sur revaluation autant de marchandises qu'il en faut pour trois cens cinq^ (sic) macoutes, ou trois mille cinq cens, a quoi ils ont mis leur esclave." Translation : — "Macoute : a sort of money of account, or mode of reckoning, in use among the negroes in some places on the coast of Africa, par- ticularly on the coast of Angola. ' Should be " trois cens cinquante." 2 Should be " trois cens cinquante." ADAM SMITH ON COINAGE. 13 Those who advocate an abstract notion of money, as a sign only of value, forget that it must also be an equivalent. It is this which makes a distinction between money as a measure of value and all other measures, that it must itself be an equivalent for the thing measured ; and however philosophers may differ among themselves about the theory of money ; its value in practice will always be determined, like that of all other commodities, by the supply and demand, and the cost of production. Adam Smith, vol. i. b. 1. c. v. p. 5-i. : — " In reality, during the continuance of any one regulated pro- portion between the respective values of the different metals in coin, the value of the most precious metal regulates the value of the whole coin. Twelve copper pence contain half-a-pound avoir- dupois of copper, of not the best quality, which, before it is coined, is seldom worth sevenpence in silver ; but as by the regulation twelve such pence are ordered to exchange for a shilling, they are in the market considered as worth a shilling, and a shilling can at any time be had for them. — The silver coin still continues in the same worn and degraded state as before the reformation of the gold coin. In the marlvCt, however, one-and-twenty shillings of this degraded silver coin are still considered as worth a guinea of this excellent gold coin." This, I think, is not correct : — it is not " the value of the most precious metal which regulates the value of the whole coin;" but it is that coin which is a legal tender in the payment of debt to any amount, which " The macoute is worth ten : there must be ten of them to make the hundred, which is also among this nation another sort of money of account. "In order to make the valuation of their purchases and of their sales, or rather of their exchanges, the negroes fix the number of macoutes which they will have ; for example, for a negro (piece dTnde d'un cote et de I'autre), a piece of India muslin on one side and the other, for how many macoutes they consent to receive each sort of merchandise which they desire to have for this negro. " Suppose then that they had fixed their slave at 3500, wliich amounts to 350 macoutes : in oi'der to make this number of ma- coutes in commodities, every sort of merchandise has also its price in macoutes ; for example, two knives reckon as one ma- coute ; a copper basin weighing two pounds, and twelve inclies in diameter, three macoutes, &c., in which manner they take, according to the valuation, so much merchandise as is required for 350 macoutes, or 3500, at which they have put their slave." 14 COINS AND CURRENCY. determines tlie standard of value relatively to com- modities ; and it is quite vain to endeavour to regu- late the value of the whole coin upon the principle of one coin being of a more precious metal than the other. Adam Smitli, vol. i. b. 1. c. v. p. 58.: — " Were the silver coin brought back as near to its standard weight as the gold, a guinea, it is probable, would, according to the present proportion, exchange for more silver in coin than it would purchase in bullion. The silver containing its full standard weight, there would in this case be a profit in melting it down, in order, first, to sell tlie bullion for gold coin, and afterwards to ex- change this gold coin for silver coin to be melted down in the same manner. Some alteration in the present proportion seems to be the only method of preventing this inconveniency. '* The inconveniency pei'haps would be less, if silver was rated in the coin as much above its proper proportion to gold as it is at pi'esent rated below it ; provided it was at the same time enacted that silver should not be a legal tender for more than the change of a guinea ; in the same manner as copper is not a legal tender for more than the change of a shilling. No creditor could, in this case, be cheated in consequence of the high valuation of silver in coin, as no creditor can at present be cheated in consequence of the high valuation of copper. The bankers only would suffer by this regu- lation. When a run comes upon them, they sometimes endeavour to gain time by paying in sixpences, and they would be precluded by this regulation from this discreditable method of evading im- mediate payment. They would be obliged, in consequence, to keep at all times in their coffers a greater quantity of cash than at present ; and though this might, no doubt, be a considerable incon- veniency to them, it would, at the same time, be a considerable security to their creditors." It is to be observed that Adam Smith expresses himself with some diffidence upon altering the pro- portion between the gold and silver coin, and relies upon the provision that silver coin should not be a legal tender for more than the change of a guinea, " in the same manner as copper is not a legal tender for more than the change of a shilling." Adam Smith, vol. ii. b. 4. c. iii. p. 274. : — " In England it (the expense of coinage) is defrayed by the Government, and if you cari-y a pound weight of standard silver to tlie Mint, you get back sixty-two shillings, containing a pound weight of the like standard silver." At the time he wrote every one had a right to LEGAL TENDER LIMITATION OF SILVER. 15 bring gold and silver to the ]\Iint to be converted into coin, not at the charge of the person who brought it, but of the State. This was not the case with the copper coin, which the government reserved to itself the right of coining ; and no private person derived any benefit from its being exchanged for a shilling by law, so much beyond its value. It would be ne- cessary'' to confine the silver coins to the same restric- tion of coinage, to make the cases analogous. It was not the provision alone that copper coin should not be a legal tender for more than a shilling that secured " the creditors from being cheated," but the circum- stance that copper coin should be a legal tender only for a shilling, and no private person having the privilege of coining copper. As no one could get the copper coin without paying for it at the rate of a shilling for twelve pence, and as a shilling could always be had for twelve pence, the twelve pence were worth a shilling. The market price of silver having, before the reformation of the gold coin, and after the re- formation, been constantly, to the time when Adam Smith wrote, above the Mint price, no individuals brought silver to the Mint to be coined ; and pri- vate interest was as effectual as any law would have been, in preventing any silver being coined, as it would have been attended with loss. The legal tender clause is inoperative when the price of silver is above the Mint price •, and when it is helom the Mint price it would not protect the standard, as individuals would then coin bullion at a profit, and the money traffickers would inundate the country with silver coin, and the gold coin would be melted or ex- ported. The limitation to twenty-one shillings of silver coin as a legal tender would not then be a protection. As the bullion price of silver was above the Mint price, which effectually prevented its being coined, it was then in the same predicament in effect as the copper coin : the one was prohibited by law from being coined by individuals, and the other by private interest. 16 COINS AND CURRENCY. The limitation of the legal tender clause to forty shillings is now a matter of convenience. It may be inconvenient to the public to receive a larger sum in silver coin, but the limitation may be fixed at 40 shillings or 100 shillings, the silver being rated in the coin 7 or 10 per cent, above its proper proportion to gold, with perfect safety to the standard, the Govern- ment always reserving to itself the right of coining the silver. It would be liable to the objection which Adam Smith mentions in the passage before quoted, that, "when a run comes upon them (the bankers), they sometimes endeavour to gain time by paying in sixpences ; and they would be precluded by this reo'ulation from this discreditable method of evadinfifty-nine pence per ounce ; it was sixty and a half; it changes every day, according to the importa- tion. When South America sends silver, it falls in the English market. Gold is now higher than silver. As gold is wanted here, its price rises abroad." F 2 68 COINS AND CURRENCY. The following is a statement in the " Times " news- paper: — " The premium on gold at Paris is 12^ per mille, which, at the English mint price of 3/. 17*. lO^d. per ounce for standard gold, gives an exchange of 25*46, and the exchange at Paris on London at short being 25*62|^, it follows that gold is 0*65. per cent, dearer in London than in Paris." * It is long since I made the calculation stated below : I had difficulty to discover the assumed par which I deduced to be 25*15, which was confirmed by Mr. Rothschild, and which appears from the statement in the " Times," December 11th, 1850, to be the par there assumed. I have made the calculation in a form which may be more acceptable, perhaps, to the generality of per- sons than a more recondite method : I think the " additional labour of calculating the premium" may not be so trifling, except to professed cambists, as Mr. Hubbard supposes. See p. 73. I submit that it appears incorrect to quote any English mint price of gold, the 3/. 175. \0\d. are simply portions or fractions of the ounce of gold ; being as much gold as the sovereign, and the value of gold or of any other commodity cannot be mea- * Supposed par Premium . . fr. cnt. 25*15 121 30,180 1,257 . 31,437 = 311 fr. cnt 25*62 1 Actual exchange. 25*46 Assumed exchange. 1,000 fr. cnt. Assumed par 25*15 Premium 31 16^ centimes. 25-46 fr. cnt. cnt. fr. If 25-46: 16^:: 100=0*65 ON THE PAR OF EXCHANGE. 69 sured by itself — the 31. 17 s. lO^d. are only weight or quantity : they represent the ounce of gold, and have no relation to value : this will be evident if we take the so-called mint price at 41. an ounce, or four sovereigns per ounce : each sovereign would weigh one quarter of an ounce, and the four sovereigns or pounds would be merely four quarter ounces of gold : the 3^. 175. lO^d. are 3-^^ sovereigns. Gold can have no price, and cannot be dear or cheap in London ; and silver can have no price, cannot be dear or cheap in Paris : in the nature of things there cannot be a par, which is determined by weight of the same metal. It must be admitted, I think, that where so much intricacy exists in arriving at a par, and which is no par, it is not to be expected that country bankers should regulate their operations in banking, by care- fully studying the foreign exchanges. The " Times " has lately varied its form thus : — " The quotation of gold at Paris is about 6 per mille, and the short exchange on London is 25 '17^ per £ sterling. On comparing these rates with the English mint price of 31. 17s. lO^d. per ounce for standai'd gold, it appears that gold is nearly -^q per cent, dearer in Paris than in London." It appears from the evidence, of Horsley Palmer, Esq.*, that the Directors of the Bank of England do not embarrass themselves with nice calculations of exchange — P. 8. (129.) " A par of exchange, in the language of the Bank, means, no demand for bullion to be exported." * A Digest of the Evidence on the Bank Charter taken before the Committee of 1832. London. 1833. F 3 70 COINS AND CURRENCY. CHAP. VII. THE BANK OF AMSTERDAM. ON AN EXCHANGE BANK AND INTERNATIONAL TREASURY FOR BULLION. The following account of the Bank of Amsterdam, by Sir William Temple, Bart., Ambassador at the Hague and at Aix-la-Chapelle in 1668, may prove interesting, and show the high character of those who had the custody of the Treasure. P. 79.: — " By this Senate are chosen the chief magistrates of the town, which are the Burgomasters and Eschevins : the Burgomasters of Amsterdam are four, whereof three are chosen every year ; so as one of them stays in office two years ; but the three last chosen are called the Reigning Burgomasters for that year, and preside by turns after the first three months ; for so long after a new election, the Burgomaster of the year before presides, in which time it is supposed the new ones will grow instructed in the forms and duties of their office, and acquainted with the state of the city's aifairs. " The Burgomasters are chosen by most voices of all those persons in the Senate, who have been either Burgomasters or Eschevins ; and their authority resembles that of the Lord Mayor and Aldermen in our cities. They represent the dignity of the government, and do the honour of the city upon all occasions. They dispose of all under-offices that fall in their time ; and issue out all monies out of the common stock or treasure, judging alone what is necessary for the safety, dignity, or convenience of the city. They keep the key of the Bank of Amsterdam (the com- mon treasure of so many nations), which is never opened without the presence of one of them ; and they inspect and pursue all the great public works of the city ; as the ramparts and stadt- house, now almost finished with so great magnificence, and so vast expense. " This office is a charge of the greatest trust, authority, and dignity ; and so much the greater by not being of profit or ad- ON THE BANK OF AMSTERDAM. 71 vantage, but only as a way to other constant employments in the city that are so. The salary of a Burgomaster of Amsterdam is but five hundred gilders a year (about fifty pounds sterling, p. 108.), though there are offices worth five thousand in their disposal." P. 83. :— " In this city of Amsterdam is the famous Bank which is the greatest treasure, either real or imaginary, that is known anywhere in the world. The place of it is a great vault under the stadthouse, made strong with all the circumstances of doors and locks, and other appearing cautions of safety that can be ; and 'tis certain that whoever is carried to see the Bank shall never fail to find the appearance of a mighty real treasure, in bars of gold and silver, plate, and infinite bags of metals, which are supposed to be all gold and silver, and may be so for aught I know. But the Burgomasters only having the inspection of the Bank, and no man ever taking any particular account of what issues in and out^ from age to age, 'tis impossible to make any calculation,, or guess what proportion the real treasure may hold to the credit of it. Therefore the security of the Bank lies, not only in the eff"ects that are in it, but in the credit of the whole Town or State of Amsterdam, whose stock and revenue is equal to that of some kingdoms, and who are bound to make good all monies that are brouglit into their Bank : the tickets or bills hereof make all the usual great payments that are made between man and man in the Town, and not only in most other places of the United Provinces, but in many other trading parts of the world. So as this Bank is properly a general cash, where every man lodges his money, because he esteems it safer, and easier paid in and out than if it was in his coffers at home : and the Bank is so far from paying any interest for what is brought in, that money in the Bank is worth something more in common payment than what runs current in coin from hand to hand ; no other money passing in the Bank but in the species of coin the best known, the most ascertained, and the most generally current in all parts of the Higher as well as the Lower Germany." * In a luminous account of the Bank of Amsterdam by Adam Smith (b. iv. c. 3. v. ii. p. 277.), written by him about a century afterwards in 1775, we are in- formed : — " Before 1609 the great quantity of dipt and worn foreign coin * See " Observations upon the United Provinces of the Nether- lands," by Sir William Temple, of Shene, in the county of Surrey, Baronet, Ambassador at the Hague and at Aix-la-Chapelle in the year 1668. London, 1673. r 4 72 COINS AND CURRENCY. which the extensive trade of Amsterdam bi'ought fi'om all parts of Europe, reduced the value of its currency about nine per cent, below that of good money fresh from the Mint. Such money no sooner appeared, than it was melted down or carried away, as it always is in such circumstances. The merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange ; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain. " In order to remedy these inconveniences, a Bank was es- tablished in 1609, under the guarantee of the city. This Bank received both foreign coin, and the light and worn coin of the country, at its real intrinsic value in good standard money of the country, deducting only so much as was necessary for defraying tlie expense of coinage, and the other necessary expense of manage- ment. For the value which remained after this small deduction was made, it gave a credit in its books. This credit was called Bank money, which, as it represented money exactly according to tlie standard of the Mint, was always of the same real value, and intrinsically worth more than current money. " It was at the same time enacted, that all the bills drawn upon, or negotiated at Amsterdam, of the value of six hundred guilders and upwards, should be paid in bank money, which at once took away all uncertainty in the value of these bills; every merchant, in consequence of tlais regulation, was obliged to keep an account with the Bank, in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for bank money." In England we are not subject to any inconvenience from the circulation of foreign coins, and there is no uncertainty in the value of our coins relatively to each other or relatively to the standard of the Mint ; our currency, considered as a national or domestic currency, is liable to neither variation nor uncertainty, but we are not free from the disadvantao-e arising; from an uncertainty in the value of our currency, compared with the currency of foreign nations ; the precious metals of gold and silver have a variable value relatively to each other, which inconvenience would not be, if England had the same standard of value as other countries, there would then be a par of exchange ; the coins of any country may become worn or be clipped, and there would be a correspond- ing variation in the nominal exchange, but this vari- ation can be detected by the diminished weight, and allowed in the calculation. If we had a silver ON THE PAR OF EXCHANGE. 73 standard, while other countries have a silver standard, or if other countries had a gold standard, while Ave have a gold standard ; or if an exchange Bank were established upon the plan which I venture to submit, there would be no uncertainty in the exchange from the variations in the relative value of gold and silver. In a pamphlet by John Gellibrand Hubbard, Esq. He observes (p. 91.): — " Considered with reference to those qualities which constitute the superiority of gold and silver for the purposes of money over the baser metals, gold is in all of them superior to silver ; and I do not see that the circumstance of other countries having adopted the less perfect, should determine this country to reject the moi'e perfect metal as the standard of its currency. The disadvantage of having no permanent par of exchange is quite imaginary. The real exchange between two countries varies constantly, and in a degree far exceeding the mere relative variations of gold and silver ; and the only practical inconvenience of a single standard here, is in the trifling additional labour of calculating (for ex- change operations) the premium which gold may bear abroad."* It appears to me that it is the essence of a par that it should be 'permanent ; without a par there is no test, and in a commercial sense no exchange : the *' relative variations of gold and silver " in value have no necessary reference to the commercial exchanges : the exchanges vary according to the expense of trans- porting the precious metals from one country to the other; the relative value of gold and silver varies ac- cording to the productiveness of the respective mines, the cost of production relatively to each other, and to the demand and supply, without reference to the balance of payments which is the legitimate ground of variations in the commercial exchanges. The evidence of P. H. Muntz, Esq., before the Com- mittee of the House of Commons on commercial dis- tress in 1848, shows that he did not treat, as a matter of indifference, the circumstance of our having a gold standard while other countries have a silver standard. * "The Currency and the Country." London, 1843. 74 COINS AND CURRENCY. P. 105.:— " 1322. Do you know, from any authentic source, that it was going out? — I know that gold was sent out in September, and I believe in October, and I believe there was a considerable drain in both metals. " 1323. To foreign parts? — Yes. " 1324. Perhaps you can furnish the Committee with information upon that which is certainly at variance with the returns that they have ; are you aware that the exchanges at that time were in fa- vour of this country? — I do not find that they were at the end of September, or the beginning of October; what you call the ex- changes being in favour of this country depends upon the premium on gold abroad ; I have known frequently the exchange to be ap- parently in our favour instead of against us, but the premium on gold has been 3 or 4 per cent, on the other side of the water." I irive this evidence to show how the dilFerence of standard introduces confusion in the calculation of the exchange ; and when so very great importance is attached to the exchanges, when upon the modern principle of Bank management, they are to be the rule in determining the issue of Bank notes, it would appear to be most desirable that all uncertainty should be removed, as to the exchanges being in our favour or against us. Adam Smith (b. iv. c. 3. v. ii. p. 279.) : — " Those deposits of coin, or those deposits which the Bank was bound to restore in coin, constituted the original capital of the Bank, or the whole value of what was represented by what is called Bank money. At present they are supposed to constitute but a very small part of it. In order to facilitate the trade in bullion, the Bank has been for these many years in the practice of giving credit in its books, upon deposits of gold and silver bul- lion. This credit is generally about 5 per cent, below the Mint price of such bullion. The Bank grants, at the same time, what is called a recipice or receipt, entitling the person who makes the deposit, or the bearer, to take out the bullion again at any time within six months, upon transferring to the Bank a quantity of Bank money equal to that for which credit had been given in its books when the deposit was made, and upon paying one-fourth per cent, for the keeping, if the deposit was in silvei', and one-half per cent, if it was in gold ; but at the same time declaring, that in default of such payment, and upon the expii-ation of this term, the deposit should belong to the Bank at the price at which it had been received, or for which credit had been given in the transfer ON THE BANK OF AMSTERDAM. 75 books. What is thus paid for the keeping of the deposit may be considered as a sort of warehouse rent, and why this warehouse rent should be so much dearer for gold than for silver, several dif- ferent reasons have been assigned. The fineness of gold, it has been said, is more difficult to be ascertained than that of silver. Frauds are more easily practised, and occasion a greater loss in the most precious metal. Silver, besides, being the standard metal, the State, it has been said, wishes to encourage more the making of deposits of silver than those of gold." One reason for charging a higher commission on gold than on silver might have been the varying relative value of gold to silver, which might be con- siderable even in six months. There could be no loss on this account on silver deposits, as it was restoring the same commodity that was received; but the gold deposits being delivered back in silver, or calculated in silver money, there would be more uncertainty . respecting its value at the time of de- livery relatively to the gold received. The relative proportional value of gold to silver was not settled in 1609 ; the discovery of the American mines made the proportional value more uncertain, and gold was becoming more valuable relatively to silver. P. 281.:— " A person can generally sell his receipt for the difference be- tween the mint price of bullion and the market price. A receipt for bullion is almost always worth something, and it very seldom happens, therefore, that anybody suffers his receipt to expire, or allows his bullion to fall to the Bank at the price at which it had been received, either by not taking it out at before the end of the six months, or by neglecting to pay one-fourth or one-half per cent, in order to obtain a new receipt for another six months. This, however, though it happens seldom, is said to hap- pen sometimes, and more frequently with regard to gold than with regard to silver, on account of the higher warehouse rent which is paid for the keeping of the more precious metal." P. 282.: — " The owners of bank credits, and the holders of receipts, con- stitute two different sorts of creditors against the Bank. The holder of a receipt cannot draw out the bullion for which it is granted, without reassigning to the Bank a sum of bank money equal to the price at which the bullion had been received. If he 76 COINS AND CURRENCY. has no bank money of bis own, he must purchase it of those who have it. The owner of bank money cannot draw out bullion without producing to the Bank receipts for the quantity which he wants. If he has none of his own, he must buy them of those who have them. The holder of a receipt, when he purchases bank money, purchases the power of taking out a quantity of bullion, of which the Mint price is five per cent, above the Bank price. The agio of five per cent., therefore, which he commonly pays for it, is paid, not for an imaginary, but for a real value. The owner of bank money, when he purchases a receipt, purchases the power of taking out a quantity of bullion, of which the market price is com- monly from two to three per cent, above the Mint price. The price which he pays for it, therefore, is paid likewise for a real value. The price of the receipt, and the price of the bank money, compound or make up between them the full value or price of the bulHon." B. iv. c. 3. V. ii. p. 284. : — " The sum of Bank money for which the receipts are expired must be very considerable. It must comprehend the whole ori- ginal capital of the Bank, which, it is generally supposed, has been allowed to remain there from the time it was first deposited, nobody caring either to renew his receipt, or to take out his deposit, as, for the reasons already assigned, neither the one nor the other could be done without loss. But whatever may be the amount of this sum, the proportion which it bears to the whole mass of Bank money is supposed to be very small. The Bank of Amsterdam has, for these many years past, been the great ware- house of Europe for bullion, for which the receipts are very seldom alloAved to expire, or, as they express it, to fall to tlie Bank. The far greater part of the Bank money, or of the credits upon the books of the Bank, is supposed to have been created, for these many years past, by such deposits which the dealers in bullion are con- stantly both making and withdrawing. No demand can be made upon the Bank, but by means of a recipice or receipt. The smaller mass of Bank money for which the receipts are expired, is mixed and confounded with the much greater mass for which they are still in force; so that, though there may be a considerable sum of Bank money for which there are no receipts, there is no specific sum, or portion of it, which may not at any time be demanded by one. The Bank cannot be debtor to two persons for the same thing ; and the owner of Bank money who has no receipt, cannot demand payment of the Bank till he buys one. In ordinary and quiet times he can find no difiiculty in getting one to buy at the market price, which generally corresponds with the price at which he can sell the coin or bullion it entitles him to take out of the Bank. " It might be otherwise during a public calamity ; an invasion, for example, such as that of the French in 1672, The owners of Bank money being then all eager to draw it out of the Bank, in ON THE BANK OF AMSTERDAM. 77 order to have it in their own keeping, the demand for receipts might raise their price to an exorbitant height. The holders of them might form extravagant expectations, and, instead of two or three per cent., demand half the Bank money for which credit had been given upon the deposits that the receipts had respectively been granted for. The enemy, informed of the constitution of the Bank, might even buy them up, in order to prevent the carrying away of the treasure. In such emergencies, the Bank, it is sup- posed, would break through its ordinary rule of making payment only to the holders of receipts. The holders of receipts who had no Bank money, must have received within two or three per cent, of the value of the deposit for which their i-espective receipts had been granted. The Bank, therefore, it is said, would in this case make no scruple of paying, either with money or bullion, the full value of what the owners of Bank money who could get no re- ceipts were credited for in its books, paying, at the same time, two or three per cent, to such holders of receipts as had no Bank money, that being the whole value which in this state of things could justly be supposed due to them." Adam Smith (b. iv. c. 3. v. ii. p. 287.) : — " The Bank of Amsterdam professes to lend out no part of what is deposited with it, but for every guilder for which it gives credit in its books, to keep in its repositories the value of a guilder either in money or bullion. That it keeps in its repositories all the money or bullion for which there are receipts in force, for which it is at all times liable to be called upon, and which, in reality, is continually going from it and returning to it again, can- not well be doubted. But whether it does so likewise with regard to that part of its capital for which the receipts are long ago expired, for which in ordinary and quiet times it cannot be called upon, and which in reality is very likely to remain with it for ever, or as long as the States of the United Provinces subsist, may perhaps appear more uncertain. At Amsterdam, however, no point of faith is better established, than that for every guilder circulated as Bank money, there is a corresponding guilder in gold or silver to be found in the treasure of the Bank. The city is guarantee that it should be so. The Bank is under the direction of the four reigning Burgomasters, who are changed every year. Each new set of Burgomasters visits the treasure, compares it with the books, receives it upon oath, and delivers it over, with the same awful solemnity, to the set which succeeds ; and in that sober and religious country oaths are not yet disregarded. A rotation of this kind seems alone a sufficient security against any practices which cannot be avowed. Amidst all the revolutions which faction has ever occasioned in the Government of Amster- dam, the prevailing party has at no time accused their predecessors of infidelity in the administration of the Bank. No accusation could have aifected more deeply the reputation and fortune of the disgraced party ; and if such an accusation could have been 78 COINS AND CURRENCY. supported, we may be assured that it would have been brought. In 1672, when the French King was at Utrecht, the Bank of Amsterdam paid so readily, as left no doubt of the fidelity with which it had observed its engagements. Some of the pieces which were then brought from its repositories, appeared to have been scorched with the fire which happened in the townhouse soon after the Bank was established. Those pieces, therefore, must have lain there from that time." B. iv. c. 3. V. ii. p. 288.:— " What may be the amount of the treasure in the Bank, is a question Avhich has long employed the speculations of the curious. Nothing but conjecture can be oifered concerning it. It is gene- rally reckoned that there are about two thousand people who keep accounts with the Bank ; and allowing them to have, one with another, the value of fifteen hundred pounds sterling lying upon their respective accounts (a very large allowance), the whole quantity of bank money, and consequently of treasure in the Bank, will amount to about three millions sterling, or, at eleven guilders the pound sterling, thirty-three millions of guilders ; a great sum, and sufficient to carry on a very extensive circulation, but vastly below the extravagant ideas which some people have formed of this treasure." " The city of Amsterdam derives a considerable revenue from the Bank. Besides what may be called the warehouse-rent above mentioned, each person, upon first opening an account with the Bank, pays a fee of ten guilders ; and for every new account, three guilders three stivei's ; for every transfer two stivers, and if the transfer is for less than 300 guilders, six stivers, in order to dis- courage the multiplicity of small transactions. The person who neglects to balance his account twice in the year forfeits twenty- five guilders. The person who orders a transfer for more than is upon his account, is obliged to pay three per cent, for the sum overdrawn, and his order is set aside into the bargain. The Bank is supposed, too, to make a considerable profit by the sale of the foreign coin or bullion which sometimes falls to it by the expiring of receipts, and which is always kept till it can be sold with ad- vantage. It makes a profit likewise by selling Bank money at five per cent, agio, and buying it at four. These different emolu- ments amount to a good deal more than what is necessary for pay- ing the salaries of officers, and defraying the expense of manage- ment. What is paid for the keeping of bullion upon receipts, is alone supposed to amount to a neat annual revenue of between one hundred and fifty thousand and two hundred thousand guilders. Public utility, however, and not revenue, was the original object of this institution. Its object was to relieve the merchants from the inconvenience of a disadvantageous exchange. The revenue which has arisen from it was unforeseen, and may be considered as accidental." ON AN EXCHANGE BANK. 79 Adam Smith (b. iv. c. 3. v. ii. p. 278.) : — " It was at the same time enacted, that all the bills drawn upon or negotiated at Amsterdam, of the value of six hundred guilders and upwards, should be paid in Bank money, which at once took away all uncertainty in the value of those bills. Every merchant, in consequence of this regulation, was obliged to keep an account with the Bank, in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for Bank money." Could not a similar bank be established in London? If an exchange bank were established to receive bul- lion and coin upon the same principle as that of Amsterdam, and for the sums deposited were to give bank credits in that money or precious metal which should constitute the general money or standard of value in the great commercial countries, all uncer- tainty respecting the exchanges would be removed ; there would be a par of exchange which would be permanent, and which might be constantly referred to. It may be a matter for consideration, whether any compulsory clause would be necessary, in order to enforce the drawing of foreign bills payable in bank money. The advantage derived from the bank may be determined by experience, and its utility proved ; if it was adopted only in a limited degree, the benefit would be secured of ascertaining whether the ex- change was favourable or unfavourable, and in what degree ; and if the same standard prevailed in com- mercial countries, it would doubtless very much facilitate the transaction of business. The bank money would have no circulation at home because it would not be a legal tender. In the Bank of Amsterdam no money ^vas paid without producing the credit and the receipt for the same amount : the credit was the sum deposited, less the deduction on account of agio, or on account of the difference between the value of the bank money and the current money. The credit and the receipt seldom remained with the same person. There was a convenience in being able to take out this money, 80 COINS AND CURRENCY. without parting with the receipt, which would vary in value with the agio ; and it was equally convenient to be able to sell the receipt without taking out the money. To prevent the " stock -jobbing tricks," sometimes occasioned by the opposite interests of those who desired to depress and those who desired to raise the agio, " The Bank has of late years (p. 286.) come to the resolution to sell, at all times, bank money for currency, at five per cent, agio, and to buy it in again at four per cent. agio. In consequence of this resolution, the agio can never either rise above five, or sink below four per cent., and the proportion between the market price of bank and that of current money, is kept at all times very near to the proportion between their intrinsic values. Before this resolution was taken, the market price of bank money used some- times to rise so high as nine per cent, agio, and sometimes to sink so low as par, according as op- posite interests happened to influence the market." Any regulation of this kind could only be required in case our circulating currency was of a different standard from the Bank standard ; the varying rela- tive value of gold to silver might then render some such regulation necessary. The expenses of the establishment were paid by sundry charges which have been enumerated. Besides the advantage of being the means of fixing the exchanges, this bank money had the additional value of being " secure from fire, robbery, and other accidents ; the city of Amsterdam is bound for it ; it can be paid away by a simple transfer, without the trouble of counting, or the risk of transporting it from one place to another." — P. 278. If the standard of the international money were silver, if the bank money were to consist of crowns of one ounce each of standard silver, and the bank pound of four such crowns, there would be no un- certainty in our exchange with those countries which have a silver standard, in respect of the varying ON AN EXCHANGE BANK. 81 relative value of gold to silver : the crown might be divided into cents for the coins of a lower denomi- nation, as might be judged convenient : the ancillary- coins to be rated in exchange with the crown at 7 or 10 per cent, above their intrinsic value, and to be a legal tender only to the value of the crown; — the State reserving to itself the privilege of coining the ancillary coins: as these coins would be wanted only for exchange purposes, few would be required ; neither the crown nor the ancillary coins should be legal tender in the national circulation. If, in consequence of the abundant supply of gold from Australia and California, the great commercial countries should adopt a gold standard, it would appear very desirable to have the gold exchange coin of a simple and well-known weight ; as in the case of a silver exchange standard, it has been suggested to have for the inteo:er exchanfi^e coin a crown weiijhino: one ounce of standard silver ; so, in case of a gold standard, it may be advisable to coin the gold bank pound from one quarter of an ounce of standard gold. The sovereign or pound sterling now weighs about 123 J grains of standard gold ; the bank pound would weigh 120 grains: the apportionment of the ounce of standard gold, according to the Mint regulations, is 3/. 175. lO^d., or ^\^ sovereigns: the apportion- ment according to the proposed bank pound would be 4/. or four quarter ounces : the difference would be about 2£ per cent., being the difference between 3^. 175. lO^c?. and 41. : there might be gold half bank pounds, and the other coins might be silver and copper, in such divisions as might be thought advisable : the ancillary coins of silver to be 7 or 10 per cent, more valuable as coin than as bullion, and the copper coins 15 or 20 percent, more valuable: only a small quantity of the secondary coins would be required, as they would be used only for exchange calculations : all the ancillary coins to be coined only by the State, and none of the bank coins to be a leQ:al tender in the national circulation. G 82 COINS AND CURRENCY. As our standard is gold, there would be no agio on depositing gold bullion in the Bank, except what may arise from the circulating coin being worn, when that was deposited. With the silver bullion deposited in the Bank it would be different; there would be an agio, which would vary according to the relative value of silver to gold at the market. The principle being admitted, that it is desirable that every nation should have an exchange Bank and an exchange money of the same metal, the details for carrying into execution the system might be easily arranged ; what is expedient for one coun- try is expedient for every other country, and the interest of one is the interest of all. The exchange would be a domestic or national exchange, like that at Amsterdam ; it would consist of the variation between the circulating coin and the bank coin ; it would not be a varying exchange between dilFerent countries, produced by the varying relative value of the precious metals relative to each other. The ancillary coins should be legal tender only for a certain amount : this may be arranged. As the ounce of standard gold contains 440 grains of fine gold and 40 grains of alloy, together 480 grains, and as the pound would contain one quarter of this weight, or 120 grains of standard gold, on the proposed plan of a gold bank pound, — The shining in value would be g^th of 120 grains, or 6 grains. The penny would be yV^h of the shilling; or ^ grain. The farthing would be Jth of the penny; or ^th grain. One grain of gold bank money would correspond with two-pence bank money. There would be no alteration required in the do- mestic or national currencies of different countries ; there would be one invariable standard of inter- national money, doing away with all mystery, and making weight the only test of value. ON AN EXCHANGE BANK. 83 Is not this a consummation devoutly to be wished ? B. iv. c. 3. V. ii. p. 289.: — Adam Smith states his motive in writing his ac- count of the Bank of Amsterdam to have been as follows : — " But it is now time to return from this long digression, into which I have been insensibly led^ in endeavouring to explain the reasons why the exchange between the countries which pay in what is called bank money, and those which pay in common cur- rency, should generally appear to be in favour of the former, and against the latter. The former pay in a species of money, of which the intrinsic value is always the same, and exactly agree- able to the standard of their respective mints ; the latter is a species of money of which the intrinsic value is continually vary- ing, and is almost always more or less below that standard." And he also states the motive and object of those who established the Bank to have been — P. 289.: — " Public utility, however, and not revenue, was the original object of this institution. Its object was to relieve the merchants from the inconvenience of a disadvantageous exchange. The revenue which has arisen from it was unforeseen, and may be con- sidered as accidental." There was at Amsterdam no rival establishment issuing promissory notes payable to bearer on demand, and anxious to get possession of this bullion. The merchants of Amsterdam were careful to confine the bank money to its proper use, to pay with it foreign bills of exchange, and, indeed, all bills, except those which may be supposed to circulate among the traders at home and the retail dealers, bills of small amount, not exceeding six hundred guilders, about 60^. ster- ling ; these bills might be draAvn in current money. This arrangement might suit a small state like Hol- land, where different monies circulated ; here such a limitation would be unnecessary ; but the great prin- ciple remains the same in a large or in a small state ; that the owners of the international bullion should G 2 84 COINS AND CURRENCY. not part with the possession of it, and that the mer- chants who could pay for it, or who imported it, should be uncontrolled in the employment of it in their foreign trade. P. 277.: — " The merchants, with plenty of currency, could not always find a sufiicient quantity of good money to pay their bills of exchange, and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain." Who were benefited by this disadvantageous ex- change? Those who furnished the good bills in exchange for the currency ; namely, the dealers in bullion, who, before the establishment of the Bank, had the power of regulating, to a certain extent, the exchange, by withholding the bullion which was to provide for the payment of the bills. The Bank of England appears to stand in the same relation to the merchants and manufacturers, that the bullion dealers at Amsterdam stood in, previously to the establishment of the Bank. The bullion dealers may have created, by means of a monopoly, a dis- advantageous exchange, for their own benefit: the Bank of England, by means of its monopoly and bank regulations, withholds, at its pleasure, the bullion which is the natural corrective of the exchange ; the British merchants, with plenty of good inland bills, cannot always procure bullion to pay their foreign bills of exchange. Is not the natural remedy for this inconvenience, that which was adopted by the intelligent merchants of Amsterdam ; to establish a bank and international treasury^ where the merchants of the "great mercan- tile republic" may deposit their own bullion to pay their own bills of exchange ; where the bullion deposited may be in the possession of the owners^ and not in the pos- session and under the control of those who simply hold it on trust? The merchants of Amsterdam were aware that the possessor of bullion could always create good bills, by ON AN EXCHANGE BANK. 85 transmitting the bullion to cover them. Of this I shall treat in the following pages. Adam Smith (b. iv. c. 1. v. ii. p. 222.) : — " The gold and silver which can properly be considered as accu- mulated or stored up in any country, may be distinguished into three parts ; first, the circulating money ; secondly, the plate of private families ; and, last of all, the money which may have been collected by many years' parsimony, and laid up in the treasury of the prince. " It can seldom happen that much can be spared from the circu- lating money of the country, because in that there can seldom be much redundancy. The value of goods annually bought and sold in any country, requires a certain quantity of money to circulate and distribute them to their proper consumers, and can give em- ployment to no more. The channel of circulation necessarily draws to itself a sum sufficient to fill it, and never admits any more. " The melting down of the plate of private families has, upon every occasion, been found a still more insignificant resource (for carrying on foreign war). To accumulate treasure seems to be no part of the policy of European princes." Adam Smith (b. iv. c. 1. v. ii. p. 225.) : — " Besides the three sorts of gold and silver above mentioned, there is in all great commercial countries a good deal of bullion, alternately imported and exported, for the purposes of foreign trade. This bullion, as it circulates among difierent commercial countries in the same manner as the national coin circulates in every particular country, may be considered as the money of the great mercantile republic. The national coin receives its move- ment and direction from the commodities circulated within the precincts of each particular country ; the money of the mercantile republic from those circulated between difierent countries. Both are employed in facilitating exchanges, the one between different individuals of the same, the other between those of different nations. Adam Smith again observes (b. iv. c. 6. v. ii. p. 376.): — " The great annual importation of gold and silver is neither for the purpose of plate nor of coin, but of foreign trade. A round- about foreign trade of consumption can be carried on more advan- tageously by means of these metals than of almost any other goods. As they are the universal instruments of commerce, they are more readily received in turn for all commodities than any other goods ; and on account of their small bulk and great value, G 3 86 COINS AND CURRENCY. it costs less to transport them backward and forward, from one place to another, than almost any other sort of merchandise, and they lose less of their value by being so transported. Of all the commodities, therefore, which are bought in one foreign country, for no other purpose but to be sold or exchanged again for some other goods in another, there are none so convenient as gold and silver. In facilitating all the different round-about foreign trades of consumption which are carried on in Great Britain, consists the principal advantage of the Portugal trade ; and though it is not a capital advantage, it is, no doubt, a considerable one. " That any annual addition which, it can reasonably be sup- posed, is made either to the plate or to the coin of the kingdom, could require but a vei'y small annual importation of gold and silver, seems evident enough ; and though we had no direct trade with Portugal, this small quantity could always, somewhere or an- othei', be very easily got." Adam Smith, p. 289., observes, " The object of the Bank was to relieve the merchants from a disadvan- tageous exchange ;" and he makes no allusion to the advantage derived from it, in consequence of its being " the great warehouse of Europe for bullion." P. 284. : — " The Bank of Amsterdam has, for these many years past, been the great warehouse of Europe for bullion." But it was only the warehouse ; the burgomasters were the depositaries of the treasure of the great mercantile republic, placed in the Bank by the owners for safe custody, and for the payment of their foreign bills of exchange, the property of individuals, and purchased with the commodities of different nations. Whence arose the scarcity of " good money " to pay their bills of exchange? It must have arisen from a scarcity of bullion, for it is quite certain that the merchant who possessed bullion could find in this bullion the good money which he wanted, and which he could transmit to pay the bills he might draw. It is said that " many regulations " were made in vain to prevent this scarcity of " good money " or of bullion. The Dutch Government had the good sense to sanc- tion what the sagacity and disinterestedness of the Dutch merchants proposed for the remedy of this ON AN EXCHANGE BANK. 87 evil. They determined that a public warehouse, open to the world, should be established for the safe cus- tody of the international bullion, the most convenient commodity, the money of the great mercantile republic. This treasury of many nations was constituted a bank of deposit, as described by Adam Smith, for the transfer of accounts, and the delivery of the bullion to the individual owners when required. No part of this treasure was to be lent by the Bank, no profit was to result from it to the owners beyond the ad- vantage of safe custody, honest delivery, and transfer of property. Adam Smith thus expresses himself respecting this Bank in 1775, more than 150 years after its estab- lishment — P. 287. : — " Amidst all the revolutions which faction has ever occasioned in the Government of Amsterdam, the prevailing party has at no time accused their predecessors of infidelity in the administration of the Bank. No accusation could have affected more deeply the reputation and fortune of the disgraced party ; and if such an accusation could have been supported, we may be assured that it would have been brought. In 1672, when the French King was at Utrecht, the Bank of Amsterdam paid so readily as left no doubt of the fidelity with which it had observed its engagements. Some of the pieces which were then brought from its repositories, appeared to have been scorched with the fire which happened in the town-house soon after the Bank was established. These pieces, therefore, must have lain there from that time." The relief afforded to the Dutch merchants appears to have been complete ; whether that scarcity of " good money " to pay their foreign bills of exchange was occasioned by the bullion dealers, and the conse- quent uncertainty in the value of those bills, or from any other cause, the remedy appears to have been perfect. The gold and silver bullion, the most convenient of all commodities, under certain circumstances of commerce, that great medium of the exchange, was allowed to per- form, unconstrained, its useful oflSce ; it perambulated G 4 88 COINS AND CURRENCY. the globe or was stationary according to the wants of commerce and of exchange ; to liquidate the balance of debt among nations, furnishing the most convenient of all commodities, to supply the deficiency of interna- tional merchandise. What rash hand shall interrupt or disturb the circulation of this stream of Pactolus, the life-blood of foreign commerce, the Palladium of industry, the secuHty against bad markets ; harmless as the dove, but Avise as the serpent, it holds on, when unconstrained, its salutary course ; like the stream that, descending from the mountains, irrigates the plain with countless rills, carrying fruitfulness and plenty through the land ; if " cribbed, cabined, and confined," it bursts forth a mountain torrent, carrying ruin and desolation, or, by its absence, converting the fertile plain into a barren waste. It is to be observed that the Bank of Amsterdam offered the advantage of an instantaneous coinage, a ready Mint, giving, without delay, the bullion de- posited, or a credit at the Bank, and a recipice for the bullion received, the one saleable in the market, payable to bearer, and the other transferable. The recipice was to guard the depositors from loss, and the Bank equally from loss, on account of the variation in the relative value of Bank money to currency. The credit in the Bank was a fixed sum, 5 per cent, below the Mint price of bullion, and the Bank required the production of both documents for the amount which it paid. The bearer of both re- ceived the bank money. He may have sold his receipt, and he bought another when wanted. The Bank of Amsterdam Avas the warehouse for the gold and silver required to carry on the round-about foreign trade, for the bullion required to be trans- mitted to cover bills drawn to pay the balance of debt ; the exchanges were no cause of alarm, because, if excessively unfavourable, a remedy was always at hand. And let it be remembered that this Bank was es- tablished in that country which one would suppose ON AN EXCHANGE BANK. 89 the least fitted for such an important trust, exposed to intestine division, the constant seat of war, " the prize-fighting stage for all Europe." But such was the mighty power of truth and justice, that nothing could shake the fabric built on so sure a foundation. The hi^h-minded Bur^-omasters and Directors could still present a fearless front, even with the enemy almost at the gates of Amsterdam. " In 1672, when the French King was at Utrecht, the Bank of Am- sterdam paid so readily as left no doubt of the fidelity with which it had observed its engagements." It is to be observed that the Bank of Amsterdam was established for the convenience of the merchants, and that it was placed under the guarantee of the city, and '• under the direction of the four reigning burgomasters, who are changed every year. Each new set of burgomasters visits the treasure, compares it with the books, receives it upon oath, and delivers it over, with the same awful solemnity, to the set which succeeds ; and in that sober and religious country, oaths are not yet disregarded. A rotation of this kind seems alone a sufficient security against any practices which cannot be avowed." It was considered, as it ought to be, simply a com- mercial question. The warehousing of the gold and silver, and the delivery of that gold and silver, is purely a mercantile question, and relates only to the most convenient commodity for international commerce. The same rule should apply to the precious metals as to any other international merchandise, bonded under safe custody, for free influx and efflux, like tobacco, tea, or coffee. This international treasury has nothing to do with banking, beyond the delivery of the bullion and the transfer of accounts or credit. The business of a bank is to lend money, to receive deposits, and to discount bills, and has no relation to the precious metals as merchandise. The exchanges are simply a commercial question, with which no bank has any concern : it is a question of the cost of the freight, 90 COINS AND CURRENCY. insurance, and commission attending the transport of bullion, as of any other commodity. The international treasury also is purely a mercantile question, and the merchants should manage it. They should establish the bank or international treasury for their own con- venience and security. Why should the merchants of Great Britain hesitate to do that which was found to be so advantageous to the merchants of Amsterdam ? Are they less wealthy, or less sober, or less religious than those gallant Hollanders? Is the city of Lon- don less powerful than Amsterdam? Let the inter- national Bank and Treasury be governed by, and be amenable only to, the international merchants ; and what blessings will they confer upon the country ! It is as important that the circulation of this interna- tional bullion should be free, as that the circulation of the national coin should be free. The property in this bullion should be as sacred to the use of the individuals of the great mercantile republic, the international traders of all nations, to the owners of this bullion, as the property in the coin belonging to each individual, in the national circulation, is sacred to his use. To in- terrupt or impede the movement of the national coin, is to interrupt and impede the movement and direc- tion of the commodities circulated within the precincts of each particular country. To interrupt or impede the movement of the bullion, the money of the great mercantile republic, is to interrupt and impede the movement and direction of the commodities circulated among different nations. If a corporate company had been established at Amsterdam, with the privilege of issuing notes, pay- able to bearer on demand, for 5/., 10/., 20/., and 100/., is it to be for one moment supposed that these high-minded, disinterested, and independent Hollanders would have allowed this international bullion, deposited under a promise to restore it to the rightful claimant on demand, — is it to be imagined that they would have permitted this sacred deposit to be given up to this corporate company, and to be held ON AN EXCHANGE BANK. 91 by them in pledge for the payment of their notes, that the merchants would have listened to such a proposal ? that the nation would have suffered it ? What the Bank of Amsterdam was, the Bank of England is now, as respects the international bullion ; it was not so when Adam Smith wrote. The Bank of Amsterdam was then " the great warehouse of Europe for bullion." May it not be said that the Bank of England is now the great warehouse for bullion, not only for Europe, but for the world — especially for gold ? Adam Smith conjectured that there might be 2000 depositors, each having 1500/. sterling in the Bank of Amsterdam, amounting to 3,000,000/. sterling in the whole. Supposing 10,000,000/. to be required in the em- ployment of bullion in the round-about foreign trade of consumption — if we allow 5000 depositors at 2000/. each on an average — that would complete the sum. If the merchants of Amsterdam could afford to have 3,000,000/., surely the international traders of Great Britain could afford to have three times that sum employed for the same advantageous purpose. It is the most available of all assets, and would be a small sacrifice for so great a benefit ; and perhaps a much less sum, perhaps one half only, would, on an average, be required. Let it be remembered that the experiment has been tried, and completely succeeded. The object is to separate the bullion, which is im- ported and exported for the purposes of foreign trade, from the national bank, and from all banks issuing promissory notes. No national bank, nor any bank, should be suffi- ciently powerful in its capital or in its circulation to influence prices generally ; the bullion would be taken to the bullion warehouse, and be the property of in- dividuals^ who, with their own resources, would pay their foreign bills. The coin for circulation, and the bullion for expor- tation, would be perfectly distinct ; the one employed 92 COINS AND CURRENCY. in the home circulation, and the other in the foreign trade. The bullion dealers would purchase bullion from the individual depositors in the bank, as was the case at Amsterdam. The bullion would be free — in the possession of the owners, whether the original importers, or those who had purchased it from them. To talk oifree trade without free prices appears a contradiction in terms. The institution of the Bank of Amsterdam was in accordance with that spirit of independence and self-reliance, which should distinguish the commercial character — was worthy of a free people — was worthy of the men who warred against the gigantic power of Spain ; who successfully resisted the tyranny of the Duke of Alva; who founded their commonwealth of civil and religious freedom on the shoals of the ocean, when the land would no longer afford them an asylum of liberty : these truly great men, these merchant princes, taking for their motto, " Villus virtutibus aurum," disdained and rejected the temptation of profit. " Public utility, and not revenue, was the original object of the institution of the Bank," The Bank had one simple duty to perform, to keep safely and deliver honestly the gold and silver with which it was entrusted. CHAP. VIII. ON THE BANK OF AMSTERDAM. In Mr. M'Cullocli's edition of Adam Smith, p. 215. b. iv. c. 3. — To my great astonishment, and deep regret, I find, in a note on the conduct of the Bank of Amsterdam, an accusation of the most serious nature against the Directors of that celebrated Institution, and which, one would hope, admitted of a more satisfactory ex- planation than is given by M. Storch, from whose work (Cours d'Economie Politique, iv. p. 96. Paris, 1823) the information appears to be derived. One would require some very clear evidence, that Adam Smith could have been mistaken in the character of this Bank, and that, contrary to the received opinions, the " four reigning Burgomasters " neglected their duty, or were deceived by the Directors ; disregarded their oaths; and that the guarantee of the city of Amsterdam was a nullity. But Mr. M'Culloch asserts, upon the strength of his own discovery, that the regulations described by Adam Smith had the effect of " shutting the coffers of the Bank," while M. Storch thinks that these regulations were intro- duced "to guard the Bank from the effects of the underhand proceedings of the Directors." Smith's Wealth of Nations, by J. R. M'Culloch, Esq., 4th Edition, Edinburgh, 1850. B. iv. c. 3. p. 215. (note):— " Tlie events that liave transpired since the publication of the Wealth of Nations have shown that the Directors of the Bank 94 COINS AND CURRENCY. of Amsterdam had abused the confidence placed in them. To- wards the middle of last century they began to make considerable advances, in a private way, from the bullion deposited in their coffers, to the Government and the East India Company. But as this was a proceeding altogether inconsistent with the principles on which the Bank was founded, it could not fail to endanger its stability ; and as the Directors must have been early aware of the difficult situation in which they had placed themselves, M. Storch thinks that the regulations described by Dr. Smith, with respect to the mode of recovering bullion deposited in the Bank, instead of being intended to facilitate the commerce in bullion, had been devised to guard the Bank from the effect of the underhand pro- ceedings of the Directors. At all events it is certain that the regulations in question were enacted about the time when the Directors began to make secret advances to Government and the East India Company, and, on examination, it will be found that they, in fact, shut the coffers of the Bank. *' The bearer of a receipt for a deposit of bullion could not withdraw it without previously placing in the hands of the Bank an amount of bank money equal to the price at which the bullion had been received, or to the credit given him in the books of the Bank. If, therefore, the holder of a receipt for a deposit of gold or silver had made use of this credit or bank money, and in nine C'cses out of ten it was the desire to avail himself of that credit that led him to make the deposit, he had no power to make a demand upon the Bank for the gold or silver he had lodged in its hands, until he purchased an equivalent amount of bank money from some other individual ; and as no bank money was ever issued, except on a deposit of bullion, it is clear that in the vast majority of cases, no individual could draw bullion from the Bank until some other individual had previously placed an equal sum in its coffers. By this ingenious contrivance the Bank received, on the one hand, what she paid out on the other ; and the amount of bullion in her possession continued undiminished by the demands of her ordinary customers. " But, however strange it may seem, these regulations do not appear to have excited any suspicion with respect to their real object. The habit of seeing the Bank always fulfil her engage- ments, the remembrance of what had taken place in 1672, and the confidence placed in the integrity of the city magistrates, by whom the Bank was administered, all contributed to blind the public and allay suspicion. "This delusion was partially dissipated in December 1790. In the course of that month, the Bank published a notice stating that she would, in future, fix, from time to time, the price at which she would pay the silver deposited in her coffers ; and she began by fixing it at such a rate that those who withdrew it sustained a loss of ten per cent. She announced, at the same time, that she would pay no deposits except to those creditors who had bullion of the value of 2500 florins and upwards in the Bank. ON THE BANK OF AMSTERDAM. 95 " This declaration could not fail to excite universal distrust. But the confidence placed in the rectitude of the management and the stability of the Bank, was still so great as to enable her to get over this crisis. Her dissolution w^as, however, at hand. In 1795 the French invaded Holland ; and the provisional Govern- ment, established in the city of Amsterdam, was obliged to issue a declaration, which put to rest all doubts -with respect to the real situation of the Bank, by informing the public that, during the last fifty years, the directors had successively advanced 10,624,793 florins to the East India Company, the provinces of Holland and West Friezland, and the city of Amsterdam. And thus, though the bullion actually in the coffers of the Bank, and the debt due to her, were together fully equal to her engagements, yet, as she had advanced so large a sum as ten and a half millions, to those who were no longer in a condition to meet the claims upon them, this statement of her affairs was really equivalent to a declaration of bankruptcy. In consequence, bank money which had previously borne a premium of five per cent, over the current metallic money of Holland, immediately fell to sixteen per cent, below it. This extraordinary decline marked the fall of an institution which had enjoyed for nearly two centuries unlimited credit in the commercial world, and rendered the greatest services to the country in which it was established." Storcli, Cours d'Economie Politique, iv. p. 96. Paris, 1823. T think I shall show that Mr. M'Culloch is quite mistaken as to the operations of the Bank, and I will hope that M. Storch is not well informed of the cir- cumstances he undertakes to detail : — Mr. M'Culloch: — " The bearer of a receipt for a deposit of bullion could not withdraw it without previously placing in the hands of the Bank an amount of bank money equal to the price at which the bullion had been received, or to the credit given him in the books of the Bank." Adam Smith states : — " The owners of bank credits and the holders of receipts con- stitute two different sorts of creditors against the Bank." * The holder of a receipt only was not entitled to any bank money ; he may have made no deposit. * B. iv. c. 3. V. ii. p. 282. 96 COINS AND CURRENCY. He held a receipt which entitled him to the value of the difference between what the Bank gave for bullion and the market price. The holder of a bank credit was entitled to the amount of bullion deposited at the price which the Bank gave, five per cent, below the market price, with an agreement to purchase it at four per cent. As Adam Smith observes (p. 283.) : — " The price of the receipt and the price of the bank money com- pound, or make up between them the full value or price of the bullion." (P. 282.): — " The person who has a receipt, and who wants to take out bullion, finds always plenty of bank credits or bank money to buy at the ordinaiy price ; and the person who has ' bank money and wants to take out bullion, finds receipts always in equal abundance.' " When the holder of a receipt, which simply en- titled him to an agio or premium on bank money, had purchased a bank credit, he could withdraw bank money itithout " previously placing in the hands of the Bank an amount of bank money equal to the price at which the bullion had been received, or to the credit given him in the books of the Bank :" as Mr. M'Culloch supposes. The Bank paid the bank money due upon the credit given to the depositor, either to himself if he demanded payment, or to the person to whom he had sold it, and also the value of the receipt ; and the Bank received nothing. It is not to be wondered at that " these regulations do not appear to have excited any suspicion with respect to their real object." The bearer of a receipt was not entitled to any bank money. If he allowed the receipt to expire, which was his own fault, or, perhaps, his wish, he lost and the Bank gained the difference between the price of bank money and bullion, perhaps 5 per cent. The bank credit re- presented the bank money deposited ; if the depositor had parted with this to another, that person, and not MR. m'CULLOCH on THE BANK OF AMSTERDAM. 97 himself, became the owner of the money. It is not correct to say, " If, therefore, the holder of a receipt for a deposit of gold or silver had made use of this credit or bank money, and, in nine cases out of ten, it was the desire to avail himself of that credit that led him to make the deposit, he had no power to make a demand upon the Bank for the gold or silver he had lodged in its hands, until he purchased an equivalent amount of bank money from some other individual, and as no bank money was ever issued, except on a deposit of bullion, it is clear that in the vast majority of cases, no individual could draw bullion from the Bank until some other individual had placed an equal sum in its coffers." The receipt and bank credit are here confounded. The receipt was not a bank credit for a deposit. The holder of a receipt was not generally the person who made the deposit, and had certainly no claim to any bank money in virtue of the receipt. If the deposi- tor " had made use of this credit or bank money," he must have transferred to another his right or claim to the bank money, and received its value. The pur- chasers and sellers of receipts, and of bank credits, were quite independent of the Bank. The Bank could not owe two persons for the same thing. It paid the bank money on demand to the extent of the credit. The receipt was given for the convenience of those who thought the bullion market might be more in their favour. It lessened the labour of the Bank to require the receipts which might always be had, to be paid at the same time as the bank money ; if the party chose to receive the value of the receipt and not to allow it to fall to the Bank, which must seldom have happened. The following extract from Adam Smith (b. iv. c. 3. V. ii. p. 285.) states the value of a receipt and of a bank credit, and what, it was supposed, the Bank would do in case of an invasion : — " It might be otherwise during a public calamity ; an invasion, for example, such as that of the French in 1672. II 98 COINS AND CURKENCY. " In sucli emergencies, the Bank, it is supposed, would break througli its ordinary rule of making payment only to the holders of recei[>ts. The holders of receipts, who had no bank money, must have received within two or three per cent, of the value of the deposit for which their respective receipts had been granted. The Bank, therefore, it is said, would in this case make no scruple of paying, either with money or bullion, the full value of what the owners of bank money, who could get no receipts, were credited for in its books ; paying, at the same time, two or three per cent, to such holders of receipts as had no bank mon(^y, that being the whole value which, in tiiis state of things, could justly be supposed due to them." Mr. M'Culloch proceeds : — " By this ingenious contrivance the Bank received on the one liand what she paid out on the other ; and the amount of bullion in her possession continued undiminished by the demands of her ordinary customers." It appears, I think, that this "ingenious contri- vance" had no existence. Such " contrivances " are not deserving of the gentle epithet of "ingenious:" contrivances which would elude the payment of a just debt, and delude the public with a semblance only of honesty. "In the course of that month (December 1790) the Bank pub- lished a notice, stating that she would in future fix, from time to time, the price at which she would pay the silver deposited in her coifers ; and she began by fixing it at such a rate, that those who withdrew it sustained a loss of ten per cent. She announced, at the same time, that she would pay no deposits, except to those creditors who bad bullion of the value of 2500 florins and upwards in the Bank." Without a knowledge of the state of the current coin at Amsterdam at the time, an opinion can scarcely be formed why the price of silver should be fixed from time to time, or how the loss of 10 per cent, arose ; the limitation of payments to sums not less than 2500 florins, about 250/. sterling, might have been met by the depositors of the smaller sums of bullion disposing of it to the larger depositors. It appears that the Bank got over this crisis, and that the dissolution of the Bank took place on the invasion of Holland by the French in 1795, when the provisional government announced that the Bank MR. m'cULLOCH on THE BANK OF AMSTERDAM. 90 had, during the last fifty years, made advances to the East India Company, the provinces of Holland nnd West Friezland, and the city of Amsterdam, to the amount of 10,624,793 florins: the bullion actually in the coffers of the Bank, and the debts due to her, being fully equal to her engagements. What the ultimate result was, whether any loss was sustained by the creditors of the Bank, is not stated The sum advanced in the fifty years was not so very great, about one million sterling ; and Ave know not what part of this sura, or whether the whole, was repaid. It is said that the directors, not the burgomasters, had successively advanced. It should be recollected that the city of Amsterdam was gua- rantee to the depositors, that the Bank derived considerable profits from commission, &c., and that the invasion of the French was probably the cause of the provinces of Holland and West Friezland not fulfilling their engagements. I think I have shown that Mr. M'Culloch is in error in supposing that the Bank of Amsterdam, by an " ingenious contrivance, shut the coffers of the Bank," — and, to borrow the language of Mr. M'Cul- loch, that " an institution which had enjoyed for nearly two centuries unlimited credit in the commer- cial world, and rendered the greatest services to the country in which it was established," has not ren- dered itself amenable to so grave a charge. I am not the apologist for any misconduct in the directors of the Bank, but the advocate of the principles on which the Bank was established by the enlightened merchants of Amsterdam. The example of this noble institution, great in its two centuries of prosperous duration, and great even in its fall, since it fell only with its country's freedom, and ceased to be a bank only when Holland ceased to be a country, offers a memorable instance how dangerous it is to depart from the strict line of duty, even when the voice of patriotism may seem to de- mand it. H 2 100 COINS AND CURRENCY. And let it be reraembered that no want of manage- ment, or even of integrity in the Directors of the BanJc^ at all militates against the principle of the institution ; that the great mercantile republic, the international traders of all countries, should each possess his own stock of bullion ; that each individual foreign mer- chant should depend upon his own integrity in the ful- filment of his engagements, and sliould be sustained by his own character for " fortune, probity, and pru- dence." This Bank had no company of proprietors partici- pating in its profits, and resisted every inducement to issue promissory notes. This illustrious institution of truly great merchoMts^ based upon the immutable laws of Justice and Truth, may claim the admiration of future ages ; and when generations shall have passed away, the Bank of Amsterdam will offer a bright example of disinterested conduct, worthy of a " sober and religious countr}^," and may serve to guide pos- terity in the establishment of international treasuries, for the bullion of the Great Mercantile Republic. 101 CHAP. IX. ON THE MERCANTILE SYSTEM: ON THE APPLICATION OF THE BONDING PRINCIPLE TO GOLD AND SILVER BULLION : AND ON MONETARY SCIENCE. Adam Smith (b. iv. c. 1. v. ii. p. 235.) : — " The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines, only by the balance of trade, or by exporting to a greater value than it imported ; it necessarily became the great object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the ex- portation of the produce of domestic industry. Its two great engines for enriching the country, therefore, were restraints upon importation, and encouragement to exportation. " The restraints upon importation were of two kinds. " First. Restraints upon the importation of such foreign goods for home consumption as could be produced at home, fi"om what- ever country they were imported. " Secondly. Restraints upon the importation of goods of almost all kinds, from those particular countries with which the balance of trade was supposed to be disadvantageous. " Those different restraints consisted sometimes in high duties, and sometimes in absolute prohibitions. "Exportation was encouraged sometimes by drawbacks, some- times by bounties, sometimes by advantageous treaties of commerce with foreign states, and sometimes by the establishment of colonies in distant countries. " Drawbacks wexe given upon two diffei-ent occasions. When the home manufactures were subject to any duty or excise, either the whole or a part of it was frequently drawn back upon their exportation ; and when foreign goods, liable to a duty, were imported in order to be exported again, either the whole or a part of this duty was sometimes given back upon such exportation. "Bounties were given for the encouragement either of some H 3 102 COINS AND CURRENCY. beo-inning manufactures, or of such sorts of industry of other kinds as were supposed to deserve particular favour. " By advantageous treaties of commerce, particuhir privileges ■were procured in some tbreiga state for the goods and merchants of the country, beyond what were granted to those of other countries. "By the establishment of colonies in distant countries, not only particular privileges but a monopoly was fr<-quently procured for the goods and merchants of the country which established them. " The two sorts of restraints upon importation, above men- tioned, together with these four encouragements to exportation, constitute the six principal means by which the commercial system proposes to increase the quantity of gold and silver in any country, by turning the balance of trade in its favour." Adam Smith (b. iv. c. 3. v. ii. p. 204.), in the fourth book of his " Inquiry into the Nature and Causes of the Wealth of Nations," treats largely of the commercial system which then prevailed, and which he endeavours to expose. The principle of this system, as expressed in the annexed extract, was, that gold and silver were the true riches of a country ; that to accumulate this gold and silver should be the object of the Government; that this could only be done in a country which had no mines, like England, by exporting more goods than were imported ; that the balance would be paid in gold and silver ; that if this balance were against Eng- land, gold and silver must be sent to pay this balance ; that this would impoverish the country, as an importation of gold and silver would enrich the country ; that this balance being against or in favour of the country would be determined by the balance of trade. The " balance of trade " was thus made a test, and it became the object of legislation to prohibit importation or diminish it by high duties, and to encoiu'age exportation by drawbacks of duties in many cases, and by bounties in others. The mer- chants and manufacturers were interested in uphold- ing this system, and the landed interest also ; bounties were granted on the exi^ortation of corn, of herrings, (&c., and the duties on imported articles were some- times withdrawn on exportation. High duties were imposed) and sometimes a prohibition upon the im- ON THE MERCANTILE SYSTEM. 103 portation of manufactured goods, and light duties on the raw material. The country gentlemen and noblemen thought that the importation of gold and silver, or money, would enrich the country; the merchants and manufacturers knew that the system adopted, to promote this exportation and discourage the importation, would enrich themselves, and the landlords thought they should partake of the benefit of the system, by the bounty, on the exportation of corn, and the prohibition to import from abroad, ex- cept upon payment of high duties, the corn, and other agricultural produce of foreign nations ; com- petition would be lessened or destroyed, and high prices would be obtained. It is to be observed, that the interest of the manu- facturers and merchants was not put forward as the primary motive. The system was to enrich the country^ a favourable balance of trade was to enrich the country. The balance of trade we hear little of in the present day, but we hear a great deal of the favourable and unfavourable exchange, not from the merchants, and manufacturers, and landlords, but from the advocates of the Bank of England. The country now is supposed to be benefited, not by a flow of gold and silver into the pockets of the merchants, and manufacturers, and landlords, but into the coff'ers of the Bank of England. The country's welfare is supposed to be dependent upon a sufiicient quantity of the precious metals being retained in the cofiers of the Bank ; and the Bank of England and the country are one according to the modern system. Instead of filling the country with gold and silver, by high duties, and bounties, and drawbacks, the system of the present day is to fill the coff'ers of the Bank of England in case of need, by means of low, or rather, falling prices, and a losing commerce: until this system be gotten rid of, there will be fre- quent recurrence to low prices, as the remedy for the apprehensions of the Bank. The commerce of the H 4 104 COINS AND CURRENCY. country is now in the power of the Bank of Eng- land, as it was before in the power of the legishiture ; for legislative enactment we have substituted the de- cisions of the Bank parlour; for a responsible Go- vernment, composed of King or Queen, Lords and Commons, we have substituted an irresponsible body composed of 24 Directors and a Governor and De- puty Governor. To these we have confided the com- merce and prosperity of this mighty empire. Instead of the mercantile system, supported by merchants, and manufacturers, and the agricultural interest, we have now the monetary system endan- gering the welfare of merchants, manufacturers, and the agricultural interest. We have not to complain of the severity of the penal enactments, to support the monopoly of the mercantile system, but we have to complain of the iiower vested in the Bank of Eng- land, to support itself^ in case of need, by the losses and distress of commerce ; for the mercantile sys- tem supported by sanguinary laws, we have Bank management supported by monopoly. Adam Smith (b. iv. c. 3. v. ii. p. 303.) observes : — " There is no commercial country in Europe of -whicli the approaching ruin has not frequently been foretold by the pre- tended doctors of this system, from an unfavourable balance of trade." The same ruin to this country is now foretold by the unfavourable exchange, causing an exportation of the precious metals, and a drain of gold from the Bank of England. B. iv. c. 1. V. ii. p. 208.: — " When those countries became commercial, the merchants found this prohibition, upon many occasions, extremely incon- venient. They could frequently buy more advantageously with gold and silver, than with any other commodity, the foreign goods which they wanted, either to import into their own, or to carry to some other foreign country. They remonstrated, therefore, against this prohibition, as hurtful to trade." Vol. ii. p. 212.: — " Tlie prohibition of exporting gold and silver was, in France ON THE MONETARY SYSTEM. 105 and England, confined to tlie coin of those respective countries. The exportation of foreign coin and of bullion was made free. In Holland, and in some other places, this liberty was extended even to the coin of the country. The attention of Government was turned away from guarding against the exportation of gold and silver, to watch over tlie balance of trade, as the only cause which could occasion any augmentation or diminution of those metals. From one fruitless care it was turned away to another care, much more intricate, much more embarrassing, and just equally fruitless." May it not be said, that the attention of Govern- ment is now turned away from guarding against an unfavourable balance of trade, to watch over the exchanges, as the only cause that can occasion any augmentation or diminution of the gold and silver in the Bank of England ; that these exchanges are no longer to be influenced by the balance of imports or exports, encouraging exports by bounties and discouraging imports by prohibitory laws, or high duties, but by a control over prices^ in order to pro- tect the Bank of England from an inconvenient de- mand for gold to be exported. It is worthy of remark, that the foreign merchants remonstrated against the prohibition to export gold and silver; so the foreign merchants must remonstrate in the present day against the same prohibition, not enforced by law, but contrived by the management of the Bank of England ; not because that manage- ment i^revents their buying advantageously with gold and silver abroad, not for this obvious reason only, but for the more stringent and unanswerable reason, that the management lowers the prices of goods, and ruins credit, and destroj^s markets, in conformity with the modern doctrines of monetary science. 106 COINS AND CURRENCY. ON THE APPLICATION OF THE BONDING SYSTEM TO GOLD AND SILVER. Great Britain, by its commercial policy in allowing goods to be bonded free of duty, in order to be ex- ported to any part of the world where such goods may be wanted, has rendered herself the emporium of the commerce of the world. These goods pay no duty either on importation or exportation ; simply a charge for warehouse rent. The goods are deposited under a perfect confidence that they will be delivered when required. Should not the precious metals be allowed the same privilege ? Should any restriction, direct or indirect, be imposed upon the free exporta- tion of gold and silver ? Are not these commodities received and deposited under the same confidence, and the same engagement to deliver them when re- quired, as sugar and cofi:ee, and brandy, and rum, and other productions of foreign countries ? Should the "most convenient of all commodities for carrying on the round-about foreign trade " be subject to restriction and obstruction in their delivery for ex- portation from which other commodities are exempt? An emporium of commerce implies necessarily an emporium of the exchanges. Should not the ex- changes be free ? Is not the promise to pay on de- mand equivalent to a promise to deliver on demand? Is not the promise to pay on demand 46/. 145. Qd. the same as a promise to deliver on demand one pound of standard gold ? Can any reason be as- signed why the promise to deliver sugar shall be un- restricted in its performance, and the promise to deliver gold should be eluded ? Is not the promise GOLD AND SILVER AS MERCHANDISE. 107 of the Bank of England as sacred as the promise of the owner of goods, and of the warehouseman ? The Bank of England restricts the free exportation of the precious metals in various ways. Every ob- stacle raised to the demand for gold for exportation, is an infringement upon the free trade in gold, and the more indirect the more unjustifiable, whether by giving a shock to credit, and embarrassing trade, or by forcibly reducing prices, and substituting other commodities for gold. It appears contradictory that Great Britain should encourage the round-about foreign trade, by opening her ports for safe deposit and free influx and efflux of commodities ; should encourage foreigners to make our ports the emporium of all sorts of goods for the suf)ply of the world ; should promote the carrying trade for the benefit of our shipping, by allowing and inviting foreign merchants to store their mer- chandise in our bonded warehouses, there to remain till suitable foreign markets are found for their con- sumption, and should deny to the " Great Mercantile Republic" the same advantage with regard to that commodity which is allowed to be the most convenient of any, facilitating the exchanges of commodities between the different countries, where the immediate productions of one country cannot be exchanged for the immediate productions of the other country; that if Great Britain exports her manufactures to the Brazils, or Russia, or California, or Australia, and receives gold and silver in return ; that the gold and silver which have been purchased with English manu- factures, and warehoused in the vaults of the Bank of England, under the bond of a solemn promise or engagement to deliver it on demand, shall not be again freely exported to America to purchase food, or to Russia to purchase hemp. To aflect to encourage the carrying trade for the benefit of the shipping, or the free influx and efflux of merchandise, without payment of duty in the round-about foreign trade, without at the same time allowing the free influx 108 COINS AND CURRENCY. and efflux of the precious metals, is an evident incon- sistency. To affect to encourage the credit of the merchants of this country, based upon " fortune, pro- bity^ and frudence^^ and at the same time to throw obstacles in the way of performing promises, and thereb}^ undermining the confidence which is the foundation of credit, is most unjust. That credit is equally founded upon " fortune, probity, and pru- dence/' inducing confidence, whatever may be the form of that credit, whether bills of exchange, in- land bills, or promissory notes; all rest upon the ibundation of confidence in the fulfilment of the fro- mise. The President of the United States has signified the wish, and declared the probability, that New York may become the emporium of the commercial and monetary power of the world, as in the follow- ing extract : — Message of President Polk, 5th December, 1848; Evening Mail, Dec. 22. 1848. : — " If these and other necessary and proper measures be adopted for the development of the wealth and resources of New Mexico and California, and regular territorial governments be established over them, such will probably be the rapid enlargement of our commerce and navigation, and such the addition to the national wealth, that the present generation may live to witness the con- trolling commercial and monetary power of the world transferred from London and other European emporiums to the city of New York." It is not the possession of gold and silver mines in Mexico and California, which will procure for New York the preference over European nations to be the emporium of gold and silver ; and if it transferred from London to that city, " the controlling commer- cial and monetary power of the world," we may rejoice at the depository of such a mischievous power being separated from England by the Atlantic. Most strange is it that the President, Avhile inveighing against the power lodged in London, should covet GOLD AND SILVER AS MERCHANDISE. 109 it for New York. The possession of the American mines could not insure to Spain and Portugal the gold and silver which those mines produced: this wealth will follow industry and commerce, and secu- rity of fwperty^ and the safe custody of the precious metals. If the free and unmolested circulation of the pre- cious metals is required for the convenience of the interchange of commodities between distant countries, it is equally required for the free and unmolested cir- culation of bills, and for the adjusting the differences, or paying the balances due from nations among them- selves : as at the clearing-house in London the pay- ment of millions is accomplished by the payment only of the balances or differences, and these differences again balanced among themselves, till the actual sum paid is minute to a degree which, to the uninitiated, would be incomprehensible ; so with the clearing- house in London for foreio;n bills, or the Exchansfe, the balances of the international bills may be reduced to a comparatively minute balance, to be remitted in gold or silver upon the great international reckoning. But with the vast transactions of international com- merce, the trade of the nations of the earth, what unhesitating performance of the promise should pre- vail : what a frank unhesitating deliver}^ of the gold and silver stipulated ! The gold and silver bullion which is imported and exported for the purpose of exchange with commo- dities, because manufactures, or colonial produce, or other goods, cannot be profitably sold or purchased, should be considered as merchandise of which it sup- plies the place. It should be considered only as " the most convenient commodity ;" it is sold by weight in exchange for other commodities, and according to its fineness or quality. It comes within the category of those goods, which are bonded for exportation, which are allowed a free influx and efflux without the payment of any duty. All these bonded goods have a determinate owner, 110 COINS AND CURKENCY. who sells them, and transfers to another his right to them. They are in no case under the control, much less are they subject to any claim of ownership, on the part of the owner of the warehouse who receives them into his custody. If he should traffic in the same description of goods, he never blends the bonded goods with his private stock, much less does he apply them to the fulfilment of his own private engage- ments. All these anomalies occur with respect to the precious metals lodged with the Bank of England. They are deposited there by the different foreign mer- chants who import them, or by those who have pur- chased them from those merchants who are members of the great mercantile republic. The receipt given to the depositor is equal to a bond to deliver on de- mand gold or silver of equal fineness and weight. The promissory notes are equal to a bond to deliver to the " bearer," and not to any individual pro- prietor. This lessens not the obligation. The Bank of England traffics with the gold and silver deposited, and with it fulfils its own engagements. The private stock or coin of the Bank of England, and the stock of the depositor, are both, and indiscriminately, ap- plied by the Bank of England to discharge its own engagements. The bullion, when coined, becomes money, and the distinction is lost between " the con- venient commodity " of the great mercantile republic and the " money" of the Bank of England. The Bank of England receives the bullion deposited by the owner, under a solemn engagement to deliver it again, whether wanted as a commodity or as coin, and, when its wants require it, appropriates it to its oicn use. The Bank receives it as bullion, and em- ploys it as money. Should not these anomalies be corrected ? The foreign merchants of every commercial coun- try, forming so many branches of the Great Mercantile Eepublic, should be the guardians and storekeepers of their own gold and silver, as happens with other goods which are bonded for exportation. Every GOLD AND SILVER AS MERCHANDISE, 111 ounce of gold, and every pound of silver bullion so stored, should have its distinct and appropriate owner, as was the case with the Bank of Amsterdam, which derived its chief value from this assured possession ; and as this most convenient commodity when coined of a certain weight and fineness becomes money, when made a legal tender in the payment of debt, the owners may employ their agents (the Exchange Bank) with whom they have lodged this commodity as their bankers, to pay their bills with this bullion, when calculated as coin. They may transfer their right to this bullion in any quantity they please, equi- valent to coin or money, the money of exchange, like the Bank of Amsterdam. No one will be able to exercise any right of ownership, or any control over this bullion, but the legal possessor. No one else will have any claim to it. It will be a legitimate founda- tion of credit to the owner, and to no other person. The owner and storekeeper will be recognised in their separate characters. There will be no curtailment of credit, but a distribution among the separate owners. The merchants will be independent, self-supporting, self-dependent, assisting each other, knowing what they can rely upon, and will be liberated from all control. The bullion deposited by each individual will be so much capital or dead stock, and nothing more. The issuer of promissory notes may consider one fifth of gold and silver sufficient to meet the demands on him for cash, in exchange for his notes. The gold and silver are to him money in the shape of coin. This may also be considered a dead stock ; by this he supports his credit, inasmuch as the payment of his notes on demand in gold requires it ; but the banker's credit does not depend upon this gold and silver, but upon the opinion entertained by the public of his "fortune, probity, and prudence." But the foreign merchant has no reliance upon his stock of gold for his credit, nor does it at all depend upon his paying his bills in gold. He deals with bullion only 112 COINS AND CURRENCY. as a commodity, as a most convenient commodity to remit, wherewith to pay a balance of debt, or to pur- chase other commodities. As the casks of tobacco in a tobacco warehouse, of which there are constantly many thousand hogsheads in bond, belong to separate individuals, are a dead stock, a valuable portion of each individual's capital, so the separate portions of bullion would be a valuable portion of each indivi- dual's capital. All commerce is private enterprise, and private industry. In commerce there is or ought to be no such thing as national credit, national dis- credit, national distress, or national pressure on the money market : no such thing as national grievance, or ruin from the state of the exchanges. All is private, personal, the affair of the individual. It can be monopoly only that produces general pressure, that confounds the unprincipled speculator with the enlightened merchant and industrious tradesman, that produces a general shock to credit, and, like the Upas tree, paralyses exertion. That oppression can be pro- duced only by monopoly, sanctioned by law. Instead of lowering prices in order to encourage the exportation of commodities, and which must be injurious to all the holders of merchandise, whether it be foreign produce warehoused in England, and manu- factures, the appropriate objects of exportation, or whether it be the commodities of home consumption, may it not be worthy of the grave consideration of the advocates of tlie system, that would influence the exchanges by the means of low prices, whether it would not be equally politic, and wise, and econo- mical, to revive the justly repudiated system of boun- ties, limiting the articles on which the bounty is to be granted to a few commodities of general consumption abroad ? This would be profitable to the owners of the preference manufactures, or produce, and would be taxing the country only to a small extent, in com- parison with the general tax, in low prices, now levied on commerce and industry, for the sake of bringing gold to the coffers of the Bank of England. When- ON AN INTERNATIONAL TREASURY. 113 ever the Bank entertained apprehensions that their funds might be exhausted, or so reduced as to en- danger the convertihility or rather payment of the note, if the Government were to offer a bounty of 20 per cent, on some particular commodities, and induce the holders to export them at prices that would leave them a profit, there would be no derangement of markets generally, nor beyond the supposed necessity of the occasion. If we wished to stop the export of five millions of gold and silver, and were to engage some houses to export goods to this amount, allow- ing them 20 per cent., in order to insure them a profit, the country would pay one million in the shape of a tax, the merchants would gain a profit, a less general derangement of commerce would ensue, and the Bank of England would retain its gold. May we not recommend this scheme to the advocates for the mono'poly of the Bank of E7igland f " Ridiculum acri Fortius et melius niagnas plerumque secat res." Horace. " For ridicule shall frequently prevail, And cut the knot, when graver reasons fail." Francis. Adam Smith (b. iv. c. 5. v. ii. p. 313.): — Of bounties. " We cannot give our workmen a monopoly in the foreign, as we have done in the home market. We cannot force foreigners to buy their goods, as we have done our own countrymen. Tlie next best expedient, it has been thought, therefore, is to pay theiii for buying. It is in this manner that the mercantile system pro- poses to enrich the whole country, and to put money into all our pockets, by means of the balance of trade." The monetary system has succeeded to the mercan- tile system ; bullion in the Bank of England to the balance of trade, low prices to the bounty, low j^rices to the benefit of the foreigner, who is induced to buy cheap goods at the expense of the manufacturer, mer- chants, and producers, who are presented with the " screw " instead of a bounty. I 114 COINS AND CURRENCY. It is very remarkable that Sir R, Peel dwells upon the necessity of securing the convertibility of the Bank of England note, in other words, the payment of the holders of bank notes, but says little or no- thing of paying gold to the depositors, and assumes that a demand for gold can only arise from the value of the note not being equivalent to gold — as if the note could, and Avould supply the place of the gold, if both were of equal value. The demand for gold for exportation, and the demand for coin for circulation, each arises, from separate causes, from different people, and for different objects, but in neither case from the bank note not being equal in value to the coin. This is a fundamental error in Sir R. Peel's theory. As this demand for gold for exportation is quite distinct from the demand for coin for bank notes for circulation, and as it is the demand for ex- portation which alarms the Bank Directors, we shall lessen their assumed claim to depress prices, in pro- portion as we exempt them from this demand. If the power of the Bank of England over prices were removed, in whatever proportion tlie foreign merchants and exporters of commodities become their own storekeepers for bullion, for the payment of their foreign bills, for the payment of foreign balances of debt, and for the supply of the round-about foreign trade of consumption, in the same proportion they would relieve the Bank of England and would relieve all other banks ; and there seems no reason why the experiment may not be made on a small scale, as well as on a large scale. If the Government will make bank crowns of 1 oz. standard silver, or gold pounds of \ oz. of standard gold, as explained before, a legal tender for the payment of foreign bills drawn in that money, this mode of payment may be adopted to any extent the foreign merchants please. If at the same time an Exchange Bank were established in London, for the safe custody of bullion under proper gua- rantees upon the plan proposed, the e.vpei'wient might be safely tried, and no one could be injured. There ON AN INTERNATIONAL EXCHANGE BANK. 115 would be no Board of Proprietors, and the depositors of the bullion, the most convenient commodity^ could not suffer loss, any more than the depositors of sugar or coffee in a bonded warehouse. This system is so very important, as doing away with all uncertainty in the exchanges, with all apprehen- sion arising from the exportation of bullion, which could only affect the owners and exporters as it would the owners and exporters of any other commodity, that it may be Avell worth the consideration of the foreign merchants connected with the colonies, whe- ther an exchange bank may not be established by them vf'iih. peculiar advantage ; the colonial trade being carried on at a considerable distance from London, and Liverpool, and Dublin, and Glasgow, it may be of vast importance for merchants connected with those remote districts, always to have a supply of gold and silver by which to make payments, or shipments of this most convenient commodity. The more remote the country, the more uncertain the markets ; and the greater the fluctuation in the markets, the more needful is that commodity, which comparatively is liable to no fluctuation. The colonists and the mer- chants connected with the colony, would then have an international money, simple, constant in supply, and a credit which would not depend, in any degree, npon the o'reater or smaller amount of bullion in the Bank of England or any bank. Tliey would not regulate their commerce by the state of the exchanges, but by the state of their own funds, and their own credit, founded upon their '' fortune, probity, and prudence." The plan might be gradually extended, and adopted according to its ascertained merit. There can be no risk in following the path of truth and justice, and such would be the path of those truly great merchants^ who should depend only upon their own resources, and their own character; but the power of the Bank of England over prices, must be abandoned. The country and the foreign merchants would be I 2 116 COINS AND CURRENCY. benefited by the arrangement. The foreign mer- chants in exporting bullion, instead of commodities, when not offering abroad a remunerative price ; and every productive class in the country would be re- lieved by the depressing influence of the Bank of England on prices being withdrawn. If the merchants and manufacturers will not follow the most noble example of the merchants of Amster- dam, may it not become the duty of the State to esta- blish a warehouse for the safe custody and delivery of bullion, on the same principle that they establish a tobacco warehouse for the safe custody and delivery of bonded tobacco ? Security of property from all ar- bitrary interference which may deteriorate its money price, is as much a duty of the State as protecting it from damage or violence, and as important as revenue, and much more so. It will be only necessary to pro- vide for the safe custody of the bullion, and its deli- very to the lawful claimant. The storekeeping de- partment will thus be provided for ; and the merchants may find it for their interest to avail themselves of such a safe custody, and themselves make arrange- ments for the international bank. But will not the merchants undertake the whole business, in all its branches, providing the needful store or warehouse, and separating entirely the bullion from all control, either of a bank of issue or a bank of loan ? The bullion in the exchange or international bank will be solely at the disposal of each depositor, the cash balances will represent that bullion. The mer- chant will receive no interest for the bullion, any more than he does now for bonded tobacco, and all the productive industry of the country will be free from any arbitrary depression of prices, independently of supply and demand, that the products of their industry may be substituted, as now, for bullion; in order to secure, in the language of tlie school of " monetary science," the convertibility of the Bank of England note. But the establishment of international exchange ON AN INTERNATIONAL EXCHANGE BANK. 117 banks, and treasuries for the safe custody of bullion, should be the work of the mercliants and manufacturers of the great mercantile republic : let every important member of that community discharge the duty im- posed upon each. Let London, Dublin, Glasgow, New York, Havre, Paris, Amsterdam, every member have its own separate treasury and exchange bank. The interest of one is the interest of all ; and the interest of all is the interest of each. Let bullion be stored in each emporium of commerce, and the merchants of each assert their independence of all national banks. What can be more sacred than the credit of the foreign merchant, a member of the great mercantile republic ? with whom should he entrust this invaluable attribute, the result of his " fortune, probity, and prudence," by which he hopes to acquire and main- tain the confidence of the commercial community far as his name is known, and the power of purchasing the products of the East and of the West, of the North and of the South, of all countries within the sphere of international traffic ; with whom should he entrust this valuable power ? The answer is obvious : to " no one:^'' he should be the sole guardian of his own character and reputation^ and should be responsible only to God, his conscience, and the laws of his coun- try. But how can he accomplish this, without having in his own possession the safety fund which is needful to protect him from the uncertainty of markets ? Shall he surrender this ^gis of his credit to a corporate body? — this bullion, this most convenient commodity^ to the directors of a national bank, or to any other managers having a distinct interest, and by an action irresponsible and unseen, baffling his calculations, and endangering his credit and that of his distant correspondents? Shall he complain of a despotic rule over prices, in order to evade a promise or an obligation at his cost, and not keep the remedy in his own custody ? Is he so fallen, so humi- liated, that he dare not be the keeper of his own I 3 118 COINS AND CURRENCY. " fortune, probity, and prudence," of his own charac- ter and reputation ? Where shall we seek the canse of this voluntary dependence ? Should not the mem- bers of the great mercantile republic adopt the same system as was found so efficient by the enlightened merchants of Amsterdam ? Truth and justice will triumph in every state, whether it be the small repub- lic or the mighty empire. The present period, as respects the more abundant suppljT- of the precious metals, bears an analogy to that of 1609, when the Bank of Amsterdam was esta- blished. Adam Smith observes (b. i. c. 11. v. i. p. 266.): — " The discovery of the mines of America, it is to be observed, does not seem to have had any very sensible effect upon the prices of things in England till after 1570, though even the mines of Potosi had been discovered more than twenty years before." * P. 267. : — "Between 1630 and 1640, or about 1636, the effect of the dis- covery of the mines of America, in reducing the value of silver, appears to have been completed, and the value of that metal seems never to have sunk lower, in proportion to that of corn, than it was about that time." In 1609 there was a considerable influx of the pre- cious metals, and a prodigious quantity had been in . the previous years introduced into Europe. At the present time, the quantity imported appears to bo increasing, and an amazing quantity has also been im- ported in the last few years, since the discovery of gold in California and Australia. So far there is a simi- larity in the circumstances of the two periods; and the present would appear to be a convenient and suit- able time for our merchants to establish, in imitation of the merchants of Holland, an exchange bank, a treasury for the safe custody, for the deposit and de- livery of the precious metals. The commerce of Hol- land, in 1609, may have borne as large a proportion * See Adam Smith, p. 271. ON AN INTERNATIONAL EXCHANGE BANK. 119 to the commerce of the world as does at present that of Great Britain. The bullion dealers would avail themselves of such a bank ; they woukl deposit and withdraw as suited the convenience and wants of commerce; they would buy of the importing mer- chants, and would be always ready to furnish the gold or silver that might be required by those who had no deposit themselves ; they would act as did the bullion dealers in Amsterdam, of whom it is said by Adam Smith. (B. 4. c. 3. v. 2. p. 284.) " The far greater part of the bank money, or of the credits upon the books of the Bank, is supposed to have been created, for these many years past, by such deposits which the dealers in bullion are continually both making and withdrawing." As the dealers in stock supply the demands for stock on the London Stock Exchange, buying and selling as may be required, and in any quantity, so the dealers in bullion would supply the bullion required, as the wants of commerce, either for bills of exchange, or the round-about foreign trade might require : they would be dealers in bullion, as the stock-brokers are dealers in stock : and both would and should be dis- tinct from any bank, and free from all control. I 4 120 COINS AND CURRENCir. CHAP. X. In the examination of the rule which determines the circulation of coins, the conclusion is forced upon us, that, in spite of all laws, private interest will alone prevent their being melted or exported : " Vir- tus post nuramos." However melancholy this consideration may be, it is satisfactory to find that self-interest may be made to correspond with the public welfare : that the in- terest of the individual and the interest of the State may be made the same : that the public may have the advantage of an abundant supply of ancillary coins, without danger of their being melted or ex- ported ; and, at the same time, the State may derive some revenue from the seignorage that is imposed upon them. These combined interests ought to in- sure to all countries the benefit of each having its own appropriate national coins, to the exclusion of all foreign coins, the circulation of which should be prohibited. Le Blanc, p. 345. : — It is observed by the Court of the Mint in their remonstrance to King Henri III. of France, that " After the introduction of foreign money only disorder and confusion had prevailed in respect of the coins : And that it belongs only to the Prince to coin money for his subjects, be- cause the efBgies and arras thereon engraven testify to them, the superiority over them w^hich God has conferred upon liim ; that they may render to him obedience, and pay the taxes which belong to him : and are the sure means of perpetuating your name and arms thro' all countries, and of preserving them for ever to posterity ; for, as was said by one of the ancients, the coins of princes are so many statues, which are erected to them ON THE TRUE BASIS OF THE CURRENCY. 121 throughout the world : and, in fact, of all that the Greeks and Romans have been able to do, in order to preserve for ever their memory, no monument has remained to us more entire than their coins." "Paulo majora canamus." At length a brighter prospect opens to our view : we now appeal to the immutable principles of Justice and Truth : founding our reasonings on this basis, let us see if we cannot dispel the mystery, which has so long enveloped and obscured the much agitated question of the currency. Shall Ave hesitate to ascend, with firm and un- faltering step, to that temple, " Edita doctrina sapientum templa serena,'' LUCRETIDS, where Faith uncorrupt, the handmaid of Justice, and Truth undisguised preside ? " Justitise soror, Incorrupta fides, nudaque Veritas." Horace. Let us listen to Adam Smith as the professor of moral philosophy in the University of Glasgow : — " Though Nature, therefore, exhorts mankind to acts of benefi- cence, by the pleasing consciousness of deserved reward, she has not thought it necessary to guard and enforce the practice of it by the terrors of merited punishment in case it should be neglected. It is the ornament which embellishes, not the foundation which supports the building, and which it was, therefore sufficient to re- commend, but by no means necessary to impose. Justice, on the contrary, is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world, if I may say so, to have been the peculiar and darling care of Nature, must in a moment crumble into atoms." * * Adam Smith's " Moral Sentiments," part ii. sect. 2. p. 215. 122 COINS AND CURRENCY. The same eminent author observes : — "There is, however, one virtue of which the general rules de- termine with the greatest exactness, every external action which it requires. This virtue is justice. The rules of justice are ac- curate in the liighest degree, and admit of no exceptions or modifi- cations, but such as may be ascertained as accurately as the rules themselves, and which generally, indeed, flow from the very same principles with them. If I owe a man ten pounds, justice requires that 1 should precisely pay him ten pounds, either at the time agreed upon, or when he demands it. What I ought to perform, how much I ought to perform, when and where I ought to perform it, the whole nature and circumstances of the action prescribed, ai'e all of them precisely fixed and determined. Though it may be awkward and pedantic, therefore, to aSect too strict an adherence to the common rules of prudence or generosity, there is no pedantry in sticking fast by the rules of justice. On the contrary, the most sacred regard is due to them; and the actions which this virtue re- quires are never so properly performed, as when the chief motive for performing them is a reverential and religious regard to those general rules which require them." * We now bid adieu to the rivahy of the gold and silver coins, the pounds and the sliillings and the pence, and we rest upon the word of Promise : sacred, inviolable word! Who shall dare to question the sanctity of a promise, or hope to violate with impu- nity its solemn obligation ? The Almighty himself is bound by his promise. It was this that cheered the great prophet of Israel, while wandering through the desert's thirsty plains ; and when from Nebo's Mount he viewed the land of Promise. Shall we fall down and worship the image por- trayed in the dream of the Chalda^an tyrant, dazzled with the brightness of the fine gold., and overlook the feet of iron and clay ? Shall we have regard to the gold, and disregard evasion in the Promise ? We shall find that any monetary system founded * Adam Smith's "Moral Sentiments," part iii. sect. 6. v. i. p. 439. ON THE BANK OF ENGLAND. 128 upon other basis than that of Justice and of Truth, will share the fate of Nebuchadnezzar's image when assailed by (V. 34.) * " That stone (of Truth), cut out without hands, which smote the image upon his feet that were of iron and clay, and brake them to pieces." (V. 35.) " Then was the iron, the clay, the brass, the silver, and the gold, broken to pieces together, and became like the chaff of the summer threshing floors; and the wind carried them away, that no place was found for them ; and the stone, that smote the image, became a great mountain and filled the whole earth." ''Magna est Veritas et pnevalebit." THE BANK OF ENGLAND. The following statement respecting the Bank of England is taken from Adam Smith's " Wealth of Nations," b. ii. c. 2. vol. ii. p. 65. : — " The Bank of England is the greatest bank of circulation in Europe. It was incorporated, in pursuance of an Act of Parlia- ment, by a charter under the great seal, dated the 27th of Jul}', 1694. It at that time advanced to Government the sum of one million two hundred thousand pounds, for an annuity of one hundred thousand pounds : or for 96,000^. a year interest, at the rate of eight per cent., and 4000/, a year for the expense of management. The credit of the new Government, established by the Revolution, we may believe, must have been very low, when it was obliged to borrow at so high an interest. " In 1697, the Bank was allowed to enlarge its capital stock, by an ingraftment of 1,001,171/. lOs. Its whole capital stock, there- fore, amounted at this time to 2,201,171/. lOs. This ingraftment is said to have been for the support of public credit. In 1696, tallies had been at forty, and fifty, and sixty per cent, discount, and Bank notes at twenty per cent. — (James Postlethwaite's History of the Public Revenue, page 301.) During the great recoinage of * Daniel, c. ii. 124 COINS AND CURRENCY. the silver, which was going on at that time, the Bank had thought proper to discontinue the payment of its notes, which necessarily occasioned their discredit. " In 1708, the credit of Government was as good as that of pri- vate persons, since it could borrow at six per cent, interest, the common legal and market rate of those times. "In 1722, the Bank had advanced the public 9,375,027/. 17*. lOlf/.; and its capital stock amounted only to 8,959,995/. I4s. 8d. It was upon tliis occasion that the sum which the Bank had advanced to the public, and for which it received interest, began first to ex- ceed its capital stock, or the sum for which it paid a dividend to the proprietors of bank stock ; or, in other words, that the Bank began to have an undivided capital, over and above its divided one. It has continued to have an undivided capital of the same kind ever since. In 1746, the Bank had, upon different occasions, advanced to the public 11,686,800/. and its divided capital had been raised by different calls and subscriptions to 10,780,000/. The state of these two sums has continued to be the same ever since. In pursuance of the 4th of George 4., c. 25, the Bank agreed to pay to Government for the renewal of its chai'ter 1 10,000/. without interest or repayment. This sum, therefore, did not in- crease either of those two other sums. " The dividend of the Bank has varied according to the vari- ations in the rate of the interest which it has, at different times, received for the money it had advanced to the public, as well as according to other circumstances. This rate of interest has gradually been reduced from eight to three per cent. For some years past the Bank dividend has been at five and a half per cent. " The stability of "the Bank of England is equal to that of the British Government. All that it has advanced to the public must be lost befoie its creditors can sustain any loss. No other banking company in England can be established by Act of Par- liament, or can consist of more than six members. It acts not only as an ordinary bank, but as a great engine of State. It receives and pays the greater part of the annuities which are due to the creditors of tlie public ; it circulates exchequer bills, and it advances to Government the annual amount of the land and malt taxes, which are frequently not paid up till some years thereafter. In those different operations, its duty to the public may sometimes have obliged it, without any fault of its directors, to overstock tlie circulation with paper money. It likewise dis- counts merchants' bills, and has upon several different occasions, supported the credit of the principal houses, not only of England, but of Hamburgh and Holland. Upon one occasion, in 1763, it is_^sai(l to have advanced for this purpose, in one week, about 1,600,000/., a great part of it in bullion. I do not, however, pretend to warrant either the greatness of the sum, or the short- ness of the time. Upon other occasions, this great Company has been reduced to the necessity of paying in sixpences." ON THE BANK OF ENGLAND. 125 The above description of the Bank of England in- forms us, that it is " the greatest bank of circulation in Europe ;" that, from the time of its establishment in 1694 to 1722, it had advanced more than its capi- tal to the public, and had a reserve fund correspond- ing to that which is now called the " Rest," being the excess of profits beyond the sum paid in divi- dends; and that, in 1696, tallies had been at 40, 50, and 60 per cent, discount, and bank notes at 20 per cent, discount, which perhaps is not to be wondered at, as it had discontinued the payment of its notes dur- ing the confusion which resulted from the recoinage of the silver coin in King William's reign. * " The Bank had received the clipped money at its full value. They had taken guineas at thirty shillings ; and when the notes issued by them in exchange came in, there was not sufficient specie to meet the daily demand. Had they paid in full, they must soon have been drained of specie, and they resorted to the plan of paying cash, at first in instalments of 10 per cent, once a fort- night, and, afterwards, 3 per cent, once in three months. But that this was only a temporary pressure arising from extraor- dinary circumstances, and not discredit, was proved from sealed bills, bearing interest, being received by their creditors in lieu of specie. Bank notes were advertised at 20 per cent, discount, but it must be remembered that guineas were at 50 per cent, pre- mium." That the Bank of England acts not only as an or- dinary bank, but as a great engine of State, circu- lating exchequer bills, and advancing to Government the annual amount of the land and malt taxes ; that it also discounts merchants' bills, and has, upon occa- sion, supported the credit of the principal houses, not only of England, but of Hamburgh and Holland, advancing in one week, in 1763, about 1,600,000/., a great part of it in bullion. " On other occasions, this great company has been reduced to the necessity of paying in sixpences." 1 am quite aware of the establishment of Joint- * See History of the Bank of England, by John Francis, v. i. p. IG London, 1848. 126 COINS AND CURRENCY. Stock Banks, and also of the more extensive opera- tion of the Bank of England since Adam Smith wrote; but these appear to be of the same nature, and may have borne as great a proportion then to the com- merce and finance of that period, as its present ope- rations bear to the commerce and finance of the present period. No doubt is expressed by Adam Smith of the com- petency of the Bank to discharge these various offices ; nor is any remedy proposed for obviating the neces- sity of paying occasionally in sixpences, except the alteration he suggested (b. i. c. 5. v. i. p. 52.), that silver coin should not be a legal tender for more than a guinea, and should be coined of less weight than the proportional value of silver to gold, but omitting a necessary condition, that the State only should have the privilege of coining the silver coin. This regu- lation was not suggested by the difficulty of the Bank meeting its engagements, but for the purpose of preventing the exportation of the heavy silver coin. * P. 40. Before 1759, the Bank issued notes for no lower a sum than 20/. ; in that year it commenced issuing notes and post bills for 15/. and 10/. In 1794, the Bank commenced issuing notes for 5/. In 1797, the Bank suspended cash payments, which suspension was continued by Acts of Parliament till 1821, when the Bank commenced paying off their notes under 5/. in gold ; and, in January 1826, an Act was passed (p. 66.) "to limit, and after a certain period to prohibit, the issuing of promissory notes under a limited sum in England." (7 Geo. 4. c. 6.) By this Act, no further notes under 5/. w^ere allowed to be stamped, and those already stamped could not be issued or re-issued after the 5th of April, 1829, under a penalty of 20/. P. 58. " In 1822, an Act was passed permitting the * The " History and Principles of Banking," by James William (jilbart, Srd ed. London, 1837. ON THE BANK OF ENGLAND. 127 " country bankers to continue the issuing of notes " under bl. until the expiration of the Bank Charter in *' 1833. As the law previously stood, these notes were " prohibited on the resumption of cash payments by " the Bank. The Directors made the following refe- "rence to this subject, in a memorandum they deli- "veredtothe Parliamentary Committee of 1832:" — "By the resolution of the House of Commons of 1819, the Bank were required, within four years, to pay oif in gold the amount of their one-pound notes then in circulation (about 7,500^000/.) ; fur- ther, to provide the coin for paying off the country small notes in 1825 (about seven or eight millions more) ; in addition to which, the necessity was imposed of providing tlie requisite surplus bullion for insuring the convertibility of all their liabilities, which addition of bullion to their then stock, could not be estimated at less than 5,000,000/., making in the aggregate 20,000,000/. of gold, as necessary to be provided from foreign countries, within the space of four years from 1819. " That supply of gold could only be purchased by reduced prices of commodities ; the Bank withdrawing a given amount of secu- rities, in the first instance, the notes for which might be re-issued in payment of the gold as imported. The low prices and general state of trade from 1819 to 1821, and the withdrawal of the Bank's securities, enabled the Bank to cancel their small notes in the latter year, and in the following (1822), three years prior to the time fixed by Parliament, they were in a situation to fui'nish the gold for paying off the country small notes, when, without any communication with the Bank, the Government thought proper to authorise a continuance of the circulation of country small notes until 1833. The consequence of that measure was, to leave in the possession of the Bank an inordinate quantity of bullion (14,200,000/. in January 1824), and further to afford the power of extension to the country bankers' issues, which, it is believed, were greatly extended from 1823 to 1825." We are informed, by the above memorandum, that the supply of gold *' could only be purchased by reduced prices of commodities;" and that the low prices and general state of trade from 1819 to 1821, and the withdrawal of Bank securities, enabled the Bank to cancel their small notes in the latter year; and in the following year (1822), three years before the time fixed by Parliament, they were in a situation to furnish gold for paying off the country small notes ; the Bank had also to provide about five millions of 128 COINS AND CURRENCY. bullion for insuring the convertibility of all their lia- bilities; altogether amounting to 20,000,000/. Horsley Palmer, Esq., Governor of the Bank (Evidence, p. 21. 723.): — " There is no means of supplying the Bank with gold, except- ing only the diminution of the amount of Bank notes, which im- mediately contracts the currency, and lowers prices, by increasing the value of money." P. 18. (28.): — " The Bank of England being conducted on safe and certain principles, has nothing to fear from foreign demand. No caution, no prudence, no principle of management, can render it entirely safe from being drained of its specie, by internal panic or political discredit." In the memorandum, it is said, " the supply of gold could only be purchased by reduced prices of commodities." It seems to me a strange expression to purchase by " reduced prices of commodities." To purchase with commodities at reduced prices, might raise the inquiry, AVhat commodities ? But the Bank has no commodities wherewith to purchase. In the words of Adam Smith (b. ii. c. 5. v. ii. p. 138.): — " This gold and silver, like the tobacco of Virginia, must have been purchased with something that either was the produce of the industry of the country, or that had been purchased with something else that was so." But the Bank purchases the gold and silver with- out any produce of industry of its own. Still, some one must have paid with commodities for the gold and silver, from which sort of payment the Bank is exempt. It is said that " the Bank of England, being con- ducted on safe and certain principles, has nothing to fear from foreign demand." What are those " safe and certain principles?" Are they not stated to con- sist in the judicious exercise of the power to lower prices, when the occasion may require, by a control over the currency, by the diminution of the amount of bank notes " in circulation ? " ON THE BANK OF ENGLAND. 129 At a later period, in a pamphlet* by J. Horsley Palmer, Esq., the following passage occurs, p. 23. : — " We must keep in mind that England is the centre of the whole commerce of England and America, if not the world ; and any hasty or unnecessary step taken, will not only affect the credit and prices of this country, but, to a certain degree, those of all parts of the continent, from wlience we are to obtain that bullion which we have lost. The causes of that loss, so seriously affect- ing the credit and commercial transactions of the country, de- mands the closest investigation. The fall in price of almost all the leading articles of raw produce (sugar, coffee, tea, silk, cotton, piece goods, metals, drugs, &c.), from the 1st of July last, when the rate of interest was first advanced, has not been less than from 20 to 30 per cent." Whether the Bank of England contracts the circu- lation, or, by raising the rate of discount, shocks the commercial credit, both operations have one object in view, which is, by lowering prices, to bring back the gold to the coffers of the Bank. The Governor of the Bank of England states his opinion, that circumstances may arise, when it may be impossible for the Bank to retain the specie ; namely, " an internal panic or political discredit ;" and that the only way to procure bullion is to lower prices ; and that a fall of 20 to 30 per cent, took place in the prices of the leading articles of com- merce after the Bank raised the rate of discount. If, on the return to cash payments, the general state of trade and low prices, from 1819 to 1821, enabled the Bank to acquire bullion to the extent of twenty millions, is it not fair to conclude that the action of the Bank may have contributed to produce the depression? This state of things enabled the Bank to meet its engagements three years before the time fixed by the Government. It is certain that, if not the proximate cause, the Bank was the original cause of much of this distress : if the Bank had not suspended payments, this reaction would not have occurred. It may appear to some extraordinary that * Causes and Consequences of tlie Pressure upon the Money Market. By J. Horsley PuLner, Esq. London. 1837. 130 COINS AND CURRENCY. the Bank could procure the bullion three years be fore the stipulated time ; but the greater the shock to credit, the greater the depression of trade and the lower the prices, the more intense the effect on the value of commodities the more unprofitable is com- merce, and the less employment there will be for the two instruments of commerce — credit and bullion. The Governor expresses himself alarmed at the loss of bullion which the Bank had sustained, and at the effect it might have upon credit and prices ; the Governor does not contemplate the power of the Bank of England to repair its loss from its own property, but from the low prices of the commodities of other people. Was it not to uphold the credit of the Bank, and not to uphold " public and private credit " ? Public and private credit would not be strengthened by reduced prices of commodities, by a loss to the owners of those commodities of 20 to 30 per cent.; but unprofitable traffic would occasion a stagnation of commerce, and the unemployed bullion would flow into the coffers of the Bank, and the exportation of gold would cease : and it ought to be clearly under- stood, that the interest of the Bank is not, in this proceeding, identified with the interest of the mer- chants and manufacturers : it can never be the in- terest of the latter, that the prices of merchandise should be lowered by an operation quite independent of supply and demand In the commercial concerns of this country, a party is introduced whose interest, as bankers, may be quite distinct from the interest of the country, and upon whose operations may depend the prosj^erity or mis- fortune of the trading community, and indirectly acting upon the commerce of the Avhole world. The gold may be wanted by foreign Governments in case of war, or on account of financial operations of states, as was the case with America ; or in the legi- timate use of bullion for the purposes of the round- about foreign trade, as explained in a former part of this treatise, having no connection with the credit ON THE BANK OF ENGLAND. 131 of Bank of England notes, or of commercial credit generally. It is quite clear that the Bank of England gave no equivalent for the fourteen millions of gold which they held in January 1824; this "inordinate quantity of bullion" was imported by the great mercantile re- public, and was deposited in the Bank of England, as any other foreign commodity might have been depo- sited in a bonded warehouse, waiting till a demand should arise for it. The Bank had given a solemn undertaking, in the shape of Bank notes, or a credit, that they would restore it on demand. When the Bank withdrew their small notes from circulation, and gave gold in exchange, they did not cancel their debt, or in any degree lessen it. They owed still the same sum, but to a different party. They owed it in the form of credits Avhicli they had given, or bank notes which they had given, that is, promises to pay the gold on demand. They took the gold imported by the " great mercantile republic," and with it fulfilled their contract with the " British public." They withdrew the gold from international circula- tion, and locked it up in the national circulation ; and for the gold which should have supplied the demand for the international circulation, were sub- stituted, by means of the low price, the produce and manufactures of the merchants and manufacturers. The bullion employed in the round-about foreign trade of consumption by the great mercantile repub- lic, the international traders of all nations, is not only a safety fund, but it is also a corrective fund. In a period of very high prices from speculation or other causes not connected with the cost of production, the bullion is exported instead of commodities, and this cessation of demand occasions a fall in the prices, at the same time that the influx of commodities is checked by the reduced demand and lower scale of prices. In a state of unnaturally depressed prices, the influx of bullion, instead of commodities, lessens the supply, and tends to raise the prices of those com- K 2 132 COINS AND CURRENCY. moclities. The influx of bullion has a tendency to raise prices when too depressed, and the efflux of bul- lion has a tendency to lower prices when too high. This corrective influence is exerted to bring commo- dities to their natural price, to raise it when too de- pressed, and to reduce it when too high : these ope- rations should be quite independent of the currency. The cost of production, with a fair remuneration, ac- cording to the existing state of society, is what Adam Smith calls the "natural price;" and he calls the market price, that which results from the effectual demand and supply. He observes (b. i. c. 7. v. i. p. 77.):- " The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat be- low it. But whatever may be the obstacles which hinder them from settling in this centre of repose and continuance, they are constantly tending towards it." The international bullion is the great instrument in restoring prices to this natural state between buyer and seller; and how unjust is it for any third party, neither buyers nor sellers, neither importers nor exporters of any commodities, to interfere with this safet}^ and corrective fund, for the purpose of enabling themselves either to escape from the per- formance of their contract to deliver gold on demand, or to procure that gold at the expense of the mer- chant and manufacturer, to the great detriment of commerce and of the country ! How desirable that this bullion should be in the custody of the individuals of the great mercantile republic ! Mr. Horsley Palmer stated, in his evidence before the Committee on Banking, in 1832, p. 6.*: — " (P. 72 .) In ordinary times, in a full period of currency, and * A Digest of the Evidence on the Bank Charter, 1832. ON THE BANK OF ENGLAND. 133 at a par of exchange, the Bank regulates its issues by investing in securities bearing interest a given proportion of the deposits, and the value received for the notes in circulaton ; the rest is kept in coin or bullion ; two-thirds in security and one-third in bullion, the circulation being regulated afterwards by the course of exchanges with foreign countries." P. 7.: — " (p. 120.) A demand on the Bank for gold to be exported is the only criterion of an unfavourable exchange, and the inward flow of gold is the only indubitable proof that the exchanges are fa- vourable." P. 8. :— " (p. 129.) A par of exchange, in the language of the Bank, means no demand for bullion to be exported. "(p. 166.) But private paper is the worst means which a bank of issue can have to regulate its notes ; it extends the circulation dangerously, and it interferes with private bankers." " The chief functions of the Bank are the supply of a paper circulation to the public, and to be a safe deposit for the public money, and for the money of individuals who prefer a public body to a private banker. " The Bank of England keeps its notes in circulation by the securities they hold, or the bullion they possess ; and they provide for the continual issue of paper by purchase in the market, when any part they hold is redeemed or paid off, and these purchases are necessary for a due regulation of the general currency of the country." From this evidence it appears that the chief func- tion of the Bank, as respects the currency, was to supply the public with a paper circulation by an in- terchange of securities, with bank notes; that the principle which was to govern the Bank in determi- ning when the circulation was full, was the state of the exchanges, which was ascertained by the demand for bullion for exportation ; and that it was the prin- ciple of the Bank to keep two-thirds of their deposits and circulation in securities, and one-third in bul- lion ; that the exchanges were supposed to be at par, when there was no demand for bullion for exporta- tion. It would follow from this, that a wholesome or safe state of the circulation ought to co-exist with there £ 3 134 COINS AND CURRENCY. being one-tliird of the amount of deposits and circu- lation, in bullion or coin, at the Bank. This rule appears to have been quite nugatory, and not to have been acted upon by the Bank. Samuel Jones Loyd, Esq., in his " Ilemarks on the Management of the Circulation," &c., expresses (p. 22.) his high approbation of a plan suggested by the Governor and some of the Directors, in their ex- amination before the Committee : — " It was proposed to take ' the period of a full currency, and, consequently, a par of exchange,' and to invest and retain in securities two-thirds of the available funds of the Bank, and to hold the remaining third in coin and bullion. This being done, the Bank was thencefortli to retain the aggregate amount of the securities unaltered, and whatever demand might arise from the action of the public, in presenting notes for payment, was to fall exclusively upon the coin and bullion." P. 24. Mr. Loyd approved of it "upon the as- sumption, that the plan in question was to be con- sidered as applicable exclusively to the management of the currenc}' ;" and it failed, in his opinion, because, " in obedience to a necessity, real or supposed, the authors of the rule acquiesced in the application of it indiscriminately to the general management of the whole concern, and, in so doing, they diminished its simplicity, and altogether destroyed its efSciency." — (Published in 1840.*) P. 26. : — " First. For the simple and exclusive purpose of regulating the circulation of the country, it leaves us without any rule whatever; and accordingly we find, by the published returns, that no fixed relation exists between the amount of bullion and the amount of circulation. " Second. The circulation may decrease whilst the bullion is increasing ; or it may increase whilst tlie bullion is decreasing. We have had practical examples of each kind within the last few years. " Third. The bullion, through the demands of the depositors, may leave the Bank coffers in large amounts, in fact, it may be wholly drained out, without any contraction of the circulation, * Remarks on the IManagement of the Circulation, &c. By Sauiucl .Jones Loyd. ON THE BANK OF ENGLAND. 135 and therefore without any effect being produced upon prices or foreign exchanges, by means of which the continuance of the drain may be checked. This is a possibility : it cannot strictly be said to have occurred, though the condition of the Bank has lately approximated very closely to this state of things. " It is further to be observed, that none of these results could occur under the application of the rule in question, strictly and exclusively, to the management of the circulation: it is only when banking transactions, as well as those of currency, are brought under its operation that these contingencies arise." In proof of the inapplicability of the rule it is stated, p. 40: — That the securities were, in January 1839 . . . ^21,680,000 Ditto October 1839 . . . 24,939,000 Increase of securities .... £ 3,259,000 P. 35.: — The stock of bullion was, in January 1839 . . . £9,336,000 October 1839 . . . 2,525,000 Decrease o^hxyWion .... £6,811,000 P. 33. : — Circulation. Deposits. Securities. Bullion. Jan. 10. 1839 . 18,201,000 10,315,000 21,680,000 9,336,000 Oct. 18. „ . 17,612,000 6,734,000 24,939,000 2,522,000 Mr. J. Horsley Palmer, " Causes and Consequences," &c. P. 39.: — " It is perfectly immaterial whether banks of issue retain their just proportion of reserves in Bank of England notes or coin, but one or the other, it is submitted, they ought to be compelled to retain with reference to their liabilities, or to abandon the issue of notes, the upholding of which, under discredit, becomes a source of difficulty and danger to the public at large, as well as to the Bank of England." P. 41.: — " Under the system which now exists, embracing a total amount of bank -paper circulation in Great Britain and Ireland of about forty-five millions, the half of which may be assumed to be unpro- tected by an adequate reserve of either Bank of England notes or K 4 136 COINS AND CURRENCr. coin, it certainly is impossible to insure the convertibility of paper even for foreign payments ; 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 adequate reserve of bullion expanding and contract- ing as the currency may fluctuate in value with reference to foreign countries, there could be no difficulty in preserving it against depi-eciation for all purposes of foreign payment." P. 43. :~ " 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 Ire- land," &c. P. 50.: — " So dangerous does the system appear, as it noio stands, that it becomes questionable whether the Bank of England and the bodies in question can jpermanently exist together P He concludes by saying, p. 51. : — " Whether the Bank of England, as now constituted, be the establishment most capable of upholding public and private credit, or whether its sphere of action should be extended or contracted, are public questions. The interest of the public only is to be considered ; and decisions taken in that view, and with a full knowledge of all the facts and principles bearing upon such com- plicated and difficult subjects, will be sure to meet with the con- currence of every individual connected with the Bank, as they ought to do with that of every well-wisher to his country." The remedy here proposed is a limitation of the amount of paper money, to be issued by one body, with an adequate reserve of bullion. What is meant by paper money " expanding and contracting as the cur- rency may fluctuate in value with reference to foreign countries," is not very clear ; I suppose it alludes to the exchanges being favourable or unfavourable, and to the influx or efflux of bullion. On this subject I shall have occasion to treat hereafter. I have thought it well to give an outline of the opinions and systems which prevailed previously to the introduction of the Bank Act of 1844. 137 CHAP. XL ON AN ACT TO REGULATE THE ISSUE OF BANK NOTES, AND FOR GIVING TO THE GOVERNOR AND COMPANY OF THE BANK OF ENGLAND CERTAIN PRIVILEGES FOR A LIMITED PERIOD. (19 JULY, 1844.) Sir Egbert Peel, on introducing the Bill, truly observes, p. 3.* : — *' I shall therefore proceed at once to call the attention of this Committee to a matter which enters into every transaction of which money forms a part. There is no contract, public or pri- vate, no engagement, national or individual, which is unaffected by it. The enterprises of commerce, the profits of trade, the ar- rangements made in all the domestic relations of society, the wages of labour, pecuniary transactions of the highest amount and of the lowest, the payment of the national debt, the pi'ovision for the national expenditure, the command which the coin of the smallest denomination has over the necessaries of life, are all affected by the decision to which we may come on that great question which I am about to submit to the consideration of the Committee." He also adds what may not be so evident to others as to her Majesty's Government. P. 5. : — " They are of opinion that inquiry has been exhausted, that all the information which is essential to the formation of a satis- ffictory judgment has been collected, and that it is incumbent on the Ministers of the Crown to submit to the decision of Par- liament the measures which in their opinion it may be fitting to adopt." • Speeches of the Right Honourable Sir Robert Peel, Bart., on the Renewal of the Bank Charter, and the State of the Law respecting Currency and Banking. London, 1844. 138 COINS AND CURRENCY. P. 8.: — " Now, the whole foundation of the proposal I am about to make rests upon the assumption that according to practice, ac- cording to law, according to the ancient monetary policy of this country, that Avhich is implied by the word ' pound ' is a certain definite quantity of gold with a mark upon it to determine its weight and fineness, and that the engagement to pay a pound means nothing, and can mean nothing else, than the promise to pay to the holder, when he demands it, that definite quantity of gold." Sir Robert Peel then ridicules the definition of some writers. P. 10. : — " The last definition of the standard of value which I shall quote is this : ' The standard is neither gold nor silver, but it is sometliing set up in the imagination, to be regulated by public opinion.' " A definition nearly resembling that of the " macute" of the African, gravely advanced by so celebrated a writer as ]\Iontesquieu, and noticed in a former part of this treatise. P. 16.:— " The precious metals are distributed among the various countries of the world in proportion to their respective neces- sities, by laws of certain though not very obvious operation, which, without our interference, will allot to our share all that we require. Some entertain the apprehension that we may be drained of all our gold in consequence of a demand for gold from foreign countries, either for the payment of their armies in time of war, or in consequence of sudden and unforeseen demand for foreign corn for our own internal consumption. It is supposed that gold, being an article in universal de- mand, and having at all times and in all places an ascertained value, is more subject to exportation than any thing else. But the export of gold, whether coin or bullion, is governed by precisely the same laws by which the export of any other article is governed. Gold will not leave this country, unless gold be dearer in some other country than it is in this. It will not leave this country, merely because it is gold, nor while there is any article of our produce or manufacture which can be exported in exchange for foreign produce with a more profitable return. If gold coin be in any country the common medium of exchange ; or if the promissory notes, which perform in part the functions of gold coin, arc at all times and under all circumstances of equal value with gold, and are instantly convertible into gold ; ON THE BANK ACT OF 1844. 139 there are causes in operation which, without any interference on our part, will confine within known and just limits the extent to which gold can be exported. There may, no doubt, be tempo- rary pressure from the export of gold, even when it is confined within those limits ; but none for which you may not provide, none to which you would not be subject, in a higher degree pro- bably, were any other standard of value adopted in preference to gold." I think it not correct to say, that precisely the same laws govern the export of coin and bullion and that of other articles : other articles leave a profit and a loss which gold does not, and gold is neither dear nor cheap in this country. It has no price in this country. It appears to me that gold does leave this country merely because it is gold ; simply to pay debt, as coin leaves the pockets of individuals at home, simply to pay debt. It is exported to purchase foreign pro- duce, when manufactures cannot be exported without leaving a loss. It is true that it would not be ex- ported when manufactures or produce would leave a profit. It is the commodities which occasion the profit or loss, which are dearer or cheaper, not the gold. What the causes are which operate to confine the exportation of gold within hiown and just limits are not stated; nor what are those knoicn and just limits. Gold coin is in England " the common medium of exchange ; " and " promissory notes perform in part the functions of gold coin ; " but can it be said that they are " at all times, and under all circumstances, of equal value with gold," while gold can be exported for the payment of debt, or in lieu of commodities, which promissory notes cannot ? Can it be said that at all times, and under all circumstances, promissory notes are instantly convertible into gold, while obsta- cles are thrown in the way of converting them into gold by diminishing the amount of notes in circulation, and rendering necessary the circulation of these notes in the home market, from which they cannot be spared to procure the gold from the Bank ? The object of 140 COINS AND CURRENCY. the Bank Bill seems to be to make these promissory notes as valuable in the foreign market, where they will not circulate, as they are in the home market, where they are exchangeable for gold coin. The object seems to be to make the promissory note as valuable for exportation as gold, and to substitute it for gold ; not directly, which cannot be done, but indirectly, to make the promissory notes exchange for something in the home market which shall be equivalent or better than gold in the foreign market. The gold will only be worth its weight of gold in the foreign market, but if manufactures and produce can be lowered in price in the home market, so as to ex- change for more gold in the foreign market than the gold paid for the purchase ; if they can be lowered so as to leave a profit on the commodities exported in lieu of gold ; then, indeed, gold will not be exported, not because there is an equivalency between gold and paper in the home market, but because there is more than an equivalency between the pound's worth of manufactures in the foreign market and the gold pound in the foreign market. It is a substitution of manufactures and produce for gold to be exported, or an exchange of bank notes for manufactures which shall be more than equal in value to the gold pound abroad. If we cannot export the paper pound, yet if by contraction of the circulation, raising the rate of interest and a shock to credit, we make the paper 2)0und at home worth more than equal to the gold pound abroad ; and if we can make the world believe that all this pressure is necessary to restore the equi- librium between paper and gold in the home market, or that it is necessary and useful in order to rectify the exchanges, we succeed in establishing a great fallacy ; and people are deluded into an acquiescence with injustice to the manufacturer, and merchant, and agriculturist. The pressure is to make the paper pound equal, or more than equal, in value to the metallic pound in the foreign market, not in the home ON THE BANK ACT OF 1844. 141 market, where the promissory note was always as valuable as the sovereign. We have " equivalency " in the promissory note re- latively to the sovereign in the home market, but not in the foreign market, and the confusion and distress and pressure arise from the operation of endeavouring to make the promissory note an article of merchandise like gold, of making it an " equivalent " for gold for purposes of exportation ; and as it is impossible to make the promissory note merchandise in the foreign market, we force, by the law of private interest, an exchange of it for merchandise in the home market ; and that merchandise, sold at ruinous prices, is the substitute for gold in the foreign markets ; and then we boast of having rectified the exchanges or stopped the exportation of gold, and restored the equivalency between promissory notes and gold. SirK. Peel, p. 21.: — " It is contended by some, that if you were to dispense with coin altogether, to adopt the principle of Mr. Ricardo's plan, and make Bank notes not convertible into gold at the will of the holder, excepting when presented to the amount of a very con- siderable sum (300/. or 400/., for instance), and then convertible into bullion and not coin, you would provide a security against the effects of a panic connected with political causes, causing a sudden demand for gold. I very much doubt the policy of taking such precautions against such a contingency, and consider that the most effectual measure for promoting permanent confidence in the paper circulation of the country, is to require that the gold coin shall be in general use for small payments, and that the promissory note shall be of equal value with the coin which it professes to represent." The objection to Mr. Ricardo's plan is, that it would not only banish coin from the circulation, but it would be a breach of promise^ as expressed in the note, and the difficulty of procuring gold for the notes by the generality of holders would depreciate their value. It would be also preventing the great mercantile republic from procuring less sums than 300/. or 400/. for the purposes of foreign trade, which would be unjust, and a great hindrance to commerce. 142 COINS AND CURRENCY. P. 22.: — "I must state, at the outset, that in using the word money, I mean to designate by that word the coin of the realm, and promis- sory notes payable to bearer on demand. In using the words paper currency, I mean only such promissory notes. I do not include in those terms bills of exchange, or drafts on bankers, or other forms of paper credit. I will not weary the House with a discus- sion as to the precise nature of deposits, and whether they consti- tute a part of the currency of the country." P. 25.: — " Lord Liverpool observes : ' It has been a common artifice, practised by those who have written on paper currency, to con- found paper credit with paper currency ; and even the higher sorts of paper currency with the inferior sorts, such as immedi- ately interfere Avith the use of the coins of the realm. " ' Paper currency, strictly speaking, consists only of bills or notes payable or convertible into cash on demand by the person who issued the same at the will of the holder.' " Sir Kobert Peel says : — " That appears to me to be the true definition of paper cur- rency as distinguished from paper credit. It is the substitute for and immediate representative of coin, and with coin it constitutes * money.' " It will be observed that Lord Liverpool not only makes a distinction between credit and currency, or promissory notes payable to bearer on demand, but between the higher sorts of paper currency and the inferior sorts, such as immediately interfere with the use of coin. At the time he wrote (during the Bank restriction), we had a circulation of one and two pound notes, and it was doubtless these that he al- luded to, and which immediately interfere with the use of coin. He drew a distinction between one and two pound notes, and those of a lower denomination, and five and ten pound notes, and perhaps between both these descriptions and twenty, and fifty, and hundred pound notes. He drew a distinction between all these promissory notes and bills payable after date, but only a distinction. He called one kind paper credit, and the other currency. But he did not call ON THE BANK ACT OF 1844. 143 either of them " money." Here Lord Liverpool and Sir R. Peel are at variance, and upon a very important point. Sir R. Peel proceeds p. 25. : — "And if you will adhere to the standard of value, and will adopt such] measures as shall ensui'e the uniform equivalency of bank notes to coin, you may safely, in my opinion, leave untouched other forms of paper credit, and entrust the regulation and control of them to individual caution and discretion." The " equivalency" of bank notes to coin depends upon the performance of the promise to pay coin when required, and the confidence in a promise de- pends upon the opinion entertained of the " fortune, probity, and prudence " of the person who makes the promise, whether that promise be for ten thousand pounds, or for ten pounds. P. 26.: — " There are some, however, who admit the validity of this dis- tinction^ and yet contend that no new legislative interference is required in the case of promissory notes. In their opinion, the true principles which should govern the issue of such notes are, freedom of competition, and immediate convertibility into coin at the will of the holder. The combination of these principles will, in their opinion, afford to the public a complete security against the abuse of the privilege of issue. " In support of that opinion they have undoubtedly the high authority of Adam Smith and of Ricardo. Both these eminent writers assume, that immediate convertibility into coin is all that is requisite to prevent the excessive issue of paper. It is no im- peachment of their sagacity, if, in the progress which this science, like all other sciences, is making, there be reason to doubt the soundness of any particular opinion which they may have deli- vered. And it is our duty to disregard their authority, and to act on the conclusions of our own judgment, if either reason or experience convinces us that they are safer guides. "It appears to me that we have, from reasoning from expe- rience, fi'om the admissions made by the issuers of paper money, abundant ground for the conclusion, that, under a system of un- limited competition, although it be controlled by convertibility into coin, there is not an adequate security against the excessive issue of promissory notes." But we want not a security against the excessive 144 COINS AND CURRENCY. issue of promissory notes, but a security for the pay- ment of these notes when issued. No limitation of quantity will insure the payment of bad notes ; by unlimited competition good notes or valid promises may supply their place; and under whatever secu- rities the Government may choose to impose. P. 27.: — "We should infer, certainly, from reasoning, that free compe- tition in the supply of any given article, will probably insure us the most abundant supply of that article at the cheapest rate. But we do not want an abundant supply of clieap promissory paper. We want only a certain quantity of paper, not, indeed, fixed and defi- nite in nominal amount, but just such a quantity of paper, and that only, as shall be equivalent in point of value to the coin which it re- presents. If the paper be cheaper than the coin, it is an evil and not an advantage. That system, therefore, which provides a constant supply of paper equal in value to coin, and so varying in amount as to insure at all times immediate convertibility into coin, together with perfect confidence in the solvency of the issuers of paper, is the system which ought to be preferred. Now, unless the issuers of paper conform to certain principles, unless they vigilantly ob- serve the causes which influence the influx or efl3ux of coin, and regulate their issues of paper accordingly, there is danger that the value of the paper will not correspond with the value of coin. The difference may not be immediately perceived, nay, the first effect of undue issue, by increasing prices, may be to encourage further issues ; and as each issuer, where there is unlimited com- petition, feels the inutility of individual efforts of contraction, the evil proceeds, until the disparity between gold and paper becomes manifest, confidence in the paper is shaken, and it becomes neces- sary to restore its value by sudden and violent reductions in its amount, spreading ruin among the issuei's of paper, and deranging the whole monetary transactions of the country." P. 28. :— " If we admit the principle of a metallic standard, and admit that the paper currency ought to be regulated by immediate refe- rence to the foreign exchanges — that there ought to be early con- tractions of paper on the efflux of gold — we might, I think, infer from reasoning, without the aid of experience, that an unlimited competition, in respect to issue, will not afford a security for the proper regulation of the paper currency." To place promissory paper in the home circulation in the same category as an " article" or commodity, and to suppose that it can vary like merchandise in UN THK liAiNK ACT Ui<" 10^^. 1^0 value, according to its quantity, is to confound the " promise " with the " pound." The pound is gold, and will vary in value according to the supply rela- tively to the demand, and to the cost of production, being gold. The pound, or sovereign, is the measure of value and the equivalent. The promise is an en- gagement to " pay to the holder, when he demands it, a definite quantity of gold," viz., " this pound," or sovereign. The promise is one thing, and the pound is another. When it is said, " We do not want an abundant supply of cheap promissory paper," is it meant that we do not want an abundant supply of cheap pounds, or of cheap promises ? The pound is not affected in value by the promise, nor the pro- mise by the pound. Whatever the pound may be, the promise is fulfilled by paying that pound on de- mand ; and whatever may be the value of the pro- mise, the pound or sovereign remains unaltered in value. The pound is merchandise of a certain weight, and its value must be determined by the crucible and the scales. The promise is a moral obligation, not depending upon quantity or quality, but "truth." The test of the promissory note is " truth." How can the value of the paper be determined by its quantity, and how can a promise to deliver coin on demand, if true, be less valuable than coin ? How can the promise be cheap or dear, or how can con- fidence in the promise, the opinion of another respect- ing the promise, affect the value of the pound ? If the confidence of the public be shaken, it must be con- fidence in the promise, and they will immediately demand payment of the coin. How can contraction restore confidence in a promise, when no doubt ever existed ? The foreign exchanges cannot be affected by the quantity of paper in circulation, as long as gold is paid in performance of the promise ; gold is demanded for exportation ; the pound is demanded because the promise is unavailable in transmitting the balance of debt. 146 COINS AND CURRENCY. Can anything be more preposterous than that .1 countiy banker, or that any banker, should be deter- mined in the amount of his issues of promises by the state of the exchanges ; that his domestic circulation should be contracted on the efflux of gold ? And are we to conclude, because he does not regulate the issue of his notes by the state of the exchanges and the efflux of gold from this kingdom, that therefore unlimited competition will not determine the proper amount of currency that this country may require ? Why should the home circulation have any thing to do with the foreign demand for gold? This is the result of the present system. If the coin in banks of issue were kept distinct and separate from the bullion employed in the interna- tional commerce of the Great Mercantile Republic, the national and the international circulation would both regulate themselves, without any interference of the government, or of any national bank. The demand for coin in the home circulation would be quite as potent, and would not yield to the demand for gold for international commerce or for any other purpose. The exportation of bullion, that " most convenient commodity," must not always be identified with the exchanges. The rivalship now is between the demand for the "great mercantile republic" and the great na- tional bank. It is the Bank of England, and not the nation, that wants to retain the gold, in order to be enabled to fulfil its own enofagements. But the effect of competition is not limited to cheapness but ex- tends to goodness. By competition we not only get a cheaper article but a better article. The competition of banks may produce good banks as Avell as cheap banks ; safe banks of deposit, as well as money lenders, at low interest. It is clear that the Bill is founded upon the prin- ciple that the promissory notes, even when payable, and paid in coin on demand, are liable to be depre- ON TPIE BANK ACT OF 1844. 147 ciated relatively to the gold, and that the paper could " be cheaper than the coin." P. 29. Sir R. Peel adduces evidence "to prove that country banks do not and cannot control their issues according to the state of the foreign ex- changes." P. 30. : — " And thus each refusing to make the individual sacrifice, (which, indeed, is useless where only made individually,) the crisis comes : there is a demand for gold which cannot be satisfied, and the end of all is much individual suffering and many fortunes ruined, from the necessity of a sudden and violent effort to establish, by the contraction of issue, an equilibrium between gold and paper." What is wanted is not an equilibrium between gold and paper, but an equilibrium between promise and performance or paj'ment. " The crisis comes ! " What crisis ? The crisis of the Bank of England ? But, in truth, the notes in circulation should have nothing to do with the demand for gold for exporta- tion. The gold is wanted for exportatio7i either in the regular round-about foreign trade, w^hich is perfectly legitimate, or to pay debt, or to guard against loss from the high prices in our markets, and these high prices are checked by the demand being lessened for commodities, and gold being ex- ported in their stead ; but it was not the overissue of notes which raised prices, but the overlending of money to individuals, and which ought to be checked according to the rules of prudence^ not according to the state of the exchanges. " There is a demand for gold which cannot be satisfied, and the end of all is, much individual suffering and many fortunes ruined, from the necessity of a sudden and violent effort to establish, by the contraction of issue, an equilibrium between gold and paper." What have individuals to do with the engage- ments of the Bank of England ? What would be said of an}^ joint-stock bank at Liverpool or Manchester, who, when pressed for the fulfilment of their engage- L 2 118 COINS AND CURRENCY. ments, were to inflict " much individual suffering " and " ruin many fortunes," in order to establish an equilibrium between their " debits and assets," or between " their notes in circulation, and the Bank of England notes and gold and silver in their coffers ?" P. 31.: — " Thus it appears to me, that the conclusions of reason against unlimited competition of issue, are amply confirmed by the admis- sions of the advocates for it." * The admissions were, that the issuers of promis- sory notes did not, and could not, regulate their issues according to the amount of gold in the Bank of Eng- land, according as that gold was increasing by im- portation or diminishing by a demand for exportation, or according to the foreign exchanges, and that " there will be an increase in the local circulation when prices rise." Can it be concluded by reason, that the operations of one bank are to be guided by those of another? That a banker is to be determined in his decision, not by his own ability to meet his engagements, but by the ability of another bank, however powerful, to meet its engagements ; or that the issues of a private banker, in a limited neighbourhood, are to be deter- mined by the commercial operations of the "great mercantile republic ;" that it is an essential part of his business to study the foreign exchanges, and to understand the full meaning of the following state- ment? " The premium on gold at Paris is 7 per mille, which, at the English Mint price of 3/. 17*. lO^d. per ounce for standard gold, gives an exchange of 25.32^, and the exchange at Paris on Lon- don at short being 25.30, it follows that gold is 0.10 per cent, dearer in Paris than in London." — Evenitig Mail, April 10. 1849. Sir Robert Peel, p. 31. :— " Are the lessons of experience at variance with the conclusions * See the Evidence of Mr. Hobhouse and of Mr. Stuckey. Sir R. Peel, p. 28. ON BANKING IN THE UNITED STATES. 149 we are entitled to draw from reason and from evidence ? What has been the result of unlimited competition in the United States? In the United States the paper circulation was supplied, not by private bankers, but by Joint-Stock Banks, established on principles ap- parently the most satisfactory. There was every precaution taken against insolvency; unlimited responsibility of partners — excellent regulations for the publication and audit of accounts — immediate convertibility of paper into gold. If the principle of unlimited com- petition controlled by such checks, be safe, why has it utterly failed in the United States .'' How can it be shown that the experiment was not fairly made in that country ? Observe this fact. While there existed a central Bank (the United States Bank), standing in some such relation to the other banks of the United States as the Bank of England stands to the banks of the country, there was some degree (imperfect, it is true) of control over the general issues of paper. But when the privileges of the Central Bank ceased, when the principle of free competition was left unchecked, then came, notwithstanding professed convertibility, immoderate issues of paper, extravagant speculation, and the natural conse- quences, suspension of cash-payments and complete insolvency. Hence, I conclude, that reason, evidence, and experience combine to demonstrate the impolicy and danger of unlimited competition in the issue of paper." Sir Robert Peel considered that the United States Bank afforded a " lesson of experience," in favour of a national or central bank : in the following chapter I have given some account of that bank, of the reasons alleged for the refusal to renew its charter, and of the establishment of a Constitutional Treasury. L o 150 CHAP. XII. ON BANKING IN THE UNITED STATES. The following extracts from Gilbart's " History of Banking in America" will show, that the opinions of statesmen in America have differed upon the utility of a National Bank.* In the year 1831, Mr. Albert Gallatin thus speaks of the advantages derived from the Bank of the United States. P. 16.:— " Experience, however, has since confirmed the great utility and importance of a ' Bank of the United States in its connexion with the Treasury : ' * the safe keeping of the public monies ; and the perfect facility with which all the public payments are made ' in, and transferred from one part to the other, in the extensive territories of the Union. 'The uniformity of duties and taxes of every description,' from the uniformity ' of the currency/ being such as will ' ensure a currency sound, and uniform itself, and at the same time check and regulate that which will continue to constitute the greater part of the currency of the country.' " He then dwells upon the greater degree in which the circulation of the United States Bank had increased in proportion to that of the State Banks. P. 17.:— " The general complaints on the part of the State Banks, that they are checked and controlled in their operations by the Bank of the United States, — that, to use a common expression, it operates as a screw, is the best evidence that its general opera- tion is such as had been intended. It was for that very purpose that the Bank was established." P. 18. :— " The manner in which the Bank checks the issues of the State Banks, is equally simple and obvious. It consists in receiving * " The History of Banking in America," by James William Gilbart : London, 1837. ON BANKING IN THE UNITED STATES. 151 the notes of all those which are solvent, and requiring payment from time to time, without suffering the balance due by any to become too large. " We think that we may say, that on this operation, which re- quires partieuhir attention and vigilance, and must be carried on with great firmness and due forbearance, depends almost exclu- sively the stability of the currency of the country. " The principal advantages derived from the Bank of the United States, which no State Bank, and, as it appears to us, no bank established on different principles could afford, are, therefore, first and principally, securing with certainty an uniform, and, as far as paper can, a sound currency ; secondly, the complete security and great facility it affords to government in its fiscal operations ; thirdly, the great convenience and benefit accruing to the com- munity, from its extensive transactions in domestic bills of ex- change and inland drafts. We have not adverted to the aid which may be expected from that institution in time of war, and which ive think should be confined to two objects." These objects are stated to be, advances on the se- curity of the " additional taxes laid during the war ; and afFordino; facilities for raisino^ loans." These were the principal arguments in favour of the Bank of the United States, and which, in some respects, are similar to those advanced by Sir Robert Peel on the introduction of the present Bank Bill. It may be observed that there is this wide distinc- tion between the United States Bank, called by Sir Robert Peel, the Central Bank, and the Bank of England ; the former was not the warehouse or Bank of deposit of the bullion, which formed the interna- tional money of the Great Mercantile Republic, that " most convenient commodity for carrying on the round-about foreign trade." It may be also observed that the check and control exercised by the United States Bank was on the State Banks; "p. 18. by receiving the notes of all those that are solvent, and requiring payment from time to time, without suffering the balance due by any to become too large." This is different from the control proposed by Sir Robert Peel ; that was to be exerted without dis- crimination upon the general currency of the country, including the issues of the Bank of England ; and tiie L 4 152 COINS AND CURRENCY. control was to be regulated, not by the solvency of the banks, but by the state of the exchanges. We shall find that General Jackson, when Presi- dent, entertained very different views respecting the United States Bank. P. 19.:— " In 1832, a law passed both Houses of Congress for a renewal of the charter of the Bank of the United States ; but the President, General Jackson, refused to ratify it. This power is conferred upon the President." P. 20. :— The President returned the bill to the Senate, with a very long message, stating his objections, which were principally of a political nature. P. 21.:— "It will make the American people debtors to aliens in nearly the whole amount due to this Bank, and send across the Atlantic from two to live millions of specie erery year to pay the Bank dividends." Also, by conferring too great power on the direc- tors, it might endanger the institutions of the country. P. 22. :— " It is easy to conceive that great evils to our country and its in- stitutions might flow from such a concentration of power in the hands of a few men irresponsible to the people." Also that the Bank might procure for itself the power to purchase lands within the States — a power granted to the Government only for particular purposes of general interest, and with the consent of the State where such lands are situated; that "the stockholders should be Americans only, if such a bank were established ; that the capital of the bank was unneces- sarily large." P. 22. :— " The old B;Ank of the United States possessed a capital of only eleven mi lions of dollars, which was found fully sufficient to enable it, with despatch and safety, to perform all the functions required of it by the Government. The capital of the present ON BANKING IN THE UNITED STATES. 153 Bank is thirty-five millions of dollars, at least twenty-four more than experience has proved to be necessary to enable a bank to perform its public functions. The public debt which existed during the period of the old Bank, and on the establishment of the new, has been nearly paid oiF, and our revenue will soon be reduced. This increase of capital is, therefore, not for public, but for private purposes." P. 23. :— In 1833, General Jackson removed the government deposits from the Bank of the United States. P. 24.: — *' A great part of the session of 1834 was occupied in debates connected with the removal of the public deposits from the Bank of the United States, and upon the embarrassments produced by the consequent pressure upon the money market. The senate took the side of the Bank, and March 26th passed two resolutions : 1. "That the reasons assigned by the Secretary of the Treasury for the removal of the money of the United States, deposited in the Bank of the United States and its branches, communicated to Congress on the 4th of December 1833, are unsatisfactory and in- sufficient." 2. "That the President in the late executive proceedings in relation to the public revenue has assumed upon himself au- thority and powers not conferred by the constitution and laws, but in derogation of both." The house of representatives took the side of the President, and on April 4th passed the following resolutions : 1. " That the Bank of the United States ought not to be re-chartered." 2. " That the public deposits ought not to be restored to the Bank of the United States." P. 28. :— In his address to Congress, deUvered December 1st, 1834, General Jackson referred to the Bank of the United States in the following terms : — " Circumstances make it my duty to call the attention of Con- gress to the Bank of the United States. Created for the con- venience of the Government, that institution has become the scourge of the people. Its interfei'ence to postpone the payment of a portion of the national debt, that it might retain the public money appropriated for that purpose to strengthen it in a political contest — the extraordinary extension and contraction of its accom- modations to the community — its corrupt and partisan loans, &c. " It is a subject of congratulation, that Congress and the coun- try had the virtue and firmness to bear the infliction ; that the energies of our people soon found relief from this wanton tyranny in vast importations of the precious metals from almost every part of the world ; and that at the close of this tremendous eflorl to 154 COINS AND CURRENCY. control our Government, the Bank found itself powerless, and no lon"-er able to loan out its surplus means. The community had learned to manage its affairs without its assistance, and trade had al- ready found new auxiliaries, so that on the 1st October last the ex- traordinary spectacle was presented of a national bank, more than one-half of whose capital was either lying unproductive in its vaults or in the hands of foreign bankers. " It seems due to the safety of the public funds remaining in that Bank, and to the honour of the American people, that mea- sures be taken to separate the Government entirely from an institution so mischievous to the public prosperity, and so regard- less to the constitution and laws. " Events have satisfied my mind, and I think the minds of the American people, that the mischiefs and dangers which flow from a national bank far over balance all its advantages. The bold eifort the present Bank has made to control the Government, the distresses it has wantonly produced, the violence of which it has been the occasion in one of our cities famed for its observance of law and order, are but premonitions of the fate which awaits the American people, should they be deluded into a perpetuation of this institution, or the establishment of another like it. " Happily, it is already illustrated that the agency of such an institution is not necessary to the fiscal operations of the Govern- ment. The State Banks are found fully adequate to the per- formance of all services which were required of the Bank of the United States, quite as promptly, and with the same cheapness. They have maintained themselves, and discharged all these duties, while the Bank of the United States was still powerful, and in the field as an open enemy : it is not possible to conceive that they will find greater difficulties in their operations when that enemy shall cease to exist. " If the several States shall be induced gradually to reform their banking systems, and prohibit the issue of all small notes, we shall in a few years have a currency as sound, and as little liable to fluctuations, as any other commercial country." P. 34., 1836, Mr. Gilbert observes:— " The charter of the Bank of the United States expired in this year. A new charter was, however, obtained from the State of Pennsylvania, authorizing the Bank to carry on business in that State. The Bank also obtained permission to continue their agencies in some of the other States. Though it retains the title of ' Bank of the United States,' yet it is not chartered by Con- gress, it is no longer the Bank of the Government ; it has no longer the power to establish branches in the various States with- out their consent, and it must be subject to such laws or taxes as the respective States may impose." This bank failed, after a fearful struggle, under the presidency of Mr. Biddle. ON BANKING IN THE UNITED STATES. 155 P. 36. :— In his farewell address to Congress, deliTered December 6th, 1836, the President thus adverts to the Bank of the United States: — The President severely animadverts upon the conduct of the Bank of the United States and " the dangerous power " it wielded, which induced him " to prevent the continuance of that institution." He observes : — " Experience continues to realise the expectations entertained as to the capacity of the States' Banks to perform the duties of fiscal agents of the Government. — Independent of these services, vphich are far greater than those rendered by the United States Bank, and its twenty-five branches, a number of the deposit Banks have, with a commendable zeal to aid in the improvement of the currency, imported from abroad, at their own expense, large sums of the precious metals for coinage and circulation." Gilbart, p. 200. The following is an extract from a " communication from a correspondent of the Times." " Immediately on the removal of the public deposits from the late Bank of the United States, speculations in its stock on a fall to a large amount ensued. Here the mania commenced. New local banks were thereupon chartered by the several States, and their stocks became the object of speculation. Paper money being abundant in the hands of a favoured few, these gentlemen turned their attention to the national domain. The disease had now be- come contagious, and consequently almost universal. Every de- scription of property, foreign or domestic, personal or landed, was greatly enhanced in price ; but more especially lands. In the height of this mania, the President directed the Secretary of the Treasury, under the date of the 11th of July, 1836, to in- struct the receivers of public money in the western and south- western States, to take nothing in payment of the public lands but gold or silver, or the notes of banks in their vicinity, that would be redeemed forthwith in specie. " The eifect of this order was twofold. It compelled the western and south-western banks to contract their loans, and thus gradually withdraw from circulation a portion of their paper, lest they should subject themselves to a run. At the same time it compelled both the speculator and the actual settler, who wished to purchase the public land, to provide hioiself in 156 COINS AND CURRENCY. the Atlantic States with specie, and transport it to the place where his p^ment was to be made. " By these anticomraercial regulations, the gold and silver was withdrawn from the marts of commerce, where it ought to have been left, as the means of regulating and balancing the accounts between the United States and foreign countries ; and it was thrown into a district of territory where it remains unemployed in the vaults of certain banks, in the form of deposits, to the credit of the government. This is an unnatural state of things, and has tended incalculably to embarrass the merchants on the seaboard." * President Polk, in his Message to Congress, Dec. 5th, 1848, f dwells at some length upon the subject of a National Bank, which he himself disapproves of; he alludes to the opinion of President Washington, and highly commends the operation of the Constitutional Treasury established in 1846. " Without reflecting upon the dissimilarity of our institutions, and of the condition of our people and those of Europe, they conceived the vain idea of building up in the United States a system similar to that which they admired abroad. Great Britain had a national bank of large capital in whose hands was concen- trated the controlling monetary and financial power of the na- tion ; an institution wielding almost kingly power, and exerting ■vast influence upon all the operations of trade, and upon the policy of the government itself. Great Britain had an enormous public debt, and it had become a part of her public policy to regard this as a ' public blessing.' Great Britain had also a re- strictive policy, which placed fetters and burdens on trade, and trammelled the productive industry of the mass of the nation. By her combined system of policy, the landlords and other property holders were protected and enriched by the enormous taxes which were levied upon the labour of the country for their advantage. " Imitating this foreign policy, the first step in establishing the new system in the United States was the creation of a national bank. Not foreseeing the dangerous power and countless evils which such an institution might entail on the country, nor per- ceiving the connexion which it was designed to form between the Bank and the other branches of the miscalled ' American system,' but feeling the embarrassments of the Treasury and of the busi- ness of the country, consequent upon the war, some of our states- men, who had held different and sounder views, were induced to yield their scruples, and, indeed, settled conviction of its unconsti- tutionality, and to give it their sanction as an expedient which * A Gencvese Traveller. f Evening Mail, Dec. 20. 1848. ON BANKING IN THE UNITED STATES. 157 they vainly hoped might produce relief. It was a most un- fortunate error, as tlie subsequent history and final catastrophe of that dangerous and corrupt institution have abundantly proved. The Bank, with its numerous branches, ramified into the States, soon brought many of the active political and commercial men in different sections of the country into tiie relation of debtors to it, and dependents upon it for pecuniary favours ; thus diflfusing throughout the mass of society a great number of individuals of power and influence to give tone to public opinion, and to act in concert in cases of emergency. The corrupt power of sucli a political engine is no longer a matter of speculation, having been displayed in numerous instances, but most signally in the political struggles of 1832, 1833, and 1834, in opposition to the public will, represented by a fearless and patriotic President. "But it has been urged that the national bank, which consti- tuted so essential a branch of this combined system of measures, was not a new measure, and that its constitutionality had been previously sanctioned, because a bank had been chartered in 1791, and had received the ofl[icial signature of President Washington. A few facts will show the just weight to which this precedent should be entitled, as bearing upon the question of constitu- tionality. " Great division of opinion upon the subject existed in Con- gress. It is well known that President Washington entertained serious doubts both as to the constitutionality and expediency of the measure ; and while the Bill was before him for his oflicial approval or disapproval, so great were these doubts that he required ' the opinion in writing ' of the members of his cabinet, to aid him in arriving at a decision. " Additional light has been recently shed upon the serious doubts which he had on the subject, amounting at one time to a conviction that it was his duty to withhold his approval from the Bill. This is found among the manuscript papers of Mr. Madison, authorized to be purchased for the use of the Government by an Act of the last session of Congress, and now for the first time accessible to the public. From these papers it appears thnt President Washing- ton, while he yet held the Bank Bill in his hands, actually re- quested Mr. Madison, at that time a member of the House of Representatives, to prepare the draught of a veto message for him. Mr. Madison, at his request, did prepare the draught of such a mes- sage, and sent it to him on the 21st of February, 1791. A copy of this original draught, in Mr. Madison's own handwriting, was care- fully preserved by him, and is among the papers lately purchased by Congress. " The weight of the precedent of the bank of 1791, and the sanction of the great name of Washington, which has been so often invoked in its support, are greatly weakened by the development of these facts. The experiment of that bank satisfied the country that it ought not to be continued, and at the end of twenty years Congress refused to recharter it. It would have been fortunate for 158 COINS AND CURRENCY. the country and saved thousands from bankruptcy and ruin, had our public men of 1816 resisted the temporary pressure of the times upon our financial and pecuniary interests, and refused to charter the second bank. Of this the country became abundantly satisfied, and at the close of its twenty years' duration, as in the case of the first bank, it also ceased to exist. Under the repeated blows of President Jackson it reeled and fell, and a subsequent attempt to charter a similar institution was arrested by the veto of President Tyler. " The Vice-President (of the senate) exercises the veto power as eflfectually by rejecting a bill by his casting vote, as the Presi- dent does by refusing to approve and sign it. This power has been exercised by the Vice-President in a few instances, the most important of which was the rejection of the bill to recharter the Bank of the United States, in 1841. " The bank has been succeeded by a practical system of finance, conducted and controlled solely by the Government. The consti- tutional currency has been restored ; the public credit maintained unimpaired, even in a period of foreign war ; and the whole country has become satisfied that banks, national or state, are not necessary as fiscal agents of the Government. Revenue duties have taken the place of the protective tariff. The distribution of the money derived from the sale of the public lands has been abandoned, and the corrupting system of internal improvements, it is hoped, has been efiectually checked. " The operations of the constitutional treasury established by the Act of the 6th of August, 1846, in the receipt, custody, and disbursement of the public money, have continued to be successful. Under this system the public finances have been carried through a foreign war, involving the necessity of loans and extraordinary expenditures, and requiring distant transfers and disbursements, w^ithout embarrassment, and no loss has occurred of any of the public money deposited under its provisions. Whilst it has proved to be safe and useful to the Government, its efforts have been most beneficial upon the business of the country. It has tended powerfully to secure an exemption from that inflation and fluctuation of the paper currency so injurious to domestic in- dustry, and rendering so uncertain the rewards of labour; and, it is believed, has largely contributed to preserve the whole country from a serious commercial revulsion, such as often occurred under the bank deposit system. In the year 1847, there was a revulsion in the business of Great Britain of great extent and intensity, which was followed by failures in that kingdom unprecedented in number and amount of losses. This is believed to be the first instance when such disastrous bankruptcies, occurring in a country with which we have such extensive commerce, produced little or no injurious effect upon our trade or currency. We remained but little affected in our money market, and our business and industry were still prosperous and progressive. " During the present year nearly the whole continent of Europe ON BANKING IN THE UNITED STATES. 159 has been convulsed by civil war and revolutions, attended by- numerous bankruptcies, by an unprecedented fall in their public securities, and an almost universal paralysis of commerce and in- dustry ; and yet, although our trade and the prices of our products must have been somewhat unfiivourably affected by these causes, we have escaped a revulsion, our money market is comparatively easy, and public and private credit have advanced and improved. " It is confidently believed that we have been saved from their effect by the salutary operation of the Constitutional Treasury. It is certain that, if the 24,000,000 of specie imported into this country during the fiscal year, ending on the 30th June 1847, had gone into the banks, as to a great extent it must have done, it would, in the absence of this system, have been made tlie basis of augmented bank-paper issues, probably to an amount not less than ^'60,000,000 or ^70,000,000, producing, as an inevitable con- sequence of an inflated currency, extravagant prices for a time and Avild speculation, which must have been followed, on tlie reflux to Europe the succeeding year of so much of that specie, by the prostration of the business of the country, the suspensiou of the banks, and most extensive bankruptcies. Occurring, as this would have done, at a period when the country was engaged in a foreign war, — when considerable loans of specie were required for distant disbursements, and when the banks, the fiscal agents of the Government, and tlie depositories of its money, were sus- pended, the public credit must have sunk, and many millions of dollars, as was the case during the war of 1812, must have been sacrificed on discounts upon loans, and upon the depreciated paper currency which the Government w^ould have been compelled to use. " Under the operations of the constitutional treasury, not a dollar has been lost by the depreciation of the currency. The loans required to prosecute the war with Mexico were negotiated by the Secretary of the Treasury above par, realising a large premium to the Government. The restraining effect of the system upon the tendencies to excessive paper issues by banks has saved the Government from heavy losses, and thousands of our business- men from bankruptcy and ruin. The w-isdora of the system has been tested by the experience of the last two years ; and it is the dictate of sound policy that it should remain undisturbed. The modifications, in some of the details of this measure, involving none of its essential principles heretofore recommended, are again presented for your favourable consideration." As Sir Robert Peel refers to the banks of the United States, and adduces them as an instance where a central bank (the Bank of the United States) exercised a beneficial control, although imperfect, over other banks, and on the removal of which those banks became insolvent ; I have thought it desirable to give, IGO COINS AND CURKENCY. at some length, the opinions entertained by American statesmen of the utility of a national bank, derived from Mr. Gilbart's History of Banking in America, and from the Messages of Presidents to Congress. In 1836, a very harsh measure was adopted by the government in obliging the " receivers of the public money in the Western and South-Western States to take nothing in payment of the public lands, but gold or silver, or the notes of banks in their vicinity, that would be redeemed forthwith in specie." This proceeding is commented on by the cor- respondent of the " Times " at New York, of whose communication I have given an extract, " as anti- commercial regulations, the gold and silver was with- drawn from the marts of commerce " — " to remain unemployed in the vaults of certain banks." This regulation may have had relation to General Jackson's plan of introducing a more general metallic currency. It furnished the government with gold and silver, but " embarrassed the merchants on the seabord." A " Constitutional Treasury " was established in 1846, which is greatly lauded by President Polk in his Message to Congress on December 5, 1848 : he attributes to it the comparative exemption of the United States from the commercial difficulties and losses, which occurred in Great Britain during the year 1847. Experience would appear to have confirmed the utiHty of this system, as it was still acted upon in 1854. In the "Evening Mail," May 29th, 1854, after giving a statement respecting the banks of the United States, the writer in the " Money Article " proceeds : — " The government holds a total of nearly 6,000,000 sterling, which, being locked up in their own vaults, and unrepresented by paper of any kind, is as valueless for all the immediate purposes of commerce, as if it were at the bottom of the sea. It is also believed that there is more gold and silver in circulation among the people, than at any previous period." President Polk observes in his i\fessa<2:e : — BANKING IN THE UNITED STATES AND HAMBURG. 161 "The Bank was represented to be an indispensable fiscal agent for the Government, was to equalise the exchanges, and to regu- late and furnish a sound currency, always and everywhere of uniform value. " Tlte Bank has been succeeded by a practical system of finance, conducted and controlled solely by tlie Government. The consti- tutional currency has been restored ; the public credit maintained unimpaired, even in a period of foreign war; and the whole country has become satisfied that banks, national or state, are not neces- sary as fiscal agents of the Government." President Polk supposes that if the 24,000,000 dollars which were imported in America during the fiscal year ending 30th June, 1847, and which were deposited in the vaults of the Treasury, had been deposited in the banks, an issue of 60 or 70,000,000 dollars in promissory notes might have been issued upon the basis of this specie. If the Government of the United States found it advantageous that its employment of bullion should not interfere with the domestic or national circulation of promissory notes ; that the Government should have its separate treasury and be quite independent of the banks in this respect; is it not equally desirable that the " Great Mercantile Republic " should have their separate treasury ? that the bullion employed in their international commerce should be distinct from the national circulation, and the employment of it perfectly independent of the Bank of England, of national banks, and of all banks ? Why should there be any antagonism between the national and international circulation ? between banks of issue and the Great JVIercantile Kepublic ? between the domestic trade and foreign commerce ? The Constitutional Treasury was established in 1846, two years after the passing of the English Bank Act of 1844, and I think that the extracts from Pre- sident Polk's Message merit an attentive perusal. P. H. Muntz, Esq., in his evidence* before the Com- mittee of the House of Commons in 1848, gave an * " 1344. You mentioned that you had resided for a considei'- able time on the continent ? — I did for years, M 162 COINS AND CURRENCY. account of the mode in which the Bank of Hamburg transacted business. It appears that no promissory notes are issued by that Bank, and he thinks that in Hamburg during the panics of April and October 1847 in England, " they would not have felt any panic at all had it not been for the return of commercial bills going back from this country." Mr. M'Culloch informs us in his edition of Adam Smith, p. 487.*: — " The bank of Hamburg receives the bullion deposited in its coffers at the rate of 442 schillings the mark, and issues it at the rate of 444 schillings ; being a charge of four ninths or nearly one half per cent, for its retention." " 1345. Are you acquainted with the monetary system of Ham- burg ? — I am. " 1346. Will you be kind enough to state in what way the monetaiy system there is conducted ? — There are two monies in Hamburg ; there is the current money for ordinary purposes, and there is what is called ' banco,' which is 25 per cent, better value, and which represents silver deposited in the bank of Hamburg ; there are no notes issued at all. " 1347. In what way does a person, having a lodgment in the bank, draw it out? — By 'writing off,' as it is called; there are certain forms in which you write, ' Give to Mr. So-and-so so much banco,' and that is the way the bills of exchange are paid ; I never knew money used, and I do not think it is according to law. " 1348. Then the commercial obligations at Hamburg are dis- charged by cheques, which transfer payment to the debit of one party and to the credit of another ? — Entirely so. " 1349. The commercial transactions of Hamburg are to a very great extent, and it is a large and important city ? — It is a very important town indeed, and there is a very large trade there. " 1350. What was the state of commercial aifairs in Ham- burg, during the last year, at the time of our panics in April and October ; were they subject to the same embarrassments, or to greater or less embarrassments ? — They were subject to less em- barrassments than we were, and had it not been for the return of commercial bills going back from this country, I think they would not have felt any panic at all. " 1351. Then you think Hamburg under that system of trans- ferring payments at the Bank, would have had no panic last year, but for the return of the bills of exchange drawn upon England ? — I do not think they would." * Storch, Economic Politique, torn. iv. p. 104. 163 CHAP. XIII. ON THE CONTROLLING POWER OF THE BANK OF ENGLAND. Sir R. Peel's Speeches, p. 36. : — " We think it of great importance to increase the controlling power of a single bank of issue. We think it the wisest course to select the Bank of England as that controlling and central body rather than to appoint coraraissioners acting under the authority of Parliament for the purpose of the issue of a paper currency. I therefore propose, with respect to the Bank of England, that it should continue in possession of its present privileges of issue, but that there should be a complete separation of the business of banking from that of issue ; that there should be a department of issue sepai'ate from the department of banking, with separate officers and separate accounts. I propose that to the issue depart- ment should be transferred the whole amount of bullion now in the possession of the Bank, and that the issue of Bank notes should hereafter take place on two foundations, and two foundations only : — first, on a definite amount of public securities; secondly, ex- clusively upon bullion. The action of the public will regulate the amount of that portion of the note circulation which is issued upon bullion." P. 45. : — "We propose that 14,000,000/. should be that amount of se- curities. Seeing no advantage in a change, we propose to continue upon the present terms the existing loan of 11,000,000/. made by the Bank to the Government at 3 per cent. This debt of the Government to the Bank is to be assigned as part of the security on which the issues of the Bank are to take place. There will then remain 3,000,000/. of additional securities, ex- chequer bills or other securities, over which the Bank are to have entire control. We propose that the Bank should have a right, in case of necessity, to limit its issues upon that portion of the M 2 164 COINS AND CURRENCY. securities, viz., 3,O0O,OO0Z. Circumstances might possibly arise in wliich the Bank might find it necessary to restrict its issues ■within the amount of 14,000,000/. In that case the Bank will have full power to diminish the 3,000,000/. of securities which are to be deposited in addition to the 11,000,000/. of debt as- signed. I can hardly conceive a case in which it would be advisable to limit the issues to less than 11,000,000/." P. 57. : — " Take the case at present : the Bank is possessed of a great amount of bullion, not less than 16,000,000/. The banking de- partment of the Bank of England will be possessed of not less than 30,000,000/. of Bank notes, 14,000,000/. issued on securities, and 16,000,000/. on bullion : a great proportion of these Bank notes will necessarily lie dormant in the coiFers of the banking department, because it is not probable that more than 22,000,000/. can be made available for the supply of the legitimate demands of commerce." The Issue Department issues thirty millions of promissory notes payable to bearer on demand upon the security of eleven millions, which had been lent to the Government, and upon three millions of Ex- chequer bills, and sixteen millions of gold bullion. It would be inferred that all the property, which the Bank offers as a security, is the property of the Bank. It can never be consistent with justice to pledge another person's property as a security for debt, with which the owner of the property has no concern or participation. The eleven millions lent to the Go- vernment may be said to be the property of the Bank, but until that property is sold in the market i'orgold, it is not available to pay the promissory notes in gold. The three millions of exchequer bills may, perhaps, be also said to be the property of the Bank, being equivalent to the " Rest," which is the amount of undivided profits of the Bank, but until these Exchequer bills are sold for gold, they offer no means of paying the promissory notes ; both the debt of the Government and the Exchequer bills might be sold, at some price, for bank notes, and with these bank notes, it may be said, gold might be obtained from the Issue Department, and with this gold the notes CONTROLLING POWER OF THE BANK OF ENGLAND. 165 would be paid ; this fund of gold would be nearly exhausted by the payment of fourteen millions of gold, only two millions would remain to pay the six- teen millions of notes still with the public; and what becomes of the depositors ? We see clearly that even sixteen millions of gold are not sufficient to satisfy the claims upon the Bank, if enforced. The following is the section of the Act (7 & 8 Vict. c. 32.), relating to the management of the issue by the Bank of England: — '• Sect. ii. And be it enacted, That upon the thirty- first day of August, One thousand eight hundred and forty-four, there shall be transferred, appropriated, and set apart by the said Governor and Company to the Issue Department of the Bank of England, securities to the value of fourteen million pounds, whereof the debt due by the Public to the said Governor and Company shall be and be deemed a part ; and there shall also at the same time be transferred, appropriated, and set apart by the said Governor and Company to the said Issue Department so much of the Gold Coin and Gold and Silver Bullion then held by the Bank of Eng- land as shall not be required by the Banking Department thereof; and thereupon there shall be delivered out of the said Issue Department into the said Banking Department of the Bank of England such an amount of Bank of England notes as, together with the Bank of England notes then in cixxulation, shall be equal to the aggregate amount of the securities, coin, and bullion so transferred to the said Issue Department of the Bank of England : and the w^hole amount of Bank of England notes then in cir- culation, including those delivered to the Banking Department of the Bank of England as aforesaid, shall be deemed to be issued on the credit of such securities, coin, and bullion so appropriated and set apart to the said Issue Department ; and from thenceforth it shall not be lawful for the said Governor and Company to increase the amount of securities for the time being in the said Issue Department save as herein-after is mentioned, but it shall be lawful for the said Governor and Company to diminish the amount of such securities and again to increase the same to any sum not exceeding in the whole the sum of fourteen million pounds, and so from time to time as they shall see occa- sion ; and from and after such transfer and appropriation to the said Issue Department as aforesaid, it shall not be lawful for the said Governor and Company to issue Bank of England notes, either into the Banking Department of the Bank of England or to any persons or person whatsoever, save in exchange for other Bank of England notes, or for gold coin, or for gold or silver bullion received or purchased for the said Issue Department under the provisions of this Act, or in exchange for securities acquired M 3 166 COINS AND CURKENCY. and taken in the said Issue Department under the provisions herein contained : Provided always, tliat it shall be lawful for the said Governor and Company in their Banking Department to issue all such Bank of England notes, as they shall at any time receive from the said Issue Department or otherwise, in the same manner in all respects as such issue would be lawful to any other person or persons." May it not be asked whose property was this gold, appropriated by the Bank of England for the pay- ment of its promissory notes ? The Bank of England has no property in the circulating coin, nor in the bullion which circulates among nations, as inter- national money. It has given nothing for this coin or bullion, but promises or engagements to restore this gold and silver when demanded : no division of de- partments in the arrangement of any establishment can weaken or strengthen the rights of property or the claims of justice : no management can alter the precise nature of an engagement. The promissory notes are a debt of the Bank ; the bullion is deposited upon trust : no trustee has a right to appropriate to his own advantage the trust property confided to his care ; no store-keeper has a right to deny or impede the delivery of the commodities confided to him for safe custody, upon the express condition that he is to deliver them when demanded ; nor has either any right, by any contrivance, to defeat that de- mand, so as to retain possession of those conmiodities, to his own advantage and the prejudice of another. The Bank of England has no more property in the bullion in its vaults, the international money of the Great Mercantile Republic, than had the Bank of Amsterdam in the bullion in their vaults. The sale of three millions of Exchequer bills is not to be made for the purpose oi purchasing gold, but in order to extract three millions of promissory notes from the circulation, reducing the fourteen millions issued on securities to eleven millions. In what manner was this to check the demand for gold for exportation except by lowering the prices of CONTROLLING POWER OF THE BANK OF ENGLAND. 167 commodities, in order to render the exportation of those commodities profitable to the exporter, and thus gain for them the preference for exportation to the foreign market instead of gold, which would remain in the possession of the Bank of England ? In the examination of S. J. Loyd, Esq., before the Committee of the House of Lords, this gentleman states in his Evidence, p. 157. : — 1409. — "But with regard to the store of gold in the Issue Drpartment, it seems to me important that it should be clearly understood that all the advantages to be derived from that gold, as forming part of the circulation, are really accorded to the public through the representative of that gold, viz. the bank notes. You put the gold into store, and instead of the gold you receive for your convenience bank notes. That being done, you must not afterwards say, ' But we have got so much gold in the cellar, it is absurd not to use it.' The answer is, ' Well, use the a old, but then give back the bank notes which have been issued to you against that gold, otherwise you want to have both the notes which represent the gold and the gold itself in circulation at the same time.' " This reasoning appears to me neither just nor deducible from the facts of the case. The gold and silver appropriated to the Issue Department, and deposited there after the passing of the Bank Act, was the excess of bullion in the Bank beyond what was required for the circulation ; the circulation did not require this portion of the bullion, nor does it require it when it is wanted for exportation : Mr. Loyd says, " All the advantages to be derived from that gold, as forming part of the circulation, are really accorded to the public through the repre- sentative of that gold, viz., the bank notes." But the gold is not wanted in order to "form part of the circulation ; " it never was in the circulation ; it would not remain in the circulation ; the circulation being full admits no more : the public who want the gold are not the public among whom the bank notes circulate, but the international public, — the Great Mercantile Republic ; those who want the gold for exportation. M 4 168 COINS AND CURRENCY. The advantage sought in exchanging gold bullion for bank notes had no reference to the circulation in -wliich tliey are not wanted, and in which they will not remain : the wants of the public, as respects the cb-culation, were not increased by the importation of the bullion: the bank notes, after having discharged their office as a medium of exchange in the purchase of commodities, will be returned to the Bank to remaui there in deposit, and the Bank will then themselves hold the bank notes and the gold: the convenience sought by the bank notes was that of having a medium of exchange, as valuable as coin, in the home market, without any delay, and at the expense only of the difference between ?)l. lis. 10^6?. and 3/. 176\ 9(/., or a little more than ^ per cent., which was charged by the Bank as a commission for the accommodation : with that accommodation the transaction ended ; the gold remains in store^ with a claimant in the form of the British public for domestic or national circulation, or of the Ibreign merchant for exportation : the nature of this claim cannot be al- tered by any private arrangement of the Bank, such as a division of departments: this regulation of the Bank cannot alter the force of the obligation to de- liver the gold either to the depositor or to the bearer of the note. The gold is placed in stoi^e^ to be returned when required by the public, where it remains, either for circulation or exportation as the wants of conmierce may require. Is it fair to require from the exporter of bulHon the bank notes which were given to the Bank by another party : to make these bank notes the key of the chest containing the gold, which key has been returned to the Bank, and which the Bank can retain by the power which the Act has conferred, of controlling the currency ; and in the possession of which key the safety of tlie Ikink and the security for the payment of the note is by the Act supposed to exist ? But the note does not represent the gold ; it represents the CONTROLLING POWER OF THE BANK OF ENGLAND. 169 " fortune, probity, and prudence," of the Bank, as implied in the promise to pay sovereigns on demand. When Sir Robert Peel says, p. 57.: — "It is not probable that more than 22,000,000/. (of bank notes) can be made available for the legitimate demands of commerce : " the legitimate demands seem to be li- mited to the home circulation ; are not the demands for bullion for foreign commerce, for international commerce, legitimate, and which bullion can be ob- tained from the Issue Department only by means of bank notes ? Does not the Bank of Eno-land ignore the right of the Great Mercantile Republic ?* The real question is, whether those who may want gold for exportation, and who import the bullion, have placed it in the right store ; whether it will not be more available in the possession of the owners of the bullion than in the custody of a national bank, of those who act as bankers as well as storekeepers ; who apply this bullion to the purposes of the do- mestic circulation, who claim the right of withhold- ing it whenever it may be thought needful for their safety as bankers : that is the great object of inquiry, and which I have endeavoured to elucidate in this Treatise. • See p. 164., ante. 170 COINS AND CURRENCY. CHAP. XIV. ON THE EQUIVALENCY OF BANK NOTES TO COIN. P. 27. SirR. Peel: — "We do not want an abundant supply of cheap promissory paper. We want only a certain quantity of paper, not, indeed, fixed and definite in nominal amount, but just such a quantity of paper and that only, as shall be equivalent in point of value to the coin which it represents. If the paper be cheaper than the coin it is an evil and not an advantage." Should it not be rather : We do not want cheap loans founded upon an issue of paper ? It is the loan through the medium of paper which affects prices, by increasing the number of buyers. The increased prices will require an addition to the paper circulation, without at all disturbing the rela- tive value of the paper to the gold, and if not wanted, will be restored to the banker. P. 77. Sir R. Peel expounds his opinions, and which form the principle of his Bill, in the following words : — " The present measure is not an extension of the principle of the Act of 1819 ; it is the fulfilment and complement of that Act, but it does not carry the principle of a metallic standard farther than it was carried by the Act of 1819. That Act restored a metallic standard; it required that promissoiy notes should not be issued excepting on the condition that they were convertible into {^old at the will of the bearer. They are issued on that condition. Under the system that exists, they may not for a time conform in value to gold — they may be issued in excess — they may be the means of affording a greater degree of temporary accommodation, than could be afforded by a metallic currency — they mny increase prices, and create, for a time the appearance of prosperity. But they do all this with the certainty of ultimate reaction — the cer- ON THE EQUIVALENCY OF BANK NOTES TO COIN. 171 tainty that the time must come when, if you adhere to a metallic standard, and if you maintain it unaltered, that standard will assert its supremacy, will refuse to conform to the value of paper, and will require that paper shall conform to the value of "gold. When the depreciation of the paper is sensible — when it becomes a matter of notoriety, the law enjoining its equivalency to coin will be enforced by every holder of pai)er, from the man whose whole property is a single five pound note, to the great capitalist, who influences the foreign exchange by the extent of his dealings in money. The certain means of realising a small profit will impel every holder of paper to demand coin in exchange. What advantages will there have been in the temporary accommodation ? what advantage in the temporary increase of prices, if they are to be followed — as I contend they inevitably will — by such a con- traction of paper as will make it equal in value to coin ? " Let us not confound that accommodation which is afforded by the liberal advance of capital, that increase of prices which springs from general prosperity and increased demand, with the accommo- dation and increase of prices, which rest on no surer foundation than an undue issue of paper. I call it an undue issue, if its value do not conform with that of the coin which it professes to re- present, and which the law has made the measure of value." How is it possi])le that notes that are " convertible into gold at the will of the bearer," and actually paid, can be of less value than the gold ? How can they be depreciated ? when does depreciation become sen- sible? when did it ever become a matter of notoriety? when did the holder of a five pound note ever demand the payment of the five sovereigns, "as a means of realising a small profit ?" when did the great capi- talist do the same ? The equivalency of the paper to coin is tested by the performance of the promise to deliver coin on demand, and, if that is performed, how can the paper be depreciated ? There seems some confusion in using the words "metallic standard" and "metallic currency," as if the one could correspond with the other. If we had only gold and silver coin, and no paper money, that might be called a metallic currency; but whether we have gold and silver coin only, or gold and silver coin and promissory notes payable in coin to bearer on demand, we have in either case a metallic standard. If we had a metallic currency, the acconnnodation by 172 COINS AND CURRENCY. loans which now takes place on the circulation of promissory notes could not take place ; that portion of capital or loan wliich the banker derives from his promissory notes could not be lent to the pubHc, and prices might be lower, at least for a time, from the number of buyers and consumers being lessened, from the check to industry, from the absence of this loan ; and really Sir Robert Peel's remarks have only reference to this accommodation. These loans are the only argument he adduces ; for the depreciation of the note is quite imaginary. The holders of five pound notes think nothing of depreciation of the note, or of profit on coin, and the great capitalist who influences the foreign " exchange by the extent of his dealings in money," does not demand gold for exportation from any doubt of the equivalency of paper to coin ; for if they were not equivalent he could not obtain coin for the paper, but he exports buUion either to pay the balance of debt, or to supply to foreigners that description of commodity, which is the most convenient for carrying on tlie round-about foreign trade, or because our manufactures and pro- duce will not yield a profit in foreign countries. The whole principle of Sir 11. Peel's Bill is founded upon the notion that promissory notes may be depre- ciated, at the same time that they are payable, and are actually paid on demand. Sir R. Peel adduces as a proof the Report of the Bullion Committee. He observes, p. 23.: — " But I think experience shows that the paper currency, that is, the promissory notes payable to bearer on demand, stands in a certain relation to the gold coin and the foreign exchange in which other forms of paper credit do not stand. There arc striking examples of this adduced in the Report of the Bullion Committee of 1810, in the case both of the Bank of P^ngland and of the Irish and Scotch Banks." P. 23. " In the case of the Bank of England, shortly after its establishment, there was a material depreciation of paper in con- sequence of its excessive is?ue. The notes of the Bank of England were at a discount of 17 per cent. There was no doubt as to the solvency of the Bank, for bank stock, on which 60 per cent, had been paid, was selling at 110 per cent. After trying various ex- ON THE EQUIVALENCY OF BANK NOTES TO COIN. 173 pedients, it was at length determined to reduce the amount of bank notes out standing. Tiie consequence was an immediate increase in the value of those which remained in circulation, the restora- tion of them to par, and a corresponding improvement in the foreign exchanges." But although the Bank of England notes were payable to bearer on demand, it does not follow that they were actually paid. The Bank of England notes were payable to bearer on demand, but were not actually paid, and I find from Gilbart's " History and Principles of Banking," p. 30., this account of the Bank of England in the year 1697 : — " Bank notes were from fifteen to twenty per cent, discount. During the recoinnge in 1696, the Bank had issued their notes in exchange for the clipped and deficient coin previously in circula- tion, and they were not able to procure from the Mint a suflicient quantity of the new coins to discharge the notes presented to them for payment. They paid some of their notes by bills, bearing interest at six per cent. Tliey also advertised, that while the silver was recoining, such as think it fit for their convenience, to keep an account in a book with the Bank, may transfer any sum under five pounds from his own to another man's account." Adam Smith also says (b. v. c. 3. v. iii. p. 393.): — " During the great i*e-coinage in King William's time, when the Bank of England thought proper to put a stop to its usual trans- actions, Exchequer bills and tallies are said to have sold from 25 to 60 per cent, discount ; owing partly, no doubt, to the supposed instability of the new government established by the Revolution, but partly, too, to the want of the support of the Bank of England." Adam Smith (b. ii. c. 2. v. ii. p. 66.) : — " In 1696 tallies had been at forty, and fifty, and sixty per cent, discount, and bank notes at 20 per cent.* During the great re-coinage of the silver which was going on at this time, the Bank had thought proper to discontinue the payment of its notes, which necessarily occasioned their discredit." From the above statements it appears that, al- though the promissory notes of the Bank of Eng- * James Postkthwaite's History of the Public Revenue, p. 301. 174 COINS AND CURRENCY. land were payable to bearer on demand, they were not actually paid. The case of Ireland adduced, which happened in the year 1 804, was during the Bank Restriction Act, when the promissory notes, although payable to bearer on demand, were not actually paid. With respect to the Scotch banks, Adam Smith informs us (b. ii. c. 2. v. ii. p. 76.) : — " Some years ago, the different Banking Companies of Scotland were in the practice of insertinsj into their bank notes, what they called an optional clause, by which they promised payment to the bearer, either as soon as the note should be presented, or in the option of the directors, six months after such presentment, together with the legal interest for tiie said six months." P. 77. " The promissory notes of those Banking Companies constituted at that time the far greater part of the currency of Scotland, which this uncertainty of payment necessarily degraded below the value of gold and silver money." These promissory notes were not payable to bearer on demand ; or did the instances occur during the bank restriction ? We may I think safely reject, as erroneous, the notion that promissory notes payable to bearer on demand and actually/ paid on presentation, can by any possibility be depreciated below the coin that may be obtained for them, or can ever cease to be equivalent to coin in the home market. Sir Robert Peel considers gold, whether coin or bullion, as any other merchandise exported /or profit. He considers the 'profit to be derived from the sale of the money, not from the goods only which are bought with the gold or money ; and as scarcity and a less abundant supply enhance the value or price of other merchandise, so a scarcity of gold or paper money would enhance the value or price of gold in coin or bullion, and retain it in this country or cause its importation. He thinks the currency is to be made more valuable in this country, and the im- portation of bullion more profitable to the foreign merchant who sends it ; hence his wish and purpose to give the Bank of England a greater control over the currency, in order to enhance its value. ON THE EQUIVALENCY OF BANK NOTES TO COIN. 175 But gold can only be made dear relatively to com- modities by enhancing its power of purchasing a larger quantity in exchange, or lowering the prices ; which is to give the Bank of Kngland a power over the property of every manufacturer, and merchant, and holder of goods, by lowering the prices of all articles exchanged for gold or money. The Bank l>ill acts upon prices through its action upon the currency or loan. It is a contest, as respects the exportation and importation of gold, between the Bank of England and the Great Mercantile Republic. It is a contest, as respects the manufacturer and the national traders, between the Bank of England and all holders of property. I submit that the remedy is for the Great Mercantile Republic to retain always pos- session of its own bullion^ and to reduce the liability of the Bank of England to the duty of paying its own notes and deposits from its own resources^ as otlier bankers. Sir R. Peel defines money to be " coin and promis- sory notes payable to bearer on demand." By the same rule bullion and bills of exchange may be called money. The former is national, the latter interna- tional money. As foreign bills of exchange cannot be depreciated relatively to the bullion in Avhich they are paid, so neither can the national paper circulation be depreciated relatively to the coin in Avhich the bank note is paid. The foreign bill may never be paid, and the bank note may never be paid ; but this involves no deprecia- tion of the foreign or domestic currency, but a de- preciation of the promise to pay the coin or the bullion ; because a great number of foreign bills of exchange were returned protested for nonpayment, it would be very unreasonable to say that the currency of that country was depreciated, and equally unreasonable would it be to say that the domestic currency was depreciated, because a great number of banks had stopped payment. When bills are wanted to be remitted for payments due to a foreign country, and 176 COINS AND CURRENCY. none are to be had, the excliange brokers draw bills on that country, and send bullion to pay them. To say that the gold is sent abroad because it is profitable merchandise, seems as incorrect as to say, that the bills are sent abroad as profitable merchandise. The gold and the bill answer the same purpose in facilitating the exchange of commodities, as the instruments of commerce. There is no profit on the bill, or on the gold, as merchandise. A commission may be paid to the broker for his trouble, as well as insurance and freight. But these are charges paid by the purchaser of the bill, and, although an advantage to the bill broker, the shipowner, and the insurer, it is not derived from any trafficking with the bill or bullion, as merchandise seeking a market for the benefit of the exporter. There is no profit in the payment of debt either to the payer or receiver. Adam Smith very truly observes (b. iv. c. 1. v. ii. p. 225.): — " The transportation of commodities, when properly suited to the market, is always attended with a considerable profit ; whereas that of gold and silver is scarce ever attended with any. When those metals are sent abroad in order to purchase foreign com- modities, the merchant's profit arises, not from the purchase, but from the sale of the returns. But when they are sent abroad merely to pay a debt, he gets no returns, and consequently no profit." 177 CHAP. XV. ADAM SMITH ON BANKING : ON NATIONAL AND INTERNA- TIONAL BANKS : AND INTERNATIONAL TREASURIES. It seems quite contrary to sound reasoning and to approved practice, that any promissory notes should be issued on that coin, which is kept by a banker to supply occasional demands. It is like a stock in trade, and should be itself perfectly free and dis- engaged. Adam Smith supposed that one fifth might be a sufficient reserve of coin ^^b. ii. c. 2. v. ii. p. 26, 27.): — " A particular banker lends among his customers his own pro- missory notes, to the extent, we shall suppose, of a hundred thou- sand pounds. Though some of those notes are continually coming back upon him for payment, part of them continue to circulate for months and years together. Though he has generally in circula- tion, therefore, notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may, frequently, be a sufficient provision for answering occasional demands. By this operation, therefore, twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could other- wise have performed. The same exchanges may be made, the same quantity of consumable goods may be circulated and distri- buted to their proper consumers, by means of his promissory notes, to the value of a hundred thousand pounds, as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can in this manner be spared from the cir- culation of the country ; and if different operations of the same kind should, at the same time, be carried on by many different banks and bankers, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been lequisite." (There was no five pound tender clause when Adam Smith wrote.) It may be doubted if Adam Smith is correct in supposing that if a particular banker circulates one N 178 COINS AlTD CURRENCY. hundred thousand pounds in his promissory notes, that these notes only supply the place of gold and silver that would otherwise circulate there ; this may apply to one and two pound notes, and in a less degree to the five, six, and ten pound notes, and to notes below a pound, to notes for shillings, but the notes of a banker for 20Z. and 50/. circulate among a dif- ferent class of dealers from those among whom cir- culate the gold and silver ; they do not displace en- tirely or in a great degree the gold and silver coins ; they displace rather other forms of credit, which are not so convenient. As a bar of gold of twenty, thirty, or fifty pounds' value would not circulate among small dealers or retailers ; the larger denominations of notes rather supply the place of the bills of exchange and cheques ; they enable the banker to lend on con- vertible securities that amount or a portion of it, and so to furnish the trading public with additional loan ; but the same author observes (b. ii. ch. 2. v. ii. p. 69.):- " It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital which a dealer is obliged to keep by him unemployed and in ready money for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing either to him or to his country. The judi- cious operations of banking enable him to convert this dead stock into active and productive stock ; into materials to work upon ; into tools to work with, and into provisions and subsistence to work for ; into stock which produces something both to himself and to his country." Promissory notes, bills of exchange, and other forms of credit should all be placed in the same category ; and each form has its peculiar and distinct province, which is determined by the convenience of the trading community, in the same manner as the use of different kinds of coin is determined by the same convenience. As the trader was formerly obliged to keep by him a certain amount of money to answer occasional ADAM SMITH ON BANKING. 179 demands, which was so much unproductive stock, so must the judicious banker keep by him a certain amount of coin to meet the occasional demands of the pubHc for coin, in exchange for his notes ; that amount is supposed in the instance given by Adam Smith to be one fifth, or twenty thousand pounds upon a circulation of one hundred thousand. The banker is supposed to have one hundred thousand pounds in circulation, and twenty thousand in his coffers. It is to be remarked that no issue of notes is supposed to take place on these twenty thousand pounds in coin. These coins are a dead and unpro- ductive stock in the hands of the banker ; it is his stock in trade, and is unproductive, as the stock in trade of a tradesman ; and it would appear very strange that he should attempt to issue any notes upon this sum of money, which is kept purposely to give in exchange for notes, as the convenience of the public may require ; these gold and silver coins are not the basis of the banker's circulation, that circulation rests upon his available securities, and is sustained by the confidence which the public have in the " fortune, probity, and prudence " of the banker ; if that con- fidence be shaken, the whole amount of his promissory notes and of his deposits may be demanded, the gold and silver would soon disappear. Adam Smith (b. ii. c. 2. v. ii. p. 34.) : — " It is chiefly by discounting bills of exchange, that is, by ad- vancing money upon them before they are due, tliat the greater part of banks and bankers issue their promissory notes. They deduct always, upon whatever sum they advance, the legal interest till the bill shall become due. The payment of the bill when it be- comes due, replaces to the Bank the value of what had been ad- vanced, together with a clear profit of the interest. The banker who advances to the merchant, whose bill he discounts, not gold and silver, but his own promissory notes, has the advantage of being able to discount to a greater amount by the whole value of his promissory notes, which he finds, by experience, are commonly in circulation. He is thereby enabled to make his clear gain of interest on so much a larger sura." The banker who lends his money, and the banker N 2 180 COINS AND CURllENCY. who discounts bills before they are due, in both cases conuTionly lends his promissory notes upon the bills or securities he receives ; he does not lend or discount with his gold and silver ; that is kept in order to an- swer occasional demands for coin in exchange for his notes; he lends his notes upon bills or securities that are continually falling due, and replacing to him the money that he has lent. But if the most judicious operations of banking consist in lending and thereby rendering active and productive the different sums which would otherwise be idle in the coffers of different traders, and if the promissory notes are circulated by discounting bills of exchange, by substituting one form of paper credit which circulates as money in the payment of debt, and in the circulation of commodities, instead of a form of credit which entitles the bearer to money at a future day, and if a certain amount of gold and silver should always remain in the coffers of the banker to supply the wants of the public in substituting coin for promissory notes; if this coin should be devoted to the use of the public for their convenience, being indeed the property of a portion of the public, belonging to them before the banker issued his promissory notes, and exchanged for his notes only upon the express promise of restoring it when demanded, how much more sacred should be the de- posit of bullion confided to the safe custody of the national banker, confided to him as the banker of the world, of the great mercantile republic, to whom this bullion is the safeguard against unprofitable com- merce, a resource against the necessity of purchasing commodities at such high prices, as would leave only a loss, and absolutely necessary when wanted to carry on a round-about foreign trade of consumption. if the private banker cannot safely issue promissory notes upon coin, which may at any time be wanted for the convenience of the public, because, by dis- counting with this gold, he would encroach on a sum sacred to the use and convenience of the public, and ON NATIONAL AND INTERNATIONAL BANKS. 181 necessary for his own safety ; neither should a national bank, which receives the bulHon of the great mer- cantile republic, issue notes upon this bullion, over which it ought to have no control, which may at any time be wanted by the great mercantile republic, which may be demanded at any time, conformably to the promise or engagement given to restore it when demanded. How, then, can the issue of notes upon bullion by the Bank of England, to the extent of more than half its circulation, be justified upon any principle of jus- tice or prudence, confounding the bullion of the great mercantile republic with the coin required for the home circulation? The exportation of bullion will render the ex- changes more favourable ; it is the natural remedy, and the safe resource of the foreign merchant. The exportation of bullion will pay the balance of debt, which will limit the loss of the merchant and manufacturer, on account of the exchange, to the expense of transmitting the precious metals. The exportation of bullion, instead of manufactures, when the bullion is required by the foreign merchant as a commodity, because the prices of manufactures and produce are too high to promise any profit abroad, will have a tendency to lower prices by the cessation of the demand ; if a few millions are ex- ported of gold instead of manufactures, the demand to that extent having ceased, the prices will be re- duced to a certain degree, upon the legitimate ground of supply and demand, and no disturbance will take place. The exportation of bullion should be free as air, and no one but the owner should have any control over it. The payment of promissory notes in the domestic circulation should be free as air ; no evasion, or delay, or obstruction should be tolerated. Tliis great and magnificent country should not ac- commodate its extended commerce to any monetary N 3 182 COINS AND CURRENCY. system^ but the monetary system should be subservient to the commerce of this mighty empire, and their in- terests should not be opposed the one to the other. The Bank should be subservient to the country, and not the country to the Bank: — " Imperat aut servit CoUecta Pecunia cuique." Horace. It is a question of justice, and not of calculation, of the rights of property, and not of the exchanges. AVe should imitate the States of the United Provinces, " that sober and religious country ; " like the city of Amsterdam, our splendid metropolis should establish, or enjoy, the advantage of a bank upon the same prin- ciple. B. iv. c. 3. V. ii. p. 289. :— " Public utility, however, and not revenue, was the original object of this institution. Its object was to relieve the mer- chants from the inconvenience of a disadvantageous exchange." But it rendered a greater benefit than this, and which is not noticed by Adam Smith. This eminent author makes mention of " international money," but makes no allusion to an international bank ; to a trea- sury of many nations. Such a bank was the Bank of Amsterdam ; and as the warehouse or storehouse of Europe for the precious metals, as a safe depository for the bullion of Europe, it rendered more important services than in rectifying the exchanges. Why should not England attain the same distinction? How contrary to every just principle is it, that the issue of the national promissory notes should be based upon international money, to which the Bank of England has not the slightest claim of ownership ; and how much more unjust that the Bank of England should have recourse to measures to defeat or to evade the delivery of the bullion they hold on trust ! Adam Smith treated of banking, only as it con- cerned private or joint stock banks, substituting pro- missory notes for gold and silver, only as it regarded ON INTERNATIONAL BANKS AND TREASURIES. 183 the domestic circulation. Although he draws a very accurate distinction between the national money and the international money ; between the money or coin of the domestic circulation, and the bullion which circulates among different countries, and reasons upon the peculiar functions of each, and notices the Bank of Amsterdam as being the great warehouse for the bullion of Europe ; yet he does not allude to any necessity of such a bank as that of Amsterdam, where foreign coins do not circulate ; he considers the only use of such a bank to be to rectify and ascertain the exchanges, and never alludes to the want which every nation must have of an international ba7ik or treasury ; he did not perceive that the advantage of the Bank of Amsterdam was not confined to the cir- cumstance of providing the merchants of Amsterdam " with a sufficient quantity of good money to pay their bills of exchange," nor to the preventing the good money being melted down or carried away, nor to the obtaining of a par of exchange ; the benefit was, perhaps, still greater than even all these advan- tages, great as they were, in its being " the great warehouse of Europe for bullion," and no party in the state having any interest in this bullion except those or their representatives, individually, who de- posited the bullion. Adam Smith wrote (1775) when the "Bank of Amsterdam had for many years past been the great warehouse of Europe for bullion." (B. iv. c. 3. v. ii. p. 284.) Of the Bank of England he says (b. ii. c. 2. V. ii. p. 65.), "The Bank of England is the greatest bank of circulation in Europe." (B. ii. c. 2. v. ii. p. 43.) It will be perceived, that since Adam Smith wrote, the circumstances of the Bank of England have en- tirely altered. It now combines the business of the Bank of Amsterdam with the business it carried on when Adam Smith wrote. It is the great warehouse for bullion, and it is the greatest bank of circulation in Europe. It is a bank of circulation, which the Bank of Am- N 4? 3 84 COINS AND CURKENCY. sterdam was not, and it is the great warehouse for bullion which it then was not ; it has undertaken the important functions of the Bank of Amsterdam with- out any of the securities or checks that were used regarding the Bank of Amsterdam. The two characters are inconsistent, of conservators of the bullion, of the international money^ and most commodious commodity, and, at the same time, of a bank of circulation. The mystery consists in blending these two distinct and independent characters. A storekeeper trading with the goods deposited with him ; an international banker and a national banker; creating antagonism where only harmony should pre- vail; these are the characters to be kept distinct, these are the properties to be appropriated to their lawful owners; these are the interests to be kept entirely separate. So far from Adam Smith supposing that gold and silver were warehoused in the Bank of England, he thought that only so much of it could be kept in England as would supply the demand for coin and plate. Supposing the whole importation of gold was on account of Great Britain, he observes (b. iv. c. 6. v. ii. p. 373.): — " It is but a very small part of this importation which, it can be supposed, is employed as annual addition either to the plate or to the coin of the kingdom. The rest must all be sent abroad, and exchanged for consumable goods of some kind or other." As the domestic circulation consists of coin and Bank of England and other bank notes payable to bearer on demand, and also of the inland bills and other descriptions of paper money employed in the circulation of connnodities in the home trade ; so the international circulation consists of bills of exchange, and other descriptions of international securities, and gold and silver bullion: neither coin (as coin) nor notes have an international circulation ; foreign en- gagements arc discharged by bills or bullion, or aii ON INTERNATIONAL BANKS AND TREASURIES. 185 exchange of commodities ; the importer of bullion receives in England, in return for his international money, Bank of England notes, with which he can purchase foreign bills, or manufactures, or produce of any kind. The Bank of Amsterdam, confining its operations to the foreign demand, never paid or returned the bullion in the form of circulating coin (of Amsterdam cur- rency), which the Bank of England does, and which is one cause of confounding the national with the in- ternational money, which may advantageously be kept distinct, and which would be the case on the plan that I have suofo-ested of a bank of exchano-e. Since the extinction of the Bank of Amsterdam on the invasion of the French in 1795, there has been no similar institution established — no international treasury and exchange bank, no "great warehouse of Europe for bullion," — simply a bank of deposit, neither lending money nor discounting bills, — unless the Bank of Hamburgh may form, in a certain de- gree, an exception, — although it can scarcely come under the description of a treasury for the bullion of the great mercantile republic. In the absence of such an institution established by the merchants and manufacturers, we have seen the Bank of England suspend, under the authority of the Government, the payment of its promissory notes for a quarter of a century, in defiance of the promise expressed in the note — we have seen the Bank of France suspend the payment of its promissory notes for two years — we have had panics and alarming disturbance affectino- the bankino; and commercial in- terests to a frightful extent, and committees have been appointed in vain to seek a remedy. AVhy should we hesitate to profit by the experience of the Bank of Amsterdam ; to separate entirely the issue of notes and the loan of money from the trea- sury of the great mercantile republic? Here is an example of an exchange bank and treasury esta- blished by merchants for the convenience of merchants 186 COINS AND CURRENCY. and for the security of commerce. Will the mer- chants of the nineteenth century yield to the enlight- ened merchants of Amsterdam in their love of inde- pendence, and of that self-respect and self-reliance which must result from their being the guardians of their own bullion, that most convenient connnodity, and the possession of which is essential to the main- tenance of their character and reputation? May it not be said that, in the absence of these international treasuries, all has been confusion in the monetary systems of commercial nations ? It may be thought that I have designated too ex- clusively the Bank of England, as the warehouse for international bullion. I am aware of the large quan- tity of the precious metals deposited in the Bank of France ; my reasoning, if just, applies to the Bank of France and to all national banks, which combine with the issue of the national circulation of pro- missory notes payable to bearer on demand, the custody of the international bullion ; and also to the merchants and manufacturers, where such banks exist. 187 CHAP. XVI. ON AN OVER-ISSUE OF BANK NOTES, AND ON THE BANK OF AYR. In the account which Adam Smith gives of the Ayr Bank, he appears to have attached an undue import- ance to the drain upon the Bank for gold, in conse- quence of an over- issue of paper beyond what the circulation could absorb — the demand may have arisen from the profit arising from the difierence be- tween the mint price, and the bullion price of gold in consequence of the deficient weight of the circulating coin ; as was the case with the Bank of England. Adam Smith (b. ii. c. 2. v. ii. p. 41.) observes: — " By issuing too great a quantity of paper, of which the excess was continually returning, in order to be exchanged for gold and silvei*, the Bank of England was for many years together obliged to coin gold to the extent of between eight hundred thousand pounds and a million a year ; or, at an average, about eight hun- dred and fifty thousand pounds. For this great coinage, the Bank (in consequence of the worn and degraded state into which the gold coin had fallen a few years ago) was frequently obliged to purchase gold bullion at the high price of four pounds an ounce, which it soon after issued in coin at 3/. 17*. lO^d. an ounce, losing in this manner between two and a half and three per cent, upon the coinage of so very large a sum. Though the Bank, therefore, paid no seignorage, though the Government was pro- perly at the expense of the coinage, this liberality of Government did not prevent altogether the expense of the Bank. " The Scotch banks, in consequence of an excess of the same kind, were all obliged to employ constantly agents at London to collect money for them, at an expense which was seldom below one and a half or two per cent. This money was sent down by the waggon, and insui'ed by the carriers at an additional expense of three quarters per cent., or fifteen shillings on the hundred pounds." 188 COINS AND CURRENCr. P. 43.: — " The Bank of England, it is to be observed, by supplyino; its own coffers with coin, is indirectly obliged to supply the whole kin""dom, into which coin is continually tlowing fi-om those coffers in a great vai'iety of ways. Whatever coin, therefore, was wanted to support this excessive circulation both of Scotch and English paper money, wdiatever vacuities this excessive circulation occa- sioned in the necessary coin of the kingdom, the Bank of England was obliged to supply them. The Scotch banks, no doubt, paid all of them very dearly, for their own imprudence and inattention. But the Bank of England paid very dearly, not only for its own imprudence, but for the much greater imprudence of almost all the Scotch Banks." Is it not quite clear that the demand for gold arose from tlie profit on melting the coin and selling it as bullion? the coin was received at the rate of 3/. 175. lOi^/., and sold as bullion for four pounds an ounce — leaving to the trafficker in money a profit of two and a half to three per cent. Is not this a much more rational and easy solution of the demand for gold, than referring it to the over- issue of notes, which, without this inducement to de- mand coin, would have been returned to the Bank to be placed to the credit of the depositor, as is done at the present day, when no such traffic in coin can afford a profit, particularly as it is stated — P. 42.: — " The gold coin which was paid out, either by the Bank of England or by the Scotch banks, in exchange for that part of their paper which was over and above what could be employed in the circulation of the country, being likewise over and above what could be employed in that circuhition, was sometimes sent abroad in the shape of coin, sometimes melted down and sent abroad ia the shape of bullion, and sometimes melted down and sold to the Bank of England, at the high price of four pounds an ounce. It Avas the newest, the heaviest, and the best pieces only, which were carefully picked out of the whole coin, and either sent abroad or melted down. At home, and while they remain in the shape of coin, those heavy pieces were of no more value than the light ; but they were of more value abroad, or when melted down into bullion, at home." We find that it was the " heaviest " coins only which were melted or exported — we have seen, in- the ON THE BANK OF AYE. 189 case of the moidores and louis d'or, how small a profit will occasion the disappearance of the gold coin — and I think we may safely conclude that it was " in con- sequence of the worn and degraded state into which the gold coin had fallen," that the gold coin was de- manded in exchange for the paper money, and not in consequence " of the paper being over and above what could be employed in the circulation of the country." An issue of notes may have been occa- sioned by this traffic ; had the Bank lessened its cir- culation it would not have prevented it ; the remedy Avas to be found in reforming the gold coin, which would restore the equality between the mint price and the bullion price, and destroy all profit. Adam Smith (b. ii. c. 2. v. ii. p. 60.), on the Bank of Ayr, observes : — " The estates of the proprietors of this bank were worth several millions, and, by their subscription to the original bond or con- tract of the Bank, were really pledged for answering all its en- gagements. Hy means of the great credit which so great a pledge necessarily gave it, it was, notwithstanding its too liberal conduct, enabled to carry on business for more than two years. When it was obliged to stop, it had in the circulation about two hundred thou- sand pounds in bank notes. In order to support the circulation of those notes, which were continually returning upon it as fast as they were issued, it had been constantly in the practice of draw- ing bills of exchange upon London, of which the number and value were continually increasing, and, when it stopt, amounted to upwards of six hundred thousand pounds. This Bank, there- fore, had, in little more than the course of two years, advanced to different people upwards of eight hundred thousand pounds at five per cent. Upon the two hundred thousand pounds which it circulated in bank notes, this five per cent, might, perhaps, be con- sidered as clear gain, without any other deduction besides the ex- pense of management. But upon upwards of six hundred thou- sand pounds, for which it was continually drawing bills of exchange upon London, it was paying, in the way of intei*est and commis- sion, upwards of eight per cent., and was consequently losing more than three per cent, upon more than three-fourths of all its deal- ings." There can be little doubt that the Bank of Ayr failed from improvident loans and its expensive mode of raising money, and not from the over-issue, and the consequent demand for gold, which demand may 190 COINS AND CURRENCY. have existed in any state of the circulation ; from the worn and degraded state of the gold coin, as ex- plained in the case of the Bank of England. The following judicious observations on the Ayr Bank by Adam Smith are deserving of attention from those who imagine that gigantic banking establish- ments, with an enormous capital and circulation, are advantageous to a country. P. 63.: — " But though this operation had proved not only practicable, but profitable to the Bank as a mercantile company ; yet the country could have derived no benefit from it, but, on the contrary, must have suffered a very considerable loss by it. This operation could not augment, in the smallest degree, the quantity of money to be lent. It could only have erected this bank into a sort of general loan oflice for the whole country. Those who wanted to borrow, must have applied to this bank, instead of applying to the pri- vate persons, who had lent it their money." Is not the Bank of England a sort of general loan office for the whole country ? The Bank of England borrows from the public the money, which it pays for, either with its notes of circulation or by a credit in its books : it does not increase in any degree the quantity of money by itself borrowing, by means of its circu- lation, that money, which would otherwise be lent to different establishments of less extent, in return for the circulation of those more moderate banks, con- trolled in their issue by the wants of the public and the jealousy of rival banks. The loan and circulation would be divided among many banks, instead of being confined in a great de- gree to one bank, by means of the monopoly which the Bank of England enjoys of the circulation of pro- missory notes within the circuit of 65 miles of London, subject only to the circulation of private banks not having more than six partners. The following evidence is important as to the impossibility of increasing the circulation upon the Scotch system of banking.* * Second Report of Committee on Commercial Distress, 1848. EVIDENCE ON OVERISSUE OF BANK NOTES. 191 Mr. J. G. Kinnear, engaged in trade in Glasgow about 14 years, and secretary to the Chamber of Commerce there, and selected by them to give evi- dence, examined by Sir R. Peel. "6057. Do you object to that provision of the Bill of 1844, which prevented the establishment of new banks of issue in Scot- land ? — Yes, I do. "6058. You think that it would have been desirable to permit new banks of issue ? — Yes. " 6059. Did you see, shortly after the passing of the Bill of 1844, and before the Bill of 1845, some projects for the establish- ment of banks, founded upon the principle of giving accommoda- tion to railway projects ? — Such companies have been established in Scotland. " 6060. Do not you think that if they had the power of issue, they might have given undue fiicilities to railway projects? — I do not think that the power of issue would have enabled them to give undue facilities. "6061. Y"ou do not think that they could have exercised that power injuriously? — I do not think they could. " 6062. Do not you tiiink that they could have given undue facilities, if they had had an unlimited power of issue, without any obligation to keep gold in their coffers ? — Any bank being established at that time in Scotland, or being established now, could not, I apprehend, by any possibility, obtain an amount of circulation above, certainly not above, 250,000/. ; the total note circulation of vScotland being about three millions and a half, no new bank of issue could obtain circulation for their notes, except by displacing the notes of other banks : the same amount of three millions and a half would be divided among the issuing banks. " 6063 {Chairman). You are friendly to the convertibility of the note, are you not? — Yes, assuredly. " 6927 {3fr. Hume). R, Bell, Esq. Do you consider that you have any power of keeping out bank notes beyond what the im- mediate wants of your circulation require? — Not the least power. (By Sir W. Clay.) J. F. Macfj^rlan, Esq. (Secretary to the Chamber of Com- merce in Edinburgh.) " 7650. Is it your opinion, that if a fresh bank of issue were established now, they could get any more notes into circulation? — No ; my opinion is that they could not. "7651. That the circulation is quite full? — That the circula- tion is quite full. Parties, as soon as they have a sufficient sum, as low as 10/., immediately bank it, and only keep that which is abso- lutely necessary for the transactions of the day ; they generally draw in the morning, and bank in the afternoon. 192 COINS AND CURRENCY. CHAP. XVII. ON LESSENING THE AMOUNT OF BANK OF ENGLAND NOTES IN CIRCULATION. Adam Smith (b. ii. c. 2. v. ii. p. 69.) : — " The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so vio- lent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby to increase very considerably the annual produce of its land and labour. The commerce and industry of the country, however, it must be ac- knowledged, though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the D;iedalian wings of paper money, as when they travel about upon the solid ground of gold and silver. Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them." After mentioning, for example, an unsuccessful war, in which the enemy got possession of the capital, &c., he proceeds : — " A prince, anxious to maintain his dominions at all times in the state in which he can most easily defend them, ought upon this account to guard, not oidy against that excessive multiplication of paper money which ruins the very banks which issue it, but even against that multiplication of it, which enables them to fill the greater part of the cix'culation of the country with it." P. 73.: — " It were better, perhaps, that no bank notes were issued in any part of the kingdom for a smaller sum than five pounds. Paper money would then, probably, confine itself, in every part of the kingdom, to the circulation between the different dealers, as much as it does at present in London, where no bank notes are issued under ten pounds value ; five pounds being, in most parts of the kingdom, a sum which, though it will purchase, perhaps, little more than half the quantity of goods, is as much considered, and is as seldom spent all at once, as ten pounds are amidst the profuse expense of London." CIRCULATION OF BANK OF ENGLAND NOTES. 193 rt It « . ^ '^ CO CO 0-1 (J3 . °^ "^ s Tj3 CO ,3^ O^ CO t-^ CD d o^ d t-^ t^ t^ lO i-H r— ( CO (M I-H I-H s o o o Q o o Q o o o o o o o 00 ^D ^^ C" ^^ o o ^^ o o o o o o o « C' ^^ o* o_ o_o ^^ o o o o o o^ q^ 'O c ^ CTi GO co' oo^o" 1—^ crT ^" of -^ CO lo" lo" o^ -H lO Ol t- >— 1 00 t^ CO Oi CO lO O lO t- OJ GO t- CO CTi d o^ 00 d >o d t-^ (M* d 0^5 00 00 t^ lO (M r-l '^ -i O ^ CD (M 1-1 o CD O-J CO CO t^ OT '^ ^ o CD ^ r^ t-H im" .-T <>i' (m" o" O 1 — 1 '"' O) w oq CO CO r-J lO 00 Oi GO rH I-H 1 t-^ 00 00 I-H »0 oi OT (>j d i> lO (M r-l CO 3 (j^ ^ CO GSJ (M 00 t-^^CO^"^ CO OT ■* o x> o lO CO >-H »-^ I-H '-<"c4~ co" ,-H o ■"• •— I -H I-H rH >— ^ o o o o o o o o o o o o o Q CO o o o o o o o O O O O o o ^^ „ o o o o o o o^ o^ o^ q^ q, q_ o^ q_ 13 C ^ ^ 1^ oT •*"— r '^^ ■-h" OT oT t - ir- of of o^ lO GO ^ -f CO 1 00 CO OJ ^ 00 ^ a> (M > -5 CO •-5 1^ CO l>^ CD ■** TjH oi Tt5 oi Q 00 O) CD (M <-* Tji CO -H r-l -^ r-H « O O O o o o (-5 o o o o o o ^ 22 o o o o o o o o o o o o o ^ ^ o^o o o o o O q q q_ o^ q^ o o 13 C oTo"— " o" (m"-*" CO" GO -:f^ of d d -^'" ^ o* J:- Tf (M f O CO O "* OT OT I^ t^ (M o Oj 00 T}H O]^ »o CO !M ^H >0 00 CO CO 00 OT r—t 1 ■^oo'^ oT ) CO lO o 194 COINS AND CURRENCY. The preceding account was furnished to the Lords' Committee by James Morris, Esq., the Governor of the Bank of England. (P. 267. No. 3493.) I have divided the statement showing the amount of notes in circulation not exceeding 20/., and also the amount of notes not exceeding 40/. If notes not exceeding 20/. were issued, the amount, according to this statement, would vary from nine millions and a half to eleven millions and a half. If not exceeding 40/., it would vary from about ten to twelve millions. At the present issue of notes, the circulation varies from eighteen to twenty-one millions. If we take the average of the total circulation at eighteen and a half to nineteen and a half millions, we shall not be very wrong ; and allowing for an in- crease of circulation, in consequence of the withdrawal of the bank notes above 40/., we may take the cir- culation at twelve to thirteen millions of notes of all denominations, if none were permitted to be is- sued above 40/. If the payments in bank notes might be made for sums above 40/., by giving two or three of these notes to supply the place of some of the notes of higher deno- mination, and the use of cheques for the same purpose ; this would relieve the circulation, and the liability of the Bank to the extent of six or seven millions. The notes of a smaller denomination are those which sup- ply the place of coin, and also circulate among the retail dealers. It will be observed, that the amount of circulation is principally of the 5/., 10/., and 20/. ; chiefly the 5/. and 10/. notes. When the cir- culation in 1843 was 18,104,000/., the 5/. and 10/. notes constituted 8,319,000/., and the 20/. notes 1,221,000/. ; together, 9,540,000/., or more than one half of the circulation. The large notes rather supply the place of cheques on the Bank of England, and other banks, or remain in deposit in the banker's hands. I submit whether it would not be desirable to ON CIRCULATION OF BANK NOTES. 195 diminish in this way the amount of the circulation of the Bank of England ; lessening in the same degree its liabilities ; and whether any inconvenience felt by the London bankers or others is to be put in the scale, when weighed against the diminished liability of the Bank of England. It was stated by J. A. Anderson, Esq., Manager of the Union Bank of Scotland, to the Committee (No. 6490.), that the circulation of Scotland was about 3,000,000/., and this circulation may probably be composed of one pound notes, to the extent of one half. If so small a note circulation was sufficient for all Scotland, where the custom of drawing cheques must supply its place, surely the circulation in Eng- land, or rather in London and its neighbourhood, is unnecessarily large. It was stated by John M'Donald, Esq., Governor of the Bank of Ireland, that the amount of their notes out with the public, in October 1847, was 3,152,000/. (No. 6637.) It must appear extraordinary, that the total of notes in circulation in England by private banks, and joint stock banks in 1851, amounted only to about 6,000,000/., while the circulation of the Bank of England was 18,869,846/. The followino; is the statement of the circulation of the United Kingdom on February 22. 1851, as stated in the Evening Mail of April 11. 1851 : — Bank of England - . - . £18,869,846 Private banks .... 3,386,975 Joint stock banks _ . _ _ 2,685,756 £6,072,731 Scotland 3,033,235 Ireland - - - - . - 4,620,912 £7,654,147 o 2 196 COINS AND CURRENCY. We see, by tins statement, that the total circulation of Scotland and Ireland was in 1851- £7,654,147 And of the private and joint stock banks of England 6,072,731 £13,726,878 And while the circulation of the Bank of England was .... £18,869,846 The circulation of all other parts of the kingdom was ... - 13,726,878 And the total circulation of the United Kingdom was .... £32,596,724 of which the Bank of England circulation constituted more than one half. There can be no doubt that this disproportionate circulation must arise from the large notes being em- ployed instead of cheques, of which they supply the place ; if these large notes were withdrawn from the circulation, it would relieve the responsibility of the Bank of England to the extent of seven or eight millions. We find, when the circulation of the Bank of England in 1843 was 18,104,000?., which may be considered a moderate circulation, the amount of notes above 200?. was 4,164,000/., and the notes of 500?. were 870,000?., and of 1000?. were 2,924,000?. Sup- posing that other notes were employed in greater quantity from the withdrawal of the notes of higher denomination, there can be no doubt that the cir- culation might be very considerably lessened. If it were thought expedient, as the larger denomi- nation of notes do not supply the place of coin, they might be subject to a stamp duty, like bills payable after date. That would test their utility, and the grievance would only be the payment of a tax ; these notes are often employed to avoid the stamp duty, rather than from any wants of the circulation. These are means of diminishing the circidation of the Bank ON CIECULATION OF BANK NOTES. 197 of England promissory notes, which would be at- tended with no danger to commerce, and the Bank might be compensated for the loss it might sustain. As the banks in Edinburgh make the exchange with each other by exchequer bills (see the Evi- dence of E. Bell, Esq., No. 6863.), and in Belfast by cheques on Dublin, and in Dublin by exchequer bills as in Scotland (see the Evidence of J. Bristow, Esq., No. 7312 — 7315.), might not the banks in London, and in the country and others make their exchange by cheques on the Bank of England, where bank notes of a high denomination are now employed ? The Bank of England by limiting the amount of its notes in circulation lessens in the same proportion its liabilities, and where cheques can be conveniently substituted there would be no embarrassment to commerce. The reduction might be commenced with the large notes of 1000/. and 500/. I submit this suggestion upon the principle that the commerce of the country should not be made too dependent upon the circula- tion of the Bank of England, or of any bank or banks. If the circuit within which the Bank of England has the exclusive privilege of circulating promissory notes were lessened, it would be another means of diminishing its liabilities. If Joint Stock Banks, under what guarantee the Government might choose, had the privilege of issuing notes, that would still further reduce the liabilities of the Bank of England within its present circuit. So far back as 1832, it was stated to the Committee on the Bank Charter by George Carr Glyn, Esq. (p. 2956.), Digest, p. 56. : — " With regard to the country, it might be better if Joint Stock Companies were allowed to make their bills payable in London under 501. ; and twenty or twenty-five miles ought to be the extent of the exclusive privilege of the Bank of England for the issue of notes, or the formation of companies in banking exceedin*'- six partners. This would keep the circulation of London com- pletely to the bank, without interfering with other establishments beyond their circle." O 3 198 COINS AND CURRENCY. Sir Coutts Trotter (p. 3185.), Digest, p. 60. : — " The circulation of the bank is confined within a narrower circle than the sixty-five miles, within which no other company can issue notes ; that circle might be reduced to twenty-five miles without detriment. The wider the present currency extends, sup- posing it not to interfere with country establishments, the better." Samuel Gurney, Esq. (p. 3621.), Digest, p. 71.: — " Notes of 100/. and upwards, are most of them held by London Bankers." George Ward Norman, Esq. (p. 2694.), Digest, p. 47.: — " The difference between an individual and the Bank is, that the one may only ruin himself and connections, the other aifects all the property of the kingdom. The Bank is instituted for the public service, and ought to be I'egulated by the Legislature to that end alone." The cheques would be a private, personal liability, and the diminution of the circulation might be gra- dually introduced, and if distributed among several banks, the rivahy would reduce the amount ; this, I think, is shown by the circulation of the private and joint stock banks, being so much below their fixed issues. The competition of banks has a tendency to lessen the circulation. What Adam Smith says of money or coin is true of paper money (b. ii. c. 3. V. ii. p. 96.) : " Nobody buys it but in order to sell it again, as it yields no revenue." Each banker gains by his own paper being in cir- culation ; he gains nothing by retaining his own or his neighbour's, he is therefore anxious to part with both, and all acting upon the same principle, the circulation is reduced to the lowest amount that is consistent with the wants of the community ; as is the case in Scotland, which is further promoted by the custom of granting daily interest upon very small deposits. 199 CHAP. XVIII. WEEKLY STATEMENTS OF THE BANK OF ENGLAND. BANK OF ENGLAND. An account pursuant to the Act 7th and 8th of Victoria, c. 32., for the week ending on Saturday, May 30, 1857. Issue Depaktment. Notes issued . .£23,801,395 Government debt £ 11,015,100 Other securities 3,459,900 Gold coin and bullion . . 9,326,395 Silver bullion . £ 23,801,395 £ 23,801,395 Banking Department. Proprietors' capital £14,553,000 I Government secu- Eest Public deposits, including Ex- chequer, Saving Banks, Commis- sioners of Na- tional Debt and Dividend Ac- counts .... Other deposits . . Seven day and other bills .... 3,302,35'; 6,264,419 9,225,549 713,308 £34,058,633 Dated the 4th day of June, 1857. rities (includ- ing dead weight annuity) . . £ 10,326,131 Other securities . 18,302,575 Notes .... 4,723,920 Gold and silver coin .... 706,007 £ 34,058,633 M. Marshall, Chief Cashier. 4 200 COINS AND CURRENCY. The return from the Bank of England for the week ending the 30th of May gives the following results when compared with the previous week : — Public deposits . £ 6,264,419 Other deposits . . 9,225,549 Eest 3,302,357 Increase .... £ 708,853 Increase .... 136,929 Decrease .... 49,450 On the other side of the accounts : — The same as before. Government se- curities ... £ 10,326,131 Other securities . 18,302,575 Notes unemployed 4,723,920 Increase .... £ 633,727 Increase .... 222,085 The amount of notes in circulation is 19,077,475^., being an increase of 45,995/. ; and the stock of bullion in both departments is 10,032,402/., showing an increase of 227,575/. when compared with the preceding return. The returns of circulation of the Irish and Scotch banks for the four weeks ending the 9th of May, when added together, give the following as the average weekly circulation of those banks during the past month, viz. : — Average circulation of the Irish banks ... £ 7,155,184 Average circulation of the Scotch banks . . 3,932,834 Average circulation during past month . . . £11,088,018 On comparing the above with the fixed issues of the several banks, as given in the Banking Al- manac, the following appears to be the state of the circulation : — The Irish banks are above their fixed issue . . £800,690 The Scotch banks are above their fixed issue . 845,625 Total above the fixed issue £ 1,646,315 The amount of gold and silver held at the head offices of the several banks during the past month have been as follows : — Gold and silver held by the Irish banks ... £ 2,497,140 Gold and silver held by the Scotch banks . . . 1,588,707 Total of gold and silver held £4,085,847 ON CIRCULATION OF BANK NOTES. 201 The above statements complete the returns of tlie circulation in England, Scotland, and Ireland for the month ending the 9th of May, 1857. It appears from the Banker's Magazine that for the four weeks ending the 9th of May, 1857, from the returns of the circulation of private and joint stock banks in England and Wales, the circulation was : — Private banks £ 3,831,402 Joint stock banks . 3,172,715 £7,004,117 And that the private banks are below their fixed issues £ 681,690 The joint stock banks are below their fixed issues 130,642 £ 812,332 I have given the weekly account published by the Bank of England, by which are seen the debts and credits of the Issue Department and of the Banking Department. As the two departments are distinct, they may be considered as separate establishments. The notes issued are stated to be 23,801,395/. for Avhich the security is a debt due from the Government of 11,015,100/., and other securities 3,459,900/., and gold coin and bullion 9,326,395/. : the present pay- ment in gold of the Government debt could not be enforced : the same may be said of exchequer bills : the circulation could not spare it : the gold and silver may be demanded at any time by the lawful claimants, the holders of promissory notes, and the depositors. Although the bullion in the Issue Department is stated to be 9,326,395/., yet the Banking Department has 4,723,920/. of this sum, as it holds, in the form of promissory notes, receipts for this amount of gold and silver which it has deposited in the Issue Depart- ment, reducing the gold coin and bullion at the disposal of that department to 4,602,475/. ; at the same time the notes issued 23,801,395/. must be reduced by the amount of notes in the Banking De- 202 COINS AND CURRENCY. partment 4,723,920/., making the notes actually in circulation to be 19,077,475/. as stated. If the two departments were one, there would be be 9,326,395/. and 706,007/. together 10,032,402/., being the amount of gold and silver in the two de- partments, to meet a circulation of 19,077,475/., being a proportion of more than one half. Adam Smith supposed one fifth in coin to be sufficient to meet the demands of the circulation of private bankers. But the Bank of England supplies not only the demand for coin in exchange for its notes, but the demand for exportation of coin or bullion : and it virtually supplies the whole kingdom with coin. Is it not most desirable to limit the liability of the Bank to the payment of its own notes in coin : to distribute among man)^ banks the circulation of this one Bank, and to separate the demand for exportation from the liability of the Bank of England, and of all banks of circulation by the establishment of a bullion bank for the Great Mercantile Republic? By the statement it is seen that the average circulation of the Irish banks in May, 1857, was 7,155,184/., and of the Scotch banks, 3,932,834/., together, 11,088,018/. ; and that the circulation of private banks in England and Wales was 3,831,402/., and of joint stock banks, 3,172,715/., together, 7,004,117/. Is it not extraordinary that the circulation of the Bank of England being 19,077,475/. is nearly double the circulation of the Irish and Scotch banks ; and about a million more than the amount of the cir- culation of all the banks in Ireland and Scotland, and of the private and joint stock banks in England and Wales united ? At the same time the circulation of the private and joint stock banks are about 800,000/. below their fixed issues ; and the Scotch banks and Irish banks are, each, about 800,000/. above their fixed issues. Can any more convincing proof be given that ON CIRCULATION OF BANK NOTES. 203 the competition of banks will determine the amount of circulation according to the wants of the com- munity ? Is it not also apparent that the circulation of the Bank of England could be greatly lessened, without any detriment to the community ? Would not this add to the security of commerce and industry ? In the words of Adam Smith, b. ii. c. 2. v. ii. p. 70. :— " The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secux'e, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver." The following reasoning in the extracts from Adam Smith is, I think, founded upon an erroneous principle, b. ii. c. 2. V. ii. p. 38.: — " The whole paper money of every kind which can easily cir- culate in any country, never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there, if there was no paper money. " Should the circulating paper at any time exceed that sum, as the excess could neither be sent abroad nor be employed in the circulation of the country, it must immediately return upon the banks to be exchanged for gold and silver. " When this superfluous paper was converted into gold and silver they could easily find a use for it, by sending it abroad ; but they could find none while it remained in the shape of paper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper, and if they showed any difiiculty or backwardness in payment, to a mucla greater extent, the alarm which this would occasion necessarily increasing the run." Adam Smith limits the circulation of paper money to the value of the gold and silver of which it sup- plies the place ; but the larger denominations of notes, such as 100^., 500/., and lOOOZ., do not supply the place of gold — they supply the place of bills and cheques : it is true, if not wanted for the purpose they are used — for the purpose of convenience — they would be returned to the Bank of England ; but not for gold, but to be placed in deposit, or to the credit of the 204 COINS AND CURRENCY. party returning them. When treating of the demand for gold from the Bank of England and the Bank of Ayr, I have attributed the demand for gold coin to the deo-raded state of the current coin, and not to an over-issue. Adam Smith supposes that an excess of issue of bank notes would cause a demand for gold to the amount of the excess, because the gold could be exported, and the bank notes could not be exported. The notes were issued as an instrument of loan, like any other description of paper money, and would be employed in the purchase of goods or to pay debt, and, having discharged this office, they would be returned to the issuer through the agency of rival banks : they would not, as is truly said, remain in circulation, but neither would this excess, because it was superfluous^ be returned to the Bank'for gold. Sir Robert Peel differs from Adam Smith ; he thinks that an excess of issue can be maintained, and that this excess actually circulates, and that from the cir- culation being in excess, it becomes depreciated relatively to the gold coin, and that a demand for gold arises from its being more valuable than the paper, and that the gold is exported in consequence of the foreign exchanges becoming unfavourable from a depreciation of the currency, which appears to ine to involve a double fldlacy ; first, that the bank notes, while paid on demand in gold can possibly be less valuable than coin; and secondly, that the gold will be exported, in consequence of this de- preciation of the bank note. The instrument of loan, the paper money, may be issued in excess, and will be returned to the bank — the loan may be in excess, and will continue in excess, without reference to the instrument by which it was made. An excess of loan may occasion an exportation of gold, quite independently of the bank notes ; a loan may be made without issuing a note, and in whatever * See p. 188, ante. ON CIRCULATION OF BANK NOTES. 205 mode effected, by increasing the power of purchase, may increase the prices of goods ; and prices may rule so high, as no longer to yield any profit in the foreign market, and then goods will not be bought, and gold will be demanded for exportation, because it will leave no loss ; the " most convenient com- modity," — a most legitimate and wholesome use of it. Low prices requiring less coin and less notes to circulate the goods, both the gold and the notes may naturally be returned to the bank ; the gold and the notes will often remain in deposit, when low prices and falling markets render trade unprofitable. Lord Ashburton, p. 21. : — " It is a great mistake to suppose that whenever gold is claimed from the Bank, notes are brought in, or that when accommodation is given by discount, notes go out. In nine cases out of ten those great transactions pass through deposits, and transfers from account to account, and not by notes ; but deposits are considered as nothing, and the notes taken as tlie sole indication of the powers and dangers of the Bank. It is equally a mistake to suppose that the Bank has the power to keep out any amount of notes at its pleasure, supposing it even to disregard the danger of a drain of gold." * Lord Ashburton is treating of the Bank Act of 1844, but although the claimant of gold may bring no notes, yet the banking department must give notes to the issue department for the gold — the gold can only be obtained by means of bank notes ; it is true that accommodation or loan may be made by transfer of accounts, without the intervention of gold or notes. Lord Ashburton agrees with Adam Smith, that the Bank has not " the power to keep out any amount of notes at its pleasure," thus confirming the opinions and experience of Mr. Kinnear, Mr. Bell, and Mr. Macfar- lan, as expressed in their Evidence (see p. 191.). The following evidence, given before the Committee of the House of Commons, 10th of March, 1848, is deserving of grave consideration : — * " The Financial and Commercial Crisis considered," by Lord Ashburton. London, 1847. 206 COINS AND CURRENCY. James Morris, Esq., Governor of the Bank of England : — "3170. If circumstances similar to what occurred last year should recur in this country, the country is to expect the same mode of treating the case on the part of the Bank ? — Yes. "3171. Whether it be an internal drain, or whether it be an external drain, the only remedy that the Bank direction con- sider ought to be applied, is restriction in some mode or other, they preferring a rise in the rate of interest, and leaving it to the Government to interfere when it thinks right ? — I cannot speak to the opinion of the Bank, but I speak to ray individual opinion ; my own individual opinion is, that that is the case. "3172. The Committee understand you to think that though interference was justifiable on the 25th, any previous interference would have been improper ? — Yes ; but I am not prepared to say that the interference on the 25th was unnecessary. " 3173. So that, according to your opinion, before the Govern- ment would be justified in interfering, we must have the same extent of panic and alarm, and of failures ? — I think the Government would not be justified in interfering under a less state of alarm and excitement than prevailed on that occasion. "3174. You draw no distinction between the case in October, when the demand w^as not from a foreign export of gold in any way, or an unfavourable state of the exchanges ? — As far as the banking department of the Bank is concerned, it is immaterial to them whether the demand upon the reserve arises from an internal or an external drain." P. H. Muntz, Esq., gave the following evidence : — " 1356. You say that the Bank of England did not begin to put on the screw eax'ly enough in 1846 ? — Quite early enough for me, but I think not early enough to prevent the suddenness that took place in their action afterwards. " 1357. Do you think it absolutely necessary for the Bank to put on the screw in order to create a turn in the Exchanges ? — I think it is absolutely necessary; as long as the Bank issue is under the control of the Bank, they must be looked to as the re- sponsible parties to control the monetary affairs of the nation." John Horsley Palmer, Esq., a Director in the Bank of England, 29th February, 1848 : — "2112. It is by producing a fall in the value of all commodities in this country that you would correct the Exchange ? — Yes ; not merely in that way, but you would bring capital to this country ; by tlie high rate of interest you stop credit ; many persons trading with America, or with India and China, have found money so extremely scarce in this country that they have been forced to stop their operations. EVIDENCE ON THE CONTROL OF BANK OF ENGLAND. 207 "2113. It is by interference with trade that it acts, and not merely by the inconvenience it occasions to holders of bills ? — It causes the stoppage of trade. "2114. What would be the effect upon the manufacturers and labourers of the country during such an operation ? — It destroys the labour of the country; at the present moment, in the neigh- bourhood of London, and in the manufacturing districts, you can hardly move in any direction without hearing universal complaints of the want of employment of the labourers of the country. "2115. That you ascribe to the measure which it was necessary for the Bank to adopt, in order to preserve the convertibility of the note ? — 1 think that the present depi'essed state of labour is entirely owing to that circumstance. "2117. And the pressure produces forced sales? — It stops credit, and the British merchant sells his goods for the purpose of carrying on his payments, and brings back his capital at an earlier period than it would come in the ordinary course of trade." It will be recollected that Mr. Palmer stated in his pamphlet, before referred to, and published in 1837, that — " The fall in price of almost all the leading articles of raw produce (sugar, coffee, tea, silk, cotton, piece goods, metals, drugs, &c.) from the 1st of July last, when the rate of interest was first advanced, has not been less than from 20 to 30 per cent." * It was to remedy this state of things that the Bank Act of 1844 was passed. Before and after the passing of the Act, the same grievance appears to have existed. See page 129, ante. 208 COINS AND CURRENCY. CHAP. XIX. MR. m'CULLOCH on PAPER MONEY. Mr. M'CuLLOCii's edition of Smith's Wealth of Nations. On Money, s. 3., note 9., p. 489. Mr. M'Culloch thus announces what he considers a very important principle : — " Until very recently it was universally supposed that the ability to convert paper into gold, at the pleasure of the holder, was neces- sary to sustain its value. But it is plain, as well from the prin- ciples already stated, as from experience, that the mere limitation of the quantity of paper made legal tender is quite sufficient to preserve its value on a par with the value of gold, or to raise it higher. " It may be worth while, perhaps, to observe that neither the existence nor the want of confidence in the solvency of the issuers exercises the smallest influence over the value of paper money, properly so called. Notes not legal tender, and payable on de- mand, or at some stipulated period, are not paper money, though they serve the same purposes, during the time they continue to circulate. The value of such notes is wholly derived from the confidence placed in the ability of the issuers to retire them, when presented for payment, or when they become due. Whenever, therefore, this confidence ceases, their circulation necessarily ceases also. But no such circumstances affect paper money, meaning by paper money, paper made legal tender, and not legally conver- tible into gold or anything else, at the pleasure of the holders, or at any given period. No part whatever of the value of such paper money is derived from confidence. It circulates because it is made legal tender, and because the use of a circulating medium is indispensable ; and its value, supposing the demand to be constant, is in all cases inversely as the quantity in circulation." As an example to illustrate this extraordinary theory of paper money, Mr. M'Culloch states : — " In Russia, to give only one example, forty millions of paper rubles, or assignats, were issued in 1769 by the Government bank ON CIRCULATION OF BANK NOTES. 209 established in the preceding year. There were some regulations with respect to the conversion of these assignats into copper ; but M. Storch hns shown that these were altogether illusory, and tliat, pi'actically, the assignats were inconvertible. They were, how- ever, made legal tender at the same rate as silver rubles ; while, in order to insure their circulation, it was ordered that a certain proportion of the taxes due by each individual should be paid in them. In consequence of these regulations the assignats really formed a species of inconvertible paper money ; and as their sup- ply had not been originally excessive, and no further additions w^ere made to it for about eighteen years, they continued, during the whole of that period, to circulate at about the same value as silver. In 1787, however, a fresh emission of sixty millions of additional assignats took place, which immediately depressed their value about eight per cent, under silver. And owing to succes- sive emissions, the mass of assignats in circulation in 1811 w^as increased to the enormous sum of 577 millions, when they fell to a discount of 400 per cent, as compared with silver! Since 1815 the mass of assignats has been much diminished ; and their value lias uniformly increased with every diminution of their quantity. Can any more conclusive proof be required, to show that the value of such paper currency, as is legal tender, is always propor- tioned — other things being the same — to the quantity in circula- tion ?" In this instance there was confidence; a confidence that the Government would take this paper money as silver rubles in the payment of taxes, and when the amount exceeded the value of the taxes to be paid it fell accordingly ; the legal tender alone would not maintain the value without this confidence, and when this confidence ceased the value of the paper money ceased, in proportion to the excess that could not be disposed of in this way. Can any more melancholy instance be given of the insecurity and mischief of an inconvertible paper circulation ? A fall of 400 per cent, what misery ! what ruin may have been occasioned ! Have we forgotten the result of the issue of the French assignats ? (B. ii. c. 2., V. ii., p. 80.), Adam Smith mentions the circumstance of the paper in the American colonies being received in payment of taxes in the following terms : — " The paper of each colony being received in the payment of the provincial taxes, for the full value for whicli it had been P 210 COINS AND CUKRENCY. issued, it necessarily derived from this use some additional value, over and above what it would have had, from the real or supposed distance of tlie term of its final discharge and redemption. This additional value was greater or less, according as the quantity of paper issued was more or less above what could be employed in tlie payment of the taxes of the particular colony which issued it. It was in all the colonies very much above what could be employed in this manner. " ' A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend al- together upon the will of the prince. If the bank which issued this paper was careful to keep the quantity of it always somewhat below what could easily be employed in this manner, the demand for it might be such as to make it even bear a premium, or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued."' He also' observes (p. 79.) : — " It appeared by the course of exchange with Great Britain, that a hundred pounds sterling was occasionally considered as equivalent, in some of the colonies, to a hundred and thirty pounds, and in others to so great a sum as eleven hundred pounds' cur- rency ; this difference in the value arising from the difference in the quantity of paper emitted in the different colonies, and in the distance and probability of the term of its final discharge and redemption." Let nations beware of adopting a theory of paper money, which consists in divesting the promise of all signification, or responsibility, if indeed any pro- mise is to be expressed in the note, in rejecting the opinion of Adam Smith, that " fortune, probity, and prudence" are the foundation of the confidence of the public ; for moral obligation substitutes quantity, making the value of the paper money depend upon this material quality, and not on the eternal and immutable laws of justice and of truth. Unluckily for the theory a condition is annexed, " supposing the demand to be constant;" tliis, it is to be feared, may destroy the beautiful structure of paper cir- culation described. The alchyinist in his laboratory sought only to convert one metal into another, the baser metal into the more precious ; but modern science disdains the MR. m'cULLOCH on PAPER MONEY. 211 tardy process ; instead of the metal, the crucible and the fire employs only the simple materials of a pen, ink, and paper : these supply the place of gold by the talisman of " legal tender," and " because the use of a circulating medium is indispensable." A paper money " not legally convertible into gold or anything else at the pleasure of the holders, or at any given period," " depending for its value upon the quantity in circulation," and " deriving no part what- ever of its value from confidence," seems the legitimate and worthy progeny of the incubation of the new theory of monetary science. 212 COINS AND CURRENCY. CHAP. XX. LORD ASHBURTON AND J. HORSLEY PALMER, ESQ. In a pamphlet published in 1837 by Mr. Horsley Palmer *, are the following remarks : — P. 48.:-- " Adverting, therefore, to the mischief which appears to have attended the uncalled-for encouragement given to Joint Stock banks in England, while the advantage of those bodies is admitted in countries differently situated, it becomes the duty of Govern- ment to bring the subject under the consideration of Parliament, and to propose such regulations as may check the unlimited form- ation of such institutions hereatter, iu places where banks al- ready 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 medium, which, on a late occasion, neutralised 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, a repetition of the pressure will no doubt recur with increased violence." P. 50.: — " So dangerous does the system appear, as it noiv stands, that it becomes questionable whether the Bank of England and the bodies in question can permanently exist together." P. 51.: — "Whether the Bank of England, as now constituted, be the establishment most capable of upholding public and private credit, or whether its sphere of action should be extended or contracted, are public questions." * " (Causes and Consequences." LORD ASHBURTON AND MR. PALMER. 213 This was seven years before the passing of the Bank Act of 1844. Three years after the passing of that Act and ten years after the publication of Mr. Palmer's pamphlet, appeared a treatise on the " Fi- nancial and Commercial Crisis of 1847," by Lord Ashburton. He commences by observing: — " The recurrence at the present time of one of those visitations of commercial and financial distress, of which I have during a long life experienced so many, has once more forced upon the con- sideration of Parliament and the public, the interminable subject of banking and circulation *' The prudence and sagacity of merchants not being in fault, we are naturally led to look for our difficulties in the derangement of our monetary system, and there, beyond all doubt, they will be found." P. 4.: — " The last notable settlement of this endless controversy was by the Bank Charter Bill of 1844, and the great leaders on both sides of the House of Commons are resolved to defend it, in spite of the unfortunate fact that on the first occurrence of what is called a crisis, the failure is apparent in the evidence of a state of em- barrassment and difficulty never exceeded." P. 5.: — " Now, my object in appearing before the public is to endeavour to maintain, with as few words as the case will permit, the opinion I gave when the Charter Act was before the House of Lords, that the expectations entertained of this infallible panacea were unfounded, — that it would only work in fair weather, when restrictions of all sorts are inoperative and immaterial, — that it could not fail to break down under the first difficulty, — and that it is in fact a serious aggravation, if not, indeed, the actual cause of the distress we now experience." P. 4.: — " The various schemes for regulating the action of banks have been propounded with unhesitating confidence, and pronounced to be unfailing, although every real trial of this great practical problem proves that it still remains to be solved." I give the above extracts to show that a most ex- perienced director of the Bank of England in 1837 and a noble Lord in 1847, for many years of his p 3 214 COINS AND CURRENCY. previous life, the most eminent merchant, perhaps, in the world, both bear testimony to the unsatis- factory state of the Bank question ; the one before and the other after the passing of the Act of 1844. Mr, Horsley Palmer attributed great mischief, and danger to the Bank of England from Joint Stock banks as then established, and Lord Ashburton con- ceived that the mischief was aggravated and possibly arose from the Bank Act of 1841. Lord Ashburton, p. 27: — " The battle between theory and practice in our treatment of these subjects will probably never end ; nor will the parties, it is feared, ever permit us to profit by the wisdom, and at the same time avoid the errors of both. " The theory is this : An adverse state of foreign exchanges, from whatever cause arising, and whether temporary or otherwise, is to be corrected by making money scarce, and thereby lowering the value of all merchandise, until by the depreciation a market is forced for it abroad. Do these reasoners comprehend the losses occasioned by this depreciation of all property, when this screw is applied to correct every occasional fluctuation of the exchanges ? And, moreover, how uselessly these sacrifices are increased in cases like the present, when the difficulty to be guarded against is not real, but the result of a fanciful scale of paper and bullion, which imagines dangers while there is a larger portion of treasure in the Bank than the average of many years of supposed abundance. If our trade is to be so governed, and liable to these caprices, is it too much to say, that the advantages of a paper circulation are over- balanced by its inconveniences and dangers ? " P. 36: — " The recommendations I have to suggest are — first, the re- moval of the artificial restraints on the issues and management of the Bank, which the result has sufficiently proved to be rather mis- chievous than effectual, and which I have endeavoured to show must of necessity have been so — and, secondly, some immediate attempt to bring within more prudent bounds the wild operations of railroad companies; — these two causes having, in concurrence with and aggravation of each other, occasioned that state of things of which, without some attempt to abate those grievances, I see no termination." Lord Ashburton complains of the battle between theory and practice : may not both be rejected, and a new system adopted ? 215 CHAP. XXI. ON CREDIT. Adam Smith, b. ii. c. 2. v. ii. p. 44. "When a bank discounts to a merchant a real bill of exchange, drawn by a real creditor upon a real debtor, and which, as soon as it becomes due, is really paid by that debtor ; it only advances to him a part of the value which he would otherwise be obliged to keep by him unemployed and in ready money for answering oc- casional demands. The payment of the bill, when it becomes due, replaces to the Bank the value of what it had advanced, together with the interest. The coffers of the Bank, so far as its dealings are confined to such customers, resemble a waterpond from which, though a stream is continually running out, yet another is continually running in, fully equal to that which runs out; so that, without any further care or attention, the pond keeps always equally, or very near equally full. Little or no expense can ever be necessary for replenishing the coffers of such a bank." Let ns transfer our attention from the banker who discounts the bill to the merchant whose bill is discounted, under similar circumstances. As the coffers of the Bank, so long as its dealings are " con- fined to such customers, resemble a waterpond," so does the floating capital of the merchant, " from which though a stream is continually running out, yet another is continually running in fully equal to that which runs out." The merchant who discounts at the bill-broker's office good bills, Avhich he has received in payment for goods, pays with the " value received " or cash the bills which he may have drawn, or accepted for the purchase of goods. The bills given for the p 4 216 COINS AND CURRENCY. purchase, and received on the sale of commodities ; the stream of bills flowing out and running in, may be compared to the stream of promissory notes running out of and flowin^^ into the coffers of the Bank. Adam Smith, b. ii. c. 2. v. ii. p. 26. : — " When the people of any particular country have such con- fidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon de- mand such of his promissory notes as are likely to be at any time presented to him ; those notes come to have the same cur- rency as gold and silver money, from the confidence that such money can at any time be had for them." The same confidence in the " fortune, probity, and prudence " of a merchant gives currency to his bills payable after date; the same confidence that these bills of the merchant will be paid at maturity, as that the promissory notes of the banker will be paid on demand. The banker relies upon his bills and securities which he holds in deposit being paid, as his own bills become due ; and for his payments of promissory notes on demand, he depends upon his cash, or on his ability to borrow it on the deposit of securities ; that is, by discounting securities in case of any extraordinary and unforeseen demand. The merchant in like manner depends upon his bills payable after date, which he holds, being paid at maturity to meet his own engagements, and in case of any unforeseen or extraordinary demand upon him in consequence of these bills not being paid, he borrows the money upon securities which he holds, that is, he discounts bills, or in case of need sells his goods perhaps at a sacrifice or loss. As the merchant deals in bills payable at certain dates, or times, he has more time to provide against sudden demands than the banker, who may be called upon to pay without notice his promissory notes, or money at call. Both the hanker and the merchant equally hold a value for the bills of the one, and the promissory notes of the other. ON CREDIT. 217 The prudence of each is tested by his not depend- ing too much upon securities, the securities and goods of the merchant, and the cash and securities of the banker. The merchant holds commodities which he can sell in case of need to meet his expected payments — the banker holds securities which he can discount to meet his sudden and unforeseen payments. It will easily be seen how a disturbance of prices may affect the merchant, if obliged to sacrifice his com- modities at a great loss, and this loss may alFect the security of the bills Avhich the banker holds, and how " fortune, probity, and prudence" are the foundation of credit in both. The greater part of the commerce of this country is carried on upon credit, that is, upon the security of property in case of loan ; and upon the security of the commodities themselves when paid for by bills payable at a future day — two or three months hence. In this case the goods purchased may be the foundation of a legitimate credit, and the bill may be an instru- ment of commerce for the transfer of commodities, as legitimately as bank notes or coin, ivhen confined within certain limits, proportioned to the property of the drawer and the value of the goods purchased. In the evidence before the Committee of the House of Commons on commercial distress, the following answer was given by William Cotton, Esq., who was Governor of the Bank of England at the time of passing the Act of 1844. " 4,105. Is not a great portion of the trade of the country carried on upon credit?" — "It is; but credit does not increase capital, and credit is only the employment of other people's capital in carry- ing on business." If a merchant sells a quantity of sugar to a whole- sale grocer, taking for the cost the grocer's bill at two months' date, the grocer is enabled to trade with that sugar for two months, before he pays money or cash for the sugar, and if the wholesale grocer 218 COINS AND CURRENCY. sells this sugar, which may cost 3,000^. to retailers or shopkeepers, at a profit of 3 or 4 per cent., he realises a profit of 90/. or 120/., which is so much addition to his capital. In the same way, if the shopkeeper has paid for the sugar by a note or bill at two or three months, payable at his bankers, or has a credit for the cost, of two or three months, and in the meantime has sold this sugar at 5 per cent, profit, he gains 150/. by the transaction, and this is an ad- dition to his capital, and if he pays liis bankers or the grocer the money he has received, the transaction is at an end. Here are two additions to capital on the sale of this sugar ; the capital of neither the wholesale grocer nor the shopkeeper has been em- ployed, but the industry of both has been employed for the benefit of all parties, the merchant, the wholesale grocer, and the shopkeeper, and an addition has been made to the capital of each by these profits ; each is enabled to save an additional sura equivalent to the profit ; and it is only by saving, or spending less than one's income or revenue, that capital can be increased. "4,106. In what way would you say that credit does notincrease capital? — I will put a case which will esplain my meaning. If a manufacturer exports his goods, and gives the person to whom he exports them a certain time in which to pay for them, that is the employment of the capital of the manufacturer, for the accommo- dation of the party to whom they are exported. If he draws a bill, and then he renews that bill, and that bill is discounted, it is the capital of the discounter, which is employed in that transaction, and therefore T have always considered that credit does not at all increase capital. It is only the employment of one man's capital enabling another to carry on a much larger business, than his own capital could enable him to do." The manufacturer who exjDorts the goods, may himself have purchased them upon credit, and that credit may have been given him by a bank that borrows the money it lends from the circulation, that is, on credit, and there may be no capital in the sense of property employed in the transaction ; credit like coin, may be considered the instrument of commerce ON CREDIT. , 219 and of traffic, tlie wheel of circulation, giving activity to labour and industry, which alone add to the stock or capital of a country. Adam Smith (b. ii. c. 3. v. ii. p. 93.) : — " Capitals are increased by parsimony, and diminished by prodif>;ality and misconduct. " Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hnnds, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, wliich is the same with that of all the individuals who compose it, can be increased only in the same manner. " Parsimony, and not industry, is the immediate cause of the increase of ca^jital. Industry, indeed, provides the subject which parsimony accumulates. But wliatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater." It is seen by this account of credit how a fall in prices directly affects credit, ruining perhaps the imprudent over trader, and injuring all traders according to the quantity of goods they hold. Joshua Bates, Esq. (Committee of the House of Commons) : — "2,486. I know two more particularly where there was a capital of 60,000/., and it did not appear that they had bought more than 120,000/. or 130,000/. of corn ; they were utterly ruined from the importation being so great, in consequence ot" the exaggerated notion of the want there was for corn here." Lord Bacon observes in his essay " Of Usury" : — " It is certain that the greatest part of trade is driven by young merchants upon borrowing at interest ; so as if the usurer either call in or keep back his money, there will ensue presently a great stand of trade ; the second is, that wei'e it not for this easy borrowing upon interest^ men's necessities would draw upon them a most sudden undoing, in that they would be forced to sell their means (be it lands or goods), far under foot, and so, whereas usury 220 COINS AND CURRENCY. doth but gnaw upon them, bad markets would swallow them quite up." How careful should every state be not to allow any bank, either by monopoly, or by its great power of granting or withholding loan, to create "bad markets ! " 221 CHAP. XXII. ON THE DISCOVERY OF THE AMERICAN GOLD AND SILVER MINES. The discovery of the gold and silver mines in America reduced the value of the precious metals to about one third of their former value, and to this extent altered the standard of value. The effect of this depreciation was most pernicious to those whose property con- sisted in fixed money-rents, or annuities. But the effect was mitigated by the gradual diminution in value, and circumstances and i^r'ices gradually accommodated themselves to the new state of things. In ninety years, Adam Smith calculates that the full result was produced. We do not hear of panics being produced by the discovery of the American mines ; but if the gold and silver had been poured into the countries at one time suddenly^ raising the prices of all commo- dities to one third of their former price, then indeed a panic would have prevailed, and great ruin would have ensued. But after a time things would have accommodated themselves to the new standard of value ; but if the additional supply of gold and silver could have been, after an interval of a few years, withdrawn from the world, and have been again buried in the bowels of the earth, then a new panic would have arisen from the altered state of the standard ; commodities would have fallen in price one third, as they had before risen. One ounce of gold or silver would have purchased as much as three ounces before; great derangement would have en- sued in all money contracts ; annuitants would have 222 COINS AND CURRENCY. gained in the same proportion as tliey had before suffered ; debtors would have been injured and credi- tors would have been benefited ; but after an interval of suffering, things would have accommodated them- selves to actual circumstances. But if the power of sending forth and shutting up these streams of Pactolus, these golden treasures, was vested in a Board of Directors at Cadiz, who might exercise their power according to their judgment ; and that every now and then, every seven years for instance, they thought it advisable for the general good to exercise a discretion, in opening or shutting up these treasures ; acting by this means directly upon the prices of commodities to the extent of 20 or 30 per cent., we perceive with what a fearful power they would be invested ; how formidable to the whole trading com- munity, whose fortunes would be made dependent upon the discretion of the Board of Directors ; and if this Board of Directors were the managers of a chartered company who trafficked with this gold and silver, and Avhose interest they were bound to consult, and were themselves shareholders, and partook of the profits of the company, and had at the same time entered into an engagement, with the lawful claimants of these treasures, to deliver them on demand; we shall perceive how inconsistent would be their dif- ferent functions, if they were allowed to be buyers and sellers, to be merchants whose interests were directly affected by the prices of commodities, and at the same time partook of the profits of shareholders, and if they were sanctioned in their proceedings by the King of Spain, and amenable to no tribunal for their management, however influenced by false calculations or by the interest of the shareholders, or by their own interest ; or however the community might suffer ; and if these times of suffering were the peculiarly profitable times of the shareholders, we may imagine that these "opes" might truly become ''''Irritamenta ma- lorum,^^ that these treasures might be the instruments of incalculable mischief: that the directors and share- SUPPOSED ARBITRARY ACTION ON PRICES. 223 holders might enrich themselves, while commerce and industry were paralysed, to the great loss of the ma- nufacturers, and traders, and agriculturists ; that great uncertainty would be introduced into all com- mercial transactions ; that large fortunes would be speedily made and speedily lost, that no prudence or foresight could protect from danger; that sober- minded men would perhaps withdraw from commerce which was attended with so much hazard ; that men less cautious or less scrupulous, and many of des- perate fortunes would take their place ; that tradino- would be a sort of gambling ; that the national cha- racter would be lowered; that periodical panics might result from the measures of the Board of Directors ; that the prices of provisions would be affected like the prices of other commodities ; that the labouring classes would be affected not only from the want of employment, on account of a stagnation of trade, but on account of the uncertain value of wages which they received ; at one time too high relatively to the prices of provisions, and distressing to their employers, and at other times too low, distressing the labourers and enriching the manufacturer. What shall we say of a National Bank exercising a control over the currency ? May we not say, " Mutato nomine de te Fabula narratur." Horace. May not a control exercised over the currency, be compared to the supposed power of the Board of Cadiz over the treasure entrusted to their management ? Do they not resemble each other in the influence exerted over prices, and in the mischief that may be the conse- quence? It would be no answer to say that such thintys can never happen to the Bank of England ; because the Government is above all suspicion of countenanc- ing such proceedings, and the Directors of the Bank of England are very judicious, and are too honest to take advantage of their position to promote their own interest, and to inflict injury for its sake on the 224 COINS AND CURRENCY. country. It is sufficient for the argument that they have the power of raising and depressing prices, and that governments less scrupulous, and directors less judicious, or less honest, might derange commerce, or advance their interest to the injury of the community. Septennial commercial crises have been compared in this country to the return of Encke's comet in regu- larity. Will the recent discoveries of gold prevent this ? Evening Mail, Jan. 9, 1850. : — " A day of reaction and a day of disappointment will assuredly come. In three or four years at the most, the natural course of things will bring us round to the periodical depressions which mark our annals with almost as great certainty as the return of Encke's comet." Mr. Haggard (Observations on the Standard of Value), p. 19. : — London 1840. "A certain quantity of gold, which is accumulated by importa- tion during a period of ninety-eight mouths, is withdrawn in the space of eighteen months." Ninety-eight months is about eight years, and allow- ing the withdrawal to proceed about one year before alarm is created in the minds of the directors, the panic would be about once in seven years. 225 CHAP. XXIII. ON THE GOLD DISCOVERIES IN AMERICA, AND IN AUSTRALIA AND CALIFORNIA. Adam Smith (b. i. c. 11. v. i. p. 288.) : — " The quantity of gold and silver imported at both Cadiz and Lisbon (including not only what comes under i-egister, but what may be supposed to be smuggled) amounts, according to the best accounts, to about six millions sterling a year." P. 299.: — " It must be observed, however, that whatever may be the supposed annual importation of gold and silver, there must be a certain period, at which the annual consumption of tliose metals will be equal to that annual importation. Their consumption must increase as their mass increases, or rather in a much greater pro- portion. As their mass increases their value diminishes. They are more used and less cared for, and their consumption con- sequently increases in a greater proportion than their mass. After a certain period, therefore, the annual consumption of those metals must, in this manner, become equal to their annual importation, provided that importation is not continually increasing ; which, in the present times, is not supposed to be the case." P. 237.: — " The lowest price at which the precious metals can be sold, or the smallest quantity of other goods for which they can be ex- changed during any considerable time, is regulated by the same principles which fix the lowest ordinary price of all other goods. The stock which must commonly be employed, the food, clothes, and lodging, v.'hich must commonly be consumed in bringing them from the mine to the market, determine it. It must at least be sufficient to I'eplace that stock with the ordinary profits." P. 239.: — " If new mines were discover* d, as much superior to those Q 226 COINS AND CURRENCY. of Potosi as they were superior to those of Europe, the value of silver might be so much degraded, as to render even the mines of Potosi not worth the working." P. 235. — " When any person undertakes to work a new mine in Peru, he is universally looked upon as a man destined to bankruptcy and ruin, and is upon that account shunned and avoided by every- body. Mining, it seems, is considered there in the same light as here, as a lottery, in which the prizes do not compensate the blanks, though the greatness of some tempts many adventurers to throw away their fortunes in such unprosperous projects." Adam Smith wrote respecting the American mines nearly 150 years after they were supposed to have produced their full eiFect upon the prices or value of goods ; and when the trade of mining must have assumed a degree of consistency, which in some measure removed it from the uncertainty of a lottery. AVith respect to the silver mines, capital Avas employed, wages were paid, and workhouses were erected, the silver being separated from the extraneous matter by an extensive and laborious operation ; in the working of a gold mine the operation was a very short and simple process, by the use of mercury; but still the lowest price w^ould seem to command the food, clothes, and lodging of those employed, and replace the stock with the ordinary profits. At present, the w^orking of the gold mines in Aus- tralia, and it may be the same in California, is simply a lottery; some get much and many get nothing. The liberty of working a given spot or piece of ground is purchased by a cei^tain payment for a licence — this constitutes the rent ; the wages, and clothing, and lodging, and return for stock, consisting of a simple machinery, appear to be all centred in the same persons ; if the diggings are unsuccessful no wages are paid, no labourers are clothed from those wages, no lodging is found for them, no additional rent is paid, however long the working may last ; it seems to be altogether a lottery to all employed ; no success, no pay ; hence tliere is great difficulty in GOLD DISCOVERIES IN AUSTRALIA AND CALIFORNIA. 227 determining liow far the general workings may be remunerative. The companies hitlierto formed to prosecute the mining operations in Australia, have, I believe, been universally unsuccessful with respect to the gold. The importations of gold from Australia and Cali- fornia have been so very considerable that they must produce, in time, very great effect, but it is difficult to state or conjecture how soon, or to what extent the change may be. The extended commerce and the rapid communica- tion between different countries by means of steam vessels and railways, will disperse through every portion of the civilised globe, the gold and silver, where wanted ; and at the same time the abundance of the precious metals furnishes the means of carrying on the round-about foreign trade to a degree never before contemplated. Still there must be a time when the supply will be only equal to the demand, unless the supply should be continually increasing, in which case, prices of goods may continue to ad- vance. All these circumstances are deserving of the greatest attention from all States ; and should make every government very cautious how they make the credit or trade of the country dependent upon the greater or less supply of the precious metals. This supply, affecting prices, should be free from any control ; and all national banks and all banks should be independent of that supply, whether greater or less, for the fulfilment of their engagements: any system of banking depending upon that supply must be founded upon an unsafe principle. Q 2 228 COINS AND CUTIKENCY. CHAP. XXIV. DEBATE IN THE HOUSE OF COMMONS, MAY 10, 1847, AND AUGUST 22, 1848, ON THE BANK BILL. THE PRESENT SYSTEM CONSIDERED. — ]\IR. VANSITTART'S RESOLUTION IN 1811. — LOCKE ON PAYMENT OF FOREIGN DEBT AND ON OBSCURE LANGUAGE. In the debate in the House of Commons on May 10th, 1847 *, about three years after the passing of the Bank Act, opinions were expressed by many leading mem- bers against the measure, but no remedy was sug- gested, except the repeal of the Act or of the clause limiting the amount of notes to be issued on securi- ties to 14,000,000^. Mr. Brown, M.P. for Liverpool proposed, probably as a temporary measure of relief, witlidrawinsi: sovereifi:ns from the circulation, and re- placing them by 11. notes, " putting a certain amount of them in the deposit bank, and investing the rest in Government securities." Mr. Cardwell admitted : — " We need not disguise the fact. It is not agreeable to reduce prices, and let a foreigner have a thing for 180/. or 150/. or 120/. which is worth 200/. We must pay, however, for what is im- ported ; if not in gold, we must induce the foreigner to take other articles." Mr. Disraeli was of opinion that " The act had failed in every object which it held out as desirable to the public, and engaged to fulfil." He alluded to a memorial presented by the bankers of London to Sir Robert Peel, dated June 11, 1844 * Parliamentary Debates : Hansard. SIR ROBERT PEEL ON THE BANK BILL. 229 — the object of which was to do away with the limita- tion to 14,000,000^. of the issue of bank notes on securities ; and it concluded : — " We respectfully submit that the effect of such an absolute limitation will be to restrict the business of tlie country, by lead- ing to a general withdrawal of legitimate accommodation, unless some power be reserved by the bill, for extending the issue, with the sanction of the authorities above alluded to (the First Lord of the Treasury, the Chancellor of the Exchequer, and the Master of the Mint), in cases of emergency, to be made apparent to such authorities." Sir Robert Peel stated : — "It has been alleged on official authority that the loss of capital in conse- quence of the total loss of the potato crop, and the partial failure of other crops, and articles of subsist- ence for man, in this country, and in Ireland, has not been less than 16,000,000?." He considered this loss, with the partial failure of the cotton crop, and the speculation in railways, sufficient to occasion the pressure, and for which an increase of bank notes would be no remedy. He claimed the same privilege which he had exer- cised respecting the corn laws, and Avould propose a modification of the Act, if the interest of the country should, in his opinion, require it, but he strongly- urged no modification. He proceeded : — " The honourable gentleman has told us what took place in 1837 and 1838 — he said tlie country was then brought to the verge of ruin. But repeal the Act of 1844, and you will restore the state of the law as it existed at that period. It gave no security. Tiie Bank had the j^ower of issuing pa[)er without reference to the ex- changes; the bullion was reduced to 1.600,000/. in gold, and there was every prospect of the Bank not being able to fulfil its engage- ments. Always bear in mind, if you do consent to repeal the A(;t of 1844, you restore the old order of things, and have not the slightest security against the recui'renee of the disorders tliat took place in 1838 and 1839. But the object of the Act of 1844 has been greatly misunderstood. The main object of that Act was to insure the convertibility of paper into gold, and to prevent, in times of difficulty and distress, the tem2)tation to which it is so easy to yield, of giving accommodation, of issuing paper without reference to the exchanges, of purchasing temporary ease, and Q 3 230 COINS AND CURRENCY. afterwards aggravating the commercial pressure by a panic, wliicli leads to a demand of gold in exchange for paper. It is of the utmost importance that in these periods of commercial difficulty, we should not be exposed to that other difficulty, which aggra- vates the first, — a demand on the Bank for gold, in consequence of doubts of its ability to pay its notes in gold." In the debate on August 22, 1848, on the same subject, Sir R. Peel observed : — " In all that is the subject of legislation, as in mechanism, and everything connected with human contrivance, you take precau- tions against the dangers and evils tliat may arise from ordinary causes of disturbance ; but it is no argument against those pre- cautions, that some unforeseen event may disturb all your calcu- lations, and compel the application of extraordinary remedies. Take the case of a comj)licated piece of machinery : you may provide a remedy for friction, or for any derangement proceeding from ordinary causes, but sudden explosion may baffle all your precautions. Commercial panic is like sudden explosion, as little amenable to any control, as difficult to be provided for by pre- vious contrivances of human skilL Take the case of law : the presumption is that all law ought to be strictly obeyed ; but cir- cumstances so extraordinary may occur that the violation of law may be a venial, nay, a praiseworthy act." Sir Robert Peel in his speech, May 10th, 1847, emphatically observed : — "Always bear in mind if you do consent to repeal the Act of 1844, you restore the old order of things, and have not the slight- est security against the recurrence of the disorders that took place in 1838 and 1839." The real object of inquiry appears to me to be, ■whether a better system cannot be introduced than prevailed before 1844, and since the Bank Act has been enacted : whether the monopoly and privileges of the Bank of England should be continued : whether any corporate body should have the power of lower- ing prices ; whether commerce with its complicated interests should not be free from any control over its profits : whether the banks are not competent to manage their own business, Avith reference to their own customers, and funds and resources, without the control of any national bank: whetlier every indi- vidual banker and merchant should not manasre his o' THE PRESENT SYSTEM CONSIDERED. 231 own business, upon his own responsibility : whether Joint Stock Banks and private banks, both respon- sible for the payment of their promissory notes, are more likely to make improvident loans, than a National Bank exercising a controlling power over the cur- rency : whether a corporate body consisting of pro- prietors of bank stock, and whose interests may be opposed to that of the Great Mercantile Eepublic, is more proper to hold that bullion, which is the most convenient commodity for foreign commerce, under certain circumstances, than the merchants who may employ it at their discretion, and according to the wants of commerce : whether ownership should be separated from possession, and the Bank of England, as trustees, should have the custody of the bullion, and employ it, in case of need, agreeably to their wants, real or supposed ; or whether the proprietors of the bullion should not themselves keep it, and em- ploy it, as their property, according to the wants of the particular trade of each, agreeably to their in- terests. Credit and money are both instruments of com- merce in the exchange of commodities: to reduce prices by a shock to credit generally, is as pernicious to the holder of commodities, as far as the prices are reduced by that shock, as to tamper with the coin. When the French kings raised a revenue by debasing the coin, by ordering the coin of a certain denomi- nation to be called in, and issuins; a coin of the same denomination in return, but of lighter weight, or of less purity, they pleaded the necessity of doing so in the urgency of their wants. They did not attempt to reconcile their indignant subjects, by alleging that it was consistent and proper, upon scientific prin- ciples ; they did not talk of monetary science. We must discard this delusion of monetary science when applied to the performance of a promise, to the pay- ment of the pound or sovereign according to pro- mise. We must not treat of the engagement to pay Q 4 232 COINS AND CUREENCY. sovereigns or deliver bullion on demand, as if we were discoursing upon some nice and mysterious question of chemistry or experimental philosophy. It is a 2:>lain question of morality. AVho would attempt to discuss the obligations of the Decalogue upon scientific principles ? and how can we determine the obligation of a promise accord- ing to scientific truth ? When Mr. Vansittart, in 1811, proposed his no- table resolution, which was adopted by the House of Commons, that the value of bank notes was not de- preciated, but that the value of gold was enhanced, he advanced two fallacies, by mixing together the promise and the pound. The pound was always the same in weight of pure gold, twenty of twenty-one parts of a guinea. This had nothing to do with the p)romise ; the promise was depreciated by a want of performance : the Bank note was not paid on de- mand, as promised. It was, by Act of Parliament, made conditional upon the termination of the war. It was the promise that was depreciated, and nothing else was changed : restore the promise to its integrity, and the Bank notes resume their former value : the promise might be depreciated to any extent ; but no depreciation of the promise would affect the pound. The contractor for the delivery of certain goods fulfils his contract by the delivery, however the goods may vary in value : it is of vast importance to keep constantly in view, that where there is a promise, there is no room for monetary science or scientific truth. The histories of the French coinage, by Le Blanc and by Bazinghen, to which I have alluded, p. 22., nfford an instructive lesson on the vanity of endea- vouring to establish a double standard, by constituting both gold and silver coin as measures ojp value in the exchange of commodities. It appears to me that a similar attempt is now made to equalise the value of bank notes and coin. The French economists contended for a double stand- LOCKfi ON PAYMENT OF FOREIGN DEBT. 233 ard, notwitlistaiiding the constant efflux of that coin which was more valuable as merchandise, and which found a better market abroad than in its exchange with the legal tender coin, whether gold or silver. The error now appears to me to be of the same character, to make both bank notes and coin a measure of value, to consider both as havinsr nitrinsic value, the value of both to be determined by the same principle of supply and demand ; that bank notes are to be made equivalent to coin by scarcity or a limited supply. Locke observed, v. ii. p. 10. : — " We importing every year one hunclred thousand pounds worth of commodities more than we export, and there being no foreigners that will give us one hundred thousand pounds every year for nothing, it is unavoidable that one hundred thousand pounds of our money must go out every year to pay for that over- plus, which our commodities do not pay for. 'Tis ridiculous to say that bills of exchange shall pay our debts abroad ; that cannot be, till scrips of paper can be made current coin." However " ridiculous " this might appear to the philosopher, is not this really accomplished by the j)rovisions of the Bank Act, and by the monopoly and great power of the Bank of England ? Are not " scrips of paper," in the form of promissory notes, " made cur- rent coin" to pay our debts abroad: not by the simple act of performing the promise, and paying the coin, but by pressure upon commerce, by contraction, or the screw, reducing the prices of commodities ? Foreigners are not required to give us the " one hun- dred thousand pounds for nothing," but the manufac- turer and holder of produce are to furnish the goods to pay this sum, at prices that will remunerate the foreigner, and be more valuable to him than the coin. If we reject entirely the notion of equivalency be- tween bank notes and coin as a measure of value, the notes deriving their value solely from the pro- mise, which may be worth something or nothing, ac- cording as the promise is performed or not, I think we shall take a more just view of the case. Bank 234 COINS AND CURRENCY. * notes are not merchandise, seeking and finding, like the ancillary coins, in their exchanges with the legal tender coin, the most profitable investment. The bank note, as merchandise, has no value whatever ; it has no intrinsic value, any more than the parch- ment which conveys away the property of an estate has intrinsic value ; it is simply the undertaking to pay money, and is not money, and tlie engagement rests for its value upon the character of the person who makes the promise, and upon his ability to perform it. By introducing a new nomenclature as " equiva- lency " and " equilibrium," we perplex ourselves wdth these novel expressions ; and do we not con- found all notions of right, when pressure, contrac- tion, and the screw are applied, not to enforce the performance of the promise, but to exact forbearance in the party who demands it ? Far be it from me to impute unworthy motives to any one, but I think the following paragraph from Locke is deserving of attention. P. 50.: — " This business of money and coinage is by some men, and amongst them some very ingenious persons, thought a great mys- tery, and very hard to be understood. Not that truly in itself it is so, but because interested people that treat of it, wrap up the secret they make advantage of in a mystical, obscure, and unin- telligible way of talking ; which men, from a preconceived opinion of the difficulty of the subject, taking for sense, in a matter not easy to be penetrated but by the men of art, let pass for current without examination. Whereas, would they look into those dis- courses, inquire what meaning their words have, they would jfind for the most part, either their positions to be false, their deductions to be wrong, or (which often happens) their words to have no distinct meaning at all. Where none of these be, there their plain, true, honest sense would prove very easy and intelligible, if expressed in ordinary and direct langunge." 235 CHAP. XXV. observations on some opinions of sir robert peel, sir charles wood, colonel torrens, mr. thomas baring, sir archibald alison, mr. weguelin, and lord overstone. Sir Robert Peel. P. 7.:— " We cannot hope to agree on the measure to be adopted with regard to paper currency, unless we are agreed on the principles which determine the value of that of which paper is the represen- tative, and on the nature of the obligation which is imposed npon the issuer of promissory notes. Now I fear there is not a general agi'eement on those fundamental principles — that there is still a very material difference of opinion as to the real nature and cha- racter of the measure of value in this country. " My first question, therefore, is, Avhat constitutes this measure of value ? What is the signification of that word ' a pound,' with which we are all familiar ? What is the engagement to pay a pound ? Unless we are agreed on the answer to these questions, it is in vain we attempt to legislate on the subject. If 'a pound ' is a mere visionary abstraction, a something which does not exist either in law or in practice, in that case one class of measures re- lating to paper currency may be adopted, but if the word ' pound/ the common denomination of value, signifies something more than a mere fiction — if 'a pound' means a quantity of the precious metals of certain weight and certain fineness — if that be the definition of ' a pound,' in that case another class of measures relating to paper currency will be requisite. Now, the whole foundation," &c. (See ante^ p. 138.) When Adam Smith wrote his " Wealth of Nations," the pound consisted of twenty twenty-one parts of the guinea, and the twenty silver shilUngs which were called a pound, were not intrinsically worth the pound. We had no coin denominated a pound ; this occasioned am- biguity, not only as respected the exact nature of the pound, but also as to the standard of value, whether 236 COINS AND CURRENCY. the pound was a silver pound or a gold pound, and whether we had a gold or a silver standard. Adam Smith reasoned as if we had a silver standard when he wrote, which I have shown, I think, to be erroneous: but since the coinage of sovereigns^ the money of ac- count and the legal tender coin, the standard of value, have been the same — the pound of account and the current pound or sovereign have been the same. But Sir Robert Peel's definition is not complete, as that " definite quantity of gold " must also be declared by the state to be a legal tender in the payment of debt to any amount, to constitute the " pound " as the standard of value. It would appear a more simple statement to say that the "pound" means a "sove- reign," and the promise to pay a "pound" means the promise to pay a "sovereign." One cannot fancy any disagreement as to the nature of the "pound," or the "promise," when so stated. Is not the reasoning of Sir Robert Peel more ap- plicable to the promise than to the pound? "If the 'promise' is a mere visionary abstraction, a something which does not exist eitlier in huv or in practice, in tliat case one chiss of measures relating to paper currency may be adopted; but if the promise to pay a pound means nothing and can mean nothing else than the engagement to pay to the holder when lie demands it, a ' sovereign,' in that case another class of measures relating to paper currency v^ill be requisite." The promise appears to me to be involved in more mystery than the pound ; and that mystery consists in a departure from the simplicity and responsibility of performance which govern other promises. An attempt is made to establish the promise upon a basis "which does not exist in law or in practice" with re2:ard to other enofao-eraents: it is not made to rest, when applied to the paper currency, upon the obligation of ijeiforniance from the resources and at the cost of the person who promises, subject to the penalties incurred by others for the non-payment of debt, or the non-fulfilment of en<2:a2;ements. New words are employed to express the new " class of mea- sures " to be adopted : instead of " payment " of debt, and " performance " of " promise," when applied to SIR R. PEEL AND ADAM SMITH ON PAPER MONEY. 237 the paper currency, resting upon the basis of moral obligation enforced by Iuav, upon justice and truth ; we have the words " equivalency " and " equilibrium," enforced by " pressure," sustained by " monopoly." It will be for the public to determine whether by the Bank Act of 1844, and the arguments urged in its support, the " promise " is not treated as " a visionary abstraction," as " a mere fiction ; " and Avhether " the class of measures " relating to the paper currency, and supposed to be requisite, are upon the present system based upon the moral obligation to perform the promise. Adam Smith, p. 122., ante : — " If I owe a man ten pounds, justice requires that I should pre- cisely pay hira ten pounds, either at the time agreed upon, or when he demands it." The promise to pay ten pounds expressed in the promissory note is a debt from the banker to the holder of the note, and justice requires that it should be paid on demand. How simple are the words, " debt and payment," "promise and performance;" justice re- quires the payment of the debt, and trutli requires the performance of the promise ; how simple are the elements of the promissory note when based upon moral obliiration ! Sir Robert Peel states (p. 26.), that in the opinion of some, the true principles which should govern the issue of promissory notes are " freedom of compe- tition, and immediate convertibility into coin at the will of the holder," and that " in support of that opinion they have undoubtedly the high authority of Adam Smith and of Ricardo." It may be very proper to give at length the opinion of Adam Smith, as ex- pressed in b. ii. c. 3. v. ii. p. 82. : — " If bankers are restrained fi-om issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum ; and if they are sul)jected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented; their trade may, with safety to the public, be rendered in all other respects perfectly iree. The late multiplication of banking com- panies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, in- creases the security of the public. It obliges all of them to be 238 COINS AND CURRENCY. more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard them- selves against those malicious runs, which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle, and reduces their circulating notes to a smaller number. By divid- ing the whole circulation into a greater number of parts, the failure of any one company, an accident -which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so." I think a distinction is to be drawn between " im- mediate convertibility into coin," the words as quoted by Sir Robert Peel, and " immediate and uncondi- tional payment," the words of Adam Smith. "Conver- tibility " implies rather the ability to pay, than actual payment ; and the modern theory, and the system of the Bank Act of 1844, appear to recognise this dis- tinction : the payment is not to take place, and the bank restriction is not upon the ijayment^ but upon the demand. For legislative enactment is substituted the seductive influence of low prices ; for a demand of payment in coin or bullion is to be substituted a de- mand for manufactures and produce for exportation, at remunerating prices to the exporter, at the cost of the manufacturer and producer. There is no hardship in the performance of a promise, or in the fulfilment of an engagement ; no banker or board of directors is under any restrain tt o promise more than can be performed, or to undertake more than can be accomplished. As the great question is whether competition or monopoly should prevail, the preceding extract from Adam Smith is given, that his opinion on the subject may be clearly understood. Sir Robert Peel, December 3rd, 1847 *, debate on the currency : — " Some eighty years ago, the greatest writer that ever treated * Hansard. ADAIM SMITH ON SCARCITY OF MONEY. 239 upon the subject of political economy — the author, who stands in the same relation of pre-eminence to all tliose who have subse- quently written upon that subject, in which Sir Isaac Newton stands to his followers in the sublimer science of astronomy, made the following observations : " — Adam Smith (b. iv. c. 1. v. ii. p. 216.) : — " No complaint, however, is more common than that of a scarcity of money. Money, like wine, must always be scarce with those who have neither wherewithal to buy it, nor credit to borrow it. Those who have either, will seldom be in want either of the money or of the wine which they have occasion for. This complaint, however, of the scarcity of money is not always confined to im- provident spendthrifts. It is sometimes general through a whole mercantile town, and the country in its neighbourhood. Over- trading is the common cause of it. Sober men, whose projects have been disproportioned to their capitals, are as likely to have neither wherewithal to buy money, nor credit to borrow it, as prodigals whose expense has been disproportioned to their revenue. Before their projects can be bi'ought to bear, their stock is gone and their credit with it. They run about everywhere to borrow money, and every body tells them that they have none to lend." " That," says Sir Eobert Peel, " is the precise condition in which we are at present," &c. Can it be said that the Bank of England is exempt from this complaint ? It borrows the gold, for which it gives either bank notes payable to bearer on demand, or an engagement by a bank credit, to deliver it when required. As long as it can borrow gold from the community, it has the power to lend it ; when it lends or engages to deliver more than it can borrow, it may be said to be over-trading or over-lending : without its reserve of bank-notes in the banking department, it can procure no gold from the issue department ; its resource in that respect is exhausted, and it pos- sesses no commodities. Will it be said that the Bank of England has discovered the means of making the Great Mercantile Republic, and the trading commu- nity provide it with gold, at the expense of their credit and profits, by substituting for money, or gold and silver, their merchandise and manufactures for exportation at reduced prices, by means of pressure, pressure by law, and the screw ? Little did Adam Smith dream of any National Bank replenishing its coffers by such means. 240 COINS AND CURRENCY. Is it not most desirable to liberate the Great jMer- cantile Republic and commerce from a dependence upon any National Bank, which is liable to such a Avant of money or bullion, and which can exercise such control over the credit of the country ? Sir Charles Wood (Charles Wood, Esq.), speech. May lOth, 1844.* P. 63.: — " These objects, however, great and important as they are, are but secondary to what is the principal object of our proposed legislation. That object I understand to be the inviolable main- tenance of the standard of value in this country. By that I mean the preservation of the constant identity of value of the pound in paper and of the sovereign, with that of the quantity of standard gold, which by law constitutes the pound sterling. That this identity may be affected by an excessive issue of paper is not de- nied. The experience of this country, and still more, tliat of the United States of America, abundantly proves that the converti- bility, at the will of the holder, is no security against excessive issues, or ultimate suspension of cash payments. It is not enougli, then, to enact that the bank notes shall be convertible. The paper circulation must not only be convertible, but must vary in amount from time to time, as a metallic circulation would vary. A system, therefore, of paper circulation is required which will attain this object, and ensure a constant and steady regulation of the issues on tliis principle. This, and this alone, affords a permanent secu- rity for the practical convertibility of the notes at all times, and for the consequent maintenance of the standard." " It is because the measure of the Right Hon. Gentleman is based on this principle, and, as far as it goes, carries this principle into execution, that I feel it to be my duty to give it my cordial support." It is certainly " not enough to enact that the bank notes shall be convertible -/^ it should be enacted that the bank notes shall be converted or actually paid to the bearer on demand ; the payment may be secured by any guarantee the state may think proper to exact, and also be enforced by the penalty of bankruptcy, in cases of non-payment, like other debts. The " in- * Speech of Cliarles Wood, Esq., London, 1844. SIR CHARLES WOOD ON THE BANK BILL. 24:1 violable maintenance of the standard of value in this country " depends upon the " sovereign containing the quantity of standard gold which by law constitutes the pound sterling," or the sovereign. The sovereign in circulation cannot vary in value from the sovereign in the INIint, the standard gold coin, if both are of equal weight and fineness. The pound in paper or bank note may vary in value to any extent, as the bank note may not be paid at all ; but the standard would not be endangered by the failure of any or of all the banking establishments in the kingdom ; that standard depends solely upon the weight and fineness of the legal tender coin, the sovereign, being preserved. How can a paper circulation be made to "vary in amount from time to time, as a metallic circulation would vary? " The metallic circulation has intrinsic value, and the world for its market ; the paper circulation has no intrinsic value, and no market ; a field for circula- tion is not a market for purchase and sale, the promise and the market are quite different things, and moral obligation must not be confounded with material value. It is truly said, p. 18. : — " With a metallic currency, or, indeed, with any currency pos- sessing intrinsic value, that object is attained by the self-interest of the community, which no law and no discretion can accomplish ; namely, tlie precise quantity of money required for the wants of the community, is practically and at all times determined. If the increasing demands of commerce require a larger amount of circu- lating medium, it is for the interest of the community to divert a larger quantity of their capital for this purpose, and to procure the bullion fi'om the supply in the market ; if, on the contrary, the state of trade is such as to require less, a portion of the coin is withdrawn, and applied as any other commodity for the pur- poses of commerce." Is it not equally true that the " self-interest of the community " will determine " practically and at all times the precise quantity" of bank notes "required for the wants of the community," provided the stan- R 242 COINS AND CURRENCY. dard of the value of the bank note be preserved, namel}', " the obligation of an immediate and uncon- ditional payment of such bank notes as soon as pre- sented," in the words of Adam Smith? Is the amount of bank notes " required for the wants of the community " to be determined by law, and the discretion of the directors of the Bank of England, which it is admitted " no law and no dis- cretion can accomplish " with respect to coin ? While the standard of the coin is preserved, the due weight and fineness of the gold sovereign, and the integrity of the promise of the bank note, may not the amount of both be safely left to be determined by the self-interest of the community ? Is it not true that the interest of individuals, and the rivalry of competing banks, will better determine the amount than law, or the discretion of the Directors of a Na- tional Bank? What is the meaning of " practical convertibility ? " Is convertibility payment ? and can any payment be otherwise than practical ? In the books of Adam Smith which treat of banks and banking, we never meet with the words "conver- tibility," "equivalency," "equilibrium," or "pressure," as having any relation to the payment of bank notes ; nor " monetary science," or " scientific truth," as having any relation to the circulation of bank notes. W"e are warned by an eloquent writer, "To remount in the survey of our opinions to the first, and even remotest principles on whicli they are founded. — If we find these principles false, and that will be the case in many instances, we stop our inquiries on these lieads at once, and save an immense deal of time that we shoukl otherwise misspend. " To discover error in axioms, or in first principles grounded on facts, is like tlie breaking of a charm ; — and the paths that lead to truth, which we imagined to be so long, so embarrassed, and so difiicuh, sliow, as they are, short, open, and easy." — Bolingbroke : *' Essay on Retii-ement and Study," pp. 424. 426. MR. BARING AND :\IR. CARDWELL ON THE BANK ACT. 24o Mr. Thomas Baring in the debate of ]\Iay 10th, 1847 *, observed : — "The commerce of this country was carried on upon a system of credit; and if thoy brought it to a ready money system, they pnrnlysed trade in the manufacturing districts. " When they made the interest of money 3 per cent, in August, and 13 per cent, in April, tliey made trade the greatest lottery in the world. The country had exported, say 7,000,000/. in gold, and tlie property of the country had been depreciated 100,000,000/. in value." Mr. Card well, who advocated the Act of 1844, ob- served * : — "We need not disguise the fact. It is not agreeable to reduce prices, and let a foreigner have a thing for 180/. or loO/. or 120/. which is worth 200/. We must pay, iiowever, for what is im- ported ; if not in gold, we must induce the foreigner to take other articles. How does your currency law apply to this. There are (35,000,000/. ?) sovereigns and bullion in tlie Banlc of England. If we reduce tlie circulating medium of the country, every sove- reign abstracted from the circulating medium will tend to raise the price of money, and depress the price of commodities ; it tends to produce the exportability of other things, and to pi'event gold fi'om going out." This reasoning is very much in accordance with the theory of the monetary system ; that the com- merce of the country should be considered as the action of the country, and that the country should therefore be responsible for the consequences. Mr. T. Baring says the country had exported, say 7,000,000/. of gold, instead of which it should be said, certain individuals had exported 7,000,000/. of gold, and these individuals should be responsible each for his own act ; those merchants or manufacturers, who had exported the bullion should pay the price of this bullion in the way that best suited them. Certainly the property of the country^ the property of the trades- man, of the landholder, of the manufacturer, of the merchant, of the labourer and of the agriculturist, who had nothing to do with the export of the bullion. Parliamentary Debates, Hansard. R 2 244 COINS AND CURRENCY. or with the trade or commerce of those who wanted it, shoukl not suffer in a general depreciation of pro- perty to tlie extent of one hundred millions. Mr. Card well says, ive must pay for what is imported, if not in gold, in articles at reduced prices. It may be asked, Who are 2ve ? Not the owners of property through the country ; they are not to sell their goods which are worth 200/. for 180/, or 150/, or 120/., be- cause some manufacturers and merchants have over- traded ; these and these only should bear the loss. Why should the property of others be lowered in value, on account of their imprudence ? Colonel Torrens.* P. 12G.:— " Mr, Ricardo's proposition, which Mr. Fullarton has so strangely inverted, appears self-evident as soon as correctly stated. When a given sura in the precious metals, or in a currency convertible into the precious metals, will not purchase in the English market the quantity of commodities which can be sold for the same sum in the foreign market, it becomes the interest of the English mer- chant to make his foreign payments in gold ; and when a given amount of gold will purchase in the English market commodities which can be sold for a greater quantity in the foreign market, it will become the interest of the merchant to make his payment not in gold, but in commodities ; while, if the quantity of gold which British goods can be sold for in the foreign market cannot pur- chase in that market goods which can be sold for a greater quan- tity of gold in the home market, it will be the interest of the British merchant to bring back his return in gold. There can be no exportation of gold unless the value of gold in the home market, as measured by commodities, should have previously fallen below the value of gold in the foreign market, measured in the same commodities ; and no importation of gold, unless its value in the home market, as measured in commodities, should have previously risen above the value of gold, as measured by the same commodi- ties in the foreign market." There can be no doubt tliat when commodities cannot be exported or imported except with a pros- * The principles and practical operation of Sir Robert Peel's Bill explained and defended, by R. Torrens, Esq., F.R.S., London, 1848. COL. TORRENS ON THE BANK ACT. 245 pect of loss, gold or bills will supply their place. The proposition in the last sentence I ccJnceive to be er- roneous, and I would state it thus : — " There can be no exportation of gold unless the value of com- modities in the home market, as measured by gold, sliould have previously fallen below the value of commodities in the foreipjn market, measured by the same gold ; and no importation of gold unless the value of commodities in the home market, as measured by gold, should have previously fallen below the value of commo- dities, as measured by the same gold, in the foreign market." The profit or loss is on the commodities and not on the silver or gold. Tlie difference in value on commodities may be considerable ; the difference in value on gold would be inconsiderable, and measured by tlie expense of transport. William Ward, Esq., a bank director (evidence p. 26. 1832), p. 1928.: — " Gold can now be conveyed from Paris to London at 4*. per 100/." N. M. Rothschild, Esq. (evidence 1832, p. 101.), p. 4804. : — " At Amsterdam,^Hamburgh, and Paris, gold levels itself within a quarter per cent. ; if it rises at one of them the others follow immediately." Adam Smith, as quoted p. 176. ante, has observed that when gold and silver " are sent abroad in order to purchase foreign commodities, the merchant's profit arises not from the purchase but from the sale of the returns." P. 128. : — " Now gold in coin must be of the same value as gold demanded for exportation ; and gold, as has been already shown, cannot be demanded as a commodity for exportation, unless its value in relation to other exportable commodities be less in the home than in the foreign market, or, in other words, unless the currency, which is immediately convertible into gold, be depreciated in rela- tion to foreign currencies." " Gold is demanded for exportation in conformity to the law of equilibrium, by which the precious metals are distributed through- out the world ; but it cannot be exported unless it be of less value in the exporting than in the importing country, and unless the currency convertible into gold be less valuable than foi-eign cur- R 3 246 COINS AND CURRENCY. rencies. Again, gold will continue to be exported until the dimi- nution in its quantity renders its value in the home mai'ket equal to the value in the foreign market ; and, consequently, a note cir- culation convertible into gold must contract, under a drain of bullion, until its value becomes equal to that of foreign currencies. It is the movements of the bullion, therefore, which govern the amount of a convertible currency." I would say, gold will not be demanded for expor- tation, unless other exportable couiniodities be dearer in the home than in the foreign market, or while other exportable commodities leave a profit in the foreign market ; the exportation of gold is determined by the law of 2^roJit, by which commodities are distributed throughout the world ; it is the j^^ice of commodities abroad compared with the price of commodities at home which governs tlie movements of the bullion ex- ported, quite independently of all paper circulation in either country. Sir Archibald Alison, in his " History of Europe,"* enters largely into the question of the currency, and he determines the " pound " to be " an abstract mea- sure of value, just as a foot or a yard is of length, and different things, have at different times, been taken to denote that measure, according as the con- veniency of men suggested" (vol. ii. p. 384.); and "in truth, different things, at different times, are taken to express the much coveted abstract standard ; and what is always taken is that article in general cir- culation which is most steady in value, and most generally received." An article or merchandise "steady in value and generally received," is not an abstract but a concrete measure of value, nor is a foot or a yard an abstract measure of length, but a tangible and determinate mea- sure. The historian should consider that the "pound" or sovereign differs from the yard or foot in this re- spect, that the standard of value must be an eqiiiva- * History of Europe, by Sir Archibald Alison, Bart., D. CL. SIR A. ALISON ON PAPER MONEY. 247 lent^ as well as a measure ; the yard or foot is simply a measure. He thinks that Sir Robert Peel would have modified his opinion that the pound was a determinate weight of gold metal, if "he had seen the ounce of gold sell- ing in Australia at 3/. to 3/. 10.?., instead of 3/. lis. 10^^. the mint price ; " he thinks this " a decisive proof that gold is measured by silver and not silver by gold." Sir Robert Peel was speaking of the standard in Great Britain, and not of the standard in Australia ; and a standard of silver, if it prevailed there, would not be an abstract measure of value, but a determinate quantity of silver of a certain weight and fineness. He observes (vol. ii. p. 384.), "During the war when the metalHc currency disappeared, the pound was a Bank of England note : the standard was thus paper ; for gold was worth 28^. the pound from the demand for it on the continent." During the Bank restriction the value of the bank note was determined by the goods, whether gold or other merchandise, that the pound would buy, and also on a calculation of the probal)le time when the restriction would be removed, and the performance of the promise enforced. Vol. ii. p. 390. :— " Proceeding on the principle that the great object is to equalise the currency, and with it prices and speculation, it would enlarge the paper currency when the precious metals are withdrawn, and credit is threatened with stoppage, and pi'oportionally contract it when the precious metals return, and the currency is becoming adequate without any considerable addition to the paper. In this way, not only would the immense danger of the gold and paper being poured into the circulation at the same time be avoided, but a support would be given to credit, and an adequate supply of currency provided for the country, Avhen its precious metals were drained away, and a monetary crisis is at hand. A few millions secured on government credit, not convertible into cash, judici- ously issued by government commissioners, when the exchanges are becoming unfavourable, and money scarce, would at any time arrest the progress of the most dreadful monetary crisis that ever set in upon the country. That of 1793 was stopped by an issue of exchequer bills; that of 1797 by suspending casli payments; K 4 24S COINS AND CURRENCY. that of 1825 was arrested, as will appear in the sequel, by the accidental discovery and issue of two millions of old bank notes in the Bank of England, when their treasure was all but exhausted ; that of 1847 was at once stopped by a mere letter of the Premier and Chancellor of the Exchequer, authorising the suspension of cash payments. The prospect even of a currency which was to be a substitute for gold, not a representative of it, at once arrested the panic, and saved the nation. Such an expedient when in- trusted to government commissioners, and not to bankers or in- terested parties, is comparatively safe from abuse ; and it would at once put an end to that fluctuation of prices and commercial crises, which have been the constant bane of the country for the last thirty years," The author makes a distinction between bank notes being the substitute, and bank notes being the repre- sentative of gold and silver. When gold and silver are exchano-ed for bank notes at the Bank of Eno-- o ^ o land, they are supposed to be the representative and not the substitute for gold, and that the amount of circulation is increased in proportion to the gold re- ceived, and the notes issued for it, that both increase the amount of circulation. This appears to me erroneous ; if coin be not wanted in the home circulation, the gold will remain as a deposit, as far as the circulation is concerned: if the bank notes be not wanted in the circulation, they will be returned to the bank by those to whom they are paid in the purchase of commodities. We need be under no alarm about the expansion or contraction of the circulation, as long as the integrity of the promise is preserved ; the wants of the com- munity will determine the quantity. AVe need not invest Government Commissioners with the useless and dangerous power of regulating its quantity, ac- cording to their opinion of the wants of commerce. It is to be observed that the gold and silver are con- sidered as having relation only to the domestic circu- lation ; no notice is taken of the international bullion for the purposes of international commerce, and Government Commissioners are, by a sagacity superior to the knowledge and experience of merchants and traders, to rule the commerce of nations, " putting an end to that fluctuation of prices, and conuncrcial ON ISSUES OF PAPEll MONEY. 249 crises, which have been the constant bane of the country for the last thirty years." With respect to the Bank of England (VoL ii. p. 382.) "being obhged to take the gold at a fixed price, often above the market value," this is a com- / plete fallacy, as the gold in England being the stand- ^ ard of value can have no price. I recommend to the attention of those who are advocates for an issue of paper currency, " either by corporate bodies, under the authority and protection of government, or directly by the government itself," the following extract from " Lord Liverpool's Treatise." P. 227.:— "It is true there have been a few memorable instances, I believe but three, in which, under the authority of government, paper currency has been issued to an extravagant extent, in a neigh- bouring country. The first was while France was governed by a Regency, in the beginning of the last century ; the two others are of a later date ; and each of these experiments has proved, in its results, dishonourable to the government, and disastrous to the people. During the emission of this paper currency, the coins of that country were in a very great degree driven out of circulation ; but they re-appeared in considerable quantities as soon as this paper currency was discredited and annihilated. It ought always to be kept in remembrance, that this paper currency was issued to so great an excess, either by corporate bodies, under the au- thority and protection of government, or directly by the govern- ment itself, and not on the sole credit and responsibility of unauthorised individuals." Where shall we seek for a precedent to authorise or recommend the issue of inconvertible paper money, whether bank notes payable to bearer on demand, or government paper under the same stipulation in words, but neither of them paid according to promise? Shall we find it in the currency of the North American colonies, although a legal tender, when we are informed by Adam Smith (b. ii. c. 2. v. ii. p. 79.), that " a hundred pounds sterling was occasionally considered as equivalent, in some of the colonies, to a hundred and thirty pounds, and in others to so great a sum as eleven hundred pounds currency ; this dif- ference in the value arising from the difference in the quantity of paper emitted in the different colonies. 250 COINS AND CURRENCY. and in the distance and probability of the term of its final discharge and redemption ?" Shall we find it in the paper currency of America during the revolutionary war, when, from nine mil- lions of dollars, the issue was increased till it amounted to 200 millions of dollars, and sunk in value to nothing ? * Shall we find it in the issue of the French assig- nats, which gradually fell in value to comparatively nothing? Shall we find it in the instance of the Russian paper currency, which fell to a discount of 400 per cent ? Shall we find it in the promissory notes of the Bank of England which were at one time at a discount of 30 per cent., and remained unpaid in specie during a quarter of a century ? Have we not seen in this country the miserable efi'ects of a departure from truth, in the suspension of cash payments, the losses attending the return to cash payments, the endless debates, the unsatisfactory conclusion ? Has not this country at length embraced a system which involves an evasion, rather than the perform- ance of the promise ? Are these facts to be forgotten, to pass over us like "a summer cloud ?" Should they not be a bea- con to warn the nations against the danger of adopt- ing under any circumstances^ an inconvertible currency, from the great temptation, the apparently irresistible temptation, of abusing the power of issue, and from the incalculable mischief attending the return to the path of duty, to the performance of the promise ? How easy to yield to the temptation ! how dilfi- cult to retrace one's steps ! Facilis descensus Averni ; Sed revocare gradum, superasque evadere ad auras, Hoc opus, hie labor est. * " Considerations on the currency and banking system of the United States, by Albert Gallatin. Philadelphia " (quoted by Gilbarti, in his History of Banking in America, p. 3.). MR. WEGUELIN ON THE BANK ACT. 251 Thomas Matthias AVeguelin, Esq., M.P. Sir Robert Peel observed on introducing his bill (p. 7.), " We cannot hope to agree on the measure to be adopted with regard to paper currency, unless we are agreed on the princi[)les which determine the value of that of which paper is the representative, and on the nature of the obligation which is imposed upon the issuer of promissory notes." I would also say, that " we cannot hope to agree on the measure to be adopted," unless we are agreed upon the nature of the obligation of those who hold the bullion of the Great Mercantile Republic ; unless we are agreed upon the nature of this obligation, " it is in vain to attempt to legislate on the subject." I have endeavoured to show the nature of this oblie;a- tion, which is quite distinct from the obligation of the promise, " to pay to the holder of the promissory notes, when he demands it, a definite quantity of gold." This bullion is quite distinct from the coin which circulates as money in any particular country. This bullion is demanded and required, not for the domes- tic circulation, but for exportation, and is imported, under certain circumstances of commerce, as the most convenient commodity, and as such, circulates among nations. It is this bullion which embarrasses the Bank of England, and the banking system generally. I would separate entirely this bullion from the cus- tody of the Bank of England, and of all other banks. If the Bank of England and national banks of circulation are to keep this international money, this most convenient commodity, " in that case one class of measures relating to paper currency may be adopted ; " but if the members of the Great Mercan- tile Republic are to be the guardians of this most convenient commodity ; if there be established an international treasury, as well as a national bank, and other bunks of circulation, " in that case another class 252 COINS AND CURRENCY. of measures relating to paper currency will be re- quisite." j\lay it not be said, that " the whole foundation " of the theory of paper money rests upon this distinc- tion ? In the examination before the committee lately sitting on the "Bank Acts," T. M. Weguelin, Esq., the Governor of the Bank of England, gave this evidence, May 19th, 1857.:— With respect to the changes in the rate of discount, the Governor is asked — 438. " Do you look exclusively to the reserve, or are there other considerations that enter into the question ? — The previous answer shows that the reserve is affected by the demand for bullion, which governs the action of the bank." 439. " And no other consideration. You say ' The consideration which has chiefly induced us to make those changes, has been the demand for bullion.' Is that the only consideration ? — What governs our action is the state of the reserve, and the mode by which the reserve is affected." 440. " Then your second answer is accurate, that you look ex- clusively to the reserve ? — The reserve is only affected by the demand for bullion, and therefore the two answers are consistent ; there is no opposition between them." 517. "Without going to extremes, is it not the interest of the public to have, if possible, a moderate rate charged to them for money ? If a system could be devised by which the commercial public could be supplied with money at a moderate rate of interest, would it not be more advantageous to it than the present system ? — That is the whole question, ' if a system could be devised.' If a system could be devised by which every man who wanted to borrow could borrow cheaply, that no doubt would be a desirable system." With reference to the bills brought to you for dis- count : — 555. " Your primary considerations are the solvency of the parties, and the state of your bullion, and of your reserve ? — Those are the only considerations that affect our action." 607. " Then you would not represent to the committee that you can immediately meet a demand for bullion by any action what- ever upon the exchanges ; it must be met by a long and delayed process, must it not ? — No doubt it would take some time ; but I wish to point out, that the power of the Bank to act upon the ex- changes is very small. It must be the trade of the country which LORD OVERSTONE ON THE BANK ACT. 253 must influence the exchanges. All that the Bank in such a case can do, is to defend its own position ; and holding the reserves of the country at that moment, no doubt, its position becomes a matter of very considerable interest and importance ; but it can only do that. The trade of the country must right itself." 608. "But you do not conceive that the trade of the country can immediately furnish the Bank with the means of meeting a rapid and unforeseen drain of gold occurring upon a contingency like the failure of the harvest ? — I think we have evidence that the trade of the country is enabled to do that." It is admitted that the reserve is only affected by the demand for bullion. The "system" which I submit of separating the bullion from the national circulation has no reference to any plan "by which every man who wanted to borrow could borrow cheaply ; " that is to be arranged by the borrower and lender : the mea- sures to be adopted to carry on this " system " are matters of detail ; but the principle is that the power of the Bank of England over the currency and over prices should be abandoned. The repeal of Sir Robert Peel's bill would not accomplish that. I submit, that the Bank of England should not have this power either by Act of Parliament or by its magnitude ; that com- petition of issue should take the place of monopoly, and that the Great Mercantile Republic should possess and keep their own bulHon; not collectively, but in- dividually, or as separate commercial establishments ; as a bank of deposit, neither discounting, nor borrow- ing, nor lending, as described in the account of the Bank of Amsterdam. The Rio;ht Honourable Lord Overstone gave his evidence at considerable length before the same Com- mittee, sitting during the last session ; 7th July, 1857. His Lordship approves of the Bank Act of 1844, observing : — 3645. " The Committee have now before them, what may fairly be called the unanimous declaration of the whole body of the bank directors, that they think that that Act has worked beneficially, that it is sound in principle, and that it ought to be renewed ; an opinion in which I entirely concur." 254. COINS AND CURRENCY. The object of the Act and its mode of operation are thus described : — 3785. "I have already stated, that the object of the Act of 1844 being to make the paper money of the country sustain a diminution, both in amount and in period, precisely the same as would be sustained by the metallic money of the country, of course an increase in the value of money arises the moment the money begins to undergo a decrease of amount. Therefore, under the provisions of the Act of 1844, the rise in the rate of interest, which indicates the increase in the value of the money of the country, from the diminution of its amount, will take place earlier. In consequence of its taking place earlier, it will check the drain sooner ; it will thex'efore permit the drain to go to a less extent, and by so doing, it will limit the fluctuation in the rate of interest by making the occurrence of it earlier than it otherwise would be." 3805. "Does the bank ever proceed to raise its I'ate of discount except under an apprehension of a decrease of the store of bullion, in the issue department? — The Bank of England can only raise its rate of discount fi-om two causes, one from an actual alteration in the value of capital, and the other from an alteration in the amount of money. When the money in the country is diminislietl by a drain, its value increases, and tlie Bank of England must con- form to that alteration in the value of money which is meant by the technical term of raising the rate of interest." 3806. " What is the effect of a rise in the rate of discount upon the prices of securities and of goods ? — It is very direct and very simple. When tlie money of the country is diminished, the remaining quantity becomes more valuable ; the rate of interest rises ; that rise in the rate of interest acts upon public feeling ; the public become more cautious, credit and confidence are more or less aiFected, the remaining money performs its functions more slowly, and in that way tlie value of money in the country is increased, and inci'eased to whatever extent may be necessary to check the farther export of it, and to bring back again that which has gone." 3807. " How does it so? — It does so in this Avay. The value of money is increased ; the price of interest-bearing securities is affected; it falls more or less. Then the foreign merchants in the country begin to perceive its effect ; they write to their correspon- dents abroad, 'Money is becoming more valuable with us here; do not send us other things, send us money ; that is the best form of remittance to us now.' That money is sent, and that is the very way in which a small rise in the value of money here produces its natural and legitimate correction. The diminished amount of money is by that process corrected, the money is brought back, and every thing is put straight." 3808. " If tiiat were not so, there would be no object in i-ais- ing the rate of discount? — I object to the term 'raising' the rate of discount. The value of money rises by natural circum- LORD OVERSTONE ON THE BANK ACT. 255 stances. The Bank of England have no more power of raising the rate of discount than you or I have ; tliey must conform. As long as they had an unlimited power of issue, they might delay that operation by improperly increasing their issues. The moment they are put under legitimate and wholesome regulations on that point, their power over the rate of interest is gone; they must conform to it." 3809. " The expected effect of raising the amount of discount is to lower the prices of securities and of goods ? — It is a recog- nition that money has become more valuable in this country, and in proportion as money has become more valuable, there will be various means taken to get money remitted from abroad, in pre- ference to other things, until that disturbed relation of the value of money in this and other countries is rectified." 3810. " The natural effect of money being more stringent, is to lower the price of goods? — Yes, that is the principle at the bottom." 3811. "The present principle of currency is built upon that assumption, I presume? — I am hardly prepared to say yes or no to that question. The present system of currency is built upon a very plain and simple principle, namely, that a certain portion of the precious metals is the proper money of this country, and that paper notes are merely a mechanical contrivance, to be used for convenience in lieu of that metal. There is an end of the matter ; all the rest are consequences, not causes." 3819. " Will your Lordship be kind enough to define what you mean by ' money ; ' because at times I observe you use the word 'money' in relation to our foreign transactions, and at times you use the word ' capital ? ' — I never confound those two. I shall be very glad to refer to any answer in which I have confounded them, in order that I may correct it, but I do not believe that I have done so. Money I apprehend to be this : it is necessary for car- rying on the relations of civilised communities that there should be some one universal equivalent, which is taken as such by all countries, and the precious metals are taken and adopted in that character. Then the various conditions of different countries as- sign a certain portion of the precious metals of the world to each country, and the portion so assigned to each country for the pur- pose of acting as the universal equivalent, is the money of that country." I think the followinfy evidence throws oreat ho-ht upon the principles of the currency advanced by the supporters of the Bank Act of 1844, by which paper money and metallic money are supposed to be sub- ject to the same laws : — 3757. " Did I rightly understand your Lordship to say that the money was the capital ? — No, I said just tlie reverse ; I say that with money, retained as money, and not used as the means of ob- 256 COINS AND CURRENCY. taining capital, you can do nothing ; you might just as well have a parcel of old iron. When I was a child, a sovereign was given to me, with a grave admonition, that as long as I kept that sovereign in my pocket, I should never be without money ; but I soon found that no good came to me from keeping the sovereign in my pocket." 3790. '• Supposing there is no metallic money at all, when we cease from a state of barter, is not some legal tender necessary for the interchange of commodities ? — If you assume that you cease from a state of barter, of course there must be something to take its place ; but a state of barter is the real state at any time ; money is only the means of carrying on that barter." 3791. " Our transactions with foreign countries are carried on entirely by barter ? — Yes ; all transactions are at the bottom barter, and must be so ; they cannot be anything else." 3792. " There is the instrumentality of a medium of exchange in a domestic currency, which does not exist in our interchange with foreign countries ? — The existence of money renders the transactions of barter far more convenient, but it does not essen- tially alter the thing at the bottom : commodities must be given for commodities; that must be the bottom of the subject." I think that Adam Smith gives the true definition of money in the following extracts (b. i. c. 5. v. i. p. 40.):- " What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body. That money or those goods, indeed, save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things." P. 42. :— " But when barter ceases, and money has become the common instrument of commerce, every particular commodity is more fre- quently exchanged for money than for any other commodity." B. ii. c. 2. V. ii. p. 2 1. : — "Money, therefore, the great Avheel of circulation, the great instrument of commei'ce, like all other instruments of trade, though it makes a part, and a very valuable part of the capital, makes no part of the revenue of the society to which it belongs ; and though the metal pieces of which it is composed, in the course of their annual circulation, distribute to every man tlie revenue which properly belongs to him, they make themselves no part of that revenue." That I think is the proper description of money ADAM SMITH ON PAPER xMONEY. 257 and its uses, and of its relation to commodities ; tlic j2:old and silver money yields no revenue, but it is still " a very valuable part of the capital of the society to which it belongs:" the "sovereign" will purchase commodities and pay debt, which " old iron " will not, unless, indeed, it be made legal tender and exchange- able with the " sovereign," when it would lose its character as " old iron." AVhen money is introduced " barter ceases," and it appears to me quite erroneous to say that " commodities must be given for commodi- ties ; " the intervention of money introduces a com- mon equivalent to which the commodities exchanged are both made to be equal ; the barter, if it may be so expressed, is the barter of the commodities for the gold and silver money, and not of the conmiodities for commodities. I ha.ve said, p. 3. ante, " the payment by money is, in one sense, a species of barter, if a barter of all other commodities for one commodity can be so termed — the thing bought or sold for a sovereign, may be said to be bartered for the gold." Whatever is the produce of labour, like the sovereign, represents labour and must be capital, v/hether fixed or circulating. Adam Smith writes thus respecting paper money (b. ii. c. 2. V. ii. p. 25.) : — " The substitution of paper in the room of gold and silver money, replaces a very expensive instrument of commerce with one much less costly, and sometimes equally convenient. Circula- tion comes to be carried on by a new wheel, which it costs less both to erect and to maintain than the old one." P. 26. : — " There are several different sorts of paper money, but the cir- culating notes of banks and bankers are the species which is best known, and which seems best adapted for this purpose. "When the people of any particular country have such confi- dence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his pi'omissory notes, as are likely to be at any time presented to him, those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them." S 258 COINS AND CURIIEXCY. That appears to me a true description of paper money, deriving its currency from confidence in the performance of the promise, resting upon a moral principle. The promissory notes of the Bank of England represent the bullion in the issue depart- ment and fourteen millions issued upon securities ; but they rest also upon the solemn engagement of the Governor and Company of the Bank of England to pay them on demand ; this is independent of what (3811.) "portion of the precious metals" may be " the proper money of this country ;" and of all " me- chanical contrivance." ON THE REPORT OF THE LORDS' COMMITTEES. 259 CHAP. XXVI. A COMPENDIUM OF THE REPORT FROM THE SECRET COMMITTEE OF THE HOUSE OF LORDS, WITH SOME OBSERVATIONS ON THE REPORT AND ON THE EVI- DENCE. I HAVE considered that it may be useful to present to those who may honour these pages with a perusal, a short compendium of the very able " Eeport " of the Committee of the House of Lords, and of the valuable evidence which was given before their Lord- ships. I have ventured to make some remarks on the " Report and on the evidence." As I object to the principle of the Bank Act, and of the Bank mono- poly, and the evidence refers chiefly to the management adopted by the Directors to carry into effect the pre- sent system, I submit with great deference any re- marks I may have made on the managemeJii. I trust what I have written will be viewed with candour by those who may differ from me : the object of all being the same, to promote the welfare of the country. REPORT. " By the Lords' Committees appointed a secret Committee to inquire into the causes of the distress, which has for some time pre- vailed among the commercial classes, and how far it has been affected by the laws for regulating the issue of bank notes pay- able on demand, and to whom were referred several petitions and papers relating to the subject-matter refei'red to them." Ordered to report : — " That the Committee have met, and commenced their inquiries by calling for accounts illustrating the state of commercial affairs, and the fluctuations both in the circulation and in the value of securities, for some years past. They have subsequently ex- amined witnesses, who, from their official position, their know- s 2 2 GO COINS AND CUREENCY. ledge and experience, were able to give useful evidence, more particularly respecting the pressure and alarm which prevailed at the beginning, and towards the close of the last year. The Com- mittee have also examined into the influence of the 7 & 8 Vict, c. 32., and the effect of the letter of Her Majesty's Government addressed to the Bank in the month of October, at the moment when the commercial panic was most severely felt. "A sudden and unexampled demand for foreign corn, produced by a failure in many descrii)tions of agricultural produce through- out the United Kingdom, coincided with the unprecedented extent of speculation produced by increased f\xcilities of credit, and a low rate of interest, and had for some time occasioned over- trading in many branches of commerce. This was more especi- ally felt in railroads, for which calls to a large amount were daily becoming payable, without corresponding funds to meet them, except by tlie withdrawal of capital from other pursuits and investments. These causes account for much of the pressure under which many of the weaker commercial firms were doomed to sink, and which was felt even by the strongest. To these causes may be added a contemporaneous rise of price in cotton ; and with respect to houses connected with the East and West India trade, a sudden and extensive fall in the price of sugar, by which the value of their most readily available assets underwent great depreciation. In what precise proportion these different causes contributed to the common disaster, there is some room for difference of opinion, but that each had a considerable share in producing it, no person has been found to dispute. " Some of tliese causes are obviously beyond the reach of legislative control. But upon tliose which are connected Avith the extension of commei'cial speculation, encouraged or checked by the facility, or the difficulty, of obtaining credit, by the advance of capital and the discount of bills, the powers and position of the Bank of England must at all times enable that corpox'ation to exercise an important influence. The committee have conse- quently felt it to be their duty to inquire into the course pursued by the Bank acting under the provisions of the 7 & 8 Vict. c. 32., and they have come to the conclusion that the recent panic was materially aggravated by the operation of that statute, and by the proceedings of the Bank itself. This effect may be traced, directly, to the Act of 18-14, in the legislative restriction imposed on the means of accommodation, whilst a large amount of bullion was held in tlie coffers of the Bank, and during a time of favourable exchanges ; and it may be traced to the same cause, indirectly, as a consequence of great fluctuations in the rate of discount, and of capital previously advanced at an unusually low rate of interest. This course the Bank Avould hardly have felt itself justified in taking, had not an impression existed that, by the separation of the issue and Banking Departments, one inflexible rule for regu- lating the liank issues had been substituted by law, in place of the discretion formerly vested in the Bank. The Banking De- ON THE llEPORT OF THE LORDS' COMMITTEES. 261 partment was considered to be thus absolved from all obligation, but tliat wliich was connected with the pecuniary interests of the proprietary. Though it may be true, as stated by tlie Governor and Deputy Governor, ' that if they were to do any thing for the interests of the proprietors that was not for the interests of the whole commercial community, the evil would fall back on the Bank, and, instead of having a beneficial effect, Avould have an injurious one, as far as the Bank is concerned ;' yet this principle does not appear to have been practically recognised in all cases, and the Act of 1844 avowedly lelt the Directors at full liberty to act accoiding to their own views of their corporate interests. "But before they pursue this subject further, tlie Committee feel it their duty to lay before the House, from the testimony of some of the witnesses examined, a more full and distinct account of the causes, extent, and consequences of the distress of the last year. This is necessary, not only for a due appreciation of the facts themselves, but to enable the House to consider what remedial measures may be required, whether by an alteration of the law, by an altered system of administering the affairs of the Bank, or by a combination of both. The following is the statement made on this subject by the Governor and Deputy Governor of the Bank." Sect. I. Causes and extent of the distress of 1847 ; " Messrs. Morris and Prescott. 12. An unprecedented large im- portation of food, caused by a deficient harvest, required in pay- ment the export of a large amount of bullion, to the extent of about 7,500,000/., from the coffers of the Bank, and probably not less than 1,500,000/. from other sources— together 9.000,000/. From this great reduction in the available capital of the country, in addition to the still larger amount invested in railway expenditure, acting suddenly upon a previous high state of credit and excessive speculation, arose the pressure in tlie money market. There was an abstraction of 7,500,000/. from the bullion held by the Bank, and consequently a diminution in the notes to that extent. I assume that 1,500,000/, may have gone out from the gold in circulation; that may be more or less, but I assume that about 9,000,000/. went out in the purchase of food in the course of the year 1847. Then I make a distinction between the panic and the pressure. The panic began from the failures in the corn trade. The price of wheat had risen to about 120.?. Large arrivals of grain from the continent of Europe and from America, coupled with the prospect of an early and abundant harvest, caused a sudden fall in price to about 60s. with a corresponding decline in Indian corn. The failure of most of the corn speculators followed this great reduction in price, and their failure caused the stoppage of an eminent discount broker, having a large country connexion. This latter failure, by closing one of the principal channels of discount between the country and London, caused distrust to extend into the country. Credit be- came aflfected by these failures, and several London firms of high s 3 262 COINS AND CURRENCY. standing also failed. Tlien followed in rapid succession the failure of the Royal Bank of Liverpool, the Liverpool Banking Company, the North and South Wales Banking Company, some private country Banks, and the Union Bank of Newcastle, followed by a tremendous run upon the Northumberland and Durham District Bank. To these disasters succeeded alarm, and an almost total pro- stration of credit. The London Bankers and Discount Brokers refused to grant the usual accommodation to their customers, and necessarily obliged every one requiring assistance to resort to the Bank of England. Money was hoarded to a considerable extent, so much so that, notwithstanding the notes and coin issued to the public in October exceeded by 4,000,000/. or 5,000,000/. the amount with the public in August, still the general complaint was of a scarcity of money. Credit was so entirely destroyed that houses trading to distant countries carrying on their business through the means of credit, by a renewal of their acceptances as they became due, were no longer able to meet their engagements, and were forced to stop payment. This was the state of things previous to the issuing of the Government letter in October. 1 12. "There are about thirty-three houses, comparatively speaking large houses, which have failed in London ; they failed to the amount of 8,129,000/. The first seven are expected to pay in full ; — of the other houses there is one expected to pay 5,s. 6d., another 5*. 6d., another 6s. 6d., another 9s., another lis., another 12s., another 8s., another 3s., another 5s., &c. The result is, that, with respect to a large majority of those houses, no assistance would have been sufficient to carry them through those difficulties. 113. "Is the average above 12s.? " With the exception of the first seven, which are expected to pay in full, it is believed that the average will not be more than 6s. 8(7. in the pound." This bullion was deposited with the Bank of Eng- land, on the faith of a promise or engagement to restore it, when demanded. It was imported by the international traders, the great mercantile republic, and was wanted for the use of the same great mercantile republic, of which Great Britain is the most considerable member, as being tlie most extensively connected with the foreign trade. The export of 7,500,000/. of this bullion impoverished no one, it was never " the available capital of the country'''' for any other pur- pose til an to be exported ; it could not be absorbed in the national circulation ; this exportation ought to have produced no pressure on prices or credit, neither should the delivery of this gold have dimi- ON THE REPORT OF THE LORDS' COMMITTEES. 263 iiished the resources of the Bank ; it was the delivery of gold, and the payment of a debt, due from the Bank, with which the country had no concern : it was not the debt of the country. If the Bank of England had lent individuals too much, that also was an affair of the Bank with which the country had nothing to do; even if nine millions had been exported, leaving seven or eight millions in the coffers of the Bank, the gold could be spared or rather delivered without any inconvenience ; or even three or four millions more leaving four or five millions in the Bank, if there had been no division of the Bank in two departments. The Bank of England has two sets of customers — those who are engaged in the home trade of commerce and manufactures and agriculture, and those who are engaged in foreign commerce : the latter require the gold and silver, as the most convenient com- modity to pay debt, or to carry on the round-about foreign trade of consumption, they cannot substitute notes : the former can substitute bank notes for pur- chase and sale in the home market — is it not con- sistent, even with the present system, to render ex- traordinary accommodation, wdien required by the home trade, in the absence of any demand for bullion from the fore'gn trade ? A distinction may be drawn between " panic " and " pressure ;" but a pressure on the money market by the Bank of England may have tended so to reduce prices, that the corn may have been lowered so much in value as to have caused those failures of houses in the corn trade, which occasioned the panic ; the Bank of England may have partly produced the pressure, the failures, and the panic, and in this way may have been a principal cause of the mischief that ensued ; a fall of 50 per cent, in price on the immense importa- tion of corn was sufficient to ruin many of the im- porters. It would be instructive to trace, how far this state of things may have been produced by the fall of prices. 264 COINS AND CURRENCY. consequent upon the commercial community not re- ceiving the usual accommodation, or loan resulting from their credit, which credit very much depended upon the prices to be obtained for goods ; and the ap- prehension that prices would not be maintained ; it would be equally wrong to attribute the entire fall of prices to the conduct of the Bank of England, and to attribute no effect to this cause ; this was, doubtless, one considerable cause. If we can by the establishment of an exchange Bank, remove only one element of needless alarm and consequent panic, we shall remove from the mer- chants and traders, and owners of property, one great ground of evil and of enormous loss. As the exchange Bank would not issue notes to supply the place of the precious metals ; as they would neither discount nor lend ; as they would only, like the Bank of Amsterdam, give cash credits for gold and silver actually in their possession, there could not possibly be any alarm or panic respecting their paying, or rather delivering, the gold or silver, when demanded. All the gold and silver would belong to separate individuals or separate commercial establishments ; there would be no Banh treasure : there would be the treasure of many nations in this warehouse of the world, but each portion of this treasure having its distinct owner, it would be a bonded warehouse for the free efSux nnd influx of the precious metals, of this " most convenient commodity," like a bonded warehouse for tobacco, or for coffee or sugar; there can be no general run upon the owners of the iDonded goods ; there may be a great demand for bullion, from individuals upon individuals ; but no demand af- fecting the Bank as a Bank, any more than the demand for bonded tobacco would affect the owner of the warehouse. " Mr. Horsley Palmer, who had received a signal " mark of confidence from the Bank of England, " in his re-election to the office of Governor, in order ON THE REPORT OF THE LORDs' COMMITTEES. 265 " to facilitate Ins negotiation of the renewal of the " charter in 1833, has given the following testi- " mony : — 684. "I consider the distress of 1847 to have arisen from the deficient harvest of 1846, and the failure of the potato crop of tliat year, which rendered necessary a very large importation of forein'ii grain. Consequent upon the arrangements made for that import, the exchanges with the continent and America rapidly declined, and between the months of December 1846 and April 1847, the demand made upon the Bank in their Banking Department reduced the reserve from nine and a half millions in December to three millions in April, the last two and a half millions of which reduction took place between the 27th of March and the 17th of April. In consequence of that sudden reduction the Bank was compelled under the Act of 1844 forcibly to contract, in order to regain its position, and which forced proceeding caused a very severe pressure for the time upon the money market. Shortly after that period it transpired that speculations for the import of grain had been carried far beyond the power of the houses engaged in them to support, added to which the quantities im- ported in the months of May, June, and July occasioned a fall in the price of wheat from llOs. per quarter to 60*., and even below that value. This fall in the price of grain occasioned failures to a considerable extent in the corn trade, which engendered a material discredit in that and other branches of commerce. Sub- sequently to those events came the suspension of almost all the firms engaged in the trade with the Mauritius, which was followed by a general discredit, principally affecting the houses connected with India, particularly those most largely engaged in the export of British manufactures. These extensive suspensions caused a general discredit, and an abstraction of bank notes and coin from circulation to a very material amount, thireby creating a largely increased demand upon the reserve of the Bank; which, under the Act of 1844, it was found most difficult, and indeed impossible to sustain, the amount of the reserve ha\ing been reduced on the 23rd October to tw^o millions, including London and the Branch Banks. Thus situated, notwithstanding the Bank had advanced the rate of interest in August, September, and October, to 5^, 6, 7, and even 9 per cent, per annum, the demand continued to increase until the 2oth October, when relief was alTorded by withdrawing the restrictive clause of the Act of 1844, and by which the pressure was immediately relieved, and credit has since been gradually restored. During the whole period, from the middle of April to the day of withdrawing the restrictive clause in the Act of 1844, the foreign exchanges were in favour of this country." The reserve since the Bank Act came in operation, does not mean, as formerly, the reserve of gold in 2G6 COINS AND CURRENCY. the Bank of England ; but the reserve of Bank notes, or receipts for gold in the Banking department. Mr. Pahner's evidence is very important. It may be proper to premise, that in his evidence before the Committee in 1832, Mr. Pahner (p. 69 ante) de- signated thus a par of exchange; " a par of exchange in the language of the Bank means, no demand for buUion to be exported." It appears that in con- sequence of the large demand for food, " the ex- changes with the Continent and America rapidly declined," consequent upon the arrangements made for importing it ; and the reserve was reduced from nine and a half millions in December to three millions in April ; two millions and a half being withdrawn between the 27th March and the 17th April. This bullion had been purchased with British commodi- ties, and the export of the 6g millions of bullion, being only the most convenient commodity, was no detriment, but on the contrary a great benefit to the country ; it supplied us with food, for which we paid by a commodity, which had been purchased with British manufactures and produce ; the country was not endangered or hindered by this proceeding. It has been calculated that thirty millions worth of food was imported, and large quantities of other com- modities must therefore have been exported to pay for it. It does not follow that much more gold would have been exported, if no stringent measures had been adopted ; and the food might have afforded if not a profit to the importers, at all events, a less ruinous loss ; this gold being connected with the Bank of England, " (684.) the Bank was compelled under the " Act of 1844, forcibly to contract in order to regain " its position, and which forced proceeding caused a " very severe pressure for the time upon the money " market." Now mark, " this forced proceeding" was in order that the Bank of Enoland miirht " reo^ain its position." Should not the connection be severed be- tween " the position of the Ba?ik,'' and " the position of the country;" between the prosperity of the Bank^ ON THE REPORT OF THE LORDS' COMMITTEES. 267 and the prosperity of this mighty empire ? Can any thino^ be more friixhtful, tlian that the commerce of this mighty empire is to depend upon the position of a chartered corporation ; which position may be oc- casioned by a want of prudence or a mistaken prin- ciple of management or a fallacious system ? But tlie great pressure, and which occasioned the interference of the Government, in sending a letter annulling the most important provision of the Act, this great pressure took place in October, when the exchanges were favourable, when gold had been flowing into the Bank from abroad since April ; some small demand for the home circulation took place, in consequence of the want of country bank notes, most probably; and which mio-ht not have existed if the restrictive clause on the Bank of England issues had not prevented an issue of notes. It appears that this restrictive clause occasioned the hoarding of notes, just as in a besieged town, if notice were given or fears prevailed, that the needful food would not be obtained, each individual would keep or hoard an additional quantity of food ; but as soon as it was known that there would be no interruption to the introduction and free circulation of food, the hoarding would cease, Avith the apprehen- sion of scarcity being removed. May not the re- strictive clause have occasioned the pressure of the Bank, and the hoarding of notes by the bankers ; as all exportation of gold had ceased, the domestic circulation would be the only claimant of gold? But the exportation of gold is a matter of necessity in the absence of other suitable commodities, as the export of wld will not be attended with loss. The demand for the home circulation, when not interfered with, varies only to a limited and very appreciable extent ; the circulation can only absorb a certain quantity of notes and coin under ordinary circumstances ; that is, when not interfered with, and in the absence of mistrust or panic. The demand for gold for expor- tation is peremptory; that had ceased; the demand for notes and gold for the home circulation is condi- 268 COINS AND CURRENCY, tionalj depending upon the condition of public con- fidence ; confidence is the basis of the note circulation as it is the basis of a bill circulation ; the basis of both is the belief that a promise will be performed, when demanded, or performed at a given time : this confidence is the foundation of the circulation of both, and the mighty superstructure of the millions Avhich circulate in nations, and among nations, in the form of bills, rests upon the same foundation as the five pound note. Destroy this confidence and the superstructure of promissory notes and of bills falls to the ground : restore this confidence and the super- structure of both regains its position; this confidence in the promissory notes of the Bank of England was not endangered; so far from it, that the hoarding was the best proof of it ; the only confidence which was endangered, and which was changed into mis- trust, was the confidence of being able to get the promissory notes ; the gold was spell-bound in the coff'ers of the Bank ; it was not wanted for the home circulation nor for exportation ; the promissory notes to the amount of four millions were spell-bound in the coffers of the country bankers, and of the bankers of London — because it was supposed to be the interest of their correspondents, and their own, that they should remain there. The 7iotes would have cir- culated with cheerful reliance on the promise of the Bank of England to perform its engagements ; how was this confidence met, what did the restrictive clause of the new system impose ? " Mr. Samuel Gurney, the head of the house of " Overend and Co., bill brokers, whose experience in " money affairs is universally known and acknow- " ledged, gives the following description of the events " of 1847: — 1098. " The crisis in April, 1847, arose from several causes. The failure of the potato crop and harvest of 1846, leading to an enormous importation of food coming upon an excited state of price and transaction, aided by tlie Bank canvassing for discount, and fomenting transactions, under the new principle, that in the ON THE REPORT OF THE LORDS' COMMITTEES. 2G0 banking department they are to act on the same principle as private bankers, may be considered as tlie causes of that crisis. These led to an extent of demand upon the Bank for discount and otherwise, the yielding to which led them beyond the bounds of prudence, seeing the early payment of the dividends was at hand. Under the Currency Act they found themselves under the neces- sity suddenly of not only witlidrawing their usual accommodation by way of discount, but of calling in with a severe and unre- lenting hand the loans they had made upon the security of bills, Exchequer Bills, &c. The suddenness and severity of this change was forced upon the Bank by the Currency Act. Had it not been for that, they would have sj^read over months what they felt themselves compelled to do in a few days, to the serious derange- ment of the money market and to much alarming disaster. It is queried, was this crisis owing to the Currency Act ? I think it cannot fairly be laid to the Act only, but to the causes before specified. It may, liowever, with truth be asserted, that the force of it and the evils of it were much aggravated by the effect of this Act, in the course of action it forced upon the Bank." A commercial crisis may be produced by overtrading and commercial losses, it is the force and aggravation of the evils of this crisis, which is the question, and whether the causes of a commercial crisis and of a bank crisis may not sometimes be traced to the pre- sent system of banking. " Mi\ G. C. Glyn, m.p., a leading London banker, " and as such having an extended country corre- " spondence and connexion, was also examined by " the Committee. This v/itness had been frequently " examined before both Houses of Parliament on " similar subjects, and his experience as a practical '' banker gives peculiar weight to his opinions. His " evidence was as follows : — 1648. " I consider that the pressure which occurred in April, 1847, arose principally from the large importation of corn and other necessary articles of food, and I consider also that the foreign exchanges having been affected by the operation of those causes, the pressure in point of fact was necessary, and was carried only to the extent which was required for the proper re-adjustment of the fbi*eign exchanges. The foreign exchanges were re-adjusted, and in the course of the autumn set strongly in favour of this country. The harvest turning out very good, in the months of August and September, large failures occurred amongst the spe- culators in corn." 270 COINS AND CURRENCY. Mr. Glyn then describes the state of tlie country in September and October, " numerous failures," " the " pressure gradually increasing," " a great deal of " discredit and want of confidence," and, " a general " distrust that seemed to operate amongst nearly all " mercantile classes, and was rapidly extending itself " to the banking establishments throughout the coun- " try," and he proceeds, — " In point of fact the difference between the two periods of April and October was extremely striking. The pressure of April was very soon over, and the Bank did everything within its power for the mercantile body at the time. Although they had been obliged to restrict their operations very much, yet they attended to the appli- cations made to them, particularly those from Liverpool and some other places. But the pressure that occurred in October last arose apparently from entirely different causes. It proceeded from an apprehension, on the part of all mercantile men, that the want of confidence was becoming so great that at last the reserves of the Bank would be driven down so very low, that, in point of fact, persons who were possessed of property would not be able to con- vert that property into Bank of England notes." It would be inferred from the above reasoning, that a scarcity, requiring " a large importation of corn and other necessary articles of food," must be accompanied with a pressure sufficient " to re-adjust the foreign exchanges," in other words to stop the ex- portation of bullion. It must not be forgotten that this bullion is only demanded when it is " the most convenient of all commodities," whether for the pay- ment of debt, or for carrying on the round-about foreign trade under existing circumstances ; that it is equally advantageous to the country, that this com- modity should be exported as any other foreig^i com- modity ; whether it be gold that is exported or other foreign merchandise, both have been produced by foreign industry and paid for by British industry, there is no mischief to the country in exporting either commodity. But the pressure is applied to check this preference of gold, which leaves no profit to the exporter, by substituting another commodity that shall leave a profit, by lowering the prices of ON THE RErORT OF THE LORDS* COMMITTEES. 271 produce and manufactures below the level of the foreign market, and artificialljj to insure a profit, and, therefore a preference to the exportation of these commodities ; in addition to scarcity of food and its privations, we are to have as a necessary consequence a stagnation in trade, and consequent non-employment of labour, and all this with the intent of providing for the convertibility of the I^ank of England note ; the note was obviously convertible when it was paid in gold to be exported, the real effect is to produce an 17100711' ertibiliiy of the Bank note, to annul the de- mand for payment of the note and for the delivery of bullion, and this is the sign that the Bank has re- gained its position, that the " exchanges are re-ad- justed," and the " convertibility of the Bank of England note secured." A common interest is established be- tween the Bank of England, and the exporting mer- chant, and the foreigner. The Bank retains the gold which is still " 03S alienum," the exporting merchant profits by the low prices of the commodities exported, and the foreigner rejoices in the cheap merchandise. All these three are benefited, but where is the manu- facturer, and the owner of this cheapened commodity? Those who have produced the articles are distressed, and many, perhaps, ruined. The Chancellor of the Exchequer may rejoice in the increased quantity of manufactures exported, and the fundholder has the ad- vantage of the advanced price of stocks resulting from unprofitable trade : who can doubt the prosperity of the country^ who can dare to question these signs of prosperity, increased exports, and plenty of bullion in the Bank of England, the funds at the same time high, and the dividends of the Bank of England perhaps augmented with a bonus ! " The committee also examined Mr. G. AY. Norman, " a Director of the Bank of England, a witness " friendly to the Act of 1844, and one who is un- " wilUng that any alteration should take place in its " provisions. " He was asked what were the causes of the pres- 272 COINS AND CURRENCY. " sure on commerce in tlie spring and autumn of " 1847 ? and his reply was to the following effect : — 26S0. " I consider that the causes which produced the pressure upon commerce in the spriiifj; of List year and in the autumn were the potato disease and tlie iaihire of other crops, the vast absorp- tion of capital arising from the railways, and considerable over- trading in some branches of commerce." " Mr. Norman added that he believed the value of " foreign corn imported amounted to 30,000,000/., for " which payment nnist necessarily be provided. " Mr. Cotton, who, as well as Mr. Horsley Palmer, " had twice been elected Governor of the 15ank, and " from the same motive, whilst he considers the dis- " tress to have been ' greatly exaggerated' (8192.) and " 'nothing equal to what existed in 1825 and 1839,' " fewer banks and solvent houses having, in hisjudg- " ment, suspended payment, adds, 3194. " My impression is that there never was a time when so many parties had engaged in operations so much beyond what they ought to have done, with reference to their capital, as in the year 1847." He speaks of the indiscreet trading with India, Mauritius, and in the corn trade, and observes, ' I think we might have expected many more solvent houses to have failed.' ' After the failure of one or two houses it appeared that credit had been stretched to a most unreasonable extent, larger than I ever recollect.' " The great majority of witnesses do not concur in " Mr. Cotton's opinion, but unite in representing the " intensity of the pressure as more severe than the " distress of 1837 and 1839 ; many even consider it " to have been greater than that of the year of panic, " 1825. Mr. Palmer 679—681 : — " lias the distress and pressure upon the public been greater or less during the last year, than in any preceding cases to which you have alluded ? — I think it was greater during part of the year 1847 than ever I remember. " With greater damage to commercial credit and fortunes than on any other occasion ? — I should say ccrliunl3^ ON THE REPORT OF THE LORDS* COMMITTEES. 273 " Do you apply that observation to the country generally or to London? — I apply it to the whole country, especially to all the commercial parts of the country." " Mr. Gurney's opinion on this subject is equally " distinct and decided, — 1238. " Are there in the history of the money transactions of this or of any other country, circumstances that can be at all com- pared to those that have taken place in this country in the last twenty months ? " I think that the catastrophes of last autumn were beyond all parallel in our monetary history, as far as I know." " Mr. G. Norman concludes that in 1837 and 1839, " the causes of pressure were much less extreme than " in the year 1847. In 1839 there was but little in- " solvency of any kind. In 1837 there was, as well as " the witness recollected, no considerable insolvency " except in the American trade. In 1847, on thecon- " trary, he stated (2702.) that 'every one seemed " afraid of his neighbour,' and in the opinion of Mr. " Tooke the time was approaching when ' nobody " would pay anybody.' Another witness, Mr. Lister, " states ' there was a panic through the country ; " people thought they were in an iron cage, and could " not get out of it; that iron cage was the Act of 1844.' " " On the other hand, it is right to observe, that some *' witnesses represent the pressure in 1847 to have " been less severe than at several former periods. " The Governor and Deputy-Governor of the Bank, " in the following questions, state their imj^ressions " to this eiFect, and as regards the comparative con- " sequences of the commercial distress in different " years." 95. "You said* that you thought that the Act of 1844 had worked extremely well to secure the convertibility of the notes ; do you apprehend that there w^ould have been any danger of the notes of the Bank of England not being convertible if it had not passed ? — I think they would have been in danger. On one or two previous occasions, 1 think, they were in danger — in 1825 and in 1839." 96. " And you think that they would have been in danger now, but for this Act ? — They might have been." T 274 COINS AND CURRENCY. Mr. Prescott : — "I ngree with the Governor. I think that the pressure was not so great in 1839 as it was in 1847, and therefore that the danger in 1847 would have been greater, but for this Act." 97. " Was not the pressure greater this year than you have ever witnessed ? — I\Iy own experience scarcely carries me back to 1825, but 1 should conceive that the pressure in one or two weeks in 1825 was greater than in 1847." Mr. Morris: — " I believe that the pressure probably has been greater in London and in Lancashire, and probably in other places, but 1 doubt whether the pressure generally througliout the country has been so great as it was at the former periods." 98. "13o you consider that circumstance at all attributable to the action of the Act of 1844 upon the private bankers in the counti-y ? — I consider that the action of the Act of 1844 upon the private bankers of the country must have been of the greatest possible benefit." " And to have preserved the country from tlie failures of country banks which took place in 1825 ? — To have preserved the country from the misfortunes fallen into in 1825." 104. "Assuming that the pressure in 1847 has been more severe upon the commercial world in London than upon previous occasions within your knowledge, should you say, considering the distance at which we have now arrived from the period of pressure itself, that the recovery from it has been more rapid, and that there has been less subsequent pressure, than upon former occa- sions ? — I think the I'ecovery Irom it has been much more rapid, but it is difficult to say when the recovery has taken place." 105. " Without assuming at the present moment that we have actually recovered from it, but looking at the course of affiiirs since October, should you say that there has been less severe dis- tress consequent upon the panic, than there has been upon pre- vious occasions ? — I think that the reaction has taken place sooner than it otherwise would have done." 109. " The question is, not as to what would have happened if the Act of 1844 had not passed, but merely as to tlie matter of fact, whether the distress and the sacrifice of capital, and the general damage, both to the commercial character as well as the credit of the country, has not exceeded in the last year anything that in your experience you ever witnessed? — I think in the failure of large houses it has exceeded, but wliether it has as (nr as the whole country is concerned, I am not prepared to say. My impression is, that the damage to the country from the panic of 1825 was greater and more general then than any which has taken place in 1847." ON THE REPORT OF THE LORDS' COMMITTEES. 275 Mr. Prescott : — "I think as many as sixty or seventy country banks failed in the end of 1825, and now there has not been a dozen." In justice to the country bankers I may observe that, " Sir M. W. Ridley said in the House of Com- mons, 3rd June, 1828, that : — "In 1825 and 1826 there were 770 country bankers, and of these sixty-three had stopped payment. But of the sixty-three twenty-three had subsequently I'esumed their payments, and paid 205. in the pound ; and of the remainder, thirty-one were making arrangements for the payment of their debts, and there was a great hope that every farthing would be paid. The country bankers who had failed in 1826, had paid, on an average, 175. 6c?. in the pound." * " Mr. Jones Loyd will be found in his evidence, " as follows, to express his opinion more strongly as "to the greater intensity of the pressure on- several " former occasions than in 1847 : — 1426. "Within your experience do you know any time in which there was a greater disturbance of credit, so as to neces- sitate an increase of the reserves, than there was in that month of October, 1847? — I believe that the disturbance of credit was greater and more widely spread in 1825 than it was in 1847." 1496. "Do you suppose that any evil can occur to a great commercial city greater than that which happened during the year 1847 in the city of London, or that there ever were instances in which so complete a sacrifice of pi'operty, and so complete an impoverishment of commercial capital, has taken place in any country ? — I have no doubt that there existed much greater pres- sure, and that the evils alluded to in the question occurred in a severer form in this country in 1783, in 1793, and in 1825. We are always apt to form an exaggerated estimate of the present evil. This is the account given by Mr. Tooke of what took place in 1783: 'This contraction of the currency was attended with a great rise in the rate of interest. Consols fell from sixty -eight to fifty-four, omnium from a premium of 8 per cent, to below par. Every one, says Chalmers, must remember how impossible it was to borrow money on any security for any premium.' Then again take 1793: 'Many houses of the most established credit failed. Houses of undoubted solidity, possessing ample funds, which actually did in a short time enable them to pay every shilling of their debts, * Tooke on Prices, v. ii. p. 161. T 2 276 COINS AND CUKIIENCY. were obliged to stop pnyment. Some bankers ■wlio almost imme- diately on recovering from the first panic, resumed the regularity of their payments were obliged to make a pause. Many whom the tem- porary assistance of even a moderate sum would have enabled to surmount their difficulties could not obtain any accommodation. Those who had any money, not knowing where they could place it with safety, kept it unemployed and locked up in their coifei-s.' Such is the account given in Macpher.-on's Annals of Commerce of the pressure in 1793. It would be a most incorrect and ex- aggerated account of the state of things in 1847. Then again as regards 1825. We have Lord Ashburton's account of 1825, as given in Sir Robert Peel's speech, which, taken as a description of 1847, would be a great exaggeration." The Committee observe : — " Such is the description of the commercial world in 1847, " given by well-informed witnesses ; and the Committee consider " that a more alarming picture of the consequences of panic and " discredit could not well be given. It must also be recollected that *' in some respects the conjuncture w^as favourable. Had there been "at this time any domestic political alarm, had there been any " foreign war, or any speculations in foreign loans, or had the state " of the balances in the Exchequer been such as to render necessary " large advances from the Bank on deficiency bills, the extent and "intensity of suffering, great as they actually were, would have " been rendered still more formidable. But from these sources of " danger the country was happily exempted. Still it is clear to " your Committee that the difficulties and dangers of the case were "such as to require a remedy, prompt, decisive, and effectual." It may be useful to trace what difference existed in the circumstances, attending the different money crises, of 1793, 1825, 1837, and 1839, and if they resemble the crisis of 1847; I subjoin the following extracts from Mr. Tooke's " History of Prices," vol. i. p. 176: — "The commencement of 1793 is among the most memorable in the annals of this country, and of Europe, and indeed of the civi- lised world. It was in February of that year that the war with France, which, with the intermission of a few months, lasted for upwards of twenty years, was declared." " There had been immediately preceding that event a great re- vulsion and derangement of commercial credit, not only in this country, but in the principal trading cities of the continent of Europe." " Sir Francis Raring, in a pamphlet ])ublishod in 1797, observed, ' " A circumstance which very materially contributed to produce the distress of 1793, was the sudden, unexpected declaration of ON THE EEPORT OF THE LORDS* COMMITTEES. 277 war. That dreadful calamity is usually preceded by some indica- tion which enables the commercial conmiunity to make prepara- tion. On this occasion tlie short notice rendered tlie least dejiree of general preparation impossible, and wliich may be asoertidned by the prices of stocks in the preceding month of October, and various collateral authorities.' " Tooke, p. 178.:— " This fall of prices does not seem to have been a direct or obvious consequence of the war ; it was rather the effect of a recoil from extensive speculations, which had their origin two or three years before, connected with the extensive circulation of mercan- tile paper already alluded to. One of the chief causes of those speculations seems to have arisen on the ground of apprehended scarcity of colonial produce in consequence of the revolution in St. Domingo, which at that time constituted the largest source of supply of sugar and cotfee to the continent of Europe." P. 195.:— " The treasure of the Bank, which had been 8,055,510/. in August, 1791, was reduced in February, 1793, to 4,010,680/., while its circulation was maintained at nearly the same amount of between eleven and twelve millions. There had been a decline of the foreign exchanges in 1792, which may account, in some de- gree, for the drain ; the greater part, however, of the drain seems to have been occasioned by a demand from the country bankers for the purpose of enabling them to meet the run which they ex- perienced. But although the Bunk fully kept up the amount of its issues, while it had supplied a large amount of gold to the country, the total of the circulating medium at the beginning of 1793 was in a very contracted state, or, in other words, the pressure on the money market was very severe ; and this, notwithstanding that the Bank was liberal in its discounts, which had increased from 1,898,640/. in August, 1791, to 6,456,041/. in February, 1793." The demand for gold appears to have been in a great degree for the supply of country banks ; such a demand is not likely to occur now, since the num- ber is so reduced by the establishment of Joint-Stock Banks, and as the Bank of England notes may be legally paid for sums above five pounds, instead of gold. On the panic of L825, Tooke, ii. 161. : — "The panic was then at its height ; nearly seventy banks in town and country suspended their payments in the course of the single month of December last (1825), B;ink of England notes and gold were almost the only medium which would then be accepted in payment throughout the country ; but Bank of England notes, where even they were taken as readily as gold^ could not supply the chasm created by the discredit of the local paper, since the T 3 278 COINS AND CURRENCY. Bank had ceased to issue one pound notes ; gold, therefore, was required specifically for this, as well as for the more general purposes of meeting the demand from want of confidence in the paper." The circumstance of there being no country circu- lation of one and two pound notes, makes a broad distinction in the circumstances attending the panic of 1825 and 1847, there was no demand for gold on this account in the latter period. The Directors of the Bank of EnMand in the memorandum delivered to the Parliamentary Com- mittee of 1832, (Gilbart, p. 58.) estimated the amount of the country small notes in circulation at about seven or eight millions to be provided for, according to the intention of paying them off in 1825. The demand for the payment of these small country notes, in the panic then existing, would oc- casion an internal demand for gold on the Bank, quite independent of the exchanges. A very large export of gold took place also in 1825, connected, doubtless, with the large speculations in foreign loans. Mr. Haggard, p. 12., states that: — " In a return anade in February, 1825, the stock of gold coin in deposit is stated at 7,285,000/., while the bullion was only 1,572,000/. Unfortunately this year a large demand was made for the precious metals for international purposes. One individual exported between six and seven millions, which consequently took the greater part of the stock of sovereigns." This exportation would be quite independent of the commercial exchanges to pay a balance of debt, arising from any difference in value between the im- ports and exports. They were probably exported to pay in great part the investment in foreign loans. As regards the demand for gold in 1836 it has been justly attributed, in part, to the operations of the American Government, in order te secure a cir- culation of gold coin. Mr. Palmer states, p. 29. (Causes and Conse- quences) : — " The reduction which took place in the bullion of the Bank from April to September last (1836), is that to which it is now neces- ON THE REPORT OF THE LOHDS' COMMITTEES. 279 sarj to advert. The diminution amounted to 2,600,000/,, and was effected in the followinp^ manner: — " 200,000/. amount of silver sold. " 100.000/. gold ditto. " 2,300,000 sovereigns supposed to have been exported to America." The alteration in the currency regulations of the United States, which legalised the circulation of sovereigns as a legal tender, may account for the ex- portation of the sovereigns : this would be indepen- dent of the exchanges, as affected by commercial transactions. " The Agricultural and Commercial Bank in Ireland stopped payment (Tooke, vol. ii. p. 259.) in November, 1836, and the diffi- culties of the Northern and Central Bank in Manchester were at the same time becoming a matter of notoriety." The exportation of bullion in 1839 is supposed by Mr. Jooke (v. iii. p. 114.) to have been in a great degree occasioned by the low rate of interest charged by the Bank, 3| per cent., which continued till the 16th May, when the rate of discount was suddenly raised to 5 per cent, and 5 J per cent. Tooke, vol. iii. pp. 86. and 114. This created (p. 87.) "a considerable sensation in the money market : " — " The assistance of the Paris bankers was resorted to (p. 89), and the accommodation granted consisted of credits by twelve of the leading firms in Paris to the extent of 50,000,000 of francs, or 2,000,000 sterling, to be drawn against for account of the Bank of England." " Sect. II. Treasury letter, 25th October, and its " effects." " That remedy was sought and found in a depar- " ture from the restricted principles of the Act of 1844, " authorised by the following letter of the first Lord " of the Treasury and of the Chancellor of the Ex- " chequer, dated the 25th of October: — The Treasury letter, after describing the state of trade, recommended to the Directors of the Bank of England, in the present emergenc}^, to " enlarge X 4 280 COINS AND CURRENCY. the amount of their discounts and advances upon approved security ; but that, in order to retain this operation within reasonable limits, a high rate of interest should be charged." " In present circum- " stances they would suggest, that the rate of interest '• should not be less than 8 per cent." " If this course " should lead to any infringement of the existing law, " Her Majesty's Government will be prepared to pro- *' DOse to Parliament, on its meeting, a bill of indem- " nity. They will rely upon the discretion of the " Directors to reduce as soon as possible the amount of " their notes, if any extraordinary issue should take " place, within the limits prescribed by law." What the public wanted was, an assurance that the usual exchange of bills payable at a future day, for Bank of England notes payable on demand, would not be interrupted ; it was not altogether the loan of money that was wanted, but a power of disposing of undue good bills for good due bills, or notes payable on demand, a restoration in fact of the circulation to its ordinary channel ; it was not gold or silver that was wanted, it was an absolute want of Bank of England notes, which were hoarded by those who thought they might possibly want them, either for their oavu use, or the use of their country correspondents: it was a want of the means of discharging debt by those who abounded with property, which, on common occasions, would command those means. It Avas the same as if by any unaccountable proceeding, all the silver and copper coins were withdrawn from circulation, and no change could be obtained for the gold coin, which was alone to be procured ; or rather as if all the promissory notes under 100/. were withdrawn, and there were no means of paying by promissory notes the inland bills of smaller amount ; the difficulty of the country- arose solely, as far as respected the absence of Bank of England notes, from an erroneous application of the funds at the disposal of the public ; the notes Avere hoarded, instead of circulating among the public. ON THE REPORT OF THE LORDS' COMMITTEES. 281 It was a defective circulation acting upon excessive credit, and over trading ; and then it became a de- ranged commerce, and a deranged credit, arising from a deranged circulation, and this derangement of the circulation gave rioc to the panic ; the substitution of bank notes, when uncoridltionally paid in coin to the heave?' on demand., for undue bills, ivhen unexceptionable in character would appear at the discretion of the hanker., to be as much a rule of the circulation of bills, as the payment of coin for the bank notes is a rule of the circulation of bank notes ; in both cases it is a sub- stitution of prompt payment for credit. There was no want of confidence in the Bank of England note on the part of the public, and no want of confidence in the bills off'ered to be discounted on the part of the brokers, but there was a want of confidence in the usual exchange or accommodation, in substituting, one sort of paper money for the other ; there was no want of confidence in the value of the bill, but in the power of changing it ; something like what occurred in the time of Sir Isaac Newton, when he stated in his report of the 21st September, 1717, " that if silver money should become a little scarcer, people would in a little time refuse to make payments in silver without a premium." * Those who had silver money would not part with it, as those who had bank notes would not part with them. "Mr. Loyd states (1500.) that the ' Bank did nothing " under the letter ; the amount of notes with the " public was not increased ; that power was not ex- " ercised.' The letter was nevertheless actively and " powerfully operative." 2711. "The issue of the letter to a considerable " degree relieved the money market," observes Mr. Norman, " by holding out to persons the certainty " that they might get accommodation, whereas before " they feared that they should not." The amount of "notes (Cotton, 3262.) hoarded by bankers and com- " mercial men was at once released. These notes * Lord Liverpool, p. 80. 282 COINS AND CURRENCY. " have been estimated by Mr. S. Gurney, at about " 4,000,000/., and this acted as effectually as if an "additional issue on securities had been made by the " Bank. " A resolution was entered into on the 25th of " October, by the court of directors, expressing an " opinion that ' no deviation from the provisions of the " Act of 1844, regulating the currency was required, " in consequence of any difficulties on the part of the " Bank,' but that they consented to the measure re- " commended by Her Majesty's Government, on the " grounds of public necessity urged by the first Lord " of the Treasury and the Chancellor of the Exche- " quer." The first Lord of the Treasury and the Chancellor of the Exchequer preferred public utility to the con- tinuance of the money pressure ; the greater the pres- sure the more invulnerable was the Bank ; the country Avas preferred to the Bank. " Sect. in. Efficiency of the circulation not iden- " tical with its money amount." " The inflexible rule, considered to be invariable " and self-acting and adopted by the legislature, as " connected with, and consequent upon the separation " of the departments of issue and of banking, and the " regulations provided for both, is founded on cer- " tain principles which, before they can be adopted, de- " mand very serious examination. The Act appears " to assume that one fixed amount of notes out of the " custody of the Bank, and in the hands of the public, " will at all times produce the same effect, and will be " governed by the same laws. Unless this proposition " be true, the uniform and fixed rules of the Act of " 1844 can hardly be justified." The Committee conclude that "the efficiency of the " circulation cannot be estimated, merely by its " numerical amount," and in confirmation, they ad- duce the authority of the Bullion Committee, in 1810. " The mere numerical return of the amount of bank ON THE EEPORT OF THE LORDS COMMITTEES. 283 ' notes out in circulation, cannot be considered as at ' all decidinf^ tlie question, whether such paper is or is ' not excessive. * * * The effective currency of the ' country depends on the quickness of circulation, and ' the number of exchanges performed in a given time, ' as well as upon its numerical amount ; and all the ' circumstances which have a tendency to quicken or ' to retard the rate of circulation, render the same ' amount of currency more or less adequate to the ' wants of trade. A much smaller amount is required ' in a high state of public credit than when alarms ' make individuals call in their advances, and provide 'against accidents by hoarding, and in a period of ' commercial security and private confidence, than ' when mutual mistrust discourages pecuniary ar- 'rangements for any distant time." — Bullion Report. This "Report" was written in 1810, during the ex- istence of the Bank Restriction Act, but it is equally applicable Avhen the Bank of England pays its notes in cash, it is a principle of universal application ; it applies equally to notes payable on demand, and to notes payable after date, or bills of exchange, whether foreign or domestic, to the national coin, to the bullion or money of the great mercantile republic, to every description of money and of credit; and all these several denominations ought to be comprised in the term currency, every medium employed in the trans- fer of property founded upon confidence in the cer- tainty of the goodness of coins, and upon confidence in the " fortune, probity, and prudence " of those who promise to deliver coin : they constitute the currency of the country, and may all be included in that term as used by the " Committee " in the above just re- mark, and all ought equally to be emancipated from any inflexible rule. Mr. Samuel Gurney states : — 1116. " The effect of that panic was to cause very general dis- trust, and a gradual running down of the reserved fund of the Bank as well as of the bullion. After a little time people bef^an to think, under the influence of this panic, how are we to get cir- 284 COINS AND CURRENCY. culating medium ? And the wealthy and the more powerful took care] very largely to over-provide themselves, and drew upon the reserves of the Bank infinitely beyond tlie real necessities of the case. The consequence was, that the amount of notes in the hands of the public, amounted to nearly 21,000,000/. ; and I have not the slightest doubt that, at that period, at least from four to five millions sterling of the notes issued were locked up and in- operative, in consequence of the alarm and of a fear of not being able to get bank notes at all." " Many other statements, autliorities, and illustra- " tions mip:]it be given, exemplifying the same prin- " ciples, and proving the evil consequences of dis- " re";ardino: them ; but enough has been stated to "prove, in the judgment of the Committee, that the " inflexibility of the rule prescribed by the restrictive " clauses of the Act of 1844, is indefensible, v/hen " equally applied to a state of varying circulation, and "that its enforcement in 1847, was an aggravation " of the commercial distress, and was therefore wisely "set aside by the authority of the Government on the " 23rd and 25th of October." " Sect. IV. Inapplicability of the same rule to periods " of favourable and of adverse foreio^n exchancre." " The Committee will now proceed to consider an " analogous question ; namely, the connexion between " the act and the state of the foreio;n exchano-es. It " will be observed that the two questions of the " efficiency of the circulation, and of the contrast " existing between a favourable and adverse state of " foreign exchange, are intimately connected ; inter- " nal demand, the hoarding of notes and coin, and " the increase of banking and commercial reserves, " being frequently the concomitants and consequences "of a state of things perfectly compatible with a " favourable foreio:n exchan«xe." " In order to make their observations in respect to " the foreign exchanges more intelligible as applied " to the year 1847, it is expedient to bear in mind the " leading facts of the case. Two different periods of " pressure occurred in that year, the one in April, the ON THE RErORT OF THE LORDS' CO:\IMITTEES. 285 ' otlier in October. These two periods were clearly 'distinguishable. In April the foreign exclianges ' were adverse, and the Bank was subject to a heavy ' drain of gold for export, more especially to tlie ' United States. In October the exchanges were ' favourable. Gold was flowing in steadily, and the ' advices from abroad showed that more extended ' supplies might be depended on. This distinction, ' which is of the highest importance, is drawn by the ' Governor and Deputy-Governor of the Bank of ' England." 11. "The pressure in the months of September and October, I consider to be a very different pressure from that in the month of April. That in the month of April arose principally in con- sequence of the pressure from the export of the precious metals, and the circulation becoming more contracted, whereas I consider that in October to liave arisen from a state of panic." 145. "The question refers to the general principles of banking management : supposing the Bank were altogether free from the obligations of the Act of 1844, would not you as a banker feel it expedient to act with more caution with respect to your banking reserve at a time when there was a foreign efflux of gold than at a time when gold was coming in ? — Decidedly." '' When Mr. Horsley Palmer was asked whether a "different rule ought to be applied to the two cases " under consideration, his answer was as follows : " — - 731. 732. "Do you, from your experience connected with tin's subject, conceive that it is defensible in reasoning, or maintainable in pi-actice, that in managing the Bank the same rule should be applied to the case, whether the foreign exchanges be favourable to the country, or adverse to the country ? " "I think it is always in the power of the Bank to protect itself against a foreign demand, but it is totally impossible to protect itself against an internal demand." " The question is with respect to the restriction imposed upon your issues, for the accommodation of the public, whether you think that it is defensible in theory or maintainable in practice, that you should have the same rule in managing the Bank, when the exchanges are adverse and when the exchanges are favourable ? — Certainly not." " The observations of Mr. Huskisson were, in like " manner, brought under the notice of the Governor " and Deputy-Governor of the Bank with a view of 286 COINS AND CURRENCY. "givinp^ to those gentlemen the fullest opportunity of '' explaining how far they adopted or rejected that " authority, as well as of comparing it with the bank- " ing transactions of 1847, and with the rule laid " down by the Act of 1 844. The evidence stands as "follows:"— 236. 237. '' AVill you have the goodness to attend to the follow- ing passage. Mr. Huskisson states, in his pamphlet on Depreciation, that ' the consequences of sudden alarm cannot be measured; they baffle all ordinary calculation. Cash is then withdrawn, not be- cause the circulation is excessive, but by the country banks and tlie town bankers, for the purpose of meeting possible demands upon them, and by the community at large, either directly from tlie Bank or indirectly through the former channels, for the purpose of hoarding, from the dread of some imaginary or contingent danger.' Does that describe accurately the effect that you think takes place under the circumstances of a panic, as you have inter- preted the w^ord ? — I think decidedly." " Then in the same passage, the following sentence succeeds : ' In such a crisis every reduction in the amount of bank paper is so far from checking the drain, that it aggravates the general distress, because the gold which is taken out of the Bank, instead of being substituted in circulation for the notes withdrawn from it, is for the most part locked up, and thus in proportion as the stagnant and straitened circulation wants life and aid, it becomes every day more embarrassed, whilst each new calamity produced by such a state of things contributes to spread andinci'ease the general apprehension.' Do you agree that under such circumstances the straitening of the circulation (assuming throughout that this is produced by an in- ternal demand and not by a disorganisation of the foreign ex- changes) tends, in the words of Mr. Huskisson, to spread and increase the general apprehension, and to make the commercial world more embarrassed ? — Yes, I do. And I consider that the Bill has provided a remedy for that, inasmuch as the straitening of the circulation causes a rise in the exchanges, and an importa- tion of the precious metals for the purpose of performing that which an extra issue of notes would have done," " Mr. Huskisson adds in a passage which was not " read to the Governor of the Bank, ' it is therefore " manifest that by a possible combination of things, " the Bank might be driven to part with its last guinea, " not only without having checked the drain, but with " tlie certainty of increasing it in proportion as their " notes were diminished.' These latter words are not only " applicable here, but offer an important commentary ON THE REPORT OF THE LORDS* COMMITTEES. 287 "on the proposition of the Bank (38) already adverted " to, of allowing their bills to the extent of 1,500,000/. " to run off, and to limit the re-discounts to 100,000/. " a-day. To such a mode of proceeding the following " extract from the Bullion Report distinctly applies : " ' a very urgent demand for guineas, though arising " not from a high price for gold and the state of the " exchanges, but from fear of invasion, occurred in " 1793 and 1797, and in each of these periods the Bank " reduced their discounts, and consequently also the " number of their notes, very much below the demand " of the merchants ; your Committee question the " policy of thus limiting the accommodation in a period "of alarm unaccompanied with an unfavourable ex- " change and high price of bullion.' Yet it must be " remembered that the policy thus condemned by the "Bullion Committee was, in 1844, made imperative " on the Bank of England, if the limitation of their " discounts in October 1847, was to be resorted to in " order to preserve the solvency of the Bank." " The panic of 1825, and the subsequent pressure " in 1837 and 1839, were all met and overcome " without any violation of the law. It was not till "the stringency of the provisions of the Act of 1844 " became felt, for the first time since the Bank Re- " striction in 1797, that, by a letter of the Govern- " ment, the law of the land was set aside. Mr. Gur- "ney's evidence (1226) wall enable a comparison to " be made between the events of former times and " those of the last twenty-five months. That witness " observes, ' if by the permanent law of the country " is meant the Act of 1844, and it had ftiiled only in " one case, I should have been jealous of alteration ; " but we had three periods of crisis and great diffi- " culty in our monetary system in the last twenty-five "months, in each of which I am certain that the " calamity and difficulty w^ere materially aggravated by " this Act. If there had been only one case, I should " wish to try it a little longer ; but when we have had " three successive cases one after the other, and in each 288 COINS AND CURRENCY. " case the difficulty has been extremely aggravated "by it, I come to the solid conclusion, that the Act " must be relaxed.' " *' The Committee have hitherto considered the ques- " tion of the distinction between periods of an influx " or efflux of gold, produced by the exchanges as " affecting the Bank of England only. But the sub- "ject requires furtlier investigation in relation to tlie " effects produced on private credit and private in- " terests, by confounding these two cases. It would " appear from what has been already stated, that if an " extension of currency were to take place, when the " exchanges are adverse, the convertibility of the note " would be endangered ; a contraction of the currency " is consequently called for. If, on the contrary, at a " time of internal discredit, but of a favourable ex- " change, the same contraction should be applied to " the currency, panic must ensue with all its for- " midable consequences." " Sect. Y. The Act of 1844 applies the same rule " in cases of an adverse, and a favourable foreign ex- " change." " The Committee now proceed to examine whether "the Act of 1844 does effectually discriminate be- " tween the two cases of favourable and adverse ex- " change, which the evidence and authorities thej^ have " quoted prove to be indispensable, or whether, on the " contrary, the obligations of that Act are not uniform " and identical in both cases. This latter proposition " is deducible from the following evidence of the Go- " vernor and Deputy-Governor of the Bank." 146. "You have stated that in prudent banking a different line of conduct would be pursued by a banker on those two occasions ; does not the Act of 1844, compel tlie Bank of England to act upon precisely the same principle, whether the lessening of the gold arises from a foreign demand or from an internal drain? — The difficulty that we have is from mixing up the two departments together ; but certainly the Act of 1844 obliges us to act upon the same principle, except that that which is an internal demand may merely arise from accidental circumstances, which ON THE REPORT OF TIJE LORDS' COMMITTEES. 289 will be corrected when the foreign import, or the purposes for which it shall be wanted have been accomplished, whereas the export of bullion would necessitate an immediate corresponding limitation in the amount of notes, and therefore affect our reserve." " During an, examination tending to show the dis- " tinction between exchanges adverse or favourable, "the Governor of (283) the Bank stated that, there " was a distinction between (284) the drain according " as it was foreign or domestic, and that this was " shown in the exchanges, and in the demand for bar " gold. He was asked : — 293. 29.5. "On general principles what are the causes of an inter- nal di'ain for gold ; does it arise from money being in excess and interest being low, or does it arise from money being deficient for the purposes of the country, and interest being high ? An inter- nal drain may arise from distrust in the country, or from an in- creased demand caused by an increased want for the larger tran- sactions of the country." " Then, in these respects, an internal drain and a foreign efflux depend upon directly opposite principles ? — Yes." "Does not the Act of 1844 deal with these two things precisely in the same manner ? — Yes." " Mr. Loyd carries his views somewhat further, and, " whilst admitting the fact, seems inclined to express " an opinion which may be construed as an approval " of this principle. This will appear from the follow- " ing questions and answers : — 1376. 1450. " You consider that in its banking department, the Bank should conduct its banking business in the same way whether the drain is for foreign or for internal purposes? — lappi-ehend that the banking department should not look to the causes of a drain of bullion, but simply look to the state of the banking reserve." " The principle of the Act of 1844 has reference purely to the amount of bullion at any one time as compared with another time, and has no reference to the question whether that bullion has in- creased or diminished by the action of the foreign exchanges or from any other cause? — The Act of 1844 substantially does not look to the causes of an increase or diminution of bullion. It merely says to the public, if you like to have the bullion coined, and to use it in that form, you shall have it ; if you do not like that, and like to deposit your bullion in our cellars, you shall have the convenience of having notes in its stead." " The conclusion to be drawn from the authorities " and evidence, cited in this and the preceding sec- u 290 COINS AND CURRENCY. " tions is, that it is an error to deal solely with the " positive amount of bank notes in circulation, exclud- " ing the disturbing causes which may augment or " diminish the efficiency of those notes ; that to apply " one identical rule to cases where the exchanges are " adverse, or are favourable, is an error likewise ; " that in both these respects the Act of 1844 is de- " fective, and that in consequence of these defects it •'aggravated the distress of 1847, more especially in " the months of September and October, and that it " must have a tendency to lead to the same results " hereafter whenever similar circumstances shall arise. " The Committee will conclude this branch of the sub- " ject by the following question and answer from the " evidence of the Governor of the Bank." 148. " In those cases where the demand for gohl arises from an internal panic, the Bank of England is restrained in its banking operations by the Act of 1844, precisely in the same manner as it would be restrained if there was a demand npon the Bank for the foreign exchanges. Is not that likely to cause an aggravation of the evil in the case of an 'internal drain ?' — That was the case in October. It is impossible to legislate for a panic. We all know that a panic is so devoid of all reason that you cannot legislate beforehand to meet it. It was for that purpose that the govern- ment issued the letter as a corrective at that particular moment." Upon the evidence in the two preceding sections, I beg to offer a few remarks. Why should the ex- port of the precious metals for the purchase of food occasion any pressure upon the currency? the country was relieved from distress approaching to a famine, and the foreign merchants by the export of bullion, the most convenient commodity, were relieved from the hazard of sending other commodities to doubtful or unremunerating markets : they availed themselves of the bullion, — "the international money" circulating among nations: this bullion had been imported by the Great Mercantile Republic, and was deposited in the Bank of England under an engagement to deliver it on demand. In a natural state of thinjrs there seems no reason why the export of bullion should have any necessary relation to the domestic currency of bank notes and coin ; the bullion is required in the ON THE REPORT OF THE LORDS' COMMITTEES. 291 foreign trade, and coin and bank notes in the liomc trade. The Governor and Deputy-Governor of the Bank state (146) that " an internal drain and a foreign efflux (of gold) depend upon precisely opposite prin- ciples," and "that the Act of 1844 deals with these two things precisely in the same manner ; " in action and dependence, I would make "these two things" as distinct as they are in iwinciple. There are two customers in the form of the home trade, and the foreign trade; the one dealing with coin and bank notes, and the other with bullion ; the gold and silver bullion is required for the round- about foreign trade of consumption, and to pay debts abroad, where bank notes will not circulate. By the present arrangement the quantity of bank notes for the use of the home trade is determined by the quantity of bullion required for the foreign trade ; as the bullion diminishes in the issue department, the notes diminish in the banking department, under the name of the "reserve." Why should the trade of the bullion merchant in- terfere with the trade of the banker ? I would keep them perfectly distinct — not by a separation of de- partments of the same establishment, but by distinct and separate trades ; there would then be no confu- sion of interests or of functions : the trade of bank- ing would be as distinct from the trade of bullion as from the trade of tobacco, rum, or coffee ; all equally merchandise. (11.) Mr. Morris. "I consider that (the pressure) in October to have arisen from a stata of panic." Did not the panic arise from the pressure? May it not be asked, who first felt the pressure, the Bank or the manufacturers and merchants ? Did not the Bank transfer the pressure from themselves to the com- merce of the country? Did not the Bank refuse ac- commodation, discount, and loan, and that with re- ference to their "reserve," and not to the responsibili- ties of the parties making the application ? XT 2 292 COINS AND CUTIRENCY. The " contraction of the currency " must mean a less degree of accommodation or loan by an issue of hank notes ; but the state of the exchanges, indepen- dently of the Bank Act and Bank monopoly, offers no just rule for lending or accommodating witli bank notes ; the wants of the merchant and manufacturer in the home trade, and the resources and responsibility of each, are quite independent of the exchanges ; it is no satisfaction to tlie parties to be told that they cannot be accommodated because the exchanges are unfavourable ; the unconditional payment of the bank note ought to be quite independent of the exchanges, iind the merchants and manufacturers should have nothing to do with providing for that payment, called " the convertibility of the note," which the Committee think " would be endangered by an extension of the currency when the exchanges are adverse." This may be quite true uudar the pi^eseni system, the bank- ing department having no commodities themselves whercAvith to purchase the precious metals, with which to obtain notes from the issue department. " Sect. VI. The bank left free from responsibility " in the issuing department, and left free likewise to " manage the banking department on the principle of *' a private bank." Mr. Horsley Palmer : — " The Bank was given to understand it had nothing to do with the circulation ; that the object of the Bank was to look at the banking account alone. In making that statement, I beg to say, tiiat I dissent entirely from that doctrine ; but that was tlje doc- trine laid down for the government of the Bank." " And upon that ^lie iJirectors have acted since the Act of 1844 ? — They have professed to do so." " The same view is taken of the duties of the Bank by "Mr. S. J. Loyd, as appears by the following answer — 1414. "It was distinctly stated by Sir Robert Peel, when in- troducing the Act, that he left the Bank of England, in its banking capacity, untouched and uninterfercd Avitli, to manage its aflfairs according to its own discretion, like any other banking concern." "On this discretion the Court of Directors have " largely acted, as will appear from the following facts." ON THE llErOIlT OF THE LORDS' COMMITTEES. 293 It appears very plausible, that the issue department should simply give notes for gold, and gold for notes ; but the inquiry should be made how the issue depart- ment obtained the notes, and the gold ; this I have endeavoured to show; (see pnge 166 ante;) the notes are issued upon the security of a government debt, and 3 millions of exchequer bills, and upon gold which was a borrowed stock-in-trade, upon which I submit, no note should have been issued, for two reasons. 1st. That the gold did not belong to the Bank, and might at any time be required for the home circula- tion, and by the great mercantile republic. No pru- dent trader would borrow his stock-in-trade, and make that the foundation of his trade, and of his en- gagements, if he were liable to be called upon, at any moment, to restore the stock-in-trade, which he has borrowed ; his stock-in-trade should be his own, or independent of all contingencies, and of all engage- ments : therefore no part of the notes, I submit, ought to have been issued upon the gold and silver. 2dly. The gold and silver were held as the pro- perty and at the disposal of the public, to supply the home circulation with coin ; and the foreign demand for bullion for exportation ; I submit, the owners of the bullion should themselves keep it for their own use. The bullion should be in the custody of the owners, as notes cannot be substituted for it for ex- portation. *' Sect. YII. Unexampled fluctuation in the rate " of discounts since the Act of 1844." 478. 479. 480. " The earlier practice of the Bank " of England had been to discount at a rate nearly " fixed and uniform. From 1704 to 16th May 1839, "this rate never exceeded 5 nor was less than 4 " per cent. In the pressure of 1839, the rate was " raised for some months to 6 per cent., but it was "reduced to 5 per cent in January 1840, and re- "mained at 4 or 5 per cent, as before, till after " the passing of the 7 and 8 Vic. cap. 32. ' Prior to u 3 294 COINS AND CURRENCY. *' September 1844,' observes Mr. Horsley Palmer, ' the " Bank never reduced the rate of interest below 4 per " cent. ; though there were occasions when the value of " money for discount of bills was as low as 2 J per cent, "in the money market.' " " ' Your Lordships will bear in recollection, that " the years 1837 and 1839 were years of peculiar " pressure. The following table, extracted from the " evidence of Mr, Browne, exhibits the contrast be- " tween those years and 1847 : — 1837 Lowest rate 3L Highest rate 5^, Difference 2 J. 1839 „ 3|, „ 64, „ 22. 1847 „ 31 „ 10, „ 6|. " lie adds, ' This does not give an accurate view of " what the interest of money was in 1847, because "persons frequently paid a commission which made it " amount to 10, 20, and 30 per cent., depending on the *' time the bill had to run, and the pressure of money " at the moment. The commission charged in 1837 "and 1839 was by no means to the same extent. The " Governor of the Bank states, that on the 23rd of " October, 225,000/. was discounted by the Bank in the " London market, at rates varying from 5^- to 9 per "cent."' " The Governor of the Bank admits that such "fluctuations are of great injury to the country, but "he attributes them, not to the Act of 1844, but to " other causes." Mr. S. Gurney states (1108) :— " The Bank in a very material degree does, in our market, govern the rate of interest. I would not say that nothing else operates upon the rate of interest, but we fluctuate inevitably according as the Bank fluctuates." " But the Committee are far from wishing to lead " your Lordships to the conclusion, that it has been " the high rate of interest which has exclusively or " even mainly been productive of mischief in the com- " mercial world. On the contrary it appears that evil ON THE REPOllT OF THE LOKDS' COMMITTEES. 295 *' consequences, to the full as great, are traceable to " the periods of forced de[)ression of interest." "Morris and Prescott, 493." "The Bank of England " admit that the principle on which the rate of interest "is fixed, is regulated mainly by the state of the re- " serve in the banking department." " Hence when the reserve is high, the Bank are " led to lower the rate of interest, and thereby the " commercial profits of the corporation are increased. "Such was the case up to October 1845, when the " rate of discount was at 2^ per cent., the motive " of this is stated by the Governor as follows : — 608. " ' The rate was kept low for the encourage- " m.ent of your business as a bank, looking at tlie "banking department? — Our object was to employ "the reserve in the banking department.'" The employment of the reserve by the Bank in discounting bills involves, in my opinion, an improper ap)plication of the gold intrusted to their care, and for which they had given a promise to restore it, when demanded. The Bank was not richer for the possession of their gold, nor was it poorer when the gold was paid away. The reserve consists of the promissory notes not ab- sorbed in the circulation, and which were received from the issue department, in return for the gold and securities deposited. The issue department received the gold in trust from the Bank of England, and the Bank of England had received it in trust from the depositors, being the property of those depositors, and of their representatives ; it is not the capital of the banking department nor of the issue department. The promissory notes should, in my opinion, be issued upon the security of the assets of the Bank, and not upon the basis of gold or silver, which they may have in hand. A certain amount of gold may, indeed, be con- sidered as a deposit, from the home trade and for the use of the home trade, when that gold which would otherwise remain in the difi'erent coff*ers of merchants u 4 29 G COINS AND CURRENCY. and tradesmen, is transferred to tlie Bank, either for safe custody, or to be drawn out as the occasion may require ; but that sum is not the fluctuating " reserve " which is contemplated, when it is said tliut the " re- serve " of the bank is large or small ; this difference of amount always alludes to the fluctuating sum be- yond the icants of the home circulation, and this fluctuating amount properly forms the " international money," or "most convenient commodity," of the great mercantile republic; the bullion circulating among nations cannot properly;;be applied by the Bank to the wants of any particular country, and much less should its greater or less amount form any ground for stunulating or depressing commerce and industry. There can be no doubt that a low rate of interest will have the efi'eet of stimulating speculation. " The following evidence is given by Mr. Tooke : — 3088. 3089. " Do you think that that very great reduction in the rate of interest had the effect, during its continuance^ of giving a great stimulus to the specuhition which then took place, and to the system of trading which was then going on, on the part of certain parties ? " " Whenever there exist motives to enterprise, w hether in the shares of Joint-Stock Companies, or in investments of any kind at home or ahroad, a low rate of interest tends very considerably to promote and extend the tendency to speculation." " Do you think that it had that effect at that period ? — I think it had." " Sect. VIII. Rates of discounts of the Bank of *' England, and the Bank of France compared." " Several of the witnesses examined, have drawn a " comparison between the operations of the Bank of " England and the Bank of France." " The Committee had on this subject the benefit of "the experience and knowledge of the late Lord " Ashburton, whose loss the Committee have had ' reason to lament, in common with his friends, and " with his country." 3324. Lord Ashburton had stated : — " The transactions of the Bank of France may be said to have varied very little indeed from the limits of four to five per cent. ; thi^y never exceed five, and tlify have hardly ever been under ON THE REPORT OF THE LORDS' COMMITTEES. 297 four. Under all circumstances llipy have kept that equable rate of interest for tlieir discounts, and for their general transactions. I should state that the discounts of commercial paper by the Bank of France, so far from being insignificant, as has been intimated, are in reality very large. I take it, tliat, upon the average of years, the discount of commercial paper by the Bank of France is larger than the discount of commercial paper by the Bank of England." The example and experience derived from the management of the Bank of France form a strong argu- ment in favour of a more equable rate of interest; it has been stated that monetary convulsions are less frequent in France than in England, and are of less duration and intensity. The real question, I would submit, is, whether the Bank of England should retain so much power over the money market, and any power over prices; whether its influence should not be diminished by lessening its sphere of monopoly, or substituting entirely banks subject to competition ; and whether the custody of the gold and silver required by the great mercantile republic, should not be retained by the owners : they would individually supply the Bank of England and other banks with bullion, when not wanted for their own commerce, when required as coin for the home circulation ; instead of the Bank of England distressing commerce and lowering prices to obtain it, the power and resources of the Bank of England, and of all banks, should be reduced to that scale that they could not lower prices generally by distressing commerce. As the Bank of England issues promissory notes upon securities and bullion, and the circulation constantly exceeds the sum of 14 millions issued upon securities, the Bank of England always discounts with gold. I submit that the circu- lation might be supplied, as the wants of the country would require, by notes of diiferent banks. " Sect. IX. Errors in the Bank management in "1846, 1847." " The Committee have shown what unexampled " fluctuations in the rate of interest unfortunately " occurred in 1847, and the causes to which those 298 COINS AND CURRENCY. "fluctuations are attributable in tlie judgment of " many of the witnesses. In the minds of several of the " parties examined, the conduct of the Bank itself, in '• the (GOT) exercise of its discretion, has been on other " grounds objectionable. For a considerable time the " rate of discount was kept as low as (608) 2 h per cent., " the admitted motive being to employ profitably the " reserve in the banking department, looking to it as " bankers would do, when desirous of retaining a " (599) certain amount under discount. The bank "rates of discount in the autumn of 1846 continued "at 3L per cent., till the (605) 9th of January, 1847; " they were then raised to 4 per cent., and to A}^ per " cent, on the 16th of January ; whilst an adverse ex- " change had been in operation from the 14tli of " November, 1846, and large importations of grain " were expected from America. The Governor of " the Bank, being examined with respect to the hesita- " tion and delay exhibited in raising the rate of dis- " count under such circumstances, answered: — 601. "I have no hesitation in saying that I think the Bank would have acted more prudently if they had put it up sooner." 605. " You say that it would have been more prudent on the part of the Bank looking at the exchanges at that time, to have raised the rate of discount sooner? — Yes, I think so, looking also at the probability of a large amount of importation from America." " The same opinion is expressed by Mr. Gurney, " who observes : — 1171. 1172. "It is my opinion that they continued to advance money at a low rate of interest too long." " When you say '^much too long,' do you mean for their own interest, or for the good of the community ? — For the good of themselves and for the good of the community. But it is ex- tremely easy to look back and come to such a judgment, but not always quite so easy to look forward and judge correctly." " Of all the witnesses examined before the Com- " mittee, Mr. Loyd gives the most unreserved opinion " with respect to the errors of the Bank management. " His evidence on this point is so precise and definite, ON THE REl'OIlT OF THE LORDS' COMMITTEES. 299 *' that the Committee insert it at length, as deserving " of particular attention." 1353. 1360. 1362. " TIic course pursued by the Bank from January to April 1847, which I apprehend to have been extremely erroneous and detrimental to the public interest, was stopped only by the positive provisions of tlie Act; and if that system of pro- cedure had not been stopped it must have ended in tlie most dis- astrous consequences. 1 think there is a very strong ground for charge against the Bank. In the beginning of January, the total securities were 27,898, OOOZ., and on the lOth of April, they were 31,700,000/. There was from January to April a very large in- crease in the total amount of advances by the Bank upon securities, notwithstanding that during that period there was a very serious diminution of its bullion. This includes the private securities, which are the more important to look at, because the advances upon Government securities are less within the control of the Bank. It is in regulating the advances upon the private securities that the discretionary power principally exists. The Bank continued to increase their advances upon private securities while there was a continuous drain upon the bullion." " It should, however, be kept in mind, that by the " separation of the two departments, as has been " already shown, the Bank considered that the respon- " sibilities under which they had previously acted, " were to a considerable extent removed ; and that as " bankers, they were left to the mere consideration of " their private interests. In the case referred to, it " would seem manifest that the want of timely pre- " caution could not fail to have aggravated the in- " tensity of the subsequent pressure in April, to the " great loss of the public, and the embarrassment of " the Bank itself. In no case is it more true than in " the conduct of a bank, that not only should an ap- " propriate remedy be adopted, but that it should be " adopted at the fitting time, delay, in most cases, "rendering more severe measures indispensable." The Governor of the Bank, and Mr. Gurney and Mr. Loyd, express themselves dissatisfied with the conduct of the Bank. Mr. Gurney very considerately adds, " But it is extremely easy to look back, but not always quite so easy to look forward and judge correctly." The Committee also observe, that by the 300 COINS AND CURRENCY. separation of the two departments, the Bank con- sidered that, " as bankers, they were left to the mere " consideration of their private interests." To check the importation of food by high interest, mifi;ht have been thouglit at the time equally preju- dicial to the country and to tlie Bank. The Committee conclude, "In no case is it more true " than in the conduct of a bank, that not only should " an appropriate remedy be adopted, but that it should " be adopted at the fitting time, delay in most cases " rendering more severe measures indispensable." The question arises whether the remedy is " appro- priate?" Does it not occur that the interference of the Go- vernment or of any national bank to interrupt or withhold the supply of the precious metals, required for the purposes of international commerce, will pro- duce the same disastrous effects on foreign commerce, as the withholding the needful supply of promissory notes will produce on the domestic commerce ? The bullion is the ready money or prompt payment of foreign bills, as bank notes or coin are the prompt payment of bills due in this country ; should any control over either be exercised accordins; to the state of the exchanoes: should not both be free from all Government or Bank control ? This involves the inquiry, whether competition of issue by different banks will not secure the proper quantity of notes required by the wants of the com- munity more effectually, and more safely than the discretion of a national bank, or the wisdom of the legislature, and whether the national bank should be the guardian of the international mercliandise or bullion . Mr. Gurney says, 1171, 1172, that the Bank con- tinued to advance money at a low rate of interest too long " for the good of themselves and for the good of the connnunity." Is it not equally inconsistent that a " community " should depend upon a national bank, and that "sc- ON THE REPORT OF THE LORDS' COMMITTEES. 301 verc " measures should be exercised by any bank towards a " community " ? — The manu":ement of the Bank of En":land must be considered in connexion witli the Bank Act of 1844 — and if the restriction imposed by that Act were repealed, it shoidd then be considered in con- nexion with its monopoly, and if that ceased, in con- nexion with its magnitude and influence — and, I submit, how far these conditions should be modified. "Sect. X. Question of advances on deficiency bills." ** It is scarcely necessary to state that such ad- " vances are made at the commencement of the quar- "ter, whenever the public balances are insufl&cient to " meet the demands on the Consolidated Fund, and " that these bills are subsequently paid off out of the "growing revenue as it is received at the Exchequer. " There have been occasions on which the quarter's " revenue has been insufficient to meet these eno-ao^e- " ments, which are in such case carried on further, ad~ " ditional bills being issued for supply services. On " these advances the payment of the dividends, and con- " sequently the maintenance of the public credit, may "to a considerable extent depend ; and any interrup- " tion to the punctual performance of these engage- " ments would be attended with the most serious " consequences." The Committee infer from the evidence of the Go- vernor of the Bank, (360, 362, 365,) and from the evidence of Mr. Loyd, (1624) ; of Mr. Norman, (2751, 2752); of Mr. Cotton, (3259); and of Mr. Browne, of Liverpool, (2400) — That " the effect would have been, that, had defi- " ciency bills been required in October 1847, the " amount of accommodation then given to commerce " must have been either considerably lessened in " amount or limited in duration.''' Their Lordships conclude : " Even conceding that " no peril to public credit would ensue from the state " of things described, it is easy to suggest many cases 302 COINS AND CURRENCY. " in wLicb an adherence to the strict rules of the Act "of 1844 would be most difficult, if not impossible, " except by resortiiifi; to measures which, in periods of " internal drain, would seriously affect private credit, " and cramp forcibly the operations of the Treasury " and of the Bank of England." There can be no do\ibt that " private credit " and " the operations of the Treasury " ought to be inde- pendent of the Bank of England ; and the operations of the Bank of England and of all banks ought to be independent of the operations of the Treasury. Pri- vate credit depends upon private property, and public faith upon the payment of taxes. Would it be im- possible to avoid the necessity of " deficiency bills " altogether, or to separate them from the Bank of England ? It is stated by Lord Ashburton, in his evidence respecting the Bank of France, given in the Appendix, 3338 : " Do they pay the dividends on the French rentes? — No, they have nothing to do with the dividends." " Sect. XL Limitation of the amount of silver by ^' the Act of 1844." " The limitation of the amount of silver bullion, " which the Bank is entitled to hold under the Act of " 1844, has been complained of by many of the " witnesses, whether their opinions are favourable or " adverse to the other provisions of the Act. Cases are " stated in which the export of silver has been made, " and may be made in future, tlie means of rectifying " an unfavourable foreign exchange. Such is the " opinion of the Governor of the Bank." 342, " I consider silver quite as available a means for the con- vertibility of the note as gold. We have been limited to keep- ing one-fifth of our amount of bullion in silver. I think that limitation is too restricted. The silver can be readily sold in tlie market, and bank notes obtained for it. There is no merchandise that will sell easier than silver. By dropping a fraction in price, \vc could get bank notes out of the market immediately." The Governor appears to confine his view to silver ON THE REPOET OF THE LORDS' COMMITTEES. 303 being the means of securing the convertibility of the note, by rectifying the exchanges. " By dropping a " fraction in price we could get bank notes out of the market immediately." Tliis is quite in accordance Avith the principle of the Bank Act, as expounded by Sir Robert Peel. The demand for gold is made to cease " by getting bank notes out of the market." Is it intended to convey that, whether bank notes are withdrawn from circulation, by a sale of marketable " merchandise," or whether they are paid in gold at the Bank, the promise of the note is equally fulfilled ? Convertibility does not here mean i:)ayment. The convertibility or " ability to pay," in case of payment being demanded, is to be secured by the immediate withdrawal of bank notes from the circulation, by a shock to credit, by a pressure upon the money market, more or less severe, according to the amount of the " reserve," or bank notes, in the banking department ; by this means checking commerce, lowering prices, and in case of necessity, to such a degree, that the produce and manufactures, the proiperty of oilier s^ shall be substituted for exportation, in preference to the bullion in the issue department. Mr. G. C. Glyn places in a striking point of view the inconvenience attending the present limitation of the amount of silver : — 1286. 1287. " JNIerchants from the Pacific, whose returns are very much in silver bullion, found when it arrived last spring that there was no market for it here, and they had to send it over to Paris for returns in bills of exchange, and when they came back there was a difficulty in discounting. The interval lost, which is about six weeks, is a very serious thing to a mercantile house; and there is another evil in it ; supposing the amount of bullion held in the issue department to be in the exact proportions allowed by the Act, with one-fifth silver, and supposing that 400,000/. of notes go in taking the same amount of sovereigns out, that im- mediately alters the proportions, and the issue department must necessarily sell silver bullion to keep the proportions right, and thus reduce the circulation another 100,000/. to keep up the pro- portion." " Did you not hear of a case in which a merchant with a large amount of silver bullion was unable to obtain advances upon it ? — Decidedly. lie could not either obtain an advance upon it or sell it." 304 COINS AND CURRENCY. " In expressing their entire concurrence in these " opinions, it is scarcely necessary that the Committee " should observe that uo question of alteration of " standard is involved in them, nor do they counte- " nance such an alteration of the law as would render " the coined silver of the realm, depreciated as it is, *' compared with the mint price of silver, available, " by tale, in payments beyond a restricted amount." The amount for which silver coin may be a legal tender in the payment of debt, may be determined by convenience, as long as the light silver coin is rated by law to excliange with the sovereign at the rate of 20s. to the sovereign, and the State retains the sole p7'i- vilcqe of coining silver — the restriction to forty shil- lings was probably fixed, at the time of the resumption of cash payments by the Bank of England, on ac- count of the one and two pound notes, then in cir- culation ; of this I have written, p. 16, ante. The coined silver is not " depreciated compared with the mint price of silver," as in our coinage there is no mint price of silver; we have no mint price either of gold or silver : the ounce of gold is divided into portions, the sovereign and its fractions ; and a rate is fixed by law for the exchange of the silver coins with the sovereign — both the silver and gold coins are equally valuable relatively to commodities ; but they have no price among themselves, the silver coin being only rated and not valued. " Sect. XII. Publication of the Bank accounts, in- " eluding the reserve of notes in the banking depart- " ment." " Several of the witnesses examined have attributed "the pressure felt in 1847, and the panic which suc- " ceeded, to the publication of the accounts in the " manner prescribed by the Act of 1844. The Go- '• vernor of the Bank states : — 6. " I may state, with reference to tliat part of the Act which relates to tlie banking department, that probably the necessity which the r)ank were under of publishing their reserve of notes, ON THE REPORT OF THE LORDS* COMMITTEES. 305 had an effect upon tlie public and caused alarm in April ; and I believe that that was one of the causes that created the alarm at that time. The dividends had just been paid, and consequently the reserve was at a low iigure, I think about three millions and a fraction. The public were alarmed at that amount, not consider- ing that at that period the z'eserve goes to its lowest point, and that in consequence of the revenue coming in, it would have con- tinued to increase but for the publication which caused the alarm." 184. "I do not wish to be misunderstood. I do not object to any publication of the Bank's accounts, except our banking re- serve. I think it is right that every thing else should be put before the public, but it is a question whether we ought to be bound to publish our banking resei've, more than any other bankers in London ; and I stated, at the period when it was proposed, that my impression was, that we might sometimes feel inconvenience from it, because the public would be naturally looking to it ; and there might be periods when from peculiar circumstances our banking reserve might be low. We, knowing that a turn had taken place, might know that it was safe, and yet the public might be alarmed." " Mr. Tooke was examined likewise on this point to " the following effect : — 3144. " What is your opinion respecting the publication of the Bank accounts ? — I think it is inconveniently frequent. I do not know any advantage from it." 3145. " You think it promotes panic and alarm ? — Certainly, at periods when the Bank reserve, as we have seen, has been greatly reduced, especially at the dividend periods." " On this evidence the Committee feel it their duty " to make a few observations. In the judgment of " both of these witnesses, the danger which they ap- "prehend arose in 1847, from the publication of an " account of the Bank reserve, when that reserve was " unusually low ; and to this publication, alarm, which, "as it is shown, rapidly passed into panic, was " traceable. The same effect might consequently be " apprehended hereafter, under similar circumstances. " This alarm and panic originated in the restriction, " which prohibited any aid being given from the issu- " ing to the banking department, at a time when the " former held a large amount of bullion, and when "the foreign exchanges were favourable." " The suggestion made by the Governor of the X 306 COINS AND CURRENCY. "Bank, of publishing the whole accounts with the " exception of the reserve, appears wholly inadmissible. " Such accounts must practically furnish the elements " or data from which the amount of reserve may, with " a greater or less degree of accuracy, be deduced or " inferred. If the amount of reserve could thus be " accurately calculated, the proposed remedy would " be no corrective of the system complained of. If " the amount of reserve were to be inferred inaccu- " rately, such a proceeding would be an aggravation " of the inconvenience rather than a safe or effectual " remedy. " It would appear more in accordance with legis- " lative wisdom to reconsider the rule itself, against "which there can hardly be stronger presumptive " evidence, than the suggested necessity of concealing " the consequences to which it leads." The Governor of the Bank and Mr. Tooke concur in opinion, that the publication of the Bank accounts may create alarm, and promote panic when the re- serve is low. The Governor suggests that the accounts may be published with the exception of the reserve ; to this the Committee object, as the public might draw errone- ous conclusions from these accounts with respect to the reserve. It should be recollected that the accommodation afforded by the Bank to the community is greatly dependent upon the amount of the reserve, and it therefore appears to be quite right, and essential, that the greatest publicity should be given to it ; that the trading community may act accordingly ; that every merchant, manufacturer, tradesman, agriculturist and labourer, may be able to consult this important docu- ment, and be prepared for any impending danger. I find that an amendment was moved, but not carried, in the Bank Committee of the House of Commons, very much to the purport of the last remark. ON THE REPORT OF THE LORDS' COMMITTEES. 307 "Sect. XIII. Remedial measures recommended by " the witnesses." " The Committee feel, in common with every witness " examined, the duty and obligation of maintaining at " all times the practical convertibility of the bank " note. This they consider to be the first and most "essential object, which, in all discussions like the " present, must be kept constantly in view, both by " the legislature and by those who direct the banking " operations of this great commercial community. " Upon the practical enforcement of this principle, " not only does public and private credit depend, but " the whole industry of the productive classes, and " the wages of labour. On this point, therefore, "the Committee have the satisfaction to think that " there can be no difference of opinion. The prac- " tical questions to be settled at present are, whether " this great benefit is attained with certainty; whether " it is attained by proper means ; and whether the re- "strictions of the Act of 1844 are not attended with " grievous and unnecessary evils of a collateral kind. " Many of the provisions of that Act are, in the judg- " ment of the Committee, as well as in the judgment "of the great majority of the witnesses, judiciously " adapted to the purpose for which they were framed. " But an attempt to enforce by law, under all circum- " stances, one fixed and inflexible rule for the manage- " ment of a national bank of issue seems inconsistent " with the best written authorities, with the general " principles of economical science, as well as with the " testimony of many witnesses of practical knowledge " and experience. It can hardly fail to be productive " of most serious evils, more especially when a con- " traction of issues, indispensable in a state of adverse " foreign exchanges, is rendered imperative, as it is " by the Act of 1844, under circumstances which may " be wholly opposite. It has been shown that an en- *' largement of the issues of the Bank under a favour- " able foreign exchange, would frequently be expedient " at times, when, under the provisions of the Act, no X 2 308 COINS AND CURRENCY. " such enlargement would be possible, and even in " cases where by the Act a compulsory contraction " would be enforced. " Sir Robert Peel's letter read by Mr. Cotton (3284.) ''justifies the inference that, in his opinion, circum- *' stances will occasionally arise when these restric- "tions must be suspended by an arbitrary act of " authority. " The Governor of the Bank expresses a still more " distinct opinion that such contingencies will not be " unfrequent. His evidence is as follows : — loO, 151. "Yon have stated that a foreign demand for gold and a domestic demand for gold, are different and distinguishable things in their banking consequences. The Act of 1844 deals with those two different causes precisely in the same manner. Do you think that is right ? — Yes, I do." "On what ground? — When I say that I think it is right;, I think that you could not make provision in the Act for an excep- tion like that of a panic which may arise once in five or six years, or not even that." " To leave these cases, when they do arise, to be " dealt with by the irregular exercise of the mere " authority of the Crown and its advisers, setting aside " ' once in five or six years,' or even at periods more " remote, the express provisions of a distinct statute, " appears wholly inconsistent with that fixity and " order which it is, or ought to be, the object of all " law to secure. The evidence of Mr. Horsley Palmer "(779—792.), Mr. Gurney, (116G. 1202. 1226.), as " well as that of many of the other witnesses, is most " material as illustrative of these truths. " Two suggestions have been made to the Com- " mittee ; the one an absolute repeal of the Act of " 1814; the other a continuance of the Act, accom- " panied by a power of relaxation. Believing that "many of the provisions of that Act are judiciously "adapted to secure the primary object of the conver- " tibility of the bank note, and viewing the great " balance of evidence which has been given in favour " of the second of these alternatives, it is to that pro- " position that the Committee are desirous of directing ON THE REPORT OF THE LORDS' COMMITTEES. 300 " the attention of your Lordships. It is true that to " those who may have expected that the 7 and 8 Vict. " c. 32. would effectually prevent a recurrence of "cycles of commercial excitement and depression, "the contrast between the years 1845 and 1847 must " produce a grievous disappointment. To those who " anticipated that the Act would put a check on im- " provident speculation, the disappointment cannot be " less, if reliance is to be placed, (as the Committee *' are confident it may), on the statement of the Gover- "nor of the Bank (525.), and of other witnesses, that " 'speculations were never carried to such an enormous " 'extent, as in 1846 and the beginning of 1847.' If " the Act were relied on as a security against violent " fluctuations in the value of mone}^, the fallaciousness " of such anticipation is conclusively proved by the "fact, (2308.) that whilst the difference between the "highest and lowest rate of discount was in the "calamitous years 1837 and 1839, but 2J to 2f "per cent., the difference in 1847 rose to 6f. If it " was contemplated that the number and the extent " of commercial failures would have been lessened, " the deplorable narrative of the Governor of the " Bank, recording the failure (112.) of thirty-three " houses comparatively in large business, in London "alone, to the amount of 8,129,000/. is a conclusive " reply. If the enormous extent to which railroad " speculation has been carried be considered as an " evil to which a sound system of banking could have " applied a corrective, such a corrective has not been "found in an Act, since the passing of which, during " a period of three years, an increased railway capital "of upwards of 221,000,000/. has been authorised " to be raised by Parliament ; and when the enormous " sum of 76,390,000/. is stated, on high financial au- " thority, to have been actually expended on railways " in two years and a half. If the power of obtaining " banking accommodation on moderate terms, were " considered to be promoted by the Act of 1844, it " cannot be said that this important object has been X 3 310 COINS AND CURRENCY. " attained, since it appears in evidence (3303.) that "in 1847, in addition to an interest of 9 or 10 per " cent., a commission was also frequently paid, raising " the charge to 10, 20, or 30, per cent., according to " the time which bills had to run. The Committee " are fully aware that alternations of periods of com- " mercial excitement and of discredit, of speculation " and of collapse, are likely to arise under all systems " of currency ; it would be visionary to imagine that " they could be averted altogether, even if the cir- " culation were exclusively metallic. But it is on this " account that greater care should be taken to avoid " increasing an evil, perhaps inevitable, by any arbi- " trary and artificial enactments. " The Committee are of opinion that the principle on " which the Act of 1844 should be amended is the intro- " ductionof a discretionary relaxing power; such power, " in whomsoever vested, to be exercised only during " the existence of a favourable foreign exchange." " Several plans have been suggested by which such " a relaxing power may be exercised, but they resolve "themselves practically into three, — a legalised au- " thority, vested in the Government; in the Govern- " ment and the Bank conjointly ; or, in the Bank of " England alone." Their Lordships are of opinion that this discre- tionary power should be vested in the Bank alone, at the same time suggesting an alteration in the system of election of Governors and Deputy-Governors. Their Lordships observe : " The objection obviously *' existing to the first of these propositions is, the " danger that all governments are liable, more or less, " to be influenced in such cases by political rather " than by economical considerations. It may also be " apprehended that the exercise of an undefined and " extraordinary power would depend too much on the " personal character or the political position of the " Minister for the time being. Tlie second proposi- " tion is open to other but equally powerful objections. " A divided responsibility becomes frequently no ON THE EEPORT OF THE LORDS' COMMITTEES. 311 " responsibility at all. The Government might cast " the responsibility on the Bank, the Bank on the " Government, and in this conflict the interests of the " public would be forgotten or defeated." " It seems further to be apparent from the evidence, *' that the immediate pecuniary interests of the pro- " prietors as a trading company may at times super- " sede or control larger and higher considerations. " This ought not to be. Whilst the Committee ex- " press this opinion, they must guard themselves from " the supposition that they consider that the Bank " ought to undertake or can perform functions which " belong to the legislature and to the responsiblj " government. The first duty of the Bank of England " is, so to conduct its affairs as to secure means for " the performance of all its engagements with integ- " rity and good faith. Prudence and discretion, the " application of scientific truth to assist, and, at times, "to correct the inferences drawn from exiDerience " should be its guiding principles ; but no narrow " views of the mere pecuniary interests of its proprie- *' tary should exclusively control its action. To the " Bank of England, Parliament has confided great " privileges and exclusive powers ; for the exercise of " these powers the Bank is responsible. In these re- *' spects the Bank of England differs from an ordinary " trading corporation ; and, consequently, is bound " always to keep in view the real and permanent in- " terests of the commercial classes, and of that great " community of which it forms a part. The true " interests of the proprietors of Bank Stock can never " be prejudiced by being considered in connexion with " these larger principles." " If the Committee considered that the Act of 1814, " which they desire to see amended so far as its restric- " tive clauses are concerned, was essential to the prac- " tical convertibility of the bank note, they would "hesitate in recommending any change. But it " should never be forgotten that the liability of the " Bank consists in its deposits, as well as in its promis- X 4 312 COINS AND CUERENCr. ' sory notes. The legal obligation to discharge both ' is the same, the failure of either would be equally 'fatal. The protection given by the Act of 1844, is ' mainly given to the bank notes, and in some degree ' at the risk of the deposits." " Before the Committee close their Report, which ' the extreme importance and complexity of the sub- 'ject referred to them, as well as the value of the ' evidence taken, has rendered necessarily protracted ' and laborious, they feel it right to admit, that the ' conclusions to which they have come are opposed ' by the evidence of witnesses of ability and of ex- ' perience, and entitled, on both accounts, to respect ' and consideration." The Committee then cite the evidence of the Go- vernor of the Bank ; of Mr. S. J. Loyd ; of Mr. George Norman ; and of Mr. Cotton, who express their approbation of the Act of 1844. " In conclusion the Committee think it right to add, that, whilst they feel deeply the necessity of a sound system of legislation for the Bank of England, and for all other establishments entrusted with the pri- vilege of issuing notes used as substitutes and re- presentatives of the current coin of the realm, they are far from suggesting that it is upon laws, how- ever wisely framed they may be, that reliance can or ought exclusively to be placed. The best banking system may be defeated by imperfect management ; and, on the other hand, the evils of an imperfect banking system may be greatly mitigated, if not overcome, by prudence, caution, and resolution. In the confidence universally and justly placed in the Bank of England, the fullest testimony is borne to the integrity and good faith with which its great transactions have been conducted ; and the opinion of the Connnittee in this respect is best shown in their desire to see vested in the Bank, a wider discretion than they possess under the Act of 1844, — a discre- tion which the increased knowledge produced by ex- perience and discussion, and in which the Bank of ON THE REPORT OF THE LORDS' COMMITTEES. 313 '' England can hardly fail to participate, will enable " them to exercise to the advantage of their own cor- " poration, to their own honour, and to the permanent " benefit of tlie public, and more especially of the "commercial classes of England." " Sect. XIY. Effects of the Acts of 1844 and 1845 " on Scotland and Ireland." " The Committee have felt it their duty to examine witnesses connected with Scotch and Irish Banks. As the great bulk of Scotch and Irish pecuniary transactions are adjusted in reference to the London money market, so long as the bank notes issued in the three parts of the Empire are equally conver- tible on demand into the same coin, ' the fluctuations ' of exchange between the countries will be generally ' limited by the price at which any given amount of ' bullion can be procured in the circulating medium ' of the debtor country, and converted into the cir- ' culating medium of the creditor country, together 'with the insurance and charges of transporting it ' from the one to the other.' " * " It follows that any effects which the Act of 1844 has produced upon the London market, must have had a corresponding influence in Scotland and Ireland. To those countries, and to this extent, all the foregoing observations of the Committee apply." The Committee express their opinion that the obliga- tion imposed upon the Scotch banks, by the Act of 1845, of keeping " a stock of gold corresponding in amount with the excess of circulation, beyond the maximum fixed by the banking returns," is not re- quired to guard against " excess of issue :" they con- sider the system adopted by the Scotch banks of making exchanges twice a week, and settling the balance by the payment of exchequer bills or by letter of credit on London, a suflicient guarantee against any over-issue. " Thus every bank must be prepared * Bullion Report, 1810 ; Report on Irish Exchanges. 31 i COINS AND CURRENCY. twice a week to retire its excess of notes, and must keep funds in London for that purpose." " On tlie other hand, supposing that there should " ever arise, the formidable danger of a discredit of " the bank note — an event, however, which has never " occurred — there are manifest advantages in the " more general diffusion of gold coin, as a security for " convertibility, in Scotland and Ireland as well as in "England. If this were not provided for, the difii- " culties of such an exigency would be considerably " and locally increased, and the pressure on the Bank " of Eno-land would be increased likewise. " No complaint seems to have arisen in respect to " the operation of the Act of 1845 as regulating Irish " banking." The preceding extracts from the Report of the Com- mittee indicate their Lordships' opinions respecting the Bank Act of 1844: they suggest that a discre- tionary power should be vested in tlie Bank Directors to suspend the restrictive clause of the Act, " to be exercised only during the existence of a favourable foreign exchange ; " and that an alteration should be made in the constitution of the Bank of England. Their Lordships do not object to the separation of the departments. The Committee observe, " The first duty of the Bank of England is, so to conduct its affairs as to secure means for the performance of all its engagements with integrity and good faith. Pru- dence and discretion, the application of scientific truth to assist, and, at times, to correct the inferences drawn from experience should be its guiding principles ; but no narrow views of the mere pecuniary interests of its proprietary should exclusively control its action." It is not said to whom the Bank of England is responsible for the exercise of its *' great privileges " and " exclusive powers." As the Bank of England differs " in these respects from an ordinary trading corporation," and "is bound ON THE REPORT OF THE LORDs' COMMITTEES. 315 always to keep in view the real and permanent in- terests of the commercial classes, and of that great community of which it forms a part" — it Avould ap- pear inconsistent to apply to this establishment the same rules and principles, and responsibilities which apply to other trading corporations. It will be seen by the first paragraph of this sec- tion, that their Lordships consider, that " the prac- tical questions to be settled at present are, whether the great benefit of the " practical convertibility of the bank notes is attained with certainty," and " whether it is attained by proper means." Their Lordships consider that, " upon the practical enforcement of this principle, not only does public and private credit de- pend, but the whole industry of the productive classes and the wages of labour." Those who think tliat these great interests, these elements of national prosperity, should depend upon the conduct or management of a national bank, will reason in one way ; and those who think that " private credit" should be a personal adjunct, depending upon the " fortune, probity, and prudence " of the indivi- dual; that "public credit" should rest upon the credit of the Government, upon its ability to meet its en- gagements, upon its power to raise a sufiicient revenue; that "the whole industry of the productive classes" should rest upon security of property ; and that " the wages of labour " should depend upon capital and the demand for labour ; that all these individual and national interests should be independent of the pru- dence and discretion of a national bank, will reason in another way. The Committee observe : " It seems further to be apparent from the evidence, that the immediate pecu- niary interests of the proprietors as a trading com- pany may at times supersede or control larger and higher considerations. This ought not to be. Whilst the Committee express this opinion, they must guard themselves from the supposition that they consider that the bank ought to undertake, or can perform, 316 COINS AND CUERENCr. functions which belong to the Icgislatui'e and to the responsible government." If the Committee concede, as is implied at the con- clusion of Sect. IX., that the Bank has the power and the great " privilege " of applying pressure " severe measures " to commerce, in order to regulate or control its action, does not the Bank undertake and perform a function which does not " belong to the legislature " or to " the responsible government," a function beyond the power or privilege of either, and should this be per- mitted to the Bank of England ? It appears to me that the duty of the legislature and of the government is to enforce the payment of the debt and the performance of the promise or contract, and that their duty extends no further : the duty of those who contract the debt or make the promise is to pay the debt ; and the duty of those who direct the operations of a banking company is to take care that they have funds to meet their en- gagements from their own resources. It will be con- ceded, I conclude, that the magnitude of an establish- ment does not alter the moral obligation incurred by a promise or a contract. The "practical enforcement" of "the duty and " obligation of maintaining at all times the practical " convertibility of the bank note " is a novel mode of expression, and has been introduced since " science " was made to bear uj)on the question : a more simple expression would be " payment of the bank note en- forced by law." It would sound harsh, if applied to a promise to pay two or three months after date ; it would be extraordinary for a merchant to say that he had secured the "practical convertibility" of his bill. Is the debtor to exercise this " practical enforcement " ^ or the creditor? Is not the Bank of England the debtor, and does not the debtor exercise the "enforce- ment," not upon his own resources to discharge his liabilities, but upon the resources of those who are engaged in commerce and of those who may have had nothing to do either with the creditor or the debtor ? — is " practical " substituted for " legal " by the sup- ON THE REPORT OF THE LORDs' COMMITTEES, 317 porters of the new system, because the Act of Parlia- ment enforces by management what the Law in other contracts would enforce by penalties ? It would be very desirable to have the nature of " the great privileges and exclusive powers," and of " scientific " truth, as applied to the operations of the Bank, clearly explained and defined : that all engaged in commerce may understand their position relatively to the Bank of England. The advocates of the new philosophy, founded upon the " progress which this science, like all other sciences is making," magnify the importance of the Bank of England beyond its due proportions. They assume that the existence of the Bank of England is essential to the prosperity of the country, and that a suspen- sion of cash payments must necessarily be followed by a Bank restriction ; their Lordships must con- template a Bank restriction making the bank note a legal tender, and therefore subject to depreciation and all its sad consequences, when they state that upon the " practical convertibility " of the bank note de- pend " the whole industry of the productive classes and the wages of labour;" these results could only proceed from making the bank note a legal tender. If such fatal consequences attend a Bank restriction, it is an argument that it ought never to be imposed ; and it is also an argument that no bank should be of such magnitude, as by its failure, to involve such dis- astrous consequences and an alteration of the standard of value. Mr. Huskisson observes (Sect. IV.) "the preserva- tion of the bank from actual failure, though an im- portant, is but a secondary consideration ; that of the country is the first." Lord Ashburton, p. 9, observes * : "In speaking of the condition of the Bank, the only point really worth considering is the entire state of its relative assets and liabilities : it is in this manner that the * The Financial and Commercial Crisis Considered, 1847. 318 COINS AND CURRENCY. powers and capabilities of the Bank of England — as, indeed, of all other banks in the world — have ever been estimated, with a view of judging its means of performing the functions for which it was instituted, which require that it should, above all, maintain the integrity of its engagements." The credit of this country rests upon the solid foundation of property and character; the credit of the Bank of England rests upon the same solid foun- dation. If the Bank of England were to suspend its payments, a very calamitous event, and it could be satisfactorily shown that the property and integrity of the Bank were intact, that it still had the power and inclination to satisfy all demands with an im- mense overplus, its credit would be re-established : this happened in 1745, and in 1797, when the merchants, bankers, and others, determined to support the Bank by taking their promissory notes in payment of debt.* The Committee observe, " The protection given by the Act of 1844 is mainly given to the bank notes, and in some degree at the risk of the deposits." Neither the silver nor the gold, be it remembered, is the property of the Bank. Is it consistent with justice to press upon commerce, to check credit, in order to obtain the bullion that may be supposed need- ful to insure the payment of the Bank of England note ? Is the instrument of commerce in the foreign trade to be sacrificed to the instrument of commerce in the domestic trade ? Is it not most desirable to separate the bullion re- quired for the foreign trade from the bank notes and coin required in the home trade ? It appears to me that the Bank of England is placed in a false position, resulting from the union of the in- ternational treasury with the national bank — from blending together the bullion of the great mercantile republic with the domestic circulation of the country ■ — from making the same corporation the storekeepers * Francis's History of the Bank of England, v. i, pp. 162. 241., London, 1848. ON THE RErORT OF THE LORDS* COMMITTEES. 319 of the one, and the bankers for the other ; an entire separation of the two functions, and of the two in- terests, appears to me the appropriate remedy. That remedy must be applied by the merchants themselves, under the sanction of law — the foreign merchants, or separate commercial establishments en- gaged in foreign commerce keeping their own bullion ; not collectively in a common fund, but individually or separately : as a bullion bank, it might exercise the same rule over commerce as is now exercised by the Bank of England. If the present system involves injustice, it should be abandoned: with injustice there can be no com- promise. With all respect and due deference to their Lord- ships, I submit these observations and opinions, which will conclude with an extract from the " Commen- taries " of a celebrated judge : — " Considering the Creator only as a being of infinite power, he was able unquestionably to have prescribed whatever laws he pleased to his creature, man, however unjust or severe. But as he is also a being of infinite wisdom, he has laid down only such laws as were founded in those relations of justice that existed in the nature of things antecedent to any positive precept. These are the eternal, immutable laws of good and evil, to which the Creator himself in all his dispensations conforms ; and which he has enabled human reason to discover, so far as they are necessary for the conduct of human actions. Such among others are these principles : that we should live honestly, should hurt nobody, and should ren- der to every one his due ; to which three general precepts Justinian has reduced the whole doctrine of law. Jicris prcBcepta sunt hcec, honeste vivere, alterum non Icedere, suum cuiqxie tribuere. Inst. 1. 1.3." — Blackstone's Commentaries : Introduction, Section 2. 320 COINS AND CURRENCY. CHAP. XXVII. THE REPORTS FROM THE SECRET COMMITTEE OF THE HOUSE OF COMMONS, WITH SOJIE OBSERVATIONS ON THE REPORTS, AND ON THE EVIDENCE. FIRST RErORT. "The Secret Committee 'appointed to inquire into tlie causes of tlie recent Commercial Distress^ and how far it has been affected by the laws for regulating the issue of bank notes payable on demand,' and who were empowered to report from time to time to The House ; — Have taken the subject fully into their considera- tion, and have agreed upon the following Report : — " In obedience to the order of the House, Your Committee have inquii'ed into the matters referred to them, and having concluded their investigation so far as relates to England, have thought it ad- visable to report to The House their opinion on this branch of the subject, together with the evidence. " To complete the labour entrusted to them, the inquiry must be extended to Scotland and Ireland, and the Committee will pro- ceed on this duty without delay. " During the period of dilficulty, deputations from Liverpool and Birmingham had communicated with the Government. Your Committee, therefore, thought it best to commence their inquiry by examining Mr. Hodgson and Mr. Turner from Liverpool, and Mr. Muntz and Mr. Salt from Birmingham. " Mr. Gurney, an eminent bill-broker ; Mr. Bates, of the firm of Baring Brothers ; and Mr. Beavan, a London banker, and selected by the London bankers, were examined by the Com- mittee, more especially with respect to the distress and difficulty which had been experienced in the metropolis. " Mr. Birkbeck, a private banker, selected by the country bankers, and Mr. Pease, connected with the Northern Coal Districts, were also examined in the course of our investigations. " Full evidence respecting the proceedings of the Bank were given to the Committee by Mr. Ilorsley Palmer, a Director ; by the Governor and Deputy-Governor, and by Mr. Cotton, who was Governor of the Bank in 1844. The Bank has also furnished to the Committee much information, in the returns which will be found in the Appendix. "Lastly, the Committee thought it advisable to call before FIRST REPORT OF THE COMMONS' COMMITTEE. 321 them Mr. Jones Loyd, Mr. Tooke and Mr. Taylor, gentlemen who are well known to have given much attention to our monetary- system. " There has been a general concurrence of opinion amongst the witnesses examined before Your Committee, that tlie primary cause of the distress was the deficient harvest, especially of the Potato crop, in the year 1846, and the necessity of providing the means of payment in tiie year 1847, for the unprecedented impor- tations of various descriptions of food which took place in that year. " Among other causes, the deficient supply of cotton, the diver- sion of capital from its ordinary employment in commei'cial trans- actions, to the construction of railroads, the undue extension of credit, especially in our transactions with the East, and ex- aggerated expectations of enlarged trade, have been stated, by some of the witnesses, as having contributed to the same result. " Your Committee see no reason to doubt that these causes have in different degrees, in different parts of the country, produced the effect thus ascribed to them, " For the further development of the views entertained on these various points by the gentlemen whom they have examined, they must refer to the evidence. " With regard to some of tlie circumstances above referred to, provision has already been made by Parliament, and it must be obvious that others are beyond the control of legislative enact- ment. "Many of the witnesses, including the Governor and Deputy- Governor of the Bank of England, have expressed tlieir belief that earlier steps in the autumn of 1846 and the spring of 1847, on the part of the Bank of England might have obviated the necessity for the more stringent measures which circumstances compelled the directors to adopt in April, and might thus have pre- vented the alarm whicli was caused by those measures. The grounds on which that belief is entertained, together with the considera- tions which influenced the proceedings of the bank, are exphiined in the evidence of those witnesses who were examined on this branch of the subject. It is one, in respect to which a wide dis- cretion must necessai'ily be left with those who are charged with the management of the business of the bank, and your Committee trust that this discretion will be exercised with due prudence, if similar circumstances should again occur. " An opinion appears to have been entertained by some per- sons though not by the Governor and Deputy-Governor of the Bank of England, that tlie bank is released by the Act of 1844 from any obligation, except that of consulting the pecuniary in- terests of its propi'ietors. " It is true that thei'e are no restrictions imposed by law upon the discretion of the bank, in respect to the conduct of the banking, as distinguished fi'om the Issue Department. But the bank is a public institution, possessed of special and exclusive privileges, Y 322 COINS AND CURRENCY. standing in a peculiar relation to the Government, and exercising, from the magnitude of its resources, great influence over the ge- neral mercantile and monetary transactions of the country. " These circumstances impose upon the bank the duty of a con- sideration of the public interest, not indeed enacted or defined by law, but which Parliament in its various transactions with the bank has always recognised, and which the bank has never dis- claimed. " It is unnecessary to impose such duty by law, as there can be little doubt that the permanent interests of the bank are identified with tliose of the public at large. " That identity oi' interest gives both to the public and to the proprietors of bank stock a deep interest in every measure calcu- lated to insure an enlightened administration of the affairs of the bank. " Your Committee have leai'ned, therefore, with satisfaction, that the attention of the Court of Directors has been given to this subject, and that a change has been made by them, as to the selec- tion of the Governor and Deputy-Governor, calculated, in the opinion of Your Committee, to improve the constitution of the governing body of the bank. " They feel confident that the efiect of this change, and the ex- perience which has been acquired during the events of the last two years, will insure to the public, in the future management of the Bank of England, greater benefits from this national establish- ment than it has hitherto been the means of conferring upon the country. " Your Committee have received, with deep regret, from many witnesses, evidence of the extent of loss incurred by commercial houses in the course of last autumn, from an unprecedented combination of the circumstances above referred to, and seriously aggravated by the want of confidence which prevailed in con- sequence of the numei'ous failures, and which induced bankers and others to retain a reserve, both of gold and of bank-notes, to a very great extent. It is to be observed, that this took place with a very large amount of notes in the hands of the public, exceed- ing, in the opinion of a witness most competent to form an opinion, by no less than 4,000,000^., ' the actual requii'cments of the public at the time.' " The feeling of alarm which prevailed appears to have been immediately removed by the issue of the letter addressed to the Bank of England, on the 25th of October, by the First Lord of the Treasury and the Chancellor of the Exchequer. " The issue of that letter was, no doubt, an extraordinary exercise of power on the part of the Government ; but The House has decided that, in the peculiar circumstances of the period, they were justified in taking that step. It will be seen from the evidence of Mr. Cotton, tlie Governor of the Bank in 1844, that the possibility of circumstances arising, in which some extraordinary measures might be called for in consequence of a state of monetary FIRST REPORT OF THE COMMONS' COMMITTEE. 323 crisis, was not unforeseen by the Government at the time when the Act of 1844 was passed. " The evidence which has been given as to the effects of the Act of 1844, has been contradictory. Its beneficial effects, as regards the issues of the country banks, have been admitted by many of the witnesses, and although some have suggested an alteration of its provisions, very few have contested the general principles on which it is founded. " Your Committee have had under their consideration, whether it is advisable that powers should be conferred by law upon the Government, to enable them to meet the occurrence of any circum- stances which may call for extraordinary interference ; but they have come to the conclusion that, looking to the impossibility of foreseeing what the precise character of the circumstances may be, and also what may be the measure best calculated to meet them, it is more expedient to leave to those with whom the responsibility of the Government may rest at the time, to adopt such measures as may appear to them best suited for the emergency. " Your Committee, therefore, after a careful review of all the evidence, are of opinion that it is not expedient to make any alteration in the Bank Act of 1844. " 8th June, 1 848." James Morris, Esq., Governor of the Bank of Eng- land, and Henry James Prescott, Esq., Deputy-Go- vernor of the Bank of England, and J. S. Loyd, Esq., gave the following evidence before the Committee of the House of Commons in 1848 : — 3221. "Is there, in your opinion, any other mode by which the tendency to an efflux of the precious metals, and the con- sequent diminution of the circulating medium, can be arrested (whether that efflux arise from a demand for corn, consequent on a bad harvest or from any other cause), than such a reduction of prices of commodities as shall lead to export, and such a rise in the value of money as indicated in an advance of the rate of interest, as shall tempt capital to flow hither for investment? — No, I think that there is no other mode by which that tendency can be arrested." 3222. "Do you think that the monetary pressure of 1847 and the rise of interest, (considering them for the moment apart from the temporary panics of April and October,) were more than were to be expected from the extraordinary circumstances of the country, or were more than were necessary to prevent a yet greater drain of the precious metals than actually occurred ? — Mr. Morris. No, I think not." 3800. " Are you aware that the public stocks in the country and canal and railway shares had already by the 23rd of October Y 2 324 COINS AND CURRENCY. been depreciated in the aggregate to the amount of 1 14,752,225/. ? — It has been so stated." 3801. " Was it to be endured that a still greater depreciation than that shoukl be submitted to ? — If it was a necessary con- sequence arising out of the then state of things, it could not be helped." 3802. " The restriction having been taken off between the 23rd of October and the 1st of December, it appears that the public funds were again appreciated to the amount of 42,269,000/., and that railway shares were appreciated to the amount of 3,123,749/. ; does any thing speak more plainly than that of the ruinous effects of tiie bank restriction upon the country, and the great advantage of the removal of it ? — I consider that the pressure which arose out of the peculiar circumstances of that lime did not arise in consequence of the Bank Act, but that it arose from circumstances perfectly independent of it ; I have stated that it arose in consequence of the very large importation of food at a period of high credit and speculation, and it is impossible that a portion of the country should not suffer aft(^r you have required an importation of food to the extent of 26,000,000/. in one year." 3803. " I am speaking of the crisis in October, the period in which this panic was allayed. I believe we may take it that the same property which had been depreciated previously to the 23rd October, to an amount of very nearly 94,000,000/,, was appreciated in the course of less than six weeks after that date to an amount of 42,000,000/.? — I have stated that if the letter had not been issued, I am not prepared to say the panic might not have subsided of itself in a short period. In April the same representations were made, that unless Government came forward, and granted assistance in the way of relaxation, the consequence would be fatal to the country ; but Government did not grant any relief, and in the course of a short period things recovered themselves ; my impression is, that in October the same result might have been witnessed." 3846. "When I spoke of depreciation of stocks and fixed capital, are you not aware that all property invested in stocks and produce of every description was depreciated in the same way ; that raw cotton was sent to the continent at the same depreciated price, that raw silk and unmanufactured wool were sent to the continent at the same depreciated price, and un- manufactured wool, and that sugar, coffee, and tea were sacri- ficed as at forced sales ? — I can only state that it was, in my opinion, inevitable that the country should make a consider- able sacrifice for the purpose of meeting the efflux of bullion, which had taken place in consequence of the large importation of food ; it was impossible to go through such severe circumstances without the country being seriously affected by them." 3847. " You stated that it was all on account of the 9,000,000/ of gold that went out of the country for corn? — I stated that the sudden importation of a large amount of food, by which an amount of bullion, to the extent of 9,000,000/. went out of the FIRST REPORT OF THE COMMONS' COMMITTEE. 325 country, acting upon the previous high state of credit, and specu- hition, had j)rodiiced that etrect." 3848. " Do not jou thinlv it would have been better to trencli upon the 8,000,000/,, lying in the coilers of th(! bank than to have endeavoured to get the gold back again at such a sacrifice ? — No, I do not." 3426. " A diminished power of consumption on the part of the public would have been ratiier advantageous than otherwise to the system of circulation ? — A diminished consumption would have checked importation." 3427. " Then, the more privation the public was subjected to, the safier the system of cii'culation ? (."Mr. Prescott) — It is ne- cessary sometimes for the public to deny themselves, or for the country to deny itself, the consumption of certain foreign commo- dities, in order to restore the circulation to a proper state." 3428. " Was the intention of the Act of 1844 to stimulate ex- ports under an unfavourable state of the exchange ? (Mr, Morris) — The intention of the Act of 1844 was to place the circulation of tha country in such a condition as to necessitate exports under au adverse exchange." 3429. "Did it produce that etfect in the spring of last year? — Yes, it produced the effect of causing an export of bullion." 3430. " Vv'as it the intention of the Act of 1844, under that state of things, to stimulate the export of goods in order to correct the unfavourable balance of ti'ade? — The object of the Act of 1844 was to render it necessary that an export, either of goods or precious metals, should take place for the purpose of rectifying the state of the exchanges." 3431. "Does it fall within your knowledge that the export of goods, under the pressure of April 1847, was, for a short period, extremely embarrassed, and almost entirely sto^jped ? — I am not aware." 3432. "Was it the intention of the Act of 1844 to clieck im- ports, so as to correct the unfavourable balance of trade ? — I consider that the object of the Act of 1844 was to allow the circu- lation of the country to be acted upon by the exports and imports in the same way as the currency would have been acted upon, supposing it had been entirely a metallic currency." 3433. " Then, there being an export of gold in the spring of 1847, the tendency of the system was to check imports? — In- asmuch as the export of a certain amount of bullion would contract the circulation of the country, and cause a fall in prices, it would tend to check importation." 3434. "Then in 1847 when there was a great deficiency in food, the tendency was to check the importation of food ? — The export of the precious metals, by reducing the circulation, tended to keep down the prices of grain, and it also ke[)t down the prices of manufactures, which might be exported in payment ; therefore, if on the one hand it counteracted the rise in the price of grain, it also brought about a fall in the price of securities and manufac- tures." Y 3 326 COINS AND CURRENCY. 3445. " Do you think the system of circulation shoukl be pre- served at any cost to the employment of the people? — I think it is desirable that the circulation should be placed on such a foot- ing, as that it should expand and contract in the same way as a metallic currency would do ; I cannot vai'y from that." J. S. Loycl, Esq. : — 5192. " The Act of 1844 was supposed to have released the bank from any necessity of attending to the public interests, and it was supposed that the bank was at liberty practically to look to its own profits, and not to the general interest of the public ; was that your impression of the operation of the Act ? — In a certain sense of the word, I think that is correct ; it is desirable so to organise all public institutions, that looking to their own intei'ests wisely and discreetly, and taking a sufficiently comprehensive view of them, will be the best course not only for their OAvn but for the public interests also. At the same time, the bank, from the great magnitude of its resources and transactions, stands in a peculiar position. The bank, to whatever extremity it may allow its banking means to be reduced, can, by the very magnitude of its operations, in the last extremity, make an effort which is almost sure to protect itself ; but that effort will entail upon the commu- nity very serious consequences and produce very great mischief ; in that respect the bank seems to me to differ considerably from all private concerns. If I mismanage my private bank I am ruined, but the public sustain little inconvenience ; but if the Bank of England commits some great mistake, the bank can save itself, whilst it spreads extensive injury throughout the commu- nity ; in that respect, I think it differs in an important sense from a private concern." 5205. " The issuing of notes now depends entirely upon the increase or decrease of the quantity of bullion held by the bank ? — The quantity of notes now varies entirely with the state of the bullion." 5207. " Then the Act was passed with a view to make the Bank of England do, under the Act of Parliament, that which they had not formerly done, in the exercise of a wise discretion ? — It was passed for the purpose of securing by law the proper course being taken for protecting the convertibility of the uotp, which we had found, by previous experience, could not be safely intrusted to any discretionary action." 5247. Afis. "I call tampering with the currency the issuing of notes without reference to the variations in the bullion." 5253. "You stated that you thought the magnitude of the Bank of England was one reason Avhy it should conduct its busi- ness somewhat differently from any other banking establishment ? — More under the influence of fixed rules, was the expression I used." 5254. " You gave as a reason, that at a period of pressure the SECOND REPORT OF THE COMMONS' COMMITTKE. 327 magnitude of its transactions is so great, that it has a power to interfere for its own protection, to the disadvantage of the public, which private bankers had not ? — Yes ; I spoke witli reservation, rather as giving an opinion than a decided judgment ; I think the eflect of tlie magnitude of the bank is, that it can throw the effect of its mismanagement more upon the public, and less upon itself, than a private concern can do." 5255. " Do you think that that can be mitigated by the Bank of England being deprived of those peculiar advantages which it enjoys under the Acts of Parliament, and by those advantages being thrown more open to competition ? — I am hardly prepared to state what consequence my opinion leads to." SECOND REPORT. The Secret Committee "appointed to inquire into the causes of the recent Commercial Distress, and how far it has been affected by the laws for regulating the issue of bank-notes payable on demand," and who weie empowered to report from time to time to The House ; — Have made a further progress in the matter referred to them, and have agreed to this their Final Report : — " Your Committee, in further prosecution of the inquiry in- trusted to them, liave examined several gentlemen connected with the mercantile and banking interests of Scot]and, the Governor of the Bank of Ireland, and other gentlemen connected with the mercantile and banking interests of that country. 2. " Your Committee submit the evidence of these gentlemen to The House, together with that of other witnesses who have been examined, in reference to an incidental point which has been raised regarding the effect upon the India trade of the system fol- lowed by the East India Company in making advances on goods hypothecated with them in India. 3. " In the opinion of the witnesses from Scotland and from Ireland, no material effect has been produced upon the monetary or commercial affairs of those countries by the Acts of 1845, by which the issue of notes payable on demand in those parts of the United Kingdom is regulated. 4. "Evidence has been given by some of the witnesses as to the effect both in Scotland and Ireland which they attribute to the Act of 1844, but as on this subject Your Committee have ali'eady stated their views, they do not think it necessary to offer any further observations thereupon. 5. "With regard to the Acts of 1845, Your Committee are of opinion that it is not expedient to make any alteration in their provisions. 6. "Your Committee submit in the Appendix various accounts, in which much valuable information will be found on the whole subject of their inquiry. " 2ud August, 1848." T 4 328 COINS AND CURRENCY, SCOTLAND. The following evidence Avas given by Robert Bell, Esq., the Manager of the City of Glasgow Bank ; July, 1848 : — 6843. "Do you believe that the passing of the Act of 1845, ■which in fact imposed a restriction on the amount of currency to be issued, tended to create anything like alarm in Scotland ? — The mere 2'ullion in the Bank of England is, to make the banker in the pro- vinces more cautious in his dealings ; but, at the same time, we endeavour to give to our legitimate customers that amount of ac- commodation which we have been in the habit of crivint!;." EVIDKNCE OX BANKING IN SCOTLAND. 329 7029. " You give tliem tlie accommorlation which they require, provided you are satisfied of their solvency ? — Yes, and that it is used in the legimate way of their business." 7030. " A prudent banker, you think, might attempt to establish a restriction ; but, as regards bankers generally in Scotland, when commerce is very active, and the demand for accommodation is very great, the bankers generally give way to that, and increase their issues accordingly? — In Scotland we distinguish a good deal in this manner ; we do not think that a bank can issue a II. note more than t-lie commerce of its legitimate customers gives employment to, and if we increase our accom- modation to our customers it must be by drawing upon our resources elsewhere." 7031. "You cannot increase your notes beyond the demands of commerce ; but I am putting a case where commerce is very active; there is a disposition to speculate in railways, and there is a simultaneous demand upon all the banks for increased circula- tion ; there, it would appear that the demands of active commerce required increased issues, and in that case you think it would be the general practice of the banks in Scotland to issue in propor- tion to the demand ? — If you will look to the amount of our cii'culation during the last five years, you will find that a few hundred thousands of pounds constitute tlie wliole difference be- tween a period of great prosperity and a period of great adversity, so that whenever a banker exceeds in his accommodation to his customers his average amount, he must fall back upon his other resources ; he must fall back upon his capital, and not upon his issues." 7042. " Confidence in the Banks of Scotland, during the last two years of severe depression, has remained unshaken, has it not ? ■ — Yes, I think it has." 7043. " There has been no failure of any Bank there ? — No." J. Fletcher Macfarlan, Esq., Secretary of the Chamber of Commerce in Edinburgh ; July, 1848 : — 7525. " You have had a period of severe commercial depres- sion in Scotland ? — Yes." 7526. "During that period there has been no want of money? — There has been a difficulty in getting at it, especially up to the suspension of the Act ; they could not be certain whether they could get it when they might want it, and therefore each bank tried to secure a supply for its own demand." 7527. " What is the meaning of the observation which you have twice repeated, there has been plenty of money ? — There was plenty of deposit money, and plenty of capital in the banks, but when the depression arose, the difficulty was to get at it ; each bank regulates itself to a certain extent by the Bank of England ; had they been forced to sell the securities tliey held in reserve, 330 COINS AND CURRENCY. it would have entailed a considerable loss, tlierefore great un- willingness existed to give advances ; and hence the ditficulty." 7528. "Was there an abundant circulation in Scotland? — "We felt no Avant." 7529. " There was unbounded confidence in the banks ? — There was." 7530. "All that existing during a period of commercial de- pression ? — Yes." 7531. "No restriction on the cixrulation ? — There was a re- striction so far, that large interest was demanded ; in one case, I know there was a sum of no less than 20,000/. for which 16 per cent, was demanded." 7532 to 7538. " It was paid and answered the purpose." " The house which borrowed it, has repaid it, and is solvent." It was borrowed from a bank for " three months : " " only to tide over a dilficulty." 7399. " Will you state not what their fears (the Chamber of Commerce) then were, but what in their opinion and in your own have been the eifects of those Acts (of 1844 and 1845)? — Tiie effect, particularly of the Act of 1844, so long as there was no demand for gold for exportation, appeared to be nothing at all ; it was just a nullity ; it was not brought into operation ; it was only when a demand for the exportation of gold, or the withdrawal of gold from th(j bank arose, that then it appeared to them to come into operation." 7604. "(Sir Robert Peel) I understand you to say that, sup- posing the circulation of notes payable on demand throughout the United Kingdom was forty millions, it would be advisable that one third of that amount should be kept somewhere or other in gold ? — About that much would be amply suflicient ; in ordinary circumstances it w^ould not be required, but to guard against the foreign exchanges." 7605. " Then there would be thirteen millions of gold kept to give public confidence in tlie convertibility of the note ; it would be a dead loss keeping tliat, in one sense ? — In one sense." 7606. " That is a loss which must be borne by the United Kingdom collectively, is not it ? — Certainly ; whatever is for the public benefit should be borne by the whole nation." 7607. " The amount of gold you keep in Scotland is about one million? — Yes; I would keep none in Scotland at all; I do not see that it is necessary to keep any in Scotland." 7618. " Must not there be a loss attending upon reserving a supply of gold equal to ten or twelve millions in order to secure the convertibility of the note ? — There must be a loss ; where it is for the general interest of the country it should properly be borne by the State." 7619. "When you say 'borne by the State,' you mean borne by the people of this country who pay taxes ? — Yes, borne out of the taxes, of which Scotland pays its full proportion." EVIDENCE ON BANKING IN IRELAND. 331 7620. " Still the loss of interest is a loss borne by the country at larer cen- tum per annum, on the average amount of the Bank of England notes issued by such bankers respectively, and actually remaining in circulation, to be ascertained as follows ; (that is to say), on some day in the month of April, One thousand eight hundred and forty-five, to be determined by the said Governor and Company, an ac- count shall be taken of the Bank of England notes de- livered to such bankers respectively by the said Governor and Company Avithin three months next preceding^ and of such of the said Bank of England notes as shall have been returned to the Bank of England, and the balance shall be deemed to be the amount of the Bank of Eng- land notes issued by such bankers respectively, and kept in circulation ; and a similar account shall be taken at intervals of three calendar months ; and the average of the balances ascertained on taking four such accounts shall be deemed to be the average amount of Bank of England notes issued by such bankers respectively, and kept in circulation during the year One thousand eight hundred and forty-five, and on which amount such bankers are respectively to receive the aforesaid compo- sition of one per centum for the year One thousand eight hundred and forty-five ; and similar accounts shall be taken in each succeeding year; but in each year such accounts shall be taken in different months from those in which tlie accounts of the last preceding year were taken, and on different days of the month, such months and days to be determined by the said Governor and Company ; and the amount of tlie composition payable as aforesaid shall be paid by the said Governor and Company out of their own funds; and in case any difference shall arise THE BANK ACT OF 1844. 393 between any of such bankers and the Governor and Com- pany of the Bank of Enghind in respect of the composi- tion payable as aforesaid, the same shall be determined by the Cliancellor of the Excliequer for the time being, or by some person to be named by him, and the decision of the Chancellor of the Exchequer, or his nominee, shall be final and conclusive ; Provided always, that it shall be lawful for any banker named in the schedule hereto annexed marked (C.) to discontinue the receipt of such composition as aforesaid, but no such banker shall by such discontinuance as aforesaid thereby acquire any right or title to issue bank notes. XXIV. And be it enacted, That it shall be lawful for Bankof Eng- the said Governor and Company to agree with every aiiowe"d to banker who, under the provisions of this Act, shall be ^"iuiTssuhig entitled to issue bank notes, to allow to such banker a banks. composition at the rate of one per centum per annum on the amount of Bank of England notes which shall be issued and kept in circulation by such banker, as a con- sideration for his relinquishment of the privilege of issuing his own bank notes ; and all the provisions herein contained for ascertaining and determining the amount of composition payable to the several bankers named in the schedule hereto marked (C.) shall apply to all such other bankers with wliom the said Governor and Company are hereby authorized to agree as aforesaid ; provided that the amount of composition payable to such bankers as last aforesaid shall, in every case in which an increase of securities in the issue department shall have been autho- rized by any Order in Council, be deducted out of the amount payable by the said Governor and Company to the public under the provisions herein contained: Pro- limitation of vided always, that the total sum payable to any banker, compositions. under the provisions herein contained, by way of com- position as aforesaid, in any one year, shall not exceed, in case of the bankers mentioned in the schedule hereto marked (C), one per centum on the several sums set against the names of such bankers respectively in the list and statement delivered to the Commissioners of Stamps as aforesaid, and in the case of other bankers shall not exceed one per centum on the amount of bank notes which such bankers respectively would otherwise be entitled to issue under the provisions herein contained. XXV. And be it enacted. That all the compositions Compositions payable to the several bankers mentioned in the schedule 'st'^AulusI hereto marked (C), and such other bankers as shall '^^e. agree with the said Governor and Company to discon- tinue the issue of their own bank notes as aforesaid, shall, if not previously determined by the act of such banker as herein-betbre provided, ceat-e and determine on the 394 APPENDIX. Banks within sixty-five miles of London may accept, ^c. bills. Bank to en- joy privileges, subject to redemption upon twelve months to be given after the first day of August, 1855. Form of No- tice. first day of August, One thousand eight hundred and fifty-six, or on any earlier day on which Parliament may prohibit the issue of bank notes. XXVI. And be it enacted, That from and after the passing of this Act it shall be lawful for any Society or Company or any persons in partnership, though exceed- ing six in number, carrying on the business of banking in London, or within sixty-five miles thereof, to draw, accept, or endorse bills of exchange, not being payable to bearer on demand, any thing in the herein-before recited Act passed in the fourth year of the reign of His said Majesty King William the Fourth, or in any other Act, to the contrary notwithstanding. XXVII. And be it enacted. That the said Governor and Company of the Bank of England shall have and enjoy such exclusive privilege of banking as is given by this Act, upon such terms and conditions, and subject to the termination thereof, at such time and in such man- ner, as is by this Act provided and specified; and all and every the powers and authorities, franchises, privileges, and advantages, given or recognized by the said recited Act, passed in the Fourth Year of the Reign of His Majesty King William the Fourth, as belonging to or en- joyed by the said Governor and Company of the Bank of England, or by any subsequent Act or Acts of Parlia- ment, shall be and the same are hereby declared to be in full force, and continued by this Act, except so far as the same are altered by this Act ; subject nevertheless to redemption upon the terms and conditions following ; (that is to say,) at any time upon twelve months' notice to be given after the first day of August, One thousand eight hundred and fifty-five, and upon repayment hj Parlia- ment to the said Governor and Company or their succes- sors of the sum of eleven million fifteen thousand and one hundred pounds, being the debt now due from the public to the said Governor and Company, without any deduction, discount, or abatement whatsoever, and upon payment to the said Governor and Company and their successors of all arrears of the sum of one hundred thousand pounds per annum in the last-mentioned Act mentioned, together with the interest or annuities payable upon the said debt or in respect thereof, and also upon repayment of all the principal and interest which shall be owing unto the said Governor and Company and their successors upon all such tallies, exchequer orders, ex- chequer bills, or parliamentary funds which the said Governor and Company or their successors shall have re- maining in their hands, or be entitled to, at the time of such notice to be given as last aforesaid, then and in such case, and not till then, the said exclusive privileges of THE BANK ACT OF 1844. 395 Interpreta. tion clause. banking granted by this Act shall cease and determine at the expiration of such notice of twelve months ; and any vote or resolution of the House of Commons, signified under the hand of the Speaker of the said House in writing, and delivered at the public office of the said Governor and Company, shall be deemed and adjudged to be a sufficient notice. XXVIII. And be it enacted, That the term "bank notes" used in this Act shall extend and apply to all bills or notes for the payment of money to the bearer on demand other than bills or notes of the Governor and Company of the Bank of England ; and that the term " Bank of England Notes" shall extend and apply to tlie promissory notes of the Governor and Company of the Bank of England payable to bearer on demand ; and that the term "banker" shall extend and apply to all corpo- rations, societies, partnerships, and persons, and every individual person carrying on the business of banking, whether by the issue of bank notes or otherwise, except only the Governor and Company of the Bank of Eng- land ; and that the word " person " used in this Act shall include corporations ; and that the singular number in this Act shall include the plural number, and the plural number the singular, except where there is anything in the context repugnant to such construction ; and that the masculine gender in this Act shall include the feminine, except where, there is anything in the context repugnant to such construction. XXIX. And be it enacted, That this Act may be Act may be amended or repealed by any Act to be passed in the pre- ^""^" sent Session of Parliament. SCHEDULES to which the Act refers. SCHEDULE (A.) Bank of England. An Account pursuant to the Act 7 & 8 Vict. Cap. on the Day of for the week endinf Insne Department. Notes issued Dated the Day of Government Debt Other Securities Gokl Coin and BulHon Silver Bullion - Cashier. 396 APPENDIX. Banking Department. Proprietors' Capital Rest . _ . - Public Deposits (to include Exchequer, Saving Banks, Commissioners of Na- tional Debt, and Dividend Accounts) - - - Other Deposits - - - Seven Day and other Bills - Dated the Day of Government Securities (in- cluding Dead Weight An- nuity) - - - . Other Securities Notes . - - - Gold and Silver Coin Cashier. SCHEDULE (B.) Name and Title as set forth in the Licence -_ Name of the Firm Insert Head Office, or principal Place of Issue_ Bank. Firm. Place. An Account pursuant to the Act 7 & 8 Vict. Cap. of the Notes of the said Bank in circulation during the Week ending Saturday the Day of 18 Monday .... Tuesday - . _ Wednesday - - - - Thursday . . - Friday . - . - Saturday - - . . 6) Average of the Week \_To be annexed to this Account at the End of each period of Four Weeks'] Amount of Notes authorized by Law Average Amount in circulation during the \ Four Weeks ending as above - - J I, being [the Banker, Chief Cashier, Managing Director, or Partner of the Bank, as the Case maybe'], do hereby certify, Tliat the above is a true Account of the Notes of the said Bank in circulation during the Week above written, (Signed) Dated the Day of 18 THE BANK ACT OF 1844. 397 SCHEDULE (C.) Banks which have ceased to issue their own Bank Notes, under certain agree- ments with the Governor and Company of the Bank of England. Bank of Liverpool. J. Earned and Co. Biddulph, Brothers, and Co. Birmingham Banking Company. Birmingham Town and District Bank. Birmingham and Midland Banking Company. Burgess and Son. Coopers and Purton. CunlifFes, Brookes, and Co. Deane, Littlehales, and Deane. Dendy, Comper, and Co. Devon and Cornwall Banking Com- pany. Grants and Gillman. Hampshire Banking Company. James W. R. Hall. J. M. Head and Co. Henty, Upperton, and Olliver. Thomas Kinnersly and Sons. K. J. Lambton and Co. Liverpool Commercial Banking Com- pany Liverpool Union Bank. Liverpool Borough Bank. Manchester and Liverpool District Banking Company. Manchester and Salford Banking Company. Monmouth and Glamorgan Banking Company. Moss and Company. Mangles, Brothers. Newcastle Commercial Banking Com- pany. Newcastle- on-Tyne Joint Stock Bank- ing Company. North of England Joint Stock Bank- ing Company. Northumberland and Durham District Bank. Portsmouth and South Hants Bank- ing Company. T. and R. Raikes and Co. Robinson and Brodhurst. Sheffield Union Bank. John Stoveld. Sunderland Joint Stock Banking Company. Tugwell and Co. Union Bank of Manchester. Vivian, Kitson, and Co. Watts, Whiteway, and Co. J. and J. C. Wright and Co. Webb, Holbrook, and Spencer. THE END. I.ONDO.f rniNTKl) ttY SrOTTIS«'00[)E AND CO. NKW-STREKT SQUARB A TEEATISE COINS, CUEEENCY, AM) BAMING. PART II. i.oxrios r i; I X T n D b r s i- o t t i s w o o d e a x d co. StW-STUKET SlJUAUli A TREATISE COINS, CURRENCY, AND BANKING. WITH OBSERVATIONS Olf THE BANK ACT OF 1844 AND ON THB REPOETS OF THE COMMITTEES HOUSE OF LORDS and of the HOUSE OF COMMONS ON THE BANK ACTS. By henry NICHOLAS SEALY, Esq. Magna testatur voce per umbras: Discite justitiam moniti. PART II. LONDON : LONGMANS, GREEN, AND CO. 1867. The rii,lit of tra>!f'iifioii is reserved. PREFACE THE FIRST PART Sir Robert Peel observed, when he introduced the Bank Bill of 1844, that, in the opinion of Her Ma- jesty's Government, "Inquiry had been exhausted." Since the passing of that Act, the subject of the Currency has been much discussed. A Committee of the House of Lords and a Committee of the House of Commons have made valuable reports on the commer- cial distress of 1847, which was supposed by many to be closely connected with the system of Banking in- troduced by Sir Robert Peel's Bill : the witnesses are not agreed upon the influence which the Bank of England may have had in producing or aggravating that distress, nor are the Committees agreed upon any remedial measures — the Committee of the House of Commons recommending: no alteration in the Act. Vi PREFACE TO Since these reports were made, a Committee of the House of Commons sat in tlie last session of Parlia- ment on the same subject, and which has been reap- pointed to carry on the inquiry in the present Session, and also to inquire into the causes of the commercial distress of 1857. This Committee made a report of the evidence given before them in the last Session, and is still sitting. On these reports and on the evidence I have made some observations, with an epitome of the report of the House of Lords. It appears to me that "inquiry" is not " exhausted," and that " those great elementary truths " (in the language of Sir Robert Peel, p. 18) "which are at the foundation of the whole system of currency, paper-credit, and foreign exchange," are still deside- rata. For many years I have been in the habit of watch- ing the course of events connected with our present system of Banking, and of noting down my remarks as they have occurred. The publication of this trea- tise has been delayed from various causes; a great part of it, as far as Chapter XVI. inclusive, was printed last summer. I then waited to see the Report of the Committee sitting at that time. I have perused some of the many publications which have appeared on the Currency ; they generally treat of management, and not of principle : opinions which THE FIRST PART. VU I had previously formed, and committed to writing, I have in some instances found confirmed. Many years before the passing of the Bank Act of 1844, I had conceived and written my plan for chang- ing our gold to a silver standard : as the principle is the same whether the change be from a gold to a silver or from a silver to a gold standard, I have thought that it may be desirable to publish it in this treatise. There was no prospect of our standard being changed in 1844. The discovery of the gold mines in Russia rendered very doubtful the policy of adopting the silver standard, and the recent discoveries of gold in California and Australia render more hazardous any change in the domestic or national standard : it will be prudent to wait to see what effect these wonderful discoveries may have on the standard of this and of other countries. I may remark that the principles which I advocate are of universal application wherever foreign com- merce exerts its civilizing influence, and I venture to recommend them to the notice of the great mercantile republic, the international traders of all countries. I trust it is needless for me to disclaim all intention of impugning the motives of any writer, or of any witness who gave evidence on this long agitated ques- tion of the Currency, or of any director of the Bank of England ; least of all, would I think or speak dis- Vin PEEFACE TO respectfully or question the motives of Sir Robert Peel. That great man had the courage to overthrow a narrow commercial policy, which had for ages prevailed more or less, and which had been con- tinued, notwithstanding the cogent reasoning of Adam Smith, by whom it had been denounced seventy years before; nor would that enlightened legislator have shrunk from introducing any new measure of Currency or Banking, even in opposition to his own Bill, had he thought it conducive to the welfare of the countr3^ (Debate, May 10, 1847. — Hansard. ) If it can be shown that the circulation of coins may be brought within the rule which governs the ex- change of commodities; that the value of paper money depends upon the performance of a promise ; that bank-notes may be placed in the same category as any other written engagement that circulates among the community in the payment of debt ; that the basis on which they rest is truth, and that the absence of truth is their only weakness, I think the subject will be divested of much obscurity, and the Currency question "will be drawn from those dark recesses wherein," it appears to me, that " man, not God, has hid it." Taking truth and justice as the only safe principles, and Adam Smith as the great political writer on Com- THE FIRST PART. . IX merce, I venture to submit my opinions to the public ; and I shall be quite willing to yield assent to any more just or more true system, if it be discovered. The author of the present treatise hopes that his attempt to elucidate this " questio vexata" will be received with candour, and that some indulgence will be shown for any defects of style, by those wlio may honour it with a perusal. Castle Hill House, Nether Sto-vtet, Somerset June 1858. PREFACE THE SECOND PAKT. I HAVE j^refixed to this second part of ray " Treatise on Coins, Currency, and Banking," the preface of the first part. The principles of truth and justice which I advocate are the same in both, but with this differ- ence, to which I beg the attention of those who may honour with a perusal the first part, in which I have reasoned on the supposition that the Bank of England was under a moral obligation to pay their promissory notes with bullion^ if demanded. In this second j)art I entirely reject all claim of the public to be paid with bullion, beino^ foreio:n to the eno-aofement of the Bank of England, and I confine the moral obligation to the payment with com, the only money. In this second part I have considered the nature of money and of interest, Avith the distinction between Xll PREFACE TO THE SECOND PART. interest and usury, between a rate of interest au- thorized by law, and a rate which may depend upon the necessities of the borrower and the exaction of the lender : and I have given the opinions of learned jurists upon these subjects. I have also made remarks on the Report of the Committee of 1858, which appeared soon after the publication of my volume; and likewise on the maxims advanced on the 31st July, 1866, in the debate upon the motion of Mr. Watkin : these addi- tions will render more complete my treatise on " Coins, Currency, and Banking." I can only express my hope that this second attempt to elucidate the long-agitated question of the currency will be viewed with candour, however unable I may be to do justice to the great cause of freeing commerce and credit from the trammels im- posed upon both by the present system of restriction and limitation. Castle Hill House, Nether Stowey, Somerset: March 1867. CONTENTS. CHAP. I. Report of the Committee - - - - - 3 19 CHAP. II. On the Report of the Committee - - - - 438 Extracts from Lord Overstone's evidence - - - 439 On the rate of interest indicating the value of money - 444 Opinions of Adam Smith and of David Hume — on the effect of the discovery of the gold and silver mines in America on the interest of money — on intei'est and usury — on paper money varying in amount as a metallic circulation 445 CHAP. III. Definition of money by eminent writers - . _ 453 The Author's former definition of money — Sir Robert Peel's definition of the pound erroneous - _ . 454 " The Sydney Branch Mint Act, 1863 " - - - 465 Gold coins declared in this Act to be our only legal tender for payments of an unlimited amount - - 467 Distinction between Bills of Exchange and Bank ofEngland notes — a fundamental error in our monetary system - 469 CHAP. IV. On the Act of 1816 : gold coin declared to be the only legal tender for payments without limitation, and silver coin for 40s. - - - - - - 471 Sir Robert Peel does not allude to this Act - - 472 Bank-notes available only in the national circulation - 473 xiv CONTEXTS. Page A limitation in the denominative value of Bank-notes sug- gested ------ 474 On the Scotch Banks - - • - - - 475 On a bullion bank or warehouse - - - - 476 On the increase of trade in Great Britain and in the United States - - - - - - - 477 CHAP. V. The Act of 1819 - - - - - 479 Mr. Ricardo's plan — it had no result - - - 481 Sir Robert Peel on the Act of 1819 — theory of the Bank Act 481 Sir Robert Peel on the Standard of Value - - 484 Announces two sorts of money . . - - 484 On two and three sorts of money - - - - 485 On the obligation of the Bank-note _ - - 486 Evidence on excessive issues by banks, with remarks - 487 CHAP. YI. On the Committee's definition of the gold sovereign and Bank of England notes - ... 495 These notes are issued and circulate on credit, and are not money _...._ 495 On the relation between the Bank and the issue of notes - 497 On the resumption of cash payments — the remedy proposed by the Bullion Committee was incomplete - - 498 CHAP. VII. On the Bill of Sir Robert Peel— his Bill differs from the Act — his opinion of the system then existing - - 500 Limitation of issue to supply the place of competition - 501 On the Bank reserve - . . . _ 50I On Bank notes, coins, and bullion - - - - 502 On the bullion being warehoused as bonded goods for ex- portation ------ 503 CHAP. VIII. First statements of the Bank of England - - - 504 CONTENTS. XV Page Blackstone on Promissory Notes - - - - 505 A more simple statement suggested ... 506 On the security of the Bank of England note - - 507 On the security being realized - . . - 508 On the effect of limitation . _ > _ 509 On obtaining bullion by cheques - - - - 510 CHAP. IX. Error of the Author - - - - - 512 Sir Robert Peel on the pound - - - . 512 The Bank of England cannot purchase bullion abroad - 513 Extracts from the Report of the Committee - - 513 Adam Smith on a Pretended Payment of National Debts - 515 Mr. Weguelin on Pressure — remarks on the new monetary science - - - - - -516 Mr. Hubbard on the Reserve - - - - 517 Mr. Rodwell on the Reserve — remarks on commerce being governed by the reserve - - - - 518 CHAP. X. On the reserve being expressed in notes and not in bullion 519 Ou the Bank of England being in a false position - 520 On the fixed value of money, and on the promise - - 521 On the measure of value ----- 522 On Sir Robert Peel's definition of the pound - - 522 On the separation of accounts, and limitation of issue - 523 On the system before and after the Bank Act - - 524 CHAP. XI. The Bank of England note — on the obligation to pay money 525 The Lords' Committee on the duty of the Bank - - 526 Remarks on the means proposed to secure the payment of the note ------ 527 On i^ayment with bullion ----- 528 On the contract of the Bank . . ^ . 528 Mr. Harris on adulterating the measure of value - - 529 On paying the notes with merchandise - - - 530 On the disposal of the bullion in excess of the notes issued 530 On the national circulation and the great mercantile republic 531 CHAP. XII. On the obligation of the Bank of England note - - 533 XVI CONTE^'TS. Page On the wants of customers, and the issue of paper money - 534 On redundancy of the currency . - . - 534 On exchisive coinage and exclusive issue of notes - 535 On bullion and the great mercantile republic - - 536 On payment with uncoined gold - - - - 537 On the exportation of bullion. . _ _ _ 537 CHAP. XIII. Statements of the Bank of England - - - 538 A different form of statement . - _ _ 538 Mr. Hubbard on the Issue Department . - - 539 On notes not being given for all the bullion - - 540 On coins for the national circulation, and bullion for the foreign demand _ _ . - . 541 jVIr. Mill on the Bank Act — Mr. Muntz on the monetary sys- tem in Hamburg . _ _ . . 542 CHAP. XIV. The Bank of England note not payable in bullion - - 543 The precious metals now included in imports and exports - 544 On the bullion being claimed with notes only - - 545 The justice of this to the depositors of bullion to be con- sidered .-_... 546 The Bank of England note payable only with coin - 546 On the prevention of bullion being exported from Liverpool 547 On the witnesses examined . . _ _ 549 On interest and the currency _ _ _ _ 550 On the obligation of the Bank-note ... 55I CHAP. XV. On bullion being preferably paid for with Bank of England notes ------- 552 On the increased reserve of bullion - - - 55 4 On the Bank-note being paid with bullion - - 555 On the separation of departments - - - - 556 On the exchange of gold for notes and notes for gold (bullion) -.--__ 557 Consequences of this - . . _ _ 557 On the causes of the increase of the reserve - - 558 Mr. Norman, on the separation of departments, believes exchanging gold for notes and notes for gold (bullion) to be the solid basis of the currency - - - 559 Opinions of Colonel Torrens and Mr. Ricardo - - 560 Adam Smith and Ricardo on competition of issue - - 561 CONTENTS. XVll Page CHAP. XVI. Extract from Sir Robert Peel's speech in 1848 — lie states the great truths which should govern our monetary system .-.._. 563 Guarantees for the convertibility of our paper money - 564 The necessity of pressure ----- 564 Opposes any relaxation of the Bank Act - - - 564 Remarks upon his statement, and upon the action of the Bank of Enerland - - . _ _ 565 CHAP. XVII. SUSPENSION OF THE BANK CHARTER ACT. Statement of the Governor and Deputy Governor of the Bank of England - - - - - 567 The Government letter ----- 567 Mr. Watkin moves for a Commission of Inquiry - - 568 Debate upon this motion ----- 569 Mr. Akroyd on the French Commission . - - 570 Sir Stafford Northcote approves of inquiry, but disapproves of the motion - - - - - -571 Expresses the general consent of the Government to the principle of the Bank Act _ . _ - 573 Mr. Fawcett on the nature of the crisis - - - 574 Mr. Hubbard on the Bank Act, and separation of depart- ments ------- 575 Mr. Gladstone on the Bank Act, promissory notes, and foreign drains of bullion - . - - 576 Mr. Henley on the action of the Bank - - - 573 The debate adjourned but not resumed - - - 579 CHAP. XVIII. Mr. Watkin's motion - - _ - . 530 Interest ten per cent. - - - - - 580 M. Chevalier's opinion - - - - - 581 Government approves of the principle and of inquiry re- specting the macliinery of tlie Bank Act - - 582 Relief to the Bank of England suggested - - - 583 Adam Smith on Sumptuary laws - - - - 533 Great powers of the Bank ----- 534 Bullion procured by pressure . . . _ ^gQ Lord King on Bank restriction in 1797 - - - 537 XVin CONTENTF. Page Sir S. Northcote's statement — on suspension of the currency laws — on monopoly — capital — money — bullion — circula- tion — competition — bullion warehouse — banking and issue — foreign drains of bullion — Government bank — Lord Althorp ----- 587 to 595 CHAP. XIX. Mr. Gladstone on the ten per cent, rate of discount, with remarks _.-.-. 595 Lord Ashburton on the mode of relieving the crisis of 1825 597 Disapproves of the Bank Act . . _ _ 597 Mr. Gladstone on the Plouse of Commons discussing the question of the currency, with remarks on the payment of the Bank-note with bullion - - - 597 On the j^rinciples of the currency - - - - 598 A different payment suggested . _ - - 599 On a pretended payment ----- 600 Lord Ashburton on the evils of our present banking system 601 On the duty of the Government . - - - 602 Memoir of Adam Smith ----- 603 On the means of the Bank of England to procure bullion - 604 A new meaning given to words which favours the system - 604 Adam Smith on monopoly ----- 605 Locke on the abuse of words - - . . 605 Propositions submitted by the Author . - . 606 On scarcity of money ----- 607 On seignorage, overissue, and high prices - - - 608 On the use of bullion ----- 609 On freedom of credit, commerce, and prices - - 609 A TREATISE ON COINS, CURRENCY, AND BANKING. (SECOND PAKT.) CHAPTER T. REPORT. The Select Committee appointed to inquire into the Operation of the Bank Act of 1844 (7 & 8 Vict. c. 32), and of the Bank Acts for Ireland and Scotland of 1845 (8 & 9 Vict. c. 37 & 38), and who were instructed to inquire into the causes of the recent commercial distress, and to investigate how far it has been affected by the laws for regulating the issue of bank notes payable on demand, and who were em- powered to report their observations thereupon, to- gether with the Minutes of the Evidence taken before them: — Hate considered the matters to them re- ferred, and have agreed to the following Report : — 1. The ten years which have elapsed since the last Com- mittee sat under the same Order of Reference — viz., the Com- mittee on Commercial Distress, which reported in 1848 — have been marked by many circumstances of peculiar inte- rest and importance. The foreign trade of the United Kingdom has in that period increased with a development unprecedented, perhaps, by any other instance in the history D D 400 REPORT FROM THE SELECT COMMITTEE chap. i. of the world. The exports, which before 1848 had never exceeded 60,110,000/., the amount which they attained in 1845, have risen with little variation and with great rapidity; and in 1857, notwithstanding the severe commercial pressure which marked the latter portion of that year, they stood at 122,155,000/. 2. In the year 1849, the newly-discovered mines of Cali- fornia began to add i)erceptibly to the arrivals of gold ; and in 1851 the supply was increased by the still more fertile discoveries in Australia. The following figures, for which your Committee are indebted to the authorities of the Bank, will show how important an addition appears to have been made to the circulating medium of the world from these new sources of supply: — Estimated Increase of the European Stock of Bullion in Seven Years, 1851-1856. Imports from producing Countries. Exports to the East from Great Britain and Mediterranean. 1851 . . 1852 . . 1853 . . 1854 . . 1855 . . 1856 . . 1857 . . £ Gold. Silver. Gold. Silver. £ 8,654,000 15,194,000 22,435,000 22,077,000 ] 9,875.000 21,275,000 21,366,000 £ 4,076,000 4,712,000 4,355,000 4,199,000 3,717,000 4,761,000 4,050,000 29,870,000 £ 102,000 922,000 974,000 1,222,000 1,192,000 479,000 529,000 £ 1,716,000 2,630,000 5,559,000 4,583,000 7.934,000 14,108,000 20,146,000 130,876,000 5,420,000 56,676,000 Gold. The total import of gold in seven years has been, say ....... The exports of gold bullion and British gold coin to India, China, Australia, the Cape, Brazils, the West Indies, United States, &c. may be taken at . Which would leave as the European stock of gold increase to the 130,000,000 22,500,000 107,500,000 CHAT. I. ON THE BANK ACTS IN 1858. 401 Silver. The exports of silver to India and China have been . . ^56,676,000 The imports from the produc- ing countries . . . 29,870,000 Making the amount of silver abstracted from the European stock ..... And the estimated increase in the European stock of bullion . . . . £ £ 26,800,000 80,700,000 3. The remission of duties upon articles of necessity and upon the raw materials of industry, and the great increase of trade to which your Committee have referred, were naturally attended by a very remarkable improvement in the comforts and consuming power of the people, as exhibited in the im- ports ; and especially in the vast increase in the clearances of those articles which enter most materially into the con- sumption of the working classes. It is probable that to this cause ought chiefly to be attributed the great increase which is believed to have taken place in the circulating medium of the United Kingdom. Mr. Weguelin, a member of the Committee, and then Governor of the Bank, stated to the Committee of 1857 that this inci'case was estimated, by those in whose judgment the Bank Directors placed the greatest reliance, at 30 per cent, in the six years then last elapsed. The total gold circulation is believed by him now to amount to nearly 50,000,000/. The whole circulation of notes, which, under the Acts of 1844 and 1845, are permitted to circulate with- out being represented by bullion, retained for that purpose in the coffers of those who issue the notes, is 31,623,995/., of which 14,475,000/. are issued by the Bank of England ; 7,707,292/. by the English country bankers ; 3,087,209/. by the Scotch ; and 6,354,494/. by the Irish bankers. 4. With regard to bank notes, it is interesting here to observe, that in the smaller denominations, those — namely, which enter most into the retail transactions of the country — the number has considerably increased, concurrently with the increase of the gold circulation above referred to. The 5/. and 10/. notes of the Bank of England, which in 1851 were 9,362,000/., had risen in 1856 to 10,680,000/. 5. At the same time, for a reason which will presently be D D 2 402 REPOKT FROM THE SELECT COISIIVIITTEE chaf. i. noticed, a gi-ent diminution has been observable in the use of notes from 200/. and upwards. 6. The silver currency has in the same time increased as follows, viz. : — Silver Coin issued to the Public in excess of Receipts from the Public. £ 1851 . 26,307 1852 420,418 1853 554,442 1854 36.803 1855 47,754 1856 289,142 1857 242,273 7. AVhlle this expansion of trade was in progress, and the precious metals received this remnrkable addition, a new fea- ture in the banking business of the country was observable. The joint-stock banks in London entered more and more into competition with the private banks, and, by their prac- tice of allowing interest on deposits, began to accumulate vast amounts. On the 8th June, 1854, the private bankers of London admitted the joint-stock banks to the arrange- ments of the clearing house, and shortly afterwards the final clearing was adjusted in the Bank of England. The daily clearances are now effected by transfers in the accounts which the several banks keep in that establishment. In consequence of the adoption of this system, the large notes which the bankers formerly employed for the purpose of adjusting their accounts are no longer necessary. The dimi- nution in the use of these notes is shown by the following figures : — Bank Notes of 2001 to 1,000^. £ 1852 5,856,000 1857 3,241,000 8. Meanwhile the joint-stock banks of London, now nine in number, have increased their deposits from 8,850,774/. in 1847 to 43,100,724/. in 1857, as shown in their published accounts. The evidence given to your Committee leads to the inference that of this vast amount, a large part has been derived from sources not heretofore made available for this purpose; and that the practice of opening accounts and CHAP. I. ON THE BANK ACTS IN 1858. 403 depositing money with bankers has extended to numerous classes who did not formerly employ their capital in that way. It is stated by Mr. Rod well, the Chairman of the Asso- ciation of Private Country Bankers, and delegated by them ti) give evidence to your Committee, that in the neighbour- hood of Ipswich this practice has lately increased fourfold among the farmers and shopkee})ers of that district ; that almost every farmer, even those paying only 50/. per annum rent, now keep deposits with bankers. The aggregate of these deposits of course finds its way to the employments of trade, and especially gravitates to London, the centre of commercial activity, where it is employed first in the dis- count of bills, or in other advances to the customers of the London bankers. That large portion, however, for which the bankers themselves have no immediate demand passes into the hands of the bill-brokers, who give to the banker in return commercial bills, already discounted by them for per- sons in London and in difforent parts of the country, as a security for the sum advanced by the banker. The bill- broker is responsible to the banker for payment of this money at call ; and such is the magnitude of these transac- tions, that Mr. Neave, the present Governor of the Bank, stated in evidence : — " We know that one broker had five millions, and we were led to believe that another had between eight and ten mil- lions J there was one with four, another with three and a half, and a third above eight. I speak of deposits with the brokers." 9. It thus appears that since 1847 three most important circumstances have arisen, affecting the question refei'red to your Committee, viz. : — (1) An unprecedented extension of our foreign trade. (2) An importation of gold and silver on a scale unknown in history since the period which immediately succeeded the first discovery of America : and, (3) A most remarkable development of the economy afforded by the practice of banking for the use and distri- bution of capital. 10. In the years which immediately succeeded the great commercial crisis of 1847-8, the natural effect of such a crisis on the minds of persons engaged in trade was exhibited, and for a time prudence and caution were the marked character- istics of the commercial world. The bullion in the Bank meanwhile accumulated, increasing with little variation, until in July 1852 it amounted to 22,232,000/. At this time 404 REPORT FROM THE SELECT COMMITTEE chap. i. the notes in the hands of the public ran to the unusually large amount of 23,380,000/., yet scarcely exceeded the amount of bullion ; while the reserve of notes in the banking department of the Bank of England was 12|^ millions, and the minimum I'ate of interest 2 per cent. 11. The consequence of such a state of things was mani- fested in the year 1853, when the exports, wliich in 1852 had amounted to 78,076,000/., rose to 98,933,000/. The bullion at the same time declined, and was on the 22nd October of that year 14,358,000/., while the reserve went down to 5,604,000/., and the minimum rate of interest rose to 5 per cent. 12. In March 1854 war was declared against Russia, and an expenditure of nearly 90 millions is estimated to have been incurred by England on this account. The foreign payments were largely made in specie, which to a great extent was hoarded in the East. Foreign loans were also contracted in London for the purposes of the war. The ao-crreo;ate trade of the United Kin^rdom varied little. The Bank rate of discount was raised in May 1854 from 5 to 5^ per cent., and continued at that rate till August 3, when it was again reduced to 5. On the 5th April 1855 it was reduced to 4^, the bullion then standing at 15,079,000/. and the reserve at 8,580,000/. The bullion continued to rise, until in June it amounted to 18,169,000/., and the reserve to 11,887,000/. Before the end, however, of that year a great change occurred ; and on the 27th December the bullion stood at 10,275,000/., the reserve at 6,993,000/., while the minimnm rate of interest had been raised on 18th October to 6 per cent, for 60 days, and 7 per cent, for 95 days, at which rate it stood till the following May. The changes in the rate of discount which took place from April 1855 to March 1857 are thus stated by Mr. Weguelin: — " I have here a list of the various changes in the rates, beginning at April 5tli 1855, when the minimum rate of discount for bills having not more than 95 days to run was 4^ per cent. On May 3rd, it was reduced to 4 per cent. On June 14th, it was reduced again to 3^ per cent. On September 6th, it was raised to 4 per cent. On September 1 3th, to 4^ per cent. On Sej)tember 27th, to 5 per cent. On October 4tii, to 5^ per cent. The Committee will remark that very rapid rise in the rate of interest, which was caused by the commercial de- mand for accommodation, and for the export of bullion, occur- ring at the same time Avith a considerable demand for bullion to siii)ply the armies in the East. On the 18th of October CHAP. I. ON THE BANK ACTS IN 1858. 405 the rate was 6 per cent, for bills having 60 days to run, and for bills having 95 days to run it was 7 per cent. In 1856, on the 22nd of May it was reduced to 6 per cent., and on the 29th of May to 5 per cent., and on the 26th of June to 4^ per cent., the minimum rate. There then occurred a great demand, and the rate was raised by order of the Governor on October the 1st to 5 per cent. That was not on the ordinary weekly court day, but in the interval of the court. On October the 6th (which was again not on a court day, but on a Monday), the rate was raised to 6 per cent, for 60 days' bills, and to 7 per cent, for bills not having more than 95 days to run. On November 13th, the minimum rate for bills of all descriptions having not more than 95 days to run was raised to 7 per cent. On December 4th it was reduced to 6^, and on December 18th to 6 per cent., at which rate it now stands. Here is also an account of the variations with regard to temporary advances on stock. The first recent deviation from the practice that temporary advances on stock and exchequer bills should be made at the Bank minimum rate ordinarily, and at ^ per cent, below the minimum during the shuttings, seems to have occurred in July 1854, when exchequer bond scrip was in the market. The Bank minimum rate was then 5^ per cent.; temporary advances were made at 5 per cent., and advances were made on exchequer bond scrip at 4 per cent. I believe that was an especial arrangement at the time, which had not much reference to the state of the money market. The term of those advances varied from 14 to 31 days. During the shutting for the dividends due in January 1856, the allowance of i per cent, on advances on stock, &c. was withdrawn, and no such advances have since been made at a rate below the Bank minimum. On the 8th of January 1856, the demand for advances chiefly on Turkish scrip and bonds continuing beyond the payment of the dividends, the term was contracted to 14 days. During the shutting for the April dividends this restriction was removed. After the April payment the general term was 14 days ; but there does not appear to have been any restriction to that period. After the October payment the term was contracted to 7 days ; and on the 16th of October the Bank refused to advance on any Government securities except exchequer bills. About the 11th of November the Bank declined to re-discount bills having more than 30 days to run; that is, bills which had been advanced upon by brokers. During the shutting for January the usual course was resumed, without restriction as 40G RErORT FROM THE SELECT COMMITTEE chap. i. to stock or term. On the 9th of January 1857 the rate for advances on Government stocks and exchequer bills was raised to 6^ per cent., the rate on bills of exchauire remain- ing at 6 per cent. ; and this restriction remained in force till the present shutting. It is now 6 per cent. In addition to those restrictions, I may state that the Governors have placed certain restrictions upon the business conducted through the discount brokers. In their business with them, Avhen it suited the convenience of the Bank to have only short bills, they have limited their advances to the discount brokers to 30 days, or have insisted upon their bringing in bills not having more than 30 days to run ; the object being to obtain such a command of resources constantly returning to the Bank reserve as should keep the Bank safe in that respect." 13. Down, therefore, to the close of the inquiry of 1857, the Bank of England had continued, under the Act of 1844, to conduct its business without difficulty. The rate of dis- count had been raised, and the echeance of bills shortened, as the drain for bullion appeared to the Directors to render these measures necessary from time to time. But neither the failure of the silk crop in Italy, with the bad harvests in France and other parts of Europe, and the commercial drain thence arising, nor the requirements of specie for the mili- tary service, nor both these causes combined, had occasioned any important derangement of our monetary system. The course of trade may be collected from the exports of the years referred to, viz. : — £ 1852 78,0*76,000 1853 98,933,000 1854 97,184,000 1855 95,688,000 1856 115,826,000 1857 122,155,000 These exports do not Include shipments of stores in Govern- ment transports. 14. In the earlier part of the autumn of last year, the trade of the United Kingdom was generally considered to be in a sound and healthy state, and in the words of the Gover- nor of the Bank, in reply to the following question : — " Was there, in the month of August, any circumstance which caused you to be apprehensive of any reason for rais- ing the rate of discount? — Not in the month of August; things were then pretty stationary ; the prospects of harvest were very good ; there was no apprehension that commerce ciiAP. I. ON THE BANK ACTS IN 1858. 407 at that time was otherwise than sound. There were certain more far-seeing persons wlio consiclci'ed that the great stimu- lus given by the war expenditure, which had created a very large consumption of goods imported from the East and other places, must now occasion some collapse, and still more those who observed that the merchants, notwithstanding the en- hanced prices of produce, were nevertheless importing, as they had done successfully in the previous years. But the public certainly viewed trade as sound, and were little aware that a crisis of any sort was impending, far less that it was so near at hand." 15. In this state of things, the bullion standing at 10,606,000/., the reserve at 6,296,000/., and the minimum rate of discount at 5^ per cent., the Bank, on the 17th of August 1857, commenced a negotiation with the East India Company, which ended in a shipment of 1,000,000/. in specie for the East. The general asjiect of affairs continued with- out change until the 15th September, when the first tidings arrived of the great depreciation of railway securities in the United States, and immediately afterwards of the failure of a very important corporation, called the Ohio Life and Trust Company. Before the 8tli of October the tidings from America had become very serious : news of the suspension of cash payments by the bnnks in Philadelphia and Balti- more was received ; cotton bills were reduced to par, and bankers' drafts to 105 ; railroad securities Avere depreciated from 10 to 20 per cent. ; the artisans were getting out of employment; and discounts ranged from 18 to 24 per cent. The transactions between America and England are so inti- mate and so large, the declared value of British and Irish produce exported in 1856 to the United States having been 21,918,000/., while the amount of securities held by English capitalists in America was by some persons estimated at 80,000,000/., that this serious state of commercial disorder there could not but produce in this country great alarm. 16. In New York, sixty-two out of sixty-thi-ee banks sus- pended their cash payments. In Boston, Philadelphia, and Baltimore the banks generally did the same. The effect of the American calamity fell with the greatest weight upon the j)ersons engaged in trade with that country, and Liverpool, Glasgow, and London naturally exhibited the first evidences of pressure. On the 27th October the Borough Bank of Liverpool closed its doors, and on the 7th November the great conmiercial house of Messrs. Dennistoun & Co, suspended payment. The Western Bank of Scotland failed on the 9th November, and on the 11th the City of Glasgow Bank 408 REPORT FROM THE SELECT CO^IMITTEE chap. i. suspended its payments, which it has since resumed. The Northumberhind and Durham District Bank failed on the 26th; and on the 17th the Wolverhampton Bank for a time suspended payment. 17. Great alarm naturally prevailed in London, the centre of all the monetary transactions of the world. Vast sums deposited with the joint- stock banks, at interest, and era- ployed directly by themselves, or by the bill-brokers, in addition to other moneys deposited by their other customers, were chiefly held at call ; and the bill-brokers are stated to have carried on their enormous transactions without any cash reserve, relying on the run off of their bills falling due, or, in extremity, on the power of obtaining advances from the Bank of England on the security of bills under discount. The inevitable result of this system, at a time of com- mercial pressure and alarm, was, that the banks limited their discounts almost exclusively to their own customers, and began to add to their reserves, both in their own tills and at the Bank of England. It is well known that a periodical disturbance in the reserve of notes at the Bank of England regularly occurs at the time Avhen the dividends upon the National Debt are paid. Interesting information will be found in the evidence of 1857 as to the effect of this dis- turbance in aggravating the panic of 1847. It had no such eifect last year. By the 24th October that periodical dis- turbance was at an end. The public deposits also were in a satisfactory state, amounting to 4,862,000Z. It is interest- ing to observe, with regard to the private deposits, that the causes to which your Committee have above referred, as affecting other bankers, tend to increase the balances in the Bank of England — the bank of last resort at a time of panic. Thus, for example, the deposits of the London bankers, which, in ordinary times, average about 3,000,000/., con- tinued to rise during the commercial pressure, and amounted on the 12th November to 5,458,000/. The bill-brokers Avere compelled to resort to that establishment for assistance; and that to so great an extent, that the principal house went to the Bank to ask whether they could obtain discount to an indefinite amount, and actually received on one day, the day on which the Treasury letter was issued, no less a sum than 700,000/. Two discount houses failed. Speaking of the general discount market, the Governor of the Bank stated : "Discounts almost entirely ceased in London, except at the Bank of Eno-land." 18. It is manifest, therefore, that in this emergency every- CHAP. I. ON THE BANK ACTS IN 1858. 409 thing depended on the Bank of England ; and it appears to your Committee that the proceedings of that establishment were not characterised hy any want of foresight or of vigour. On the 16th July, however, before any indications of the coming storm were visible in any quarter, the bullion read 11,242,000/., the reserve 6,408,000/., the discounts and advances 7,632,000/. ; and the Directors reduced the rate of interest from 6 to 5^ per cent. On the 8th October, after the receipt of the American intelligence above referred to, the bullion was 9,751,000/., the reserve 4,931,000/., the discounts and advances 11,648,000/., and the rate of interest was raised again to 6 per cent. Four days afterwards the rate was raised to 7. The causes of this step are thus stated by the Governor : — " Then four days afterwards there was another change ? — Yes, on the 12th. After having raised the rate to 6 per cent., we thought it necessary to give a guarded caution to our agents, showing that we began to be a little uneasy. The rate at Hamburg was 7| ; American discounts then were greatly higher. We also, about that time, were made aware that the East India Company would want 1,000,000/. specie for shipment. The gold was then being taken for New York ; we consequently raised the rate of interest, under those circumstances, to 7 per cent." " The bullion which was wanted for the East, being silver, was to be purchased by the export of gold ; that gold to be exchanged for silver upon the continent of Europe, which silver was to be sent to the East? — That was the effect of it ; the exports to India were very large each month ; but as they were in silver, of course that silver had to be purchased on the Continent, or imported from America." *' I think it was about the 12 th of October that you were first apprehensive about the Western Bank of Scotland ? — Yes ; we had no direct application at that time, but there were rumours, and we had intimations which made us aware that they were in difficulties." 19. On the 19th October, the news from America continu- ino; still more unfavourable, there were numerous failures in this country. The bullion had gone down to 8,991,000/., and the reserve to 4,115,000/., and the rate of interest was raised to 8 per cent. At this time the Bank of France, which in one week had lost a million sterling, raised the rate to 7| ; Hamburg, to 9. 300,000/. in gold had left Liverpool for America. 20. At this juncture negotiations took place for sustaining 410 REPORT FROM THE SELECT COMMITTEE chap. i. the Borough Bank of Liverpool and the AVestern Bank of Scotland, which eventually failed, under the circumstances related by the Governor of the Bank. 21. There was great uneasiness out of doors (i. e. in Lon- don), and the Bank had an apj)lication from the principal discount house for an assurance that, if it was necessary, the bank of England would give them any loans they might require. That application was made on the 28th October. There were also inquiries for assistance from other Scotch banks ; and on the SOtli October there was an express for 50,000 sovereigns for a bank in Scotland, part of 170,000/. ; and 80,000/. for Ireland. The fii'st shipment of silver by the East India Company then took place. Under these circum- stances, the rate of discount was raised on November 5 th to 9 per cent. 22. Between the 5 th November and the 9th, an English bank received assistance from the Bank of England ; the failure of Dennistoun's house for acceptances due upon nearly two millions occurred, and the Western Bank failed on the 9th. Failui'es in London were on the increase. At tliis time (as was natural) the purchases and sales of stock in the Funds were enormous. The transfers were much beyond what they had ever been before. The bullion had sunk to 7,719,000/., and the reserve to 2,834,000/. On the 9th the rate was raised to 10 per cent. 23. On the 10th November, a leading discount house applied to the Bank of England for 400,000/. The Bank of France raised its rate to 8, 9, and 10 ])er cent, for the three different months. There was another Eno-lish bank assisted. The City of Glasgow Bank suspended payment. The dis- counts for that day at the Bank of England rose to 1,126,000/. The demand for Ireland was recommencing, and on the 10th and 11th alone the gold sent to Scotland was upwards of 1,000,000/. On the llth, Sanderson & Co., the large bill-brokers, stopped payment ; their deposits were supposed to be 3,500,000/. There was also an additional supply of gold required for the banks in Scotland. On the 12th the discounts at the Bank exceeded 2,000,000/. The following figures sufficiently exhibit the result of the fore- going operations, viz. : — Bullion. Reserve. Disconnts and Advances. £ m. £ m. £ m. 10 . . . . 7,411 2,420 14,803 11 . . . . 6,666 1,462 1,3,947 12 . . . . 6,524 581 18,044 CHAP. I. ON THE BANK ACTS IN 1858. 411 24. The GoYernment letter was issued on the 12tli of November, and was in the following terms : — "Downing Street, 12th November, 1857. ' " Gentlemen, ** Her Majesty's Government have observed with great concern the serious consequences which have ensued from the recent failure of certain joint-stock banks in England and Scotland, as well as of certain large mercantile firms chiefly connected with the American trade. The discredit and distrust which have resulted from these events, and the withdrawal of a large amount of the paper circulation authorised by the existing Bank Acts, appear to Her Majesty's Government to render it necessary for them to inform the Directors of the Bank of England, that if they should be unable in the present emergency to meet the demands for discounts and advances upon approved securities without exceeding the limits of their circulation prescribed by the Act of 1844, the Government will be prepared to propose to Parliament, upon its meeting, a Bill of Indemnity for any excess so issued. " In order to prevent this temporary relaxation of the law being extended beyond the actual necessities of the occasion. Her Majesty's Government are of opinion that the Bank terms of discount should not be reduced below their present rate. " Her Majesty's Government reserve for future con- sideration the appropriation of any profits which may arise upon issues in excess of the statutory amount. " Her ^Majesty's Government are fully impressed with the importance of maintaining the letter of the law, even in a time of considerable mercantile difficulty ; but they believe that, for the removal of apprehensions which have checked the course of monetary transactions, such a measure as is now contemplated has become necessary, and they rely upon the discretion and prudence of the Directors for confining its operation within the strict limits of the exigencies of the case. " We have, &c., (Signed) " Palmerston. " G. C. Lewis. " To the Governor and Deputy-Governor of the Bank of England." 25. ^Yhatever eflfect this letter may have had in other ways in calming the public mind, and so tending to mitigate the 412 REPORT FROM THE SELECT COMMITTEE chap. i. severity of the pressure, it did not immediately diminish the demand for discounts and advances. This continued to increase until 21st November, on which day the Bank had advanced in discounts 21,600,000/., a sum exceeding the whole amount of their deposits, both public and private ; a sum nearly three-fold the amount of their advances in July, when the rate was reduced to 5^ per cent., and more than double what they had advanced on the 27th October, when the first bank failed. Half of these loans were made to the bill-brokers, and were partly made upon securities which, under other circumstances, the Bank would have been un- willing to accept. They were made for the purpose of sus- taining commercial credit in a period of extreme pressure. 26. The letter was issued on the 12th November, but whilst in 1847 it was not found necessary for the Bank Direc- tors to avail themselves of the permission so given them to exceed the limits imposed by law, that necessity in this in- stance actually arose. An issue to the extent of 2,000,000/. beyond the legal issue was made to the banking department. The following account shows the sums actually issued from the Bank to the public : — ■ An Account showing the Extent to which the Bank of England availed itself of its Power, under the Autho- rity of Government, to issue Notes to the Public beyond the Limit allowed by the Act of 1844. Notes Issued to the Public on Securities, beyond the Statutory Limit of 14,475,000/. , November 1 3 £186.000 ■ 14-15 622,000 16 860,000 17 836,000 18 852,000 19 896,000 20 928,000 21-22 617,000 23 397,000 24 317,000 25 81,000 26 243,000 27 342,000 28-29 184,000 30 15,000 Average of 18 da ys, 4 B8,83( 3/. 27. The causes which, in the judgment of the Bank CHAP. I. ON THE BANK ACTS IN 1858. 413 Directors, immediately led to this result, are thus stated by them in their correspondence with the Treasury, laid before Parliament in December last ; — " On the 5th November the reserve was 2,944,000/., the bullion in the issue department 7,919,000/., and the deposits 17,265,000/. The rate of discount was advanced to 9 per cent., and on the 9th November to 10 per cent, " The continental drain for gold had ceased, the American demand had become unimportant, and there was at that time little apprehension that the Bank issues would be inadequate to meet the necessities of commerce within the legalised sphere of their circulation. " Upon this state of things, however, supervened the failure of the Western Bank of Scotland and the City of Glasgow Bank, and a renewed discredit in Ireland, causing an increased action upon the English circulation, by the abstraction in four weeks of upwards of two millions of gold, to supply the wants of Scotland and Ireland ; of which amounts more than one million was sent to Scotland, and 280,000/. to Ireland, between the 5th and 12th November. " This drain was in its nature sudden and irresistible, and acted necessarily in diminution of the reserve, which on the 11th had decreased to 1,462,000/., and the bullion to 6,666,000/. " The public became alarmed ; large deposits accumulated in the Bank of England ; money-dealera having vast sums lent to them upon call, were themselves obliged to resort to the Bank of England for increased supplies ; and for some days nearly the whole of the requirements of commerce were thrown on the Bank. Thus, on the 12th, it discounted and advanced to the amount of 2,373,000/., which still left a reserve at night of 581,000/. " Such was the state of the Bank of England accounts on the 12th, the day of the publication of the letter from the Treasury. The demand for discounts and advances continued to increase till the 21st, when they reached their maximum of 21,616,000/. " The public have also required a much larger quantity of notes than usual at this season, the amount in their hands having risen on the 21st to 21,554,000/." 28. The Treasury letter was the subject of discussion in the House, and an Act of Indemnity having passed, your Committee do not feel called upon to say more than that the evidence appears to them to show that the discretion of the Government was properly exercised. 414 REPOKT FROM THE SELECT COamiTTEE chap. i. 29. Your Committee will now state to the House the jreneral outline of commercial disaster, as it occurred in the United Kingdom. 30. The first occurrence in this country which caused alarm was the failure of the house of Macdonald & Co. of Glasgow and London, which took place in October, and was accompanied by the failures of Monteith & Co, and Wallace & Co. of Glasgow. The house of Macdonald em- ployed a great many workpeople in sewing muslin goods for the home trade and for the American market, and this they carried on to a very large extent. They had been in fair credit till very nearly the time of their tailure ; but shortly before that period they are described as having given out that they had changed their mode of doing business for the pur- pose of embracing a wider field. This, however, is repre- sented as having been a deception, intended to cover a system to which they had recourse, of drawing fictitious bills, and to give to these bills the appearance of genuine business transactions. From the records of the public tribunals, it appears that a very considerable number of persons (one of the partners is said to have admitted as many as seventy-five) in London and other places were employed by this firm, for a small commission, to put their names to fictitious bills, which were then discounted, a large proportion of them in Glasgow ; and when the house of Macdonald failed it was found to be indebted to the Western Bank 422,000Z. 31. The house of Monteith & Co. Avas indebted to the same bank 537,000/. ; that of Wallace & Co. 227,000/. 32. The house of Messrs. Dennistoun & Co. stopped payment on November 7 ; it is expected to pay its liabilities in full, and its members bear the highest character. But it can occasion no surprise that, on the occurrence of such a crisis as that which took place in America last year, a house, with debts owing to it from that country of nearly two mil- lions, losing at the same time 300,000/. by the failure of the Borough Bank of Liverpool, of which the partners were shareholders, should, at a juncture when general alarm pre- vailed, have been obliged to suspend its payments. 33. During the month of October there was a very great gloom in Glasgow, occasioned by the commercial panic in America, Glasgow being very intimately connected in trade with America, with New York particularly. This section states that the *' Western Bank closed on the 9th November, at two o'clock." " Tlie City of Glasgow Bank did not open on Wednesday, the 11th." Great excitement CHAP. I. ON THE BANK ACTS IN 1858. 415 prevailed, and " Troops were sent for by tlie authorities, Avho were afraid of some disturbance." "In accordance with the provisions of the Act of 1845, the banks held a considerable quantity of gold, but they were under the necessity of having more gold from London." " Had it (the arrival of the gold) any effect in regard to the panic?" — Mr. Robertson, the manager of the Union Bank, replies, " I should think it must have had an effect ; the people saw there was gold there to pay them if they wanted it ; but by the Thursday morning the panic was entirely allayed ; it entirely ceased on the Wednesday afternoon, about two o'clock ; at half-past two, I do not think there were half a dozen people in our establishment." " Had the notes of the Western Bank begun to be taken in the course of the Wednesday? — Yes." " And at two o'clock on the Wednesday afternoon you consider that the panic had come to an end ? — Quite." " And on the Thursday the Government letter was issued ? — Yes, I believe so." 34. It has been observed that the panic in Glasgow had ceased before the Treasury letter was issued, and that the demand at the Bank of England for advances and discounts did not cease with the publication of that letter ; after which date it cannot of course be attributed to any fear that there was a limit to the quantity of bank notes. On the contrary, we have seen that the advances by discount kept rising continually, and though the rate of 10 per cent, was still maintained, they rose from 15,900,000/., at which they stood on the day pi'eceding the issue of that letter, to 21,600,000/. on the 2 1 st of November. It is obvious, therefore, that the principal causes of the commercial ciusis of 1857 must be sought elsewhere. That calamity cannot be attributed exclusively or chiefly to panic occasioned by the operation of the Act of 1844. Since, too, the difficulties here experienced took their origin from America, where no such law is in force, and that crisis was felt in still greater severity than here by countries in the North of Europe, whose currency is regulated by laws widely different from ours, it remains for your Committee to inquire whether any cause or causes, common to all those countries, and sufficient to account for the occurrence of commercial disasters in them all respec- tively, have been disclosed by the evidence. 35. For a general review of the failures which occurred in England, your Committee have been indebted to Mr. Coleman, and to Mr. Ball, of the firm of Messrs. Quilter and E E 416 REPORT FROM THE SELECT COMMITTEE chap. i. Ball, both eminent accountants in London. These gen- tlemen do not profess to have studied abstruse questions of currency ; they do not represent themselves as particularly conversant with the operation of the Act of 1844. They, however, assign what appears to your Committee an adequate cause for the recent commercial crisis. Availing themselves of their experience in 1847, the affairs of which have now been finally closed, to illustrate the transactions of 1857, which still appear in estimate, and are therefore liable to correction, they ascribe the calamities of both periods to the same principal cause, viz., the great abuse of credit, and consequent over-trading. They notice also this difference between the two periods : many of the houses which fell in 1847, they say, had once been wealthy, but had long ceased to be so. Tliose of 1857 had, with few exceptions, never possessed adequate capital, but carried on extensive transac- tions by fictitious credit. Mr. Coleman adduces an instance of a firm, originally wealthy, having failed and paid ultimately a dividend of only 9d. in the pound ; and he says, that the estates which came under his notice as insolvent in 1847 paid generally very small dividends, not averaging more than 4^. 36. Another example of the same period is described by Mr. Ball as follows: — It was that of a house which failed in 1847; they were engaged very largely as merchants in this country, and they were a house of very old standing. After an interval of ten years this house has, within the last few months, paid a final dividend, making a total of Is. lOd. in the pound. Mr. Ball is asked : — " Looking back to the experience of the year 1847, were the dividends that were paid by the insolvent houses gene- rally very small ? — The average dividend Avould be small, as far as I recollect. Here and there there would be a house which would pay in full, or would pay a very large dividend ; but the general result was, that a small dividend upon the whole was received by the creditors." " Looking back now, with yovu- experience, to the results of 1847, is it your opinion that if the law had afforded greater facilities for obtaining credit at that time fur the purpose of sustaining these houses longer, the result would have been more advantageous to the houses themselves, or to the com- munity at large ? — Knowing what I do of the internal state of those houses when they did stop, I should say that had they been able to obtain further credit for a continued period of time, it would only have had a temporary effect upon their CHAP. I. ON THE BANK ACTS IN 1858. 417 position, and that most of them (of course I have a reserve of some good cases in my mind), from their internal condi- tion being worn out, and from the want of real capital in their concerns, must have failed ultimately, and the longer the assistance was continued simply ujion their credit, the greater the ultimate loss would be." " Such is your view of the failures that took place in 1847, speaking generally? — That is my view." 37. Your Committee have thought it not irrelevant to place on record these instances, Avhich it was not in the power of their predecessors in 1848 to give, because they furnish an instructive example how readily misfortunes are at the time attributed by the sufferers, and others sympathising with them, to the operation of statutory enactments — -which misfortunes, upon a full review of all the circumstances attending them, it is obvious that no wisdom of the Leo-isla- ture, no regulation of the currency, could have prevented, 38. Your Committee have before them the particulars of thirty houses which failed in 1857. The aggregate liability of these houses is 9,080,000/. ; of this sum the liabilities which other parties ought to provide for amount to 5,215,000/., and the estimated assets 2,317,000/. Besides the failures which arose from the suspension of American remittances, another class of failures is disclosed. The nature of these transactions was the system of open credits which were granted ; that is, by granting to persons abroad liberty to draw upon the house in England to such extent as had been agreed upon between them ; those drafts were then nego- tiated upon the foreign exchanges, and found their way to England, with the understanding that they w^ere to be pro- vided for at maturity. They were principally provided for, not by staple commodities, but by other bills that were sent to take them up. There was no real basis to the transaction, but the whole affair was a means of raising a temporary command of capital for the convenience of the individuals concerned, merely a bare commission hanging upon it. A banker's commission was all that the houses in Eno-land eot upon those transactions, wath the exception of receiving the consignment-^, probably of goods, from certain parties, which brought them a merchant's commission upon them ; but they formed a very small amount in comparison with the amount of credits which were granted. One house at the time of its suspension was under obligations to the world to the extent of about 900,000/. ; its capital at the last time of taking stock was under 10,000/. Its business was chiefly the granting of E E 2 418 REPORT FROM THE SELECT COMMITTEE chap. i. open credits, i.e., the house permitted itself to be drawn ui)on by foreign houses without any remittance previously or contemporaneously made, but with an engagement that it should be made before the acceptance arrived at maturity. In these cases the inducement to give the acceptance is a commission, varying from i to H per cent. The accept- ances are rendered available by being discounted, as will appear hereafter, when the affairs of the banks which failed come under our notice. 39. The obvious effect of such a system is first unduly to enhance, and then, whilst it continues, to sustain, the price of commodities. In 1857, that fall of prices which, according to ]\Ir. Neave, far-seeing people had anticipated, actually occurred. Tables have been put in, by more than one of the witnesses, exhibiting an average fall of 20 or 30 per cent,, in many instances much more, upon the comparison of July 1857, with January 1858. It needs no argument to prove wdiat effect such a fall must have upon houses which had accepted bills, on the security of produce consigned, to the extent of one hundred times the amount of their own capital. The witness says : — " In the case which you are now describing to the Commit- tee, these transactions had gone on to the extent of 900,000/. The real guarantee was partly produce and partly bills of exchange ; to whatever extent that produce was depreciated, of course the liability of the firm to fixilure would arise, and the capital of that firm to meet such depreciation of produce was about one hundreth part of the whole of their liabili- ties ? — That is so." " Do you consider that case to be a fair illustration of the recent commercial disastei's which have occurred ? — I think it is ; though I should mention that in some cases the propor- tion of capital possessed was larger than that which I have mentioned." " In some cases also perhaps it might be smaller ? — In some considerably smaller. In some cases I have known houses come under very large obligations who had really no capital at all." 40. This practice appears to have grown up of late, and to be principally connected with the trade of Sweden, Denmark, and other countries in the north of Europe. One house at Newcastle is described as conducting, before 1854, a regular trade in the Baltic. They were not great people, but were respectable people, and were doing a moderately profitable trade. They ■ unfortunately entered upon this CHAP. I. ON THE BANK ACTS IN 1858. 419 system of granting credits ; and in the course of three years the following result ensued — viz., in 1854 their capital was between 2,000/. and 3,000/. ; in 1857 they failed for 100,000/., with the prospect of paying about 25. in the pound. 41. For other instances of this abuse of credit your Com- mittee refer to the evidence, concurring entirely in the opinions expressed by the witnesses, that the great abuse of credit is a feature common to the two years 7 847 and 1857, and has been, in their judgment, the principal cause of the failures that took place in those years. Mr. Coleman says: — " Speaking generally with regard to 1847 of which your experience is now complete, are you prepared to say that the failures which occui'red in that year were owing to any imperfection of the law, by which the facilities for obtaining credit Avere unduly curtailed? — No." " With regard to the year 1857, what would your answer be to the same question? — That every house which applied and deserved assistance received it." "From whence? — From the Bank of England, as far as I know ; and more, that in the case of two houses wliich came under my personal control, I applied to know whether they could have assistance, and the answer was, yes. Gua- rantees were obtained to the amount required for one house ; but I found that I could not advise their being used. The applications, when made by me, were immediately responded to by the Bank of England." " The alteration of your opinion, I suppose, arose from the fact of further investigation into the state of solvency of the concern? — And the continued bad intelligence from the north of Europe with regard to failures." " The failures of their correspondents in the north of Europe also being communicated? — Yes." 42. The commercial crisis was very little felt in Ireland until the failure of some of the banks in England and Scotland. The trade of Ireland, with the exception of that of Belfast, being little connected with the United States, did not feel directly the effect of the failures there ; but when failures began to take place at home, there was an internal pressure consequent upon them, which, about the early part of the month of November, manifested itself severely in a demand for gold by depositors and holders of notes, and there was a run on the savings' banks. The Bank of Ireland advanced to the banks in Ireland requirlno- gold to the extent of about 250,000/. ; and they were 420 REPORT FROM THE SELECT CO.MMITTEE chap. i. obliged to draw from tlie Bank of England from 1,000,000/. to 1,200,000^ besides. Belfast has a large trade with the United States, as well as a constant intercourse with Scot- land ; but there was no alarm until the time of the Scotch hank failvu'es. Tlicre was then what had never been known before in Belfast since the institution of the joint-stock banks — a considerable run for gold in exchange for their notes. But the amount of gold which they held under the Act of 1845 was a source of strength. The banks appear to be well constituted, and no serious results ensued. 43. In London no bank failed. In Liverpool the Borough Bank, in Glasgow the Western Bank of Scotland, in New- castle the Northumberland and Durham District Bank, failed in the months of October and November last. The City of Glasgow and Wolverhampton Banks suspended pay- ment, but have since resumed. 44. Your Committee have examined Mr. Joshua Dixon, who, in August 1857, first assumed the post of managing director of the Borough Bank ; Mr. Fleming, who has been, since July 1857, assistant manager, manager or liqui- dator, of the Western Bank of Scotland ; and Mr. Kirkman Hodgson, a member of the House, and Director of the Bank of England, who, being well acquainted with the trade of Newcastle, went to that town in November for the purpose of ascertainino; how far it was right that the Bank of England should give assistance to the Northumberland Bank. 45. I'he state of these three banks at the time of their failnre may be collected from the following sunmiary, viz. : — It may be sufficient to state from this section of the Report, respecting the Borough Bank : — " In 1847 the Borough Bank was under the necessity of obtaining assistance from the Bank of England. When the commercial crisis showed itself, from the unsound position of the bank, it was in imminent danger, and application was made to the Bank of England for assistance between the 20th and the 23rd of October. The position, in general terms, of the bank was, that its assets were all locked up and unavailable, and that some 600,000/. or 700,000/. of its assets or claims on its debtors, which had until a short time previously been considered good, could not be relied upon, even for ultimate realisation. About 3,500,000/. bills were at that time in London under the indorsement of the Borough Bank of Liverpool, of which from 700,000/. to 1,000,000/. had no negotiable validity at all, except the indorsement of the Borough Bank of Liverpool." CHAP. I. ON THE BANK ACTS IN ]8)8. 421 46. After stating that a run had taken place on the Borough Bank in Liverpool on the 27 th October, and the doors of the bank were closed, this section of the Report proceeds: " The dividend of this bank, which had previously been 7 per cent., had at the last meeting, held on 10th July, 1857, been reduced to 5; and a sum of 165,000Z. was, on the face of the Report, acknowledged to have been lost. The total loss, so far as the witness could estimate it, amounted to 940,000/., being the total capital of the bank. It is ascribed, not to advances improperly made to favoured persons, but to want of discretion in the management." 47. The Western Bank of Scotland was founded in 1832. In 1834 it was already in difficulties, and their correspond- ents in London dishonoured their bills. They applied to the other banks for assistance, and received it, upon certain con- ditions. In 1847 the Westei'n Bank was again in difficul- ties, and was assisted by the Bank of England, receiving an advance of 300,000/. When it failed on 9th November, 1857, it appeared that the four insolvent houses of Macdo- nald, Monteith, Wallace, and Pattison were indebted to it in the sum of 1,603,000/., the whole capital of the bank being only 1,500,000/. One of the conditions of the co-partnery was, " That if it shall at any time appear, on balancing the company's books, that a sum equal to 25/. per centum on the advanced capital stock of the company has been lost in prosecution of the business of the company, such loss shall, ipso Jacto, and without the necessity of any further proce- dure, dissolve and put an end to the company." 48. Mr. Fleming became assistant manager in July 1857, and at once examined the affairs. He estimated that, even supposing the debts of these four houses (which had not yet become insolvent) were assumed to be good, there appeared on the face of the books as good assets 573,000/. of bad debts; and deducting the rest and guarantee fund, which then amounted to 246,000/., there remained an apparent deficiency or encroachment on the capital of the bank of 327,000/. This of itself nearly approached the limit which dissolved the partnership, and put an end to the existence of the board ; and of this state of afl'airs Mr. Fleming believes that up to that time the Directors were in a state of almost entire ignorance. From a confidential paper, having marks upon it in the handwriting of the then manager, it appears that a sum of 260,000/. was reported to him as irrecoverable on one branch of the assets, which nevertheless appeared as good assets in the published balance sheet. The dividend 422 REPORT FROM THE SELECT COMMITTEE chaf. i. was raised in 1854 from 7 to 8 per cent., and in 1856 to 9. Nine per cent, was the dividend declared in June 1857, at which date a very slight acquaintance with the books must have led to the strongest suspicion, not to say to the clear conviction, that for some time a considerable portion of the capital had been lost. 49. This bank had 101 branches throughout Scotland. It had connexions in America, who were allowed to draw upon it for the mere sake of the commission. At home, it made advances upon " indents," or, in other words, provided the manufacturer with the ca})ital with which yet unmade cloth was thereal'ter to be produced. Its discounts, which in 1853 were 14,987,000/., had been increased in 1857 (till 9th November) to 20,691,000/. AVith what care this busi- ness was conducted may appear from the circumstance that jNIacdonald's bills w^ere accepted by 124 different parties: that only 37 had been inquired about, and in the case of 21 the reports received from the correspondents of the bank Avere unsatisfactory or positively bad. Yet the credit given to Macdonald continued undiminished. The rediscounts of the bank in London, which in 1852 had been 407,000L, rose in 1856 to 5,407,000/. The exchanges of notes in Edin- burgh have been always against the Western Bank, and, for an average of the last six years, to an extent of not less than 3,000,000/. a year. This circumstance is accounted for by Mr. Fleming chiefly by reference to the nature of the trans- actions with Macdonald's and other houses in accommodation bills; 988,000/. were due to the bank fi'om its own share- holders, 50. About the end of October the Northumberland and Durham Bank applied for assistance to the Bank of England. It was declined, as they could not give any satisfactory explanation of their real position. They applied a second time, and this section relates the steps taken by the Bank of England ; and that, upon consideration of all the circum- stances, they judged it expedient to make such temporary advances as the emergency required, to prevent the con- fusion that might arise from workmen not receiviufr their wages. " This Bank had derived assistance from the Bank of England in the former crisis of 1847. Almost exactly the same circumstances arose then which arose in 1857, and almost from the same cause." " Tlie whole of the advance made in 1847 was repaid to the Bank of England, was it not ? — Yes." CHAP. I. ON THE BANK ACTS IN 1858. 423 The Derwent Iron Company was intimately connected with this bank, and " the total liability for which the Derwent Iron Company is indebted to the bank is about 947,000/., very nearly 1,000,000/." ** It appears that the concern (the Derwent Iron Com- pany) has been worked extremely badly; that it has never made any profits at all, even in the very finest years for the ironmasters, and it has gone on absorbing the money of the bank, unchecked by the Directors." " The assets, which were estimated in November at 2,500,000/., had fallen in January to 2,000,000/. ; and there was one peculiarity, which was, that while the debt of the Derwent Iron Company was taken as an asset in November at 750,000/., in January it was taken as an asset at 947,000/., and that is an asset of a very doubtful nature. The position of the bank is much worse in reality than is shown by the statement of the figures." 51. This disclosure was the result of an examination which lasted about two hours ; yet the bank had declared, at the last half-yearly meeting, a dividend of 7 per cent., making to the shareholders a statement, the substance of which showed a very prosperous state of things. Mr. Hodgson mentions that he remarked on the fact of their having declared a dividend in June, when it was admitted that half the capital was lost, and he asked how they could have done so. It was stated, in reply, that there were so many persons who depended entirely for their livelihood on the dividends received, that they really could not bear to face them without paying any dividend. 52. Each of these three banks had been in peril in 1847, and though, by the assistance of the Bank of England, they were enabled to surmount it, they fell, on the next occasion of severe commercial pressure, under circumstances still more injurious both to their own proprietors and to the public. Two bill-broking houses in London suspended payment in 1847 ; both afterwards resumed business. In 1857 both suspended again. The liabilities of one house, in 1847, were, in round numbers, 2,683,000/., with a capital of 180,000/. ; the liabilities of the same house, in 1857, were 5,300,000/., the capital much smaller, probably not more than one-fourth of what it was in 1847. The liabilities of the other firm were between 3,000,000/. and 4,000,000/. at each period of stoppage, with a capital not exceeding 45,000/. 53. These five houses contributed more than any others 42-4 EEPOET FEOM THE SELECT COMMITTEE chap. i. to the commercial disaster and discredit of 1857. It is impossible for your Committee to attribute the failure of such establishments to any other cause than to their own inherent unsoundness, the natural, the inevitable result of their own misconduct. 54. Thus we have traced a system under which extensive fictitious credits have been created by means of accommo- dation bills and open credits, great facilities for which have been afforded by the practice of joint-stock country banks discounting such bills, and rediscounting them with the bill-brokers in the London market, upon the credit of tlie bank alone, without reference to the quality of the bills otherwise. The rediscounter relies on the belief that if the bank suspend, and the bills are not met at maturity, he will obtain Irom the Bank of England such immediate assistance as will save him from the consequences. Thus Mr. Dixon states, " In incidental conversation about the whole affair, one of the bill-brokers made the remark, that if it had not been for Sir Robert Peel's Act, the Borough Bank need not have suspended. In reply to that, I said that whatever might be the merits of Sir Robert Peel's Act, for my own part, I would not have been willing to lift a finger to assist the Borough Bank through its difficulties, if the so doing had involved the continuance of such a wretched system of business as had been practised ; and I said ' If I had only known half as much of the proceedings of the Borough Bank while I Avas a Director ' (referring to the time previous to the 1st of August, when I became a ma- naging Director), ' as you must have known, by seeing a great many of the bills of the Borough Bank discounted, you would never have caught me being a shareholder.' The rejoinder to which was, ' Nor would you have caught me being a shareholder ; it was very well for me to discount the bills, but I would not have been a shareholder either.' " 55. It will be instructive now to turn to the North of Europe, to survey the condition of countries where, as in Hamburg, the currency is exclusively metallic, and to compare the state of things there with that which existed here under the laws which regulate the currency in this kingdom. 5Q. In Hamburg, on the 23rd of November, commercial confidence is stated to have been entirely at an end ; so that only the bills of three or four of the first houses were negotiable at the highest rate of discount. In the first instance, some of the leading houses and the banks origi- CHAP. I. ON THE BANK ACTS IN 1858. 425 nated a plan for relief, viz., the subscription of about 1,000,000/., and the appointment of a committee to give, by indorsement, the credit of this fund to the current bills. At first it seemed that confidence was much restored ; but in two days this hope vanished ; and on the 25th the aspect of affairs was again very gloomy. On the 27th a meeting of the Biirgerschaft Avas held, and a new arrangement was proposed by the Senate for the issue of Government bonds, on the deposit of goods, funds, and shares, to the amount of 1,125,000/. On the following day the feeling of the Exchange was better, in consequence of this Government measure, and of the arrival of considei'able quantities of silver. Yet, on the 1st of December our Consul Avrites, " The embarrassments of the mercantile community here still continue undiminished ;" and on the 3rd, " There is no deficiency of silver in the Hamburg Bank ; indeed, the amount in the cellars of the bank is now much larger than it has been at any former period ; but a total want of con- fidence prevents its holdei's from parting with it." The Government bonds could not be discounted. A loan was ultimately obtained from Vienna ; but even the arrival of the amount in specie failed to produce the desired eflfect, until the Senate reluctantly proposed that it should be intrusted to a secret committee, to be by them lent out on good security. On December 12, so soon as it was known that, by the aid of the Government, the leading houses would fulfil their engagements, the panic ceased. Money at once became abundant, and in about a fortnight the rate of discount for the best bills fell to 2 and 3 per cent. 57. The information on this subject, relating to the dif- ferent countries in the North of Europe, which will be found in the Appendix, is most instructive. It shows the severity of the disaster there sustained, and also that the real origin of it was the undue expansion of commercial credit ; and it confirms the proof that no system of currency can secure a commercial community against the consequences of its own improvidence. 58. In this place it may be convenient to notice two points on which considerable misapprehension appears to have prevailed. It is contended by some persons that the separation of the issue department by a local change, removing the office from the Bank premises, would have the beneficial effect of convincing the community that the law now regulates the issue of notes, and leaves to the discretion of the Bank Directors the purely banking business 426 REPORT FROM THE SELECT COMMITTEE chap. i. only. But strong evidence is given by the Bank Directors ■ that much j^ractical inconvenience would result from such a change ; and your Committee think that repeated dis- cussion and increasing knowledge will satisfy the public of a fact so obvious as this, viz., that without the interposition of the Executive Government, the Directors of the Bank of England have no power whatever to exceed in their issues the limit imposed by law. The duties which the Bank discharges in this respect are purely ministerial, un- accompanied by any discretionary power. Whoever dis- charged these duties, it would be equally subservient to the general convenience of the public, that the place of issue should be in the immediate neighbourhood of the place where the banking department is situate. Able papers by Lord INIonteagle and by Mr. Arbuthnot, on the subject of a State Bank, will be found in the Appendix. 59. Another misconception has often perplexed those who have reasoned about the currency — that of supposing that by Act of Parliament the price of gold is fixed. If it had so happened that our sovereign, instead of being nearly equal to a quarter of an ounce troy of gold of standard fine- ness, had been exactly equal to that weight, it would pro- bably have been obvious to all that the word " sovereign " simply meant a quarter of an ounce of standard gold, with the Queen's head stamped upon it by the Mint ; and the price of gold, as it is called, being thus exactly 4/. an ounce, anybody would have comprehended that the one was equi- valent to the other. The use of the silver and copper coins as representatives or tokens of fractional parts of that gold, would probably have been intelligible, and this troublesome confusion would not have arisen. This topic has not much presented itself in the course of the present inquiry. But it is desirable that all persons who take an interest in this subject should understand how simple is the duty discharged by the Executive Government in relation to that money, viz., gold money, which alone is the standard of value in this country, so far as the transactions of our extended commerce are concerned. At the Mint a piece of standard gold, weighing 5 dwts. 3*274 graiiis troy, is verified by a stamp, and being then called a sovereign, is returned to its owner, and in this process no seignorage is charged. At the Bank five times the same quantity is received into the coffers for custody, and in return a paper, called a 51. note, is given to the owner of the gold. He is entitled, at his pleasure, to return the note, and demand for it sovereigns CUAP. I. ON THE BANK ACTS IN 1858. 427 which contain an equal quantity of bullion. Upon every ounce of gold that thus passes in and out of the Bank an allowance, for the double transaction, of about '770,465 grain troy weight of gold, or, as it is expressed in our copper tokens, l^d., is retained by the Bank. This allowance is an equivalent for the loss of interest which it is computed the owner of the bullion saves by the transaction, inasmuch as he saves, by receiving notes from the Bank, the loss of time, and therefore of interest, which he would have in- curred if he had taken his gold to the Mint to be coined into sovereigns. This allowance yields an annual profit, which is taken into account in the arrangements between the Bank and the Government. Your Committee have not entered into the question whether any charge should be made by the Mint for coinage. So intelligible and so simple is the relation between the Government and the issue of money — so entirely is the Bank of England ex- cluded by statute from the exercise of any discretion what- ever in this respect. 60. For the opinions of the most eminent writers on the subject of the currency, your Committee refer to the Evi- dence taken in 1857. It is interesting in the highest degree to all who make the scientific study of the most abstruse questions of political economy their pursuit. But a review of that Evidence would ap])ear necessarily to involve sub- jects of controversy on which your Committee would not be able to arrive at any conclusion without much difference of opinion, and they are therefore desirous of excluding these subjects from their Report. That the public welfare in times of commercial disaster requires the maintenance of an ade- quate supply of bullion at the Bank, is the opinion of Mr. Tooke, Mr. Newmarch, and Mr. Mill, as well as of Lord Overstone, Mr. Norman, and Mr. Hubbard. That the supply necessarily maintained in the coffers of that esta- blishment, under the provisions of the Act of 1844, is greater than that which was ever maintained under circumstances of pressure in former times, is a fact beyond dispute. During the crisis of 1825 the bullion fell to 1,261,000^, in 1837, 3,831,000^., and in that of 1839, 2,406,000/.; while the lowest points to which it has fallen since 1844 have been, in 1847, 8,313,000/., and in 1857, 6,080,000/. That the opinion of the present Bank Directors is strongly in favour of maintaining the Act of 1844 appears in the Evidence. They say the assistance which they gave to the public would not have been ventured on by them except for the 428 REPORT FROM THE SELECT COMMITTEE chap. i. Treasury letter ; nor would they have ventured to act on that letter if the bullion had been much lower than it was; for they must then have begun to think of the convertibility of the note, which it would be their first duty to maintain. They attribute the maintenance of that amount of bullion to the regulations provided by the Act ; and while they affirm that the present Court of Directors, having had more experience, and having seen the gradual working of the Act of 1844, would probably, in their discretion, have adhered closely to the very regulations which the Act required of them ; yet, if they had not done so, but had been induced to issue more than the proportion which the law allowed, more o-old would have gone out by the action of the foreign exchanges, and the consequences would have been that they Avould have been left with less gold as the panic came on ; and then, even with the permission to issue more notes, they would not have felt warranted in hazarding the circulation by doing so. They further state that, for these reasons, it appears that the adoption of the policy which the Act now in force required, placed the Bank of England in such a position that it was enabled at the time of severest pressure to afford a larger aid to the commercial public than would otherwise have been in their power; that the true judgment of the Court would act in unison with the law ; but yet it is not expedient to expose them to the influence of such a pressure as would inevitably be applied at such a time ; and that, upon the whole, with a view to the operations of the Bank, including in that category their being able to afford aid to the commercial public at the time of severest pres- sure, the Act of 1844 operated, not as a fetter, but as a support, decidedly. They therefore recommend that no relaxation should be made in the provisions of that law. Gl. In this opinion the Governor of the Bank of Ireland, the representatives both of the chartered and the unchar- tered banks of Scotland, the Chairman of the Association of Private Country Bankers, and Mr. Alderman Salomons, of the London and Westminster Bank, concur. 62. Those who advocate what is called the theory of the ' Act of 1844, are guided by the following principles: — They regard bank notes as being for every practical purpose, ctpially with the gold they represent, the money of the country — the measure of value — that which extinguishes debt — not as a mere form of paper credit depending on the credit of the issuer, and constituting only the evidence and vehicle for transfer of a debt which still continues. If complete CHAP. I. ON THE BANK ACTS IN 1858. . 429 effect were p;iven to their view, the result would be that for the whole United Kingdom there would be one descrip- tion of note only, issued by the State, based on bullion in the custody of the State. This note, so secured by bul- lion, would be a legal tender everywhere, except at the place of issue. Experience having shown that even in the times when the paper circulation is most contracted, the sum in circulation with the public at large can never fall below a certain amount, and cannot therefore be presented to the Bank for payment in gold ; they are satisfied that to this extent, so limited by experience, the actual deposit of bul- lion may safely be dispensed with, the notes in question resting on the security of the State. This is their justifi- cation for the permission accorded to the Bank of England to issue fourteen millions of notes without the deposit of a corresponding amount of bullion. They consider any addi- tion to the circulating medium of the country to be the act of the private individual who carries bullion to the Mint to be coined, or to the department of issue to be exchanged for notes ; fixing the standard of money, and verifying the con- formity of the pieces therewith by either of these processes to be the duty of the State ; the use of money, and that only, they regard as tlie province of a bank, whether of a l)rivate person or incorporation, or of the banking depart- ment of the Bank of England. 63. These advocates of the theory, as it is called, of the Act of 1844, are far from contending that their theory is completely carried into effect by the provisions of the Act. The origin of that legislation is thus referred to by Lord Overstone : — " I had no connexion, political or social, with Sir Robert Peel. I never exchanged one word upon the subject of this Act with Sir Kobert Peel in my life, neither directly nor indirectly. I knew nothing whatever of the provisions of this Act until they were laid before the public ; and I am happy to state that, because I believe that what little weight may attach to my unbiassed conviction of the high merits of this Act, and the service which it has ren- dered to the public, may be diminished by the impression that I have something of personal vanity in this matter. I have no feeling whatever of the kind. The Act is entirely, so far as I know, the Act of Sir Robert Peel, and the im- mortal gratitude of this country is due to him for the service rendered to it by the passing of that Act. He has never been properly appreciated ; but year by year the character of that man upon this subject will bo appreciated. By the 430 EEPORT FROM THE SELECT COMMITTEE chap. i. Act of 1819, Sir Robert Peel placed the monetary system of this country upon an honest foundation, and he was ex- posed to great obloquy for having so done. By the Act of 1844, he has obtained ample and efficient security that that honest foundation of our monetary system shall be effectually and permanently maintained ; and no inscription can be written upon his statue so honourable as that he restored our money to its just value in 1819, and secured for us the means of maintaining that just value in 1844. Honour be to his name." 64. But it does not appear, by a reference to the speeches of Sir Robert Peel, that he propounded the two measures of 1844 and 1845 as measures of theoretical perfection; on the contrary, they can only be regarded as having been designed to accomplish a great practical object by the least possible disturbance of existing interests. Thus Mr. Rodwell : — "Then the general result of those interviews was to leave upon your mind the impression that the measure was intended to be a great step in advance towards the establishment of one central issue, which was to be arrived at by volimtary arrangement ? — ^I thought that the tendency of the views of Sir Robert Peel was, that that would be a natural result ; but I thought that his view was, that whe- ther that consequence ensued or not, the arrangement was a continuing arrangement with the country bankers, in order that that Act might pass without any opposition on their part." 65. And Sir George Clerk, the Deputy Governor of the Bank of Scotland, who was Secretary of the Treasury in Sir Robert Peel's Administration in 1844, and Vice-Pre- sident of the Board of Trade in 1845, and intimately acquainted with all that passed in reference to these mea- siu-es: — "In the debate of the 25th of April 1845, with reference to the 1/. note circulation, Sir Robert Peel said, ' Whether or not the importance attached to the continuance of the privilege (of issuing 1/. notes) can be perfectly justi- fied by reason or argument, I know not. Whether there be not an undue value attached to them may be a fair question of doubt ; still, in attempting to introduce principles which I believe to be good, I will not attempt to shock even the prejudices of the ])eople, or to run the risk of encountering that ()p[)Osition which I knew I should have to encounter from Scotland almost universally. Without guaranteeing, therefore, the continuance of these notes, all I can say is, that we do not propose to prohibit them at present ; I say caAP. I. ON THE BANK ACTS IN 1858. 431 nothing, however, as to tlie future. The discretion of Par- liament must be left unfettered in respect to them. If the continuance of this privilege affects no interests — if it has no injurious effect upon the circulation either of Scotland or of other parts of the empire, there is no doubt whatever that a future Parliament will entertain the same forbear- ance, and will not disturb the settled habits of business of a whole country, or run counter to its feelings, for the mere purpose of carrying out some theoretical principle.' " 66. Your Committee have examined the operation of those statutes, not with a view to ascertain whether they constitute the most perfect s}'stem conceivable for regulating the paper circulation of an empire, but rather whether their operation has been such as to secure the main object for which they were designed. The main object of the legislation in ques- tion was undoubtedly to secure the variation of the paper currency of the kingdom according to the same laws by which a metallic circulation would vary. No one contends that this object has not been attained. 67. Mr. Rodwell says that before the Act of 1844 the country bankers were not all aware of the consequences of their issues; that, if they had been, sucli disasters would never have arisen as arose in 1825 ; and he knows the prac- tice to have been that it was considered as a part of the business of a country banker to get out as much of his issues as he could, which eventually turned back upon him- self when he did not expect it, and was least prepared to meet it. He says that before 1844 they did not so fully understand the laws which oui>;lit to guide a banker in making his advances ; but that now they look to the unem- ployed notes (in the Bank of England) as an infallible index of what it is necessary for the Bank of England to do, and for tlie country bankers to do also. In recent times the increased facilities of intercourse and of banking have increased the rapidity with which notes find their way back to the banker who issues them ; while the restriction of bank notes in England and Wales to sums not less than 5/. excludes them in a considerable degree from the retail trans- actions of the country. It may be laid down, that in the opinion of every practical witness who is an advocate for the convertibility of notes, the amount of bullion retained in the coffers of the Bank under the operation of the existing law is not greater than a due regard to prudence would require, even if the law were altered. It appears that the present FF 432 rxEPORT FROM THE SELECT COMMITTEE chap. i. law ensures the maintenance in the coffers of the Bank of an adequate amount of bullion, whilst the history of past years proves that such an amount had not been maintained by the unassisted wisdom and firmness of the Bank Directors ; and the present Court of Directors are unanimous in desiring that they should continue to be fortified by the provisions of the present Act. 68. No complaint against the Act of 1844 has been more popular, or more commonly employed out of doors, than one, which may be expressed in the following words: — "That the trade of the country has increased ; that a larger issue should be allowed, to supjoly the increased requirements of commerce ; and that, therefore, a larger amount of notes, unrepresented by bullion, should he issued." This question is thus disposed of by Mr. Weguelin in 1857 : — " Do you consider that if the limit imposed by law of 14,000,000/. were altered, for example, to 16,000,000/., it would, in truth, add 2,000,000/. to the active circulation ? — By no means." " \Yill you state what you think the effect really would be ?— The effect would be either that those 2,000,000/. would be held in the reserve of the Bank, or, in case it occurred that the increase took place at a time when there was an adverse exchange, those 2,000,000/. would be exported from the country, and all the other figures would remain precisely the same." " It would not add, under any circumstances, to the active circulation of the public ? — It would not." " You consider that the action would be, that either it would be added to the reserve of the Bank, or that the bul- lion held by the Bank would be pro tanto diminished ? — That would be the action." " Is there, in your opinion, any sufiScient inducement, on the ground of public interest, to make an extension beyond the present limit of 14,000,000/.? — I see no advantage or particular object to be gained by it." " The advantage of saving 2,000,000/. of capital would not, in your opinion, be equal to the mischief that might result from the change ? — I think it would be of an insig- nificant character, and it would diminish the amount of actual reserve of bullion in the country." ♦' AVould not those 2,000,000/. go out of the country at the first adverse exchange, and not come back ; would not that be the ultimate effect? — That would be the ultimate effect." ON THE BANK ACTS IN 185-3. 433 69. It has been observed before, that while, on the one hand, the great increase of retail transactions has caused an increased demand for the smaller notes, concurrently with the increased demand for gold, yet, on the other hand, so great has been the effect of increasing facilities in banking, that a saving of a coi*responding amount has been effected in the larger notes. The proportions are those represented in the following table : — Yearly Averages of Notes with the Public. Notes of lit. of Cir- in. Notes of cG g Notes of Year. 5/. and O "r? '-H 20Z. to o __ .2 200/. to S-S-5 Total. lOl. For Toti cula 100/. 1000/. Per Tot cuhi £. m. £. m. £.m. ' £. m. 1844 9,263 45-7 5,735 28-3 5,253 26- 20,241 1845 9,698 46-9 6,082 29-3 4,942 23-8 20,722 1846 9,918 48-9 5,778 28-5 4,590 22-6 20,286 1847 9,591 501 5,498 28-7 4.066 21-2 19,155 1848 8,732 48-3 5,046 27-9 4,307 23-8 18.085 1849 8,692 47-2 5,234 28-5 4,477 24-3 18.403 1850 9,164 47-2 5,587 28 8 4,646 24- 19,398 1851 9,362 48-1 5,554 28-5 4,557 23-4 19.473 1852 9,839 45- 6,161 28-2 5,856 26-8 21.856 1853 10,699 47-3 6,393 28-2 5,541 24-5 22,653 1854 10,565 51- 5,910 28-5 4,234 20-5 20,709 1855 10,628 53-6 5,706 28-9 3,459 17-5 19,793 1856 10,680 54-4 5,645 28-7 3,323 16-9 19,648 1857 10,659 54-7 5,567 28 6 3,241 16-7 19,467 70. The effect has been so great that, notwithstanding the great increase of trade, the whole amount of bank notes has actually diminished since 1844, and under the present law still continues gi'adually to decline. It must be taken, therefore, that in ordinary times there is no cognizable advantage to be obtained by the commercial interest from the power of increasing the amount of notes which may be issued without the deposit of bullion. 71. It is here necessary for your Committee to advert to the question whether the law should be left, subject only to that powder which was contemplated by Sir Kobert Peel and Mr. Huskisson, and was actually exercised by the two Go- vernments of 1847 and 1857 ; or Avhether, on the other hand, provision should be made in advance for such contingencies. 434 EEPORT FROM THE SELECT COMMITTEE chap. i. and the conditions expressly laid down on which the issue of an increased number of bank notes may, in the time of pres- sure, be allowed. 72. Your Committee think that such a provision could not be regarded as any violation of the principle of the Act of 1844. To have introduced such an express provision when the law itself was first adopted by Parliament, or even when, as in 1848, it had only been a few years in operation, and was comparatively little understood, was a far more serious question of policy and of prudence than it can in fairness be regarded at the present time. Yet the inter- ference of Government in an extreme case must, in fact, be taken to have been contemplated by the framers of that Act. Mr. Cotton stated to the Committee of 1847-8 that this subject was considered when the Act was under preparation in 1844, and that Sir Robert Peel's opinion was thus ex- pressed : — "If it be necessary to assume a grave respon- fibility, I daresay men will be found willing to assume such a responsibility." It scarcely, therefore, constitutes, of itself, a sufficient ground lor bringing this important and difficult subject under the review of Parliament, and may properly await the decision of the Legislature when the other branches of the subject shall again be dealt v^^ith. 73. They would, however, here take occasion to observe that, if new provisions shall at any future time be made by Parliament, the great object of securing the maintenance, at the time of severest pressure, of an adequate supply of bul- lion should be guarded with the utmost caution. 74. In considering these new provisions, your Committee assume that no hazard will be incurred with regard to the foreign exchanges, but that the efficient action of the law in that respect will be firmly maintained. The mischief your Committee are now considering is the domestic drain occa- sioned by panic, and evidenced by hoarding, which, in cases of commercial crisis, supervenes upon a foreign drain, and creates an abrupt interference with the circulation, by withdrawing irom it for a time, for the purpose of hoarding, a part of the ordinary circulating medium. 75. Your Committee have already touched upon other points in which the enactments of the Legislature in 1844 and 1845 fall short of the principles on wliich those enact- ments are founded, and desire to express their concurrence in the wisdom of adapting practical legislation in an Impor- tant (leirree to the existinii; interests and wishes of t])e com- munity. Of these questions, an important one is tliat of tlic CHAP. I. ON THE BANK ACTS IN 1858. 435 small note clvculation still existing in Scotland and Ireland. 1'lie advice of Adam Smith (B. 2. c. 2), that no bank notes should be issued in any part of the kingdom for a smaller sum than 5/., is enforced by the Bank Directors as a matter of principle, both in 1857, and again more strongly in 1858, after the experience of the autumn of last year. It is, however, still a question into which the same considerations enter in a modified degree, by which all Governments and every suc- ceeding Parliament have been influenced, from 1826 to the present time, whether the aii))lication of this principle shall he extended to Scotland and Ireland. The failure of the Western Bank has now withdrawn 337,938/., or about jQ^h part, from the authorised circulation of Scotland ; and the Act of 1845 operates with a greater proportionate effect both upon Scotland and Ireland as the population and trade of those countries increase, and the pro])ortIon of the retail or small bank note circulation represented by bullion to the authorised or unrepresented part increases also. 76. On the other hand, it appears from the evidence that, notwithstanding the expense which the requirements of the Act of 1845 impose upon Scotland, there has been a very remarkable increase in the number of branch banks esta- blished since the passing of the Act ; so that the number of banks in Scotland, including branches, now actually exceeds the number of the whole of the banks and branches in Eng- land, or is very nearly equal to it ; and that the amount with- drawn from circulation by the failure of the Western Bank has been supplied by an amount represented by bullion, without any more severe terms being imposed on the cus- tomers of the banks. Sir George Clerk says : — " To the banks, I think, you do not consider that so much an object as to the population? — I do not think the banks have so strong an opinion In favour of the retention of the 17. note circulation as they certainly expressed before the Committee which sat upon that very subject in 1826 ; but I believe that the general opinion of the banks would be strongly in favour of the continuance of the law as it at present stands." " If it were to be altered, they would meet the case as regarded themselves by some slight Increase of commission charged to their customers ? — Probably in that way." 77. Without entering into any question respecting an issue of small notes on the credit of the State, the Com- mittee desire It should be understood as their opinion that the subject of the issue of small notes in Scotland and 436 EEPORT FROM THE SELECT COMMITTEE chap. i. Ireland, and of private issues generally in the United King- dom, should be reserved, without prejudice, for the future consideration of Parliament. 78. The Bank of Ireland complained of a special pro- hibition laid on them with regard to mortgages ; and Mr. Latouche attended on behalf of the private bankers of Ire- land to complain of an Act passed by the Irish Parliament in 1759. There appears no very obvious reason for the continuance of antiquated restrictions peculiar to Ireland. But neither of these subjects properly belongs to the present inquiry. 79. Some smaller points connected with the wording and legal operation of the Acts of 1844 have been brougiit under the notice of your Committee, with which they do not think it necessary to encumber their Report. It will be desirable that these subjects, especially the question whether a bank of issue whicli suspends its payments even for the shortest time should not lose the privilege of issue, should be carefully considered whenever the Executive Govern- ment shall next submit to the House a measure for the regulation of the relations which subsist between the Go- vernment and the Bank. 80. The pecuniary arrangements subsisting between the Executive Government and the Bank appear to your Com- mittee to fall within the terms of their order of reference ; and the Committee of 1857 took some evidence from the Governor on that subject. But your Committee understand from the Chancellor of the Exchequer that the subject is now under the consideration of the Treasury and the Bank. They think it doubtful also whether, in case it shall be neces- sary to submit it to such a consideration, separate from the v/ider questions which have come under the notice of this Committee, it would not be expedient that a less numerous Committee should be apjiointed for that purpose. The appointment of a separate Committee may tend to produce the useful conviction that it is not necessary to unsettle the great principles whicli regulate our monetary system, merely because the pecuninry relations between the Treasury and the Bank may require to be re-considered. 81. It appears to your Committee that no mischief will result from at least a temporary continuance of the present state of things, under which the Bank of England holds the powers given by the Act of 1844, subject to a notice of twelve months, which may at any time be given by the House of Commons through Mr. Speaker. They agree CHAP. I. ON THE BANK ACTS IN 185?. 437 with the opinion expressed by Mr. Goulburn in 1844. The Bank Directors had suggested the propriety of renewing the arrangement for twenty years, with the power of giving notice at the expiration of ten, as has been done in 1833. Sir Robert Peel's Government preferred the limit, which was actually adopted, of ten years ; the Act, at the ex- piration of that period, to be terminable at any time upon a notice of twelve months ; but until such notice be given, to continue in force. Mr. Goulburn thus accounts for this decision. In making the proposal, he says, " The Govern- ment were mainly influenced by the consideration that it was not advisable unnecessarily to agitate questions affecting the banking interest and the currency of the country." 82. Your Committee have stated the reasons by which it is established to their satisfaction, that the recent commercial crisis in this country, as well as in America and in the North of Europe, was mainly owing to excessive speculation and abuse of credit ; and also that in the time of pressure the houses which deserved assistance received it from the Bank of England in a manner in which that establishment would not have been able to give it, except for the bullion retained in their coffers ; — and your Committee are satisfied to leave in the discretion of the Executive Government the time and prudent opportunity of giving further effect to those prin- ciples by which the convertibility of the Bank of England note has been kept above suspicion. July 1, 1858. 438 EXTRACTS FROM chap. n. CHAP. 11. ON THE REPORT OF THE COMMITTEE EXTRACTS FROM LORD OVERSTONE'S evidence ON THE RATE OF INTEREST INDI- CATING THE VALUE OF MONEY OPINIONS OF ADAM SMITH AND HUME ON THE EFFECT OF THE GOLD AND SILVEK MINES IN AMERICA ON THE INTEREST OF MONET ON INTEREST AND USURY ON PAPER MONEY VARYING IN AMOUNT AS A METALLIC CIRCULATION. Soon after the publication of my " Treatise on Coins, Currency, and Banking," the Select Committee on the Bank Acts presented the preceding Report. I have not thought it necessary to give all the par- ticulars relating to some failures which took place durino- the crisis of 1857, and wliich are detailed in sections 33, 35, 36, 39, 45, 46, 47, 48, 50, of the Report. I have extracted, I think, sufficient from those sections to show the character of the houses, and the proceedings towards them of the Bank of England. It is to be remembered that the Evidence was given previously to this disastrous period, the exami- nations of witnesses being closed on the 24th July, 1857 ; while the Government letter, which suspended, the second time, the most important operation of the Bank Act of 1844, is dated 12th November, 1857, and that the Report is dated 1st July, 1858. This Report has given additional importance to the opinions in favour of the l^ank Act, the Commit- tee expressing a general acquiescence in the princi- ples on wliich it is founded, although they decline coming to a conclusion upon some subjects of contro- versy involved in the Evidence taken in 1857. 1 have already, in my " Treatise," given a portion of Lord Overstone's evidence, on which I made some remarks: the following evidence will further illus- trate his lordship's views, on which I beg to offer some observations. r. H. LORD oyeestone's evidexce. 439 The Right Hon. Lord Overstone, 7tli July, 1857. 3648. — The public became dissatisfied, and very reason- ably so ; some more definite and scientific system for the regulation of the paper money of the country Avas demanded. That practical and sagacious statesman. Sir Robert Peel, applied his mind to the subject. He at once grasped the true character of the paper bank note. He saw that if it was to be convertible at all times into gold, it must be treated as the direct representative, or I may say, as the shadow of the gold coin ; and from this it followed as a necessary consequence, that it must at all times be preserved at what would be the amount of a gold circulation. To secure this purjiose, it became obviously necessary to sepa- rate the accounts — that is, to establish an effectual distinction between the regulation of the amount of paper money, and the conduct of Banking business ; to render them as separate in form of account, and in fact, as they are really separate in principle ; to subject the paper money to positive regulation by law as regards the fluctuations of its amount, whilst the conduct of banking business is left subjected to the principle of free competition, and personal discretion and responsi- bility. Upon this principle, and with this view, the Act of 1844 was passed — Having arrived at a distinct and correct understanding of the true character and function of paper money, i.e. of bank notes, that they are certificates or representatives of bullion, to be kept at their proper amount by positive regulation of the quantity issued, as the coin would be necessarily pre- served at its proper amount by the regulation which arises from its intrinsic value, — the next important point for consi- deration is the extent to which this principle is recognised and carried out in the provisions of the Act of 1844. By that Act a positive limit is fixed to all the country issues. The fluctuations, therefore, in the amount of paper money are necessarily thrown upon the notes of the Bank of Eng- land exclusively, and the amount of the issues of Bank of England notes is made to vary with the bullion. By this means effectual security is obtained, that the amount of paper money in the country shall at all times conform to what would be the amount of a metallic circulation. Of this there can be no doubt. The paper money of the country, under tlie Act of 1844, conforms strictly in amount, and conse- quent value, to a metallic circulation ; those fluctuations of amount, and those only, which would occur under a purely 440 EXTRACTS FROM chap. ii. metallic circulation, can and will occur under our present mixed circulation of gold and paper, as regulated by the Act of 1844. This being the case, it only remains to consider what has been the practical result of the adoption of these principles. The effectual protection of the bullion reserve was the primary object and purpose of the Act; this has been fully accomplished. The bullion has been subjected to two severe drains, in 1847, and again in 1856-1857 ; but in neither case has it been reduced to an unduly low amount; at no time, I believe, has it fallen below 8,000,000Z. — Has this result been accomplished by an improper injury or sacrifice of our trading and commercial interests? — For an answer to this question, we may turn to the reports of the Board of Trade, showing, during the 13 years in which the Act has been in operation, an increase of imports and exports from 45,000,000/. to 120,000,000/. We may also appeal to the universal recognition that the last year, although dedi- cated to the adjustment of heavy w^ar expenditure, and ex- posed throughout to severe pressure by adverse exchanges, has been nevertheless a period of prosperity almost without example — It may be sufficient now to observe, that these provisions, the separation of the accounts, and the positive restriction of the amount of paper issues, constitute the only real and effectual distinction between the monetary difficulties and dangers which attended every period of drain previous to 1844, and the striking contrast which the subsequent period presents 3649. I apprehend that the plain, clear, and distinct principle of the question is this, — that by having limited the paper money, so that it has fluctuated with the bullion, as the bullion has gone out the money of the country has been diminished, until it reached a certa.in point, below which the national wants and necessities of the country would not permit it to be further diminished. By that means the money of this country was increased in value, so that it no longer became advantageous to send commodities to this country ; but money was the best remittance to send to this country, and by that means the store of bullion was imme- diately replenished. It is the plain result, from the opera- tion of the principle with regard to the interchange of the precious metals throughout the world, which has been recog- nised and acknowledged by every authority which has ever written upon the subject. 3651. The operation of the Act of 1844 is this, — that the CHAP. II. LORD OVERSTONE'S EVIDENCE. 441 bank notes, In otlicr words, the money of the country, must decrease as the drain of bullion goes on. That decrease in the money of the country must augment its value ; that augmentation of its value must produce two effects : one is, that it causes a temporary rise in the rate of interest, to which the Bank must conform ; and the other is, that it induces the bullion merchants of this country to write to their correspondents abroad, to say, " Money in relation to all other things has become more valuable in this country than it Avas; therefore in your transactions with us remit money in preference to other things," and in that way the exchanges are soon rectified. 3652. The rate of discount is the value of money, and that is regulated by one of two things. Generally in all its great and permanent fluctuations, it is really an alteration in the value of capital ; in some of its minor fluctuations, minor as to extent and as to duration, it may be the result of a decrease in the quantity of money 3657. When the rate of interest has naturally been rising on former occasions, the Bank has been slow and tardy in conforming to that natural increase in the value of money, and mischief has ensued from it ; but the Bank would always best serve the pubhc, if it were to conform as strictly and as speedily as is possible to the real market value. 3665. On the whole, you would not be disposed to recommend any change similar to that contemplated in the question referred to, — namely, the withdrawal of the business of issue from the Governor and Company of the Bank of England, and the placing it in the hands of a body nomi- nated by the Government, or by Act of Parliament ? — I must again say, that I dislike the expression of the business of issue being in the hands of the Governor and Company of the Bank of England. I consider the business of issue to be in the hands of the Issue Department, and in the hands of the law of the country. The Governor and Company of the Bank of England have no power in the matter of any sort or kind ; they are merely the clerks who have to do the busi- ness which the law has ordained. 3815. 3816. Oscillations in the rate of discount are mainly oscillations in the value of capital. " In their smaller character they are oscillations in the value of the money of the country." 3819. INIoney I apprehend to be this : it is necessary for carrying on the relations of civilised communities, that there should be some one universal equivalent which is taken as 442 EXTEACTS FEOM chap. ii. such bv nil countries, and the precious metals are taken and adopted in that character. Then the various conditions of different countries assign a certain portion of the precious metals of the world to each country, and the portion so assigned to each country, for the purpose of acting as the imiversal equivalent, is the money of that country. 3899. 10th July.— You do nothold the opinion that thenotes in the hands of the public ought to fluctuate now in relation to the fluctuations of the bullion in the Bank ? — The opinion which I hold is perfectly plain and distinct, that bank notes are nothing more than certificates of bullion in deposit, and that they ought to fluctuate exactly as the bullion fluctuates. 3900. I speak of the bank notes in the hands of the public ? — But I never do speak of them in that sense of the word, because I maintain distinctly that the Bank of Eng- land is itself a most important portion of the public. 3901. Still you admit that the whole of the evidence prior to 1844 proceeded upon the notes in the hands of the public only? — Yes; it proceeded upon the notes in the hands of the public only, because that was the only know- ledge which we then possessed. But I repeat, what I have stated over and over again, and what you will find I gave in answer to you on a former examination, that we always said that whenever the accounts were put into a correct and intelligible and honest form, we should then have some knowledge of the Bank reserve, and that that Bank reserve was a very important part of the c[uestion. 3935. Supposing that we had a purely metallic currency, and no notes at all, and that there was a drain of bullion, which in the same manner would be satisfied from the reserve of the Bank of England, would it in any w^ay act upon the metallic coin in the country ? — If you assume that the whole money of the country is metallic, and if you assume that a certain portion of that metallic money is taken out of the country, then there is a diminution of the money of the country to that extent ; if that diminution takes place entirely out of the reserve existing in any banking establishment, provided the condition of that reserve is made known to the public, the action will be very powerful and very salutary. 3936. But the quantity of coin circulating in the hands of the public will not be diminished by a drain upon the reserve of the Bank of England in the event of an adverse forci2;n exchano-e ? — There is no doubt that the bullion lying in the Issue Department of the Bank of England is kept more immediately to meet the effects of a foreign drain, CHAP. n. LORD OVERSTONE'S EVIDENCE. 443 to deal with foreign exchanges. No doubt, the pressure through the foreign exchanges will in the first instance be met by the bullion which is in the coffers of the Issue De- partment of the Bank of Englanank Act, and I cannot comprehend the force of the following reasoning. J. G.'Hubbard, Esq., June 26, 1857:— 2633. — " I beg to observe that there is an immense differ- ence between a security which is realised and a security which is merely dreamt of. Before the Act of 1844, the security Avas one resting only upon o})inion — resting upon caprice and arbitrary action, and uncontrolled by any legal limit — and you cannot have security -without limitation." 2634. — " Was not it equally the case before the Act of 1844, as it has been since, — that the security for the pay- ment of the notes was the bullion Avhich the Bank held to meet them ? " — " BuUion was the material in which the promise Avas to be fulfilled, but bullion never AA'as provided for the payment of all the bank notes." " You have noAV an amount of bullion AA'liich is equally incapable of meeting all those notes, but Avhich is more than capable of meeting all the notes Avhich, under any event short of a popular revolution, could possibly be presented." *' Before the Act of 1844, you might have issued an in- definite amount of credit paper; and if you had issued an indefinite amount of credit paper, you could not possibly have redeemed those notes in bullion when a crisis came ; that Avould have endangered their convertibility." 2635. — " The Avliole, therefore, amounts to having a proper reserve of bullion to meet the liabilities of the Bank ? — No ; it is impossible to say that any given amount of bullion would meet all the notes; it must be done by a limitation of the amount of credit paper." What is meant by a security realised? — A security for the payment of a debt may be sold, and with the money a debt may be paid; a security is only a guarantee for the payment; limitation of issue, " when a crisis comes," does not ensure the converti- bility of the note, that is, the payment of the note CHAP. VIII. THE EFFECT OF LIMITATION. 509 in bullion by ihcBanh of England. By limitation the prices of goods, the property of others, are lowered, and these goods are exported instead of bullion; but this is neither payment nor convertibility in bullion of the note by the Bank of England. Two things are to be proved, that the Bank of Eng- land note is payable in bullioJi^snid that appropriation of the property of others by pressure, to obtain the bullion or to retain the bullion, is justifiable. No additional notes can be issued by the issue de- partment without a corresponding amount of bullion being there deposited ; therefore the excess of bullion beyond the notes continues the same. The bullion taken to the issue department for notes does not affect the amount of notes relativel}^ to the bullion there; but the amount of notes m the cir- culation afi'ects the amount of notes available for presentation to obtain bullion through the banking department. There will always be in the issue department an amount of bullion which cannot be claimed, equal to the excess of notes in circulation compared to the amount of notes issued on securities. In times of commercial embarrassment, when the notes in circulation or hoarded are the greatest, the bullion in the issue department will be com- paratively the greatest, as happened in 1847, 1856, 1857, when about eis-ht millions of bullion were locked up in the cofters of the issue department. If the amount of bullion in the issue depart- ment were equal to all the notes issued, the result would be that there would be gold lying idle in the issue department equal to all the notes in the cir- culation and in the banking department; but the effect would be, not that there would be more bul- lion available for the foreign trade, but that there would be locked up in the coffers of the issue de- partment fourteen millions of bullion, in additii)n to the eight millions in 1817 and 1857; there would 510 ON BULLION OBTAINED BY CHEQUES. chap. viii. be twenty-two miliions of bullion ; and, on the con- trary, if sixteen millions or eighteen millions of notes were issued on securities, there would be six millions or four millions of bullion, instead of eight millions, lying idle in the issue department ; the bullion could not be drained from that department. The securi- ties and the bullion locked up in that department are equally unavailable for exportation, neither is the bullion available for the home circulation of coins. Sir Robert Peel, p. 22, p. 142, a?ite:—''l will not weary the House with a discussion as to the pre- cise nature of deposits, and whether they constitute a part of the currency of the country." The bullion in the Bank of England previously to the Bank Act, including the 6,176,270/. in the issue department, was a deposit, for which the depositors had received either bank notes or a credit, and the de- positors might have obtained this bullion either by cheques or Bank of England notes: the claim of the depositors and the liability of the Bank remained the same, before and after the passing of the Bank Act, but the means of obtaining the bullion were changed ; the depositors could no longer demand the bullion with cheques; they could only obtain it with Bank of England notes, and the Bank notes issued were limited to that amount, that notes could not be spared from the circulation to demand it — as Lord Over- stone states (pp. 341, 342, ante) : — 3980. — " The Act of 1844 has secured such an amount of paper money in this country as shall render it impossible for the bullion reserve to he drained out of the country." And 4027 : — " There is such a quantity of bullion held in reserve that the country will never bear a reduction of its notes to so low an amount as to exhaust its bullion." The six or seven millions of bullion, for which no notes were given to the banking department, remain in the issue department for want of notes to obtain it, as they cannot be spared from the circulation; and CHAP. VIII. ON PAYMENT OF BGLLION BY THE BANK. 511 this bullion cannot be demanded by clioques, as before the passing of the Bank Act. It is not the limitation of the amount of bank notes only, but the limitation of payment by banh notes alone^ which prevent the bul- lion being exhausted. I am not aware that there is any obligation on the issue department to deliver bul- lion in payment of I^aiik of England notes presented by the banking department. Sir Robert Peel (p. id'l) speaks of incurring " no risk of infringing upon that principle, which will impose a positive obliga- tion upon the Bank to receive gold in exchange for notes, and to pay notes in gold coin on demand." And the 2nd clause of the Bank Act enacts (p. 383, ante) : — " From and after such transfer and appropriation to the said issue department as aforesaid, it shall not be lawful for the said Governor and Company to issue Bank of England notes, either into the banking department of the Bank of England, or to any persons or person -whatsoever, save in exchange for other Bank of England notes, or for gold coin, or for gold or silver bullion received or purchased for the said issue department, under the provisions of this Act ; or in exchange for securities acquired or taken in the said issue department under the provisions herein contained." The issue department must give Bank of England notes for bullion, but I do not find in the Act that that department is obliged to give bullion for notes. L L 512 CHAP. IX. ERUOR OF THE AUTHOR — SIR R. PEEL ON THE POUND — THE BANK OP ENGLAND CANNOT PURCHASE BULLION ABROAD — EXTRACTS FROM THE liEPORT OF THE COMMITTEE ADAM SMITH ON A PRETENDED PAYMENT OF NATIONAL DEBTS MR. WEGUELIN ON PRESSURE REMARKS ON THE NEW MONETARY SCIENCE — MR. HUBBARD ON THE RESERVE MR. RODWELL ON THE RESERVE — REMARKS ON COMMERCE BEING GOVERNED BY THE RESERVE. In the first part of this treatise I considered the subject of the currency, under the erroneous impres- sion, tliat it was obligatory on the Bank of England to pay bullion for their notes, when demanded; and by the establishment of a bonded warehouse for bul- lion as for other goods, such as is described p. 110, a7ite^ I purposed to supersede that demand by making each owner of bullion the storekeeper of it, as of any other commodity in bond. Sir Robert Peel, by a wrong definition of the " pound," included in that definition bullion or un- coined gold, which is not mone}?-, but merchandise; it would apply to ingots of gold which vary in value according to their weight and fineness, and which are valued by the " sovereign," the only money, and can- not themselves be money ; it would be valuing money by itself, which is impossible. In pursuance of Mr. Eicardo's plan, we are informed by Mr. Haggard, J). 34 : " There were stamped at the Mint 2028 ingots, which the Act states should be 60 oz. bars, but not one of the number was precisely that weight." At the conclusion of the first part of this treatise I ob- served : " I submit, that the Bank of England should have nothing to do with the exportation and import- CHAP. IX. EXTRACTS FROM THE REPORT. 513 ation, or with the trade, of bullion. It is a commo- dity which should be viewed, with regard to the foreign trade, in the same light as tobacco or sugar," and which, I now add, the Bank of England is under no greater obligation to deliver in payment of their notes than they are obliged to pay their notes with tea, tobacco, or any other merchandise, and Vv hich the state should absolutely prohibit, as the bullion, when not in the home market, cannot be purchased abroad by the Bank of England, who have no commodities and where their notes are not current. The Bank should be superseded by the warehouse ; the warehouse for bullion^ and the Bank for money^ notwithstanding the consent of the borrower and banker to pay and receive bullion in payment of the note, on the principle alluded to (p. 473, mite)^ of the obligation of building party walls ; because it involves the insecurity of property, and "ought to be restrained by the laws of all governments, of the most free as well as of the most despotical." The committee of 1857 entertain no doubt of the propriety and necessity of securing by the Bank of England an adequate suj^ply of bullion, as will be seen by the following extracts from their report : — " Section 60. — That the public welfare, in times of com- mercial disaster, requires the maintenance of an adequate supply of bullion at the Bank, is the opinion of jNIr. Tooke, Mr. Newmarch, and jSIr. INIill, as well as of Lord Overstone, Mr. Norman, and Mr. Hubbard. That the supply neces- sarily maintained in the coifers of that establishment, under the provisions of the Act of 1844, is greater than that which was ever maintained under circumstances of pressure in former tunes, is a fact beyond dispute. " That the opinion of the present Bank directors is strongly in favour of maintaining the Act of 1844, appears in the evidence. " They attribute the maintenance of that amount of bul- lion to the regulations provided by the Act. " If they had been induced to issue more than the pro- portion which the law allowed, more gold would have gone L L 2 514 EXTRACTS FROM THE REPORT. chap. ix. out by the action of the foreign exchanges, and the conse- quences wonld have been that they vrould have been left Avith less gold as the panic came on : and then, even with the permission to issue more notes, they would not have felt w^arranted in hazarding the circulation by doing so. " They therefore recommend that no relaxation should be made in the provisions of that la^v." " Section 61. — In this opinion the Governor of the Bank of Ireland, the representatives both of the chartered and unchartered Banks of Scotland, the Chairman of the Associ- ation of Private Bankers, and Mr. Alderman Salomons of the London and Westminster Bank, concur." "Section 66. — The main object of the legislation in question was undoubtedly to secure the variation of the paper currency of the kingdom, according to the same laws by which a metallic circulation would vary. No one contends that this object has not been obtained." " Section 67. — It may be laid down that in the opinion of every practical witness, who is an advocate for the con- vertibility of note, the amount of bullion retained in the cofters of the Bank, under the operation of the exist- ing law, is not greater than a due regard to prudence would require, even if the law Avere altered." " Section 73. — They Avould, however, here take occasion to observe, that if new pi'ovlsions shall at any future time be made by Parliament, the great object of securing the maintenance, at the time of severest pressure, of an adequate supply of bullion, should be guarded with the utmost caution." " Section 74. — In considering these new provisions, your committee assume that no hazard will be incurred with regard to the foreio-n exchano;es, but that the efficient action of the law in that respect Avill be duly maintained." " Section 81. — It appears to your committee that no mis- chief will result from at least a temporary continuance of the })resent state of things under Avhich the Bank of England holds the j)owers given by the Act of 1844, subject to a notice of twelve months, which may at any time be given by the House of Commons through Mr. Speaker." " Section 82. — Your committee have stated the reasons by wliich it is established, to their satisfaction, that the recent commercial crisis in this country, as well as in America and the north of Europe, was mainly owing to excessive specu- lation and abuse of credit ; and also, that in the time of CHAP. IX. ADAM SMITH ON PRETENDED PAYMENT. 515 pressure the houses which deserved assistance received it from the Bank of England in a manner in which that establishment would not have ])een able to give it, ex- cept for the bullion retained in their coffers : and your com- mittee are satisfied to leave in the discretion of the Executive Government the time and prudent opportunity of giving further effect to those principles by which the convertibility of the Bank of England note has been kept above sus- picion." Adam Smith, B. 5, c. 3 : — " AVhen national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy ; some- times by an avowed one, but always by a real one, though frequently by a pretended payment. " The adulteration of the standard has exactly the same effect with what the French call an augmentation, or a direct raising of the denomination of the coin. " An augmentation, or a direct raising of the denomination of the coin, always is, and from its nature must be, an open and avowed operation. By means of it, pieces of a smaller weight and bulk are called by the same name, wliich had before been given to pieces of a greater weight and bulk. The adulteration of the standard, on the contrary, has generally been a concealed operation. By means of it pieces were issued from the Mint, of the same denominations, and, as nearly as could be contrived, of the same weight, bulk, and appearance, with pieces which had been current before of much greater value. When Kiug John of France, in order to pay his debts, adulterated his coin, all the officers of his Mint were sw^ornto secrecy. Both operations are un- just. But a simple augmentation is an injustice of open violence, whereas an adulteration is an injustice of trea- cherous fraud. This latter operation, therefore, as soon as it has been discovered — and it never could be concealed very long — has always excited much greater indignation than the former. The coin, after any considerable augmentation, has very seldom been brought back to its former Aveight ; but after the greatest adulterations it has almost always been brouji'ht back to its former fineness. It has scarce ever 516 ON PRESSURE ON CREDIT. chap. ix. happened that the fury and indignation of the people could otherwise be appeased." T. M. Weguelin, Esq., 19th May, 1857 :— " 558. — Then the benefit of securing the convertibility of your currency is a general one, but the means of doing it by the mode in Avhich the Bank acts, bears upon a particular section of the trade of this country ? — It bears upon that section of the trade that most uses credit, and I know of no other section that it can fall upon. It falls first of all upon those who use credit for longer periods, and ultimately it must fall upon all those who use credit at all." "559. — Can you specify what class of bills, chiefly, are the long bills in this country ? — Principally East India and China bills." " 560. — In the corn trade, are the bills generally of long date? — I tliink corn bills are generally drawn at three months." The bullion is the key of the box for obtaining bank notes from the issue department, as bank notes are the key of the box for obtaining bullion, through the medium of the banking department; those who Avant bullion for exportation take bank notes to the banking department, who carry them to the issue de- partment, who give bullion for the amount, and can- cel the notes : in this way a demand for bullion at the banking de])artment lessens the notes of the reserve to the amount of the bullion delivered, and the amount of the reserve is also liable to be lessened by a demand for coin, in consequence of an extension of trade requiring more notes in the circulation. The bullion taken from the issue department does not distress the banking department until it reaches a certain point ; and the new science consists in watch- ing and guarding against too great an export of bullion, which may affect the reserve. It therefore becomes of the utmost importance that every one should watch the reserve, and foresee the effects and calculate the probabilities, of its being lessened or in- creased : such as the state of the finances of foreign governments ; whether they may require loans ; the CHAP. IX. ON THE RESERVE AS A GUIDE. 517 spirit of the commercial and tradins; community; whether the prices of sugar, tea, coffee, rum, and corn, are higher than is consistent with the safety of the reserve; wliether any nation is likely to want more gold or silver than usual ; whether the peace of Europe is likely to be maintained ; whether the growing crops promise an abundant or a deficient harvest; how the weather is likely to be, and what winds are likely to prevail affecting the arrival of the gold ships ; whether the mines in California, Australia, and Columbia, are likely to be productive, &c. All these premonitory symptoms, indicating a probable increase or decrease of the reserve, should be carefully watched by the bankers, merchants, manufacturers, mechanics, workmen, and agricultural labourers, and should not be disregarded by those interested in railway traffic. '•''B.isurn teneatis^ amici?^^ The present system regulates or nullifies the demand for bullion at the pleasure of the directors, and which is not a real payment of bullion on their part, but a real payment in goods and securities lowered in price, the property of another party ; and this proceeding is supposed to be justified by a statement of accounts, weekly published, showing the amount of notes at the service of the banking department for conducting their business, either in the trade of discounting ^\T.th notes for the domestic or national circulation, or of procuring, with notes, bullion for the foreign trade (p. 340, ante): "3895, which everybody knows and everybody watches," under the name of the reserve, or unemployed notes in the banking department. June 26, 1857.— Mr. Hubbard (2849) does not think the " bank reserve, taken as the test (the quick- silver, as it were, in the financial barometer)," can alone be depended upon : he has observed " at certain times, each rise of one million in the bullion had been accompanied by a fall of one-half per cent, in the loanable value of money on bills ; " but the quantity of bullion is subject to many "disturbing influences " 518 ON PRESSURE ON COMMERCE. chap, ix, " whicli disqualify the reserve for the office of solitary test." For the public generally, the variations in the bullion from week to week supply reliable and suffi- cient information as to the varying amount and value of money. Mr. Rodwell says (Report, section 67), "the coun- try bankers now look to the unemployed notes (in the Bank of Eno;land) as an infallible index of what it is necessary for the Bank of England to do, and for the country bankers to do also." The trade of the country is to be extended or con- tracted by raising or lowering the rate of interest as this reserve may increase or diminish ; thus the com- merce of Great Britain is to be subservient to the medium of the exchange of commodities, instead of the medium of exchange being governed in amount by the quantity of goods ; and the country by "watch- ing " the reserve is described as a i^arty to the pro- ceeding; but lest the country may not be sufficiently aware of its duty, may trade more than suits the reserve of the bank, or raise the prices of commodi- ties too high for the markets abroad, the merchants and bankers are to be made aware of their imprudence, by the banking department raising the rate of discount, giving a shock to credit, and thereby lowering the prices of commodities and securities, and to any ex- tent that the due maintenance of the reserve may require, in order to substitute these commodities and securities for exportation instead of bullion ; instead of self-reliance and self-government, they are to be guided in their commercial and banking transactions by the wants and by the prudence and firmness of the banking department; and not only the merchant, the tradesman, and the dealer in foreign securities, and the owners of property, are to " know " and "watch" the reserve, but all "those who use credit at all." 519 CHAP. X. ON THE RESERVE BEING EXPRESSED IN NOTES AND NOT IN BULLION ON THE BANK OF ENGLAND BEING IN A FALSE POSITION — ON THE FIXED VALUE OP MONEY, AND ON THE PROMISE ON THE MEASURE OF VALUE ON SIR ROBERT PEEL's DEFINITION OF THE POUND — ON THE SEPARATION OF ACCOUNTS, AND LIMITATION OF ISSUE — ON THE SYSTEM BEFORE AND AFTER THE BANK ACT. T. M. Weguelin, Esq., May 22ncl, 1857. " 884. Your notes in the Banking Department may be diminished in two ways, either by an increase in the circu- lation of the Bank, or by a withdrawal of bullion from tlie Issue Department? — Yes," " 885. Do not you think, that if in your published ac- count the real reserve was expressed in bullion, and not in notes, so as to show the reduction taking place from week to week in the amount of the bullion, and not ai)])arently in the amount of the notes, that would be a more truthful ex- pression of the fact to the public mind, and more likely to inform them correctly of the state of the case? — I think it would point out at once the cause of the scarcity of money ; that it Avas by the abstraction of bullion from the Bank," "887. To me it appears the clearest statement that can be made " — especially from having been "accustomed so many years to look at this account in this particular form." Referring to Lord Overstone's evidence pp. 442, 501, cmte., 3i^01, it appears that liis Lordship considers the great merit of the present statements to be that they convey, "some knowledge of the Bank Reserve." A statement of accounts should be intelligible at a glance, and require no explanation ; in my opinion the present elaborate statements are most compli- cated, and the reserve might be shown by the short statement, p. 506, ante. 520 POSITION OF THE BANK OF ENGLAND, chap x. 885. It is admitted in the preceding extract that *'the abstraction of bullion from the Bank is the cause of the scarcity of money." It would appear that the Bank of England was placed in a ialse position ; the Bank had received value for the notes in circulation 20,176,270/.; and they also held bullion at the same time amounting to 14,351,295Z.— together 34,527,565/. The Bank must have o-iven notes or Bank credits for the whole of this o amount — but the Bank was allowed by the Bank Act to issue notes only for 28,351,295/. ; — before the pass- in o- of the Act the bullion inii^-ht have been demanded by cheques without the intervention of notes, after the passing of the Act the bullion could be demanded only by notes — what was to be done with the bullion for which no notes were permitted to be issued, amounting to the difference between 28,351,295/. and 34,527,565/., or 6,176,270/.— the state or the govern- ment determined that this should be placed in the Issue Department, to the credit of that Department — Avho could claim this bullion for which no notes were permitted to be issued ? — the Bank of England had given hank credits for this sum, and no person could claim it, as the notes were not available to demand it — and it remains in the Issue Department, and it is possible that the elaborate statements of the Bank of England are made to allow the lawful claimants to demand it, in the case of the winding up of the Bank concern, for there can be no doubt that among the debits of the Bank are placed these claims, and in the statement submitted to lilr.AVeguelin (849), all the bullion is on the credit side of the Bank of England, with a corresponding amount of debits. Sir Robert Peel, on introducing the Bank Bill in the House of Commons, observed, p. 3 : — " I shall, therefore, proceed at once to call the attention of this Committee to a matter which enters into every transac- tion of which money forms a part. There is no contract. CHAP. X. ON THE FIXED VALUE OF MONEY. 521 public or private — no engagement national or individual — "which is unafFccted by it." — p. 137, ante. Now money forms that part of a contract which, under all circumstances of variation in the terms of a contract, remains the same : it is the measure of value, and cannot itself undergo a change : under all circumstances it is the same, in each independent countr}^ : however the value of the goods contracted for may vary, the money, the measure of that value, does not vary — in this country the only money, the only measure of value, is the gold coin, the sovereign, the only legal tender in the payment of debt to an unlimited amount. Whatever may be the condition of any country, however disturbed in its foreign relations, or domes- tic or national tranquillity, the measure of value, the money of the realm, the gold and silver money when free from adulteration, retains its nominal value^ un- less produced by less labour, and sanctioned by the same Royal authority and laws which determined its value in the exchange of commodities. This intrinsic worth, the value of the gold coin, is independent of all other acts of Government, of all systems of banking, all overtrading; is independent of exports and imports, of the balance of trade, of the exchanges, of all external conditions; and we may depend upon it, that any system which militates against this intrinsic, self-supporting quality, is un- sound — and in the same manner, the contract rests upon the obligation and promise expressed in the contract: whatever the contract may be, if it be lawful, good faith requires its performance. The promise to pay a certain sum of money can be dis- charged only by the payment, and that obligation rests upon truth. The value of the money^ of the gold and silver money, its unchangeable value, is determined by its intrinsic worth, and lawful autho- rity ; the value of the promise re.:-ts upon truth in its performance. 522 ON THE MEASURE OF VALUE. chai-. x. Sir Robert Peel, p. 7 : — "I hope I shall l)e excused if I advert at the outset to the great principles Avhich govern or ought to govern the mea- sure of value, and the medium of exchange. They lie in truth at the very foundation of our discussion;" and he proceeds, at tlie conclusion of the paragraph, *' Now I fear there is not a general agreement on those fundamental princi])les — that there is still a very material difference of opinion as to the real nature and character of the measure of value iu this country." When we consider that the measure of value in Great Britain had been clearly expounded, and de- clared by an xict of the Legislature in the j^ears 1 816 and 1819, that that measure of value was the gold " sovereign," and the gold sovereign only, known in connnon language as the " pound," understood by every one who deals in money, from the rich banker, who trades with money, to the daily labourer, who receives his wages in this coin, this pound, or sove- reign, or its fractions in the form of shillings and pence, it would appear quite useless that any time should be spent in eliciting a fact or truth so expli- citly declared by the Legislature ; but when we arrive at Sir Robert Peel's explanation, then indeed, as he gave an entirely erroneous meaning to the " pound," it is no wonder that he should perplex himself and his hearers : his followers have adopted the same conclusions from the same erroneous premises, adapt- ing the meaning of words to tlie new theory of monetary science; making a mystery of the promise to pay a debt, in tlie acknowledged money of the Realm (p. 508, ante) — changing payment to a secu- rity for payment — blending the payment of debt in the national circulation, with the exchanges which embrace only foreign payment, and substituting for the real debtors, tiie (Jovernor and Company of the J3ank of Lngland, — " tiie trade of the country " by CHAP. X. PAYMENT OF THE NOTE WITH BULLION. 523 one advocate, p. 253, ante., and tlie " country " by another, p. 243, ante. Lord Ovcrstone, 7tli July, 1857— p. 440, ante. " It may be sufficient now to observe, that these provi- sions, the sejjaration of the accounts, and the positive re- striction of the amounts of paper issues, constitute the only- real and effectual distinction between the monetary difficul- ties and dangers Avhich attended every period of drain previous to 1844, and the striking contrast which the subse- quent period presents." In consequence of the limitation of the amount of paper issues, the notes required in the domestic or national exchann;e of commodities en^Toss so much of this circulating medium, that notes cannot be spared to demand ail the !)ullion in the Issue Depart- ment, and the bullion therefore in that department cannot be exhausted ; but still the deficiency of bul- lion, when required to pay the foreign debt, must be supplied from some source : the prices of goods for exportation are therefore lowered by a stringency on credit, and these goods, the property of others, are exported to purchase bidlion or to supply the place of bullion, which would be the most convenient com- modity to pay debt abroad ; is it not inconsistent with integrity and good faith to do this? — And when we compare the periods before and after the passing of the Bank Act, we must not forget that in 1847, p. 273, ante^ Mr. George Norman stated that (2702) " every one seemed afraid of his neighbour;" and in the opinion of j\Ir. Tooke, " the time was approaching when nobody would pay anybody;" another witness, Mr. Lister, states " there was a panic through the country ; people thought they were in an iron cage and could not get out of it ; that iron cage was the Act of 1844 "—and Lord Overstone (3833) states that in 1857, "The ^Yhole machinery of the credit system of the country had been brought to a dead lock : " surely here is no ground for boasting : but before and after the passing of the Bank Act, the Bank undertook to 524 SYSTEM BEFOEE AND AFTEE THE ACT. chap. x. pay its notes with bullion, the great fallacy of the system. " On the other hand," say the Lords' Committee of 1848, "it is right to observe that some witnesses re- present the pressure in 1847 to have been less severe than at several former periods." Those who think, with Sir Robert Peel, that the only choice is between the system which prevailed before the passing of the Bank Act, and the system which has prevailed since, may draw conclusions from a comparison of the evils which have prevailed before and since the passing of that Act : — but this comparison affords no argument with those who reject both systems; who reject as fallacies the axioms that the Bank of England note is an engagement to pay bullion, that the issue of bank notes should be go- verned by the state of the exchanges, or the influx or efflux of bullion ; and who consider that the only duty of the Bank of England is to pay its notes, its debts, with coin, the lawful money of the Realm. Speech of Sir Robert Peel, May 10th, 1847 :— " The honourable Gentleman has told us what took place in 1837 and 1838 ; he said the country was then brought to the verge of ruin. But repeal the Act of 1844, and you will restore the state of the law, as it existed at that period. It gave no security. The Bank had the power of issuing paper without reference to the exchanges ; the bullion was reduced to £1,600,000 in gold, and there was every proba- bihty of the Bank not being al)ie to fulfil its engagements. Always bear in mind, if you do consent to repeal the Act of 1844, you restore the old order of things, and have not the shghtest security against the recurrence of the disorders that took place in 1838 and ISZd:'— Hansard. 525 CHAP. XI. TITE BANK OF I'^NGLAND NOTE ON THE OliLIGATION TO PAY MONEY — THE LORDS' COMMITTEE ON THE DUTY OF THE BANK REMARKS ON THE MEANS PROPOSED TO SECURE THE PAY- MENT OF THE NOTE — ON PAYMENT WITH BULLION — ON THE CONTRACT OF THE BANK MR. HARRIS ON ADULTERATING THE MEASURE OF VALUE ON PAYING THE NOTES WITH MERCHANDISE — ON THE DISPOSAL OF THE BULLION IN EXCESS OF NOTES ISSUED — ON THE NATIONAL CIRCULATION AND THE GREAT MERCANTILE REPUBLIC. Nothing can be more simple and distinct than the tenor of the Bank of England note, of which this is a copy :— "I promise to pay the bearer on demand the sum of Ten Pounds. 1863, Jan. 26, London. Jan. 26, 1863. For the Governor and Company of the Bank of England, A. B." ,We may truly say of this promissory note : That it embraces all the conditions enumerated by Adam Smith, when illustrating, in his " Theory of Moral Sentiments," the claims of justice, in the pay- ment of debt : " If I owe a man ten pounds, justice requires that I should precisely pay him ten pounds, either at the time agreed upon, or when he demands it : what I ought to perform, how much I ought to perform, when and where I ought to perform it, the whole nature and circumstances of the action prescribed, are all of them precisely fixed and deter- mined." See p. 122 atite. What is the engagement expressed in the Bank of England note ? to pay the bearer when he demands it, the " sum of ten pounds " — a definite sum of 526 ON THE DUTY OF THE BANK. chap. xi. money, it is an engagement to pay money ^ tlie money of the realm, to pay ten " sovereigns" or " pounds," declared by tlie legislature to be the only legal tender in the discharge of debt to an unlimited amount. It is not a "certain definite quardity of gold^ with a mark upon it to determine its weight and fineness," as defined by Sir Robert Peel, which constitutes money ; but the coinage of the gold into " sovereigns " by tlie mint, agreeably to the contract with the mint, and the Royal Proclamation, determining its value in the exchange of connnodities, its rateable value in the currency : the depositors also must be similarly paid in pounds, the same money. Let the legislature confine the obligation of the Bank of England to the payment of their debt in money, in coin, and prohibit the payment of uncoined gold, which is merchandise : let the weights and scales be banished from the I^ank, except to ascertain the goodness of the " sovereigns," and let the perform- ance of the promise be determined by tlie strict rules of "Justice" — with "a reverential and relicjious reo;ard to those general rules which require them" (p. 122 ant(i), " The Lords' Committee in their Report, section 13, p. 3Q7, (aitt, when treating of the " Remedial measures recommended by the witnesses," observe, " The Committee feel, in common with every "wdtness examined, the duty and obligation of maintaining at all times the practical convertibility of the bank note." " The practical questions to be settled at present are, whether this great benefit is attained Avith certainty ; whether it is attained by proper means ; and whether the restrictions of the Act of 1844 are not attended with grievous and un- necessary e\ils of a collateral kind." " An attempt to enforce by laAv, under all circumstances, one fixed and inflexible rule for the management of a Na- tional Bank of Issue, seems inconsistent with the l^est Avritten authorities, Avith the general principles of economical science, as well as Avith the testimony of many AA'itnesses of practical knowledge and experience. It can hardly fail to be pro- cuAr. XI. ON SCIENTIFIC TRUTH. 527 ductive of most serious evils, more especially when a con- traction of issues, indispensable in a state of adverse foreign exchanges, is rendered imperative, as it is by the Act of 1844, under circumstances which may be wholly opposite." P. 311. ayite. "The first duty of* the Bank of England is, so to conduct its afiairs as to secure means for the per- formance of all its engagements with integrity and good faith. Prudence and discretion, the application of scientific truth, to assist, and at times to correct, the inferences drawn from experience, should be its guiding principles ; but no narrow views of the mere pecuniary interests of its proprietors should exclusively control its action. " To the Bank of England, Parliament has confided great privileges and exclusive powers; for the exercise of these powers the Bank is responsible." With due respect, I beg to submit the following remarks: — Their Lordships very justly observe that " the first duty of the Bank of England is, so to con- duct its affairs as to secure means for the perform- ance of all its engagements with integrity and good faith." But the Governor and Company promise to pay a sum of money^ and it rests with them to find the " proper means " of paying it. This is the duty of the Bank of England, and it is their duty to conduct their affairs with " prudence and discretion," to pay their debt, in discharge of their obligation, with " good faith and integrity." No one "will deny these moral obligations founded on the immutable princi- ples of truth and justice. When the committee speak of "economical science ;" of " the application of scientific truth, to assist, and at times to correct, the inferences drawn from ex- perience," as " its guiding principles;" of " contrac- tion of issue indispensable in an adverse state of the foreign exchanges ; " and that " no narrow views of the mere pecuniary interests of its proprietors should exclusively control its actions," they must extend the obligations of the Governor and Company beyond the M 31 528 ON SCIENCE APPLIED TO PAYMENT, chap, xi duty to pay their debt in the lawful money of the realm, agreeably to the promise contained in the pro- missory note ; allusion must be here made to the de- livery of bullion, of merchandise, and not to the pay- ment of a sum of money — to pay the notes with bullion is no duty of the Bank of England, because the Bank, having no commodities with which to purchase this bullion abroad, cannot obtain it with " integrity and good faith." To oblige others, by means of contraction or ex- orbitant interest, to export their goods, lowered in price, in order to purchase, with these cheapened goods, the bullion required by the Bank of England to pay their debts with bullion, which the Bank can purchase in the liome marJcet with their notes, when it is imported^ so far from being the " proper means " of " maintaining the practical convertibility " of the bank note, or, in appropriate language, the payment of the note, is a direct violation of " integrity and good faith ;" nor am I aware that any Act of Parliament has expressly conferred such a power or such a privilege on the Bank of England, and " science " would dis- claim any association with the performance of a pro- mise or the payment of a debt. The obliiration of the Bank of Ensfland is defined and limited by the terms of the contract, as expressed in the note and in the bank credit, to the payment in money, to pay pounds or sovereigns the money of the realm; it does not extend to pay bullion or merchan- dise, which is not a legal tender in the payment of debt — the note being payable in money to the bearer implies that it is payable where that money is current. To supply the foreign trade, the international trade of the great mercantile republic with bullion is foreign to the obligation, and to tlie duty of the Bank of England. Because one or more members of this great com- munity, the international traders of the world, find bullion the most convenient commodity with which CHAP. XI. Mil. HARRIS ON THE MEASURE OF VALUE. 529 to purchase goods abroad, or to pay their foreign debts, is the Bank of England to find this bullion either directly or indirectly, either by buying it in the home market, or by lowering the prices of com- modities, that these cheapened goods may be the means of importing it from abroad, to the great loss of the owners? Is the Bank of England to furnish bullion to the subjects of France, or of Spain, or of the United States, or of our East Indian Empire, or of the Emperor of China, at a loss of 20 or 30 per cent, to the subjects of Great Britain who import it, be- cause these remote countries have need of this con- venient commodity? Sir Robert Peel (p. 11) quotes the words of Mr. Harris : — " Take the opinion of Mr. Harris, an officer of the mint, and an eminent writer on the subject, a century before the Bank Restriction Act." " All payments abroad are regulated by the course of ex- change, and that is founded on the intrinsic value and not on the mere names of coins. We may break the public faith here, and curtail the long established measure of pro- perty, but foreigners will make ample allowance for what we may do ; and however we may rob and cheat one another, will secure themselves, and make advantage of our discredit, by bringing the exchanges against us beyond the par." What is the established measure of property in this country ? The gold coin the "sovereign," the only legal tender for payment to any amount ; that mea- sure of value is adopted in the national circulation, but the obligation of the Bank is extended beyond its legitimate sphere when the notes are paid in bullion. The debt must be paid to the foreigner by those who owe it, the foreigner will secure himself; but at whose expense is this bullion procured? Not at the expense of the Bank of England, who erroneously undertake to pay it; but at the cost of holders of goods and securities lowered purposely in value, with- out their consent, and who may have had nothing to 530 ON THE ABSENCE OF NOTES FOE BULLION, chap. xi. do with the Bank of England, the foreigner or the exchanges ; and may it not be said that " we rob and cheat one another," to nse the words of Mr. Harris, when we levy a sort of forced contribution upon one portion of the community, to enable the Bank of England to supply the great mercantile republic with bullion, a commodity, with the supply of which neither the community, the Bank of England, nor the country has anj^thing to do? The advocates of the Bank Act have given three meanings to the word money : coin, and Bank of Eng- land notes payable on demand in coin, and also bullion when demanded for exportation. The Bank of England should be bound and limited by its contract, w^liich excludes all reference to the prices of com- modities, to bullion, to the exchanges, or to the currency of other countries. I submit that the Bank of England is lowered from its true position of paying its debts from its own assets, to the unworthy proceeding of enforcing upon others an importation of bullion, in exchange for their goods, lowered in price that the Bank of Eng- land may with this bullion discharge their assumed but unfounded obligation, of paying their notes with this merchandise. Referring to the statement p. 520 ante., it must have become a question how the difference be- tween the bullion received and the available notes given for it, being 6,176,270/., was to be disposed of. Sir Robert Peel (p. 500 ante) stated, on introducing the bill, that bank notes would be given to the bank- ing department for 14,000,000/. issued on securities and 16,000,000/. on bullion, the whole amount; and that the excess of notes beyond the requirements of " the legitimate demands of commerce," which he supposed might be 22,000,000/., would " necessarily lie dormant in the coffers of the banking depart- ment; " it was, however, determined and enacted that the excess of bullion should remain to the credit of the CHAP. XI. ON THE EXCESS OF BULLION. 531 issue department, and instead of notes to this amount lying dormant in the banking department^ the excess of bullion itself should lie dormant in the issue depart- ment^ whence it cannot be drawn, because no notes were given for it, and notes cannot be spared from the circulation to demand it. Lord Overstone, July 7, 1857 (3649): *' The bulhon now lies in the Issue Department, which is nothing more than a department of the State, worked me- chanically and clerically by the clerks of the Bank of Eng- land ; but it is essentially a department of the State." His Lordship enters his protest against the expres- sion, " bullion in the Bank of England," and states — " The object of the regulations of 1844 was, not to secure the maintenance generally of a much larger amount of bullion than there was before, but to protect the bullion from the jxtssibility, under any circumstances whatever, of falling below a safe amount." Was this a justifiable proceeding? to receive bullion on condition of restoring it either in payment of cheques or notes; and afterwards to enact that it should be obtained only by notes, which could not be spared from the circulation ? Sir Robert Peel (p. 163, ante) proposes: — " That the issue of bank notes should hereafter take place on two foundations, and two foundations only : — First, on a definite amount of public securities ; secondly, exclusively upon bullion. The action of the public will regulate the amount of that portion of the note circulation which is issued upon bullion." I have endeavoured to show that the circulation rests now upon the same foundation as before the passing of the Bank Act : it rests upon the bullion and securities paid as assets for the notes given, and with a guarantee fund of the proprietors' capital, and the rest, or undivided profits. The community among whom the bank notes circulate have full confidence 532 ON THE CIRCULATION AND BULLION, chap. xr. in the integrity and good faith of the Bank of Eng- land, without caring whether the notes are issued upon bullion or other securities. 1 beUeve it is true that no notes for circulation are issued upon bullion and securities differently now from what took place before the passing of the Bank Act. " The action of the public," of the public among whom the notes cir- culate, will determine the amount of the note circu- lation, as the wants of the community may require it. The notes required to procure gold for exportation^ and which do not remain in circulation, have no re- ference to the action of this public, of the public who determine the amount of circulation, but to the action of the great mercantile republic^ who act upon the ex- changes, and require gold, not for circulation, but for the foreign trade, which is quite distinct from the action of the public who want only bank notes and coin. Sir Robert Peel confounds the action of the public for coin and notes for circulation, the national wants and national circulation, with the requirements of the great 7nercantile republic^ the international traders of the world — who govern the exchanges agreeably to their wants, by the exchange of commodities when profit attends their export, or by the export of bul- lion when this is the most convenient commodity^ in consequence of the sale in distant countries of other goods ^ leaving no profit or a loss. By the present system the distinction between the national public and the great mercantile republic is not acknowledged, and we make the trade of the British public, the industry of Great Britain, subservient to the convenience of the wide-spread commercial world. 533 CHAP. XII. ON THE OBLIGATION OF THE BANK OF ENGLAND NOTE. ON THE WANTS OF CUSTOMERS, AND THE ISSUE OF PAPER MONET. ON REDUNDANCY OF THE CURRENCY. ON EXCLUSIVE COINAGE AND EXCLUSIVE ISSUE OF NOTES. ON BULLION AND THE GREAT MERCANTILE REPUBLIC. ON PAYMENT WITH UNCOINED GOLD. ON THE EXPORTATION OF BULLION. The Committee observe, Section 60, p. 427, ante: — " For the opinions of the most eminent writers on the sub- ject of the currency, your Committee refer to the evidence taken in 1857. It is interesting in the highest degree to all who make the scientific study of the most abstruse questions of political economy their pursuit." It may well be asked, what are " tlie most abstruse questions of political economy," here alluded to ? It cannot be the subject of the Bank of England promis- sory note ; it cannot be this joortionof the currency : the promise to pay a debt in the money of the countr}% agreeably to the terms of the contract, is no " subject of " political economy," nor of " scientific study :" the obligation to pay a debt and to perforin a promise must be determined by the rules of justice, of which Adam Smith observes : — " Justice is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society, that fabric, Avhicli to raise and support seems in this world, if I may say so, to have been the peculiar and darling care of nature, must in a moment crumble into atoms." See p. 120, ante. Let nations beware how they violate the rules of justice. 534 ON REGULATING THE CURRENCY. chap. xii. " The first duty of tlie Bank of England is, so to conduct its affairs, as to secure means for the performance of all its engagements with integrity and good faith." These are the words of the Committee of the House of Lords, and it well becomes that truly noble institu- tion, the last Court of Appeal in questions relating to property, to consider whether the Bank of England performs its engagement " with integrity and good faith," when it pays its debt with merchandise instead of money, with bullion instead of coin ; with bullion obtained by lowering the prices of goods, the property of others. 4177. Lord Overstone is at great pains to show that the wants of customers are not a safe regulator for those who issue paper money. In allusion to the disasters of 1793, his Lordship observes: "Now mark how far the regulation, by the wants of cus- tomers, is a safe principle." It would be a very unsafe principle for the banker to regulate his loans by the wants of customers ; but his imprudence would have little or no effect upon the amount of circulation, which would be determined by the quantity of goods to be circulated ; the surplus of issue would be returned to the issuer, and the loan would be a debt from the customer to the lender, and would be independent of the currency. And when it is said (as reported by Mr. Chalmers), in the same paragraph of evidence : " The efforts of the country bankers to force their paper into circulation had principally occasioned the redundancy of the cur- rency," this is mistaking the currency for loan. There may have been, and doubtless was, a redundancy of loan, but those efforts of each banker to force his notes into circulation would prevent the redundancy instead of promoting it, as his notes would be dis- placing the notes of his neighbour; the circulation would not be determined in amount by the banker or his customers, but by the wants of the community, CHAP. xii. ON COINAGE AND THE ISSUE OF COINS. 535 which are quite distinct from the wants of customers ; and the efforts of bankers to supplant their neigh- bour's paper-money and to introduce their own, will, I submit, be a more legitimate control than being " subjected to such a restraining principle as the Act of 1841 applies to them." Sir Robert Peel, p. 33 : — " Some have contended, and I am not prepared to deny the position, that if we had a new state of society to deal with, the wisest plan would be, to claim for the State the exclusive privilege of the issue of promissory notes, as we have claimed for it the exclusive privilege of coinage." But the exclusive privilege of coinage is quite dis- tinct from the exclusive privilege of issuing coins y the State does not claim the exclusive issue of coins, as Sir Robert Peel would claim for the State the ex- clusive issue of promissory notes ; the exclusive pri- vilege of issue bears no analogy to the exclusive privilege of coinage ; the exclusive privilege of coinage is to preserve in its pure state the measure of value, the gold coin : any person Avho brings uncoined standard gold to the Mint may receive its value in coins; the issue is not limited; and if the issue were limited, it would lead to the same mischief and em- barrassment which now attend the limitation of pro- missory notes. When Sir Robert Peel observes, p. 34, "If the State had the exclusive power of issuing paper, there would be established a controlling power, which would insure, as far as possible, an equilibrium in the cur- rency," I confess I know not what is meant by "equilibrium." Is it an equivalency between gold coin and bank paper? — that will be insured by the payment of the note in coin. Is it an equivalency between gold bullion and bank paper? — that is entirely foreign to the obligation of the bank notes. Is it an equilibrium or equivalency between the currency of this country and of other countries? — that will be 536 ON BULLION AND THE FOEEIGN TRADE, chap. xii. adjusted by the bill-brokers and money or bullion dealers, who rectify or regulate the foreign exchanges. Referring to p. 85, ante, it will be seen that Adam Smith, B. 4. c. 1, observes : — *' There is in all great commercial countries a good deal of bullion alternately imported and exported for the purposes of foreio-n trade. This bullion, as it circulates amono-st dif- ferent commercial countries in the same manner as the national coin circulates in every particular country, may be considered as the money of the great mercantile republic." He says, " may he considered as the money ;" he does not call it " money," he does not take it out of the category of goods. He also says, p. 85, ante : — *' The great annual importation of gold and silver is neither for the purpose of plate nor of coin, but of foreign trade. A round about foreign trade of consumption can be carried on more advantageously by means of these metals than of almost any other goods, &c." And in the same paragraph he says : "of all com- modities " and " any other sort of merchandise.^^ And p. 86, ante, " The Bank of Amsterdam has, for these many years past, been the great warehouse of Europe for bullion." The Bank of Amsterdam is called the warehouse. Of coins Adam Smith observes, B. 1. c. 4: — " The inconveniency and difficulty of weighing those metals with exactness gave occasion to the institution of coins, of which the stamp, covering entirely both sides of the piece and sometimes the edges too, was supposed to ascertain not only the fineness but the weight of the metal. Such coins, therefore, were received by tale, as at present, Avithout the trouble of weighing." And Judge Blackstone, B. 1. c. 7 : — " Every particular nation fixes on its own impression, that the weight and standard (wherein consists the intrinsic value) may both be known by inspection only." cuAP. XII. ON PAYING BANK NOTES WITH BULLION. 061 The above extracts deserve tlie attention of those w]io consider uncoined gold money. 1 may be thought too diffuse in urging the necessity of the Bank of England paying its notes with money, with coins, and not with bullion, which is merchandise ; but I think the whole question turns upon the j)er- formance of the promise agreeably to the contract. It should be the object of the State to place the payment of the promissory note in consistency with the payment of all other debts, and with the per- formance of all other contracts to pay money. Surely the Legislature should acknowledge this great truth, that a debt should be paid with money only, and con- formably to the common meaning of the word '' jDound " or " sovereign." The Legislature has declared it to be illegal to pay wages in certain trades with merchandise (by an Act of Parliament, the 1 & 2 of William IV. c. ^7), the property of the employer ; may not National Banks be prohibited to pay debts with merchandise, the property of another, obtained either directly or in- directly? We have seen in the instances of the louis d'or, and moidores, adduced by Lord Liverpool, p, 21, a7ite, how small a profit will determine those who are concerned " in remitting money," or " in melting the coins ;" the advantage of 5^d. per louis d'or brought the louis d'or into the kingdom, and a loss of |;d. per louis d'or drove them out of circulation ; and " a profit of 5d. per moidore, brought the moidores into the kingdom, and a loss of Id. per moidore sent them all out again." The object should be not to prevent the exportation of bullion, the most convenient commodity under cer- tain circumstances of commerce, but to prevent that exportation interfering with the domestic circulation of paper money or with credit ; and we should make it the interest of the exporting merchant, and of all the community, to conform to the arrangement. 538 CHAR XIIL STATEMENTS OF THE BANK OF ENGLAND. A DIFFERENT FORM OF STATEMENT. MR. HUBBARD ON THE ISSUE DEPARTMENT. ON NOTES NOT BEING GIVEN FOR ALL THE BULLION. ON COINS FOR THE NATIONAL CIRCULATION, AND BULLION FOR THE FOREIGN DEMAND. MR. MILL ON THE BANK ACT. Dr. Notes issued Bank of England, 9th May, 1857. ISSUE DEPARTMENT. Cr. . . . £23,507,945 Government Debt Other securities Gold .... £23,567,945 £11,015,000 3,459,900 9,092,945 £23,567,945 BANKING DEPARTMENT, Capital . . . Rest . . . Public deposits Other deposits Seven-day bills £14,553,000 3,328,676 5,163,146 10,081,864 749,046 £33,875,732 Government securities £10,303,838 Other securities . 18,630,357 Notes 4,226,355 Gold and Silver coin 715,182 £33,875,732 T. M. Weguelin, Esq., M.P., 22nd May, 1857. 849. AVill you have the goodness to look at this paper, which exhibits the same account in another form ? (The following paper was shown to the witness.) Bank of England, 9th May, 1857. Dr. Capital £14,553,000 Rest 3,328,076 Public deposits . . 5,163,146 Other deposits . . 10,081,864 Circulation notes . . 19,341,590 Seveu-day bills Cr. Government debt . „ securities Other securities 749,046 £11,015,100 13,703,738 18,030,357 '^"•"- {t;o«;i?} 8.808,127 £53,217,322 £53,217,322 ciiAi'. xiu. ON A DIFFERENT BANK STATEMENT. 539 850. The paper I have now handed to you represents the same account (the Bank of England weekly statement of the 9th May, 1857), stating the whole assets of the Bank on one side, and the whole liabilities on the other in the way in which we have been talking about them, does it not? — Yes. 858. Then the whole of this machinery amounts simply to this; that the whole of the liabilities of the Bank, on the one hand, having an equal legal claim upon the whole of the assets, whether they consist of securities or whether they consist of bullion, you have 9,808,127/. as the reserve against those liabilities ? — Yes, you must except, however, the capi- tal and the rest as having an equal claim ; the deposits and notes and seven-day bills of course have the preference. 859. The proprietors' capital and the rest, no doubt, are claims which would not rank until the other claims were paid, but still in making out the accounts those ought to be put as a debit to the Bank ? — Yes. 860. This statement of account is very good, pro- vided there is no limitation upon your issue. 861. Assuming that the same limitation is to be kept, and supposing it were to be enacted that, on the one hand, under no circumstances should the Bank of England hold less bullion than the difference between the circulation in the hands of the public and the fixed amount of securities, and on the other hand they should never hold a less amount of Government securities than that fixed amount, the rest being left to the discretion of the Bank of England, as at present, would not all the objects of the Act be gained ? — The public would draw the same inference as they do now from the statement of our reserve. The public would feel the moment our bullion came down to 10,000,000/. or 9,000,000/. as the case might be, that the power of the Bank to issue to the public was becoming more and more limited. They would recollect that in 1847, when the bullion was reduced to 8,500,000/., the power of the Bank was then restricted to about 1,100,000/. Whatever statement of account is adopted, there will be the same effect from the same series of causes. J. G. Hubbard, Esq., 19th June, 1857. 2340. What do you think in general has been the effect of the separation of the two departments upon the issue de- partment ? " The office of the issue department is the simplest that 540 ON THE ISSUE DEPAETMENT. chap. xiii. can be imagined. The constitution of the issue department assumes and enacts the creation of 14,000,000 of credit paper, and subsequently a mere exchange of notes for any o-old that is brought to it, and the re-exchange of those notes for gold, when gold is required. It is so purely a mechani- cal operation, one in which there is no room for opinion or feeling, that very little can be said a])out it ; it is the sim- plest and the most useful proposition that can be conceived for putting our currency upon a perfectly solid basis." 2344. You believe therefore that the effect of the present Act has been indirectly, though not by express enactment, to compel the Bank to keep a minimum reserve of not less than 8,000,000/. ? — That has been its practical effect. It must be recollected that there was lying in the issue department six or seven millions of bullion, for which no available notes were given to that depart- ment, and which, therefore, could not be claimed for want of notes; that the word "gold" means bullion which is exchanged for notes payable in coin; that bullion is only a commodity^ which is here substituted for money ; and that what happens in the issue de- l^artment, as respects the 8,000,000^. in deposit, or bullion reserve, would take place with any store- keeper who received goods under an engagement to restore them when demanded, or any trustee or banker who received money in deposit, and gave available receipts for only one half the amount — the property, whether goods or money, could not all be claimed. I submit that the issue department is not war- ranted in withholding receipts or available bank notes for about one half of the bullion ; and is not warranted in paying those notes of the Bank of Eng- land with bullion ; not being authorised by the tenor of the note to do this. I have said, p. 263 ante: " The Bank of England has two sets of customers — those who are engaged in the home trade of commerce, and manufacturers and agriculture; and those who are engaged in foreign conunerce;" the former require only coin and bank CHAP. XIII. MR. MILL ON THE BANK ACTS. 541 notes for the domestic circulation, the latter require bullion for exportation, when the most convenient commodity, to pay debts abroad or to purchase goods abroad, when the markets there offer no advantage and perhaps loss in the sale of other commodities. I submit that the claim of these last customers who demand bullion for exportation should be utterly re- jected; that the Bank of England is under no obliga- tion to pay their notes with bullion ; that the members of the great mercantile republic should purchase with their own goods or securities the bullion they require ; that the trade in money for the national circulation should be the business of the banker, and the trade in bullion, either to correct or regulate the exchanges, or to pay debt abroad, or to purchase goods abroad, should be the business of the bullion dealer; that bullion or uncoined gold which is merchandise should not be confounded with coin, which is money in the country only where it circulates. It will be seen by the following evidence of J. S. Mill, Esq., 12th June, 1857, that he makes no distinc- tion between the Banks of Amsterdam and Hamburor which issue no promissory notes, and the Bank of England which issues promissory notes. 2110. Are you acquainted Avith the constitution of the Banks of Hamburg and Amsterdam ? — I have a general acquaintance Avith them. 2111. In the case of both of those Banks, are not all the notes which they issue represented by bullion actually exist- ing in their coffers ? — Yes ; that was the supposition, but it was found not to be the case in the Bank of Amsterdam at the time of the events which followed the French Revolution ; the bullion in deposit in the Bank of Amsterdam was found to have been deficient. 2112. Was not that supposed to be an accidental circum- stance owing to the pressure of the Revolutionary Avar at the time ? — I think it Avas supposed that the deficiency had existed long before that time. 2113. But it was a principle in the constitution of those tAvo Banks, that all the notes Avere actually represented by bullion in their coffers ? — Yes. 542 TUE BANKS OF AMSTERDAM AND HAMBURG, chap, xiii 2114. Therefore their circulation must have varied exactly upon the principle which has been laid down in the Act of 1 844, viz. that it should vary exactly as a metallic circula- tion would vary ? — Yes. In p. 161 ante^ I have given an extract from the evidence of P. H. Muntz, Esq., before the Committee of the House of Commons in 1848, respecting the monetary system in Hamburg. 1345. Are you acquainted with the monetary system of Hamburg? — I am. 1346. Will you be kind enough to state in what way the monetary system tliere is conducted ? — There are two monies in Hamburg ; there is the current money for ordinary pur- poses, and there is Avhat is called " banco," which is 25 per cent, better value, and which represents silver deposited in the Bank of Hamburg ; there are no notes issued at all. 1348. Then the commercial oblio-ations at Hamburg are discharged by cheques, which transfer payment to the debit of one party, and to the credit of another ? — ^Entirely so. 1351. Then you think Hamburg under that system of transferring payments at the Bank would have had no panic last year, but for the return of the bills of exchange drawn upon England? — I do not think they would. For an account of the Bank of Amsterdam, see chap. 7, p. 70 ante; no promissory notes being issued by this Bank or that of Hamburg, they offer no com- j)arison with the Bank of England in this respect. Mr. Mill :— 2011. "My opinion is that there should not be any restriction by law, except that of convertibility, which appears to me to be sufficient for all the purposes for which restriction is intended." Convertibility here includes payment with bullion to the great mercantile republic. 2104. " I think the operation of the Act is beneficial when a drain arises from one particular cause, viz. previous over-speculation." I submit that the Bank should pay its notes only with coins, and should exercise no control over the currency or overprices, and no interference with the free trade of individuals. 543 CHAP. XIV. THE BANK OP ENGLAND NOTE NOT PAYABLE IN BULLION — THE PRECIOUS METALS NOW INCLUDED IN IMPORTS AND EX- PORTS ON THE BULLION BEING CLAIMED AVITH NOTES ONLY THE JUSTICE OF THIS TO THE DEPOSITORS OF BULLION TO BE CONSIDERED THE BANK OF ENGLAND NOTE PAYABLE ONLY WITH COIN ON THE PREVENTION OF BULLION BEING EX- PORTED FROM LIVERPOOL ON THE WITNESSES EXAMINED ON INTEREST AND THE CURRENCY — ON THE OBLIGATION OE THE BANK-NOTE. In the first part of tins Treatise I proposed, as a remedy for the great disorders and injustice attend- ing the present system (p. 175 ante\ "I submit that the remedy is for the great mercantile republic to retain always possession of its own bullion, and to reduce the liability of the Bank of England to the duty of paying its own notes and deposits from its own resources, as other bankers." I was under the impression, which was erroneous, that the Bank of England was bound to pay its notes with bullion^ when demanded ; and I proposed to re- lieve the Bank by the establishment of a Bullion Warehouse, in which the owners should each retain possession of his own bullion, as of any other article which is bonded for exportation. I entered fully on the subject in Chaps. 5, 6, and 7, and I explained my views of adopting a silver standard. At present our attention may be confined to the expediency of a Bullion Warehouse, where the owners may transfer their property in the precious metals, to the purchaser, at certain established rates — some- what similar to the Bank at Amsterdam, and the present Inink at Hamburg. N N 544 BULLION AS OTHER IMPORTS, AND EXPORTS. criAp. xiv. As I observed (p. 91 ante)^ " The object is to sepa- Pcate the bullion which is imported and exported, for the purposes of foreign trade, from the National Bank, and from all Banks issuing promissory notes." At the conclusion of my Treatise (p. 374 ante)^ "I submitted that the Bank of England should have nothing to do with the exportation and importation, or with the trade, of bullion. It is a commodity which should be viewed, with regard to the foreign trade, in the same light as tobacco or sugar, and should be included by the Chancellor of the Ex- chequer in the financial statement of exports and imports : if not included, and one million of manu- factures were exported to Australia, for which the return was made in gold, the country would appear to export to the value of one million, for which no equivalent had been received, and the exports would seem to exceed the imports one million, when both were equal." It appears the Government acted upon my sugges- tion, a few months after the publication of my volume in June 1858: " The following is the official return of the imports and exports of the precious metals, for the week end- ing the 24th November, 1858 : Imports, Gold £312,480 Exports, £1,092,465 Do. Silver 248,638 Do. 107,625 £561,118 £1,260,090 " The Gazette contains the following note, added to the foot of the exports and imports by the Inspector General : — " ' The foregoing account includes considerable quantities of gold and silver, which were imported and exported between the 24th ult. and the 10th inst., such imports and exports having been first cuAP. XIV. BULLION CLAIMED WITH NOTES ONLY. 545 notified to this office since the publication of the last weekly return.' "* The Governor of the Bank of England (p. 538 ante) acknowledges the statement (849), to represent " tlie whole liabilities," and " the whole assets," of the weekly Bank statement of the 9th May, 1857. On the credit side the whole of the bullion (9,808,127/.) appears, and as the debit side and the credit side ba- lance, there must be a corresponding debit : but in the weekly statements the whole of the bullion, de- ducting the gold and silver coin (715,182/.), making the amount 9,092,945/., is placed to the credit of the issue department, and only bullion receipts or notes, to the amount of 4,226,355/., the only means of de- manding the bullion, are given to the banking depart- ment — being only so many notes as, luith the notes in circulation^ shall complete the amount of notes per- mitted to be issued. The consequence is, that about one-half of tlie bullion can never be claimed, but lies dormant in the issue department, and the bullion can never be exhausted, which forms the ground of so much exultation. It is therefore, I submit, erroneous to say (7th July, 1857)— Lord Overstone (3740): "The Bank paper is the representative of gold, because it is the certificate of gold placed in deposit against it," and (4089) : " It must further be observed, that the 8,000,000/. or 9,000,000/. of bullion lying at that time (1847) in the issue department, was represented by a corresponding amount of bank-notes put forth by that department for the use of the public." Before the Bank Act the bullion placed in deposit could be demanded by the depositor, either with bank- notes or cheques on the Bank. By the new system the bullion can be claimed only with bank-notes — it cannot be demanded by cheques in virtue of the Bank credit. * Evening Mail, November 20, 1858, "Money Market." N N 2 546 ON MONEY AND BULLION, cuAr. xiv. How far it was just to receive the bullion in deposit, and afterwards impose conditions which entirely de- feated the demand, for about one-half, is for the con- sideration of the Bank, and of the State. The Bank of England having given a credit for the amount of bullion deposited, is responsible to the depositor for the amount ; and although this Bank credit is not avail- able, and the bullion lies dormant in the issue depart- ment, yet the Bank cannot be called upon to give bank-notes while the Bank credit exists — the Bank would be twice debited for the same sum. Neither can the depositor be called upon to take notes from the circulation in order to claim the bullion v/hich he has deposited ; he has already paid for the bullion, and he cannot obtain bank-notes without paying the full value of the notes to the amount of the bullion : he would be paying both for the notes and bullion — he would be paying twice for the same sum. Both the Bank of England and the depositor are placed iu a false position : the depositor cannot claim the bullion, and the Bank retains it without paying anything for it. The confusion arises from the bullion being obtain- able only with notes, and not with cheques also ; this is the case with that portion of the bullion which lies dormant in the issue department, and which forms the ground of so much exultation, that the bullion can never be* exhausted (pp. 341, 342 ante). If I have succeeded in showing that, agreeably to the contract expressed in the Bank of England note, there is no obligation to pay bullion or uncoined gold for exportation in discharge of the debt incurred; that the gold coin " the sovereign," the money of Great Britain, is what the Governor and Company promise to pay, and not bullion, which is only a com- modity ; then all the reasoning respecting the circu- lation, founded upon the increase or diminution of bullion^ falls to the ground — the expansion of issue in consequence of its increase, or contraction of issue in CHAP. XIV. ON PAYMENT WITH MONEY ONLY. 547 consequence of its diminution, with all the fearful effects of contraction of the circulation, or raising the rate of discount, in order to check the efflux or cause an influx of the precious metals. We bid adieu to the necessity of " sudden and violent reductions in the amount of paper-money, spread- ing ruin among the issuers of paper, and deranging the whole monetary transactions of the country;" " the paper currency will no longer be regulated by immediate reference to the foreign exchanges;" "no early contractions of paper on the efflux of gold;" "no demand for gold which cannot be satisfied;" no longer " much individual suffering and many for- tunes ruined, from the necessity of sudden and violent efforts to establish, by contraction of issue, an equili- brium between gold and paper" (as depicted by Sir Robert Peel, pp. 27, 28, 30); no raising the rate of interest to an exorbitant rate ; or cotitraction of the currency, producing (2113) "stoppage of trade," (2114) destruction of " the labour of the country," or (2117) stoppage "of credit" (as statedby J.Horsley Palmer, Esq., p. 207 a7ite). Lord Overstone adduces what he considers " the crucial instance by which the validity of the principle was effectually tested;" the principle, I conclude, that the value of the money of this country is in- creased by its diminution, and that bullion conse- quently will flow into it from abroad. 4033. " It may assume the form of preventing any more money going out of this country. A very remarkable circumstance of that sort occurred in the spring of 1847. I detailed its history in my evidence of 1848." His lordship recounts his having advised the Bank of England : " Keep up your rate of in- terest, and do not fear the consequences." What was the result ? Not one of those orders was executed ; and the bullion on board the ships at Liverpool was taken out, and brought back, and deposited in the 548 ON THE REGARD FOR PRIVATE PROPERTY, chaf. xiv. vaults of the Bank of England ; not one farthing of it ever left the country." 4035. " It was an order merely founded upon the state of the exchanges." I submit that this bullion was merchandise, and not the "money " of this country; that the Bank of England ought to have no control over the exchanges ; and that the preceding instance was an illustration of the power of the Bank to control the commerce of the country. It has been truly observed : " No maxim of law or of common sense so readily commends itself to one's understanding as that which says that no man shall be a judge in his own cause; indeed, if its soundness is not seen at a glance, no amplification of discussion will be ciFectual to compel assent." * It is remarked by Judge Blackstone, B. 1, C. 1, " So great, moreover, is the regard of the law for private property, that it will not authorize the least violation of it ; no, not even for the general good of the whole community." In section 60, p. 427 ante^ to which I beg to refer, it is said : " That the opinion of the present Bank Directors is strongly in favour of maintaining the Act of 1844 appears in the evidence." And in section 61, p. 428 cm^t^: "In this opinion the Governor of the Bank of Ireland, the represen- tatives of the chartered and unchartered banks of Scotland, the Chairman of the Association of Private Country Bankers, and Mr. Alderman Salomons, of the London and Westminster Bank, concur." When Mr. Herries moved a resolution, on the 22nd of August, 1848, respecting the operation of the Bank Act, he observed : " Three years had not elapsed before they were called upon to abandon the measure which had been then introduced;" and " The * " Justice of the Peace," v. 30. No, 20. CHAP. XIV. ON THE WITNESSES EXAMINED. 549 characters of the witnesses ought also to be kept in mind." Mr. Cay ley, M.P., who was a member of the Com- mittee of 1857, and who proposed some resolutions which were not adopted, stated : Of the witnesses examined by the Committee — 23 were bankers, whose examination lasted 22 days ; 5 merchants or manufacturers . . . . "j 1 banker sent by the Chamber of Commerce > 3 ,, of Leeds J 5 theoretical witnesses 5i 1 bill-broker l| 2 accountants . . • 1 It may be worthy of consideration, whether the opinions of the Bank Directors, and of Bankers gene- rally, should not be received with some degree of caution, when examined upon a question which may concern their own interest, or that of the institutions which they represent, and in favour of which they may unconsciously have a bias. John T wells, Esq., who had been a banker in London upwards of 50 years, stated in his evidence before the Committee, July 17th, 1857: 4488. HoAv do you think that the Act of 1844 has operated? — If I were to answer you as a banker, I should say that it has operated exceedingly well, for it has afforded a rich harvest to bankers and capitalists of all kinds. But it has operated very badly to the honest, industrious tradesman, who requires steadiness in the rate of discount, that he may be able to make his arrangements with confidence ; it must distress that class very much indeed. For large capitalists and bankers it is evident (there is no occasion to disguise the thing) that it has operated exceedingly well ; it has made money-lending a most profitable pursuit to them. 4505. Taking the last three or four years, according to the Governor of the Bank, who has been examined, he con- siders that during those years, although they have been years of difiiculty, the Act of 1844 has operated well; is that your opinion ? — As far as I am able to judge of the 550 ON THE LIMITATION OF PAPER MONEY. cHAr. xiv. Bank of England, I should expect that it would operate very satisfactorily to them ; it must save them a good deal of trouble and responsibility. I should think that they could have no cause to complain of the Act, because what- ever distress it may produce, whether it does or does not, does not rest with them ; they are merely the persons who carry out the Act. It is worthy of remark that, about 1 575, when the Court of the Mint in France recommended the Kinp: to summon persons from the different princi})al towns, to give their opinions respecting the remedy for the evils then prevailing in their monetary system, they say : After hearing whom, the question shall be decided by such a number of persons as his Majesty may choose, ''^ above suspicion in the matter^ and having nothing to do with the management of the finances^ or who have any trajic or dealings in money (faisans trajic ou negociation d'argent), on account of the incon- veniences which have always resulted from their being summoned^ * Referring to the evidence of J. G. Hubbard, Esq., pp. 508 — 538 ante^ whose opinions must have great weight from his experience — having been, with the ex- ception of about five years, in the Bank direction since 1838, and who had been Deputy-Governor of the ?)ank from 1851 to 1853, and Governor from 1853 to 1855 — I beg to observe that the ground on which he attributes such wonderful effects to the " limita- tion of the amount of credit paper " is much weakened by what he afterwards admits. 2661. — A very high rate of interest is the only cause I can think of which could induce people to economise their amount of currency, and to do with less ; and that can have but a very limited efl'ect. 2662. JEven that effect, you think, must be very limited? — Very limited indeed. * The :vords in italics are printed in capital letters in the Di-iginal. — Le Blanc, p. 338. CHAP. XIV. ON THE OBLIGATION OF THE BANK-NOTE. 551 2663. In the event of an Increase of prices, or an enlarge- ment of trade, an increase of currency becomes absolutely necessary, does it not? — Certainly. 2664. Therefore an increase of currency would follow as an effect, and not precede as a cause, such an increase of trade or increase of prices ? — It would be a consequence of it. 2665. And a diminution of prices, or a contraction of trade, might lead to a contraction of the currency? — It would release a portion of the gold from its necessary function. 2666. So that in both cases the action upon the currency is the effect of changes in the state of trade, and not the cause ? — Exactly so. This agrees with the evidence of T. M. Weguelin, Esq., p. 494 ante^ that the circulation " had been comparatively " very little affected by " the amount of the advances of capital," or " the amount in secu- rities held by the Bank." It is evident, 1 think, that the losses and sufferings attending our present system of banking do not arise i'rom an over-issue of bank-notes, or from the pay- ment of bank-notes in coin; but from an assumed ob- ligation of the Bank of England to pay its notes with bullion, not for the national requirements of the cir- culation, but for the international wants of the great mercantile republic; an obligation not imposed by the tenor of the bank-note, by the words of the con- tract, or by the Act of Parliament. The 4th clause of the Bank Act entitles "All persons to demand from the Issue Department of the Bank of England Bank of England notes in exchange for gold bullion, at the rate of 3/. 175. ^d. per ounce of standard gold." The Act does not entitle all persons to demand standard gold for .notes. To prevent coins being demanded instead of bullion^ for the supply of the g7'eat mercantile republic^ I have previously suggested, that the denoinination of notes should not exceed 5/., 10/., or 20/., as experience should show to be needful, and a bullion ivarehouse for the precious metals. 552 CHAP. XV. ON BULLION BEING PREFERABLY PAID FOR WITH BANK OF ENGLAND NOTES — ON THE INCREASED RESERVE OF BULLION — ON THE BANK-NOTE BEING PAID FOR WITH BULLION ON THE SEPA- RATION OF DEPARTMENTS ON THE EXCHANGE OF GOLD FOR NOTES AND NOTES FOR GOLD (bULLION) — CONSEQUENCES OF THIS — ON THE CAUSES OF THE INCREASE OF THE RESERVE MR. NORMAN, ON THE SEPARATION OF DEPARTMENTS, BELIEVES EXCHANGING GOLD FOR NOTES AND NOTES FOR GOLD (bULLIOn) TO BE THE SOLID BASIS OF THE CURRENCY OPINIONS OF COLONEL TORRENS AND MR. RICARDO — ADAM SMITH AND RI- CARDO ON COMPETITION OF ISSUE. G. W. Norman, Esq., 3 July, 1857. 3446. Is it the fact that nobody does send gold to the Mint to be coined, because there is a slight advantage in obtaining notes for gold ? — Yes, there is a slight advantage. 3447. Is there not a difference in the price which they obtain above that which they get at the Mint ? — The Bank purchase gold at somewhat below the Mint price, but, on the other hand, the loss of time that would be incurred in getting the bullion converted into coin makes it a little more advantageous to the person who has imported the bullion to sell it to the Bank, rather than to send it to the Mint to be coined. 3448. Taking all the cii'cumstances into consideration, the price paid, and the loss of time and the trouble, there is a slight advantage in exchanging the gold for notes at the Bank, rather than sending bullion to the Mint to be coined. I have suggested, p. 503 anth^ the delivery of gold bullion from the warehouse at the rate of o/. 175. 96?., but it may be proper to increase this ad- vantage, and to deliver the bullion to the owner or to his representative by transfer, at the rate of ol. \ls. lO^d. per ounce of standard gold, or even CHAP. XV. BANK-NOTES AND BULLION. 553 something higher, if found necessary ; or to lower the rate at wliich the bullion is paid for at the Bank, and instead of 3/. 176'. 9cZ., to give only 3/. 17s. 84<:/., or even somethino; less as a seioriorao'e for coinaire, which the national public might be willing to give; ex- j)erience would determine the proper rate. At the Mint the holder of bullion now receives gold coin at the rate of 3/. 175. lO^^d. per oz. of standard gold ; there is no deduction for the expense of coinage. For the advantage recited in the above evidence he prefers receiving at once 3/. 175. dd. per oz. ; he pays the difference of l^ J. per oz. for the con- venience. As the proposed object is to separate entirely the domestic circulation of coins and bank- notes from all payment of the bank-note with bullion for exportation, if a sufficient inducement can be offered, there can be no doubt that the exporter would prefer taking bullion from the warehouse for export- ation to taking coins from the Bank, the law forbid- ding the payment of notes with bullion. We should accomplish that which we have done with respect to the ancillary coins, we should take from the exporter all temptation and inclination to infringe the law. Referring to p. 135 ante, it will be seen that the stock of — Bullion in January, 1839, was . . £9,336,000 And in October, 1839 .... 2,525,000 Decrease of bullion , . . 6,811,000 The circulation on January 10, 1839 was . 18,201,000 Do. October 18, 1839 was . 17,612,000 Decrease in the circulation . £589,000 This- was before the passing of the Bank Act of 1844. It is seen that the cii'culation varied only about half a million, while the bullion had decreased nearly seven millions. 554 THE RESERVE OF BULLION. chap. xv. It is said, in Section 60 : — " The lowest points to which the bullion has fallen since 1844 have been: in 1847, 8,313,000/., and in 1857, 6,080,000/." Whence arises this difference in the bullion retained before and after the Bank Act ? I submit that Lord Overstone has not assigned the true cause in supposing, 3649, p. 440 ante^ "As the bullion has gone out, the money of the country has been diminished, until it reached a certain point, below which the national wants and necessities of the country would not permit it to be further diminished." The 7iational wants and necessities of the country^ as respects the paper money, can refer only to the circulation^ which, from the evidence, is very little affected by the export of bullion. This reserve of bullion is not in the Bankmg de- partment, the working department, but in the Issue department, whence it cannot be drawn, because no notes were given for it ; it is not the wants and necessi- ties of the country^ or the apijarent limitation of Issue, but an operation, not shown by the statements of the Bank, or propounded by the advocates of the Bank Act, the circumstance that no notes, the only means of demanding the bullion in the Issue depart- ment, were 2:iven to the Bank of En<2^1and for about one half of the bullion received from the Bank. It is the wants and necessities of the o-reat mer- o cantile republic which occasion the demand for the bullion in the Issue department for exportation, not the national or domestic wants of the country^ which have reference only to the domestic circulation. T. M. Weguelin, Esq., 3rd March, 1857. 241. " The notes issued on the discount of bills would be returned through the medium of the bankers, and through deposits. Unless these transactions were for the purpose of exporting bullion, and unless there were an amount of in- ternal panic, which induced people to lock up their notes, and not to pay them into the hands of the bankers, as is CHAP. XV. rAYMENT OF BANK NOTES WITH BULLION. 555 usually the case, the reserve would not be affected by the magnitude of the transactions." 439. " What governs our action is the state of the reserve, and the mode by which the reserve is affected." 440. The reserve is only affected by the demand for bullion. (See p. 252 ante.) Let US keep constantly in view, that the promise expressed in the Bank of England note comprises the whole of the engagement of the Governor and Com- pany, as respects the payment of their paper money. Neither the promise nor the payment of the notes have any reference to bullion expressed or implied. The Bank having undertaken to pay its notes in bullion, to correct the exchanges in order to protect its reserve of bullion, by raising the rate of discount, and thereby giving a shock to credit, appears to me to have undertaken to do that which is quite foreign to its didy.^ as bankers ; the bullion is an asset of the Bank ; the goods and securities lowered in value to correct the exchanges are not the property of the Bank; and Mr. Weguelin (607), p. 252 ante: " It is the trade of the country which must influence the exchanges." Surely the foreign merchants are well able to manage their foreign trade, of which the exchanges form a part, without the assistance of any national Bank. As Mr. Weguelin, p. 539 ante.^ admitted the statement of account (849) submitted to him "to be very good, provided there is no limitation upon your issue," I would observe that the limitation of issue could not affect the debits and credits as they balance ; and no notice is taken of the important fact that all the bullion, 9,808,127/., is on the credit side of the account submitted, andonly notes or bullion 4,226,35!7. and the gold and silver coin 715,182/., on the credit side of the Banking department. Mr. Weguelin gives the following reason why 14,000,000/. was fixed on, as the limit of the active circulation on securities : — 556 SEPARATION OF DEPARTMENTS. chap. xv. 95. " The reason, I believe, why 14,000,000/. was fixed by the authors of the Act of 1844 was, that the active cir- cuUition had never gone down below that, or even as low as 14,000,000/. I believe the lowest amount of the circulation was in 1839, and then it was 15,800,000/." I believe that included bank post bills 1,000,000/., and it also included lost notes 600,000/., which have been subsequently written off." It does not appear that Mr. Weguelin was examined as to the cause of the increase in the amount of the bullion reserve since 1844. Mr. Hubbard: (2325) " Will you state what you think has been the effect of the separation (of the departments of the Bank of England) since 1844 ? "— " I think the effect of that separation has been, both in a scientific and in a practical view, of the utmost importance and highly beneficial. It has been so in a scientific view, because the effect of the sepa- ration was to give a legal affirmation to the true character of currency, by removing it from being confounded with bills of exchange, with promissory notes, with deposits, and with book debts, and, in fact, from the whole category of mere banking expedients and representatives of credit. Then, in a prac- tical point of view, I conceive that it has been highly bene- ficial, because it has enabled the Bank of England to give its attention Avholly to those concerns to which alone a banker ought to have to direct his attention ; namely, to a considera- tion of his liabilities upon his deposit accounts, and the claims likely to be made upon him for advances by his various customers." Mr. Hubbard differs from Sir Eobert Peel (p. 142 ante), who defines paper currency: " In using the words paper currency, I mean only such promissory notes" — " promissory notes payable to the bearer on demand." Mr. Hubbard would not confound " currency with promissory notes;" or with "the representatives of credit," and (p. 508 ante), he describes the Bank of England note as being " a security which is realised," and " you cannot have security without limitation." ciiAr. XV. EFFECTS OF THE SEPAEATION. 557 Among the " various customers " alluded to must be included, I conclude, the international traders or foreign merchants who demand bullion for exporta- tion, the great mercantile republic, who have, as such, neither " deposits " nor " book debts " with the Bank of England, to whom the Bank of England are under no liabilities, and whose claim or demand for hullion ought to be utterly rejected, and on which I have commented (pp. 540, 541 ante) : " The office of the Issue department is not so simple " as Mr. Hubbard imagines (p. 539 ante) ; it may put "our currency upon a perfectly solid basis," but I much doubt whether that basis is consistent with the promise or the tenor of the bank-note ; and how the present Act " compels "the Bank to keep a minimum reserve of not less than 8,000,000/. is not explained. It is stated only, " That has been its practical effect." Lord Ashburton terms, p. 9, the separation of the two departments " a fanciful piece of mere book-keeping;" "the simple question is what engagements can they safely incur? What means can they command ? " What means can the Bank of England command to obtain bullion from abroad ? What means have they to pay for this bullion ? Can they safely incur the engagement to pay thyir notes with bullion at the expense of others? When gold bullion is taken to the Issue department, and bank-notes are given by that department for the amount, at the rate of 3/. lis. 96?. per ounce of standard gold, this is conformably to the enactment (clause 4) which entitles all persons to demand notes in exchange for bullion ; this was allowed, no doubt, to mitigate the effects of the limitation of issue. The notes thus received must be employed in buying, or paying debts in the home market ; and these notes not being wanted in the circulation, which varies very little, will be deposited in the absence of panic in the Banking department, and increase the reserve ; but the bullion received by the Issue department for these 558 CAUSES OF INCREASED BULLION RESERVE, chap. xv. notes will also be a means of famishing notes to the Banking department. This transaction, therefore, may double the amount of notes ; the notes received for the bullion, and also the amount of bullion. This creates a redundancy in the reserve, and forms the ground of lowering the Bank of England's rate of interest, or of its being kept low, in order " to employ the reserve in the Banking department " ((^08), p. 295 ante. When notes are taken to the Issue department, whether by the Bank of England or any other Bank, and bullion is given for these notes, the notes are cancelled (3465), and the bullion, as it does not circu- late, will very probably be exported. The notes which were given for the bullion must have been withdrawn from the Banking department, as they could not be spared from the circulation; this lessens the amount of the reserve, and occasions the Bank of England to raise the rate of interest, when the reserve is di- minished to an inconvenient degree, in order to lower the prices of goods and securities, to check the efflux of bullion, or to bring back the bullion which has been exported. This last operation is not authorised by the Bank Act, which does not give the public the power of demanding bullion in payment of the Bank of England notes. Both these operations arise from the currency being- made dependent upon bullion for its increase or dimi- nution, with which the Bank of England should have nothing to do, beyond advancing money upon it as an asset, as upon other merchandise or as upon securities, regardless of its importation or exportation. As so much importance is attached by Lord Over- stone to " the separation of the accounts " (p. 440a7i^e), it appears extraordinary that this last discrepancy be- tween the enactment of the Bank Act and the practice of the Bank and of other bankers, was not noticed. I submit that the separation of departments should CHAP. XV. SErARATION OF DEPARTMENTS. 559 be suppressed, that the statement of the Bank of England should be like that of other banks, and the payment of the bank-note should be confined to money, agreeably to the Bank engagement. Lord Overstone, 7th July, 1857 : — 3649. " It is an undoubted fact tliat the bullion reserves of the Bank since 1844 have been greater than they were in an equal period before 1844, whetlier we look to the average or Avhetlier we look to the minimum. Difl'erent opinions have been expressed to this Committee as to the cause of that increase. Some persons have expressed an opinion that it has been owing to the operation of the Act of 1844 ; and others that it has been due to natural causes, and particularly to the increased production of gold. What is your Lordship's opinion on that subject ? " His Lordship states : " The object of the regulations of 1844 was, 'to protect the bullion from the possibiHty, under any circumstances whatever, of falling below a safe amovuit.' " " The phenomenon before us is this, that under two separate periods of trial, the bullion in each case has been reduced to the lowest amount which the Act will permit, and that amount on both occasions proves to be somewhere about 8,000,000/." His Lordship does not state what those " regula- tions " were, or how " the Act " produces the " phe- nomenon." Section 60. The Committee report : " That the sup- ply necessarily maintained in the coffers of that esta- blishment, under the provisions of the Act of 1844, is greater than that which was ever maintained under circumstances of pressure in former times, is a fact beyond dispute." The " provisions of the Act of 1844," which "neces- sarily " maintained this greater supply of bullion, are not stated. G. W. Norman, Esq., 3rd July, 1857: 3452. " Do you consider what is called the separation of the departments is an essential part of the system ? " "I O 560 ON TliE rrvECIOUS metals. cnAP. XV. think it is a really vital part of the system, and not merely a mode of stating the acconnts." 3453. " In what way ? " — " Because it necessarily leads to the fact that the issues of bank-notes vary in all cases exactly as bullion would vary." 3454. " There is no regulation of the currency now ; I greatly dislike anything like an artificial management of the currency. It seems to me that the currency of a country ought to be regulated by certain natural laws, and I wholly distrust all artificial plans for that purpose." 3455. " That is, you would regulate it wholly by the action of the public in exchanging gold for notes or notes for gold ? "— " Exactly." 3456. " That you believe to be the only sound principle on which a currency can be regulated ? " — " That I believe to be the only sound principle on which a currency can be regulated." 3457. " Is that practically in this country the effect of the Acts of 1844 and 1845 ? "— " It is." Colonel Torrens observes, p. 237 : " It has been satisfactorily shown by Mr. Ricardo that the exporta- tion of coin is caused by its cheapness, and is therefore not the eftect, but the cause of what is called an un- favourable balance of payments." I have commented on this subject, p. 245 a7ite^ and observed : " The profit or loss is on the commodities, and not on the silver or gold." And he proceeds : — " An unfavourable balance of foreign payments means, that of all commodities, exclusive of the precious metals, a country has brought from other countries more than it has sold to them ; that a debt, therefore, is owing by that country which she must pay in the cheapest way she can, and that an export of specie is the cheapest way of discharging the debt. But why is the export of specie a cheaper way of discharging the debt than the export of any other commodity? Because the prices of all other commodities are high, i.e., in other words, because the value of specie, as compared with other commodities, is low. Therefore it is the low value of the bullion Avhich causes it to be exported. But the Ioav CHAP. XV. LIMITATION OF ISSUE, 561. value of bullion is the same tiling as low value or depreciation of the currency ; for if the currency was not at a low value in common with the bullion, the bullion, instead of being ex- ported, would be converted into currency, either by coining it or by obtaining l)ank-notes in exchange for it." Why should " the precious metals" be excluded from the commodities which occasion an " unfavourable balance of foreign payments." I have observed, p. 374 ante^ that bullion "should be viewed as any other commodity," and, p. 544 ante., The precious metals are now included among the exports and imports ; they must be paid for, and must influence the balance of debt; and should, therefore, not be excluded. It is a fundamental error to suppose that the high or low price of bullion, or of the currency, influences the exchanges, and the import and export of bullion ; it is the high or low price of commodities which in- fluences both. Sir Robert Peel observes, p. 26 : " Both these emi- nent writers (Adam Smith and Ricardo) assume that immediate convertibility into coin is all that is requisite to prevent the excessive issue of paper." It is extraordinary that the authority of Adam Smith should be associated with that of Ricardo, since Adam Smith contemplated the payment of the bank-note with com, and Ricardo would limit it to ingots or bars of gold, of the weight of GO oz. (See p. 479 cmte) ; and then Sir Robert Peel speaks of the progress which " this science, like all other sciences, is making," as affordino; o;round to "doubt the soundness " of their opinions, if convinced by " reason or experience. But the performance of a promise, and the payment of a debt agreeably to contract, rest neither upon the authority of Adam Smith nor of Ricardo, nor upon the progress of " science," but upon justice and truth ; and I submit that experience confirms the opinion of Adam Smith, " that freedom of competition and im- mediate convertibility into coin., at the will of the o o 2 562 LIMITATION OF ISSUE. chap. xv. holder, will prevent the excessive circulation of paper," payable only in coin-, and with a regulation, if need- ful, of the denomination of bank-notes. See pp. 551, 552, ante. 563 CHAP. XVI. EXTRACT FROM SIR ROBERT PEEL's SPEECH IN 1848 HE STATES THE GREAT TRUTHS WHICH SHOULD GOVERN OUR MONETAKY SYSTEM GUARANTEES FOR THE CONVERTIBILITY OF OUR PAPEU MONEY THE NECESSITY OF PRESSURE — OPPOSES ANY RELAXA- TION OF THE BANK ACT REMARKS UPON HIS STATEMENT, AND UPON THE ACTION OF THE BANK OF ENGLAND. Sm Robert Peel in his speech in August 184'-^, about four years after the passing of the Banlv Act, observed : — " I shall conclude with an earnest hope, that when the House shall again address itself to the considera- tion of this great question, with a view to some prac- tical issue, they will bear in mind the great truths by which legislation on our monetary system should be governed ; — that they will bear in mind that trade is not carried on with paper money, but with capital or with credit, of which capital is the foundation, — that the arbitrary issue of paper money is no increase of the wealth of the countr}^, — that the rate of interest must vary with the value of money and the demand for it, and cannot be permanently regulated by the Bank of England, — that fixity in the value of the currency, that is, of the coin, or of the note which represents coin, and a guarantee thrt tlie note shall be at all times convertible into the precious metals, are essential to the welfare of all classes, but espe- cially of that class which is in the receipt of the wages of daily labour. Depreciate the value of your currency, and the prices of all articles of subsistence will speedily follow the change ; but there will be no corresponding rise in the rat of daily wages. The 564 ON CONTRACTION AND PRESSURE. chap. xvi. two shillings, or three shillings, a day will continue to be paid, long after they shall have ceased to command that amount of the necessaries and comforts of life which they did command before the period of depre- ciation. " The House will, I trust, continue to uisist upon the maintenance of the standard of value, and upon the guarantees for the instant convertibility of paper into coin. Those guarantees you cannot have with- out restrictions upon the issue of paper. You cannot have them without pressure in the time of commercial discredit. Early pressure — pressure compelled by law, if it be not induced by prudence, so far from being the great evil which some consider it to be, may be the only preventive of great future disastei', — the only certain means of maintaining entire confidence in the paper circulation of the country. May, 1847. — " If I, myself, thought that any relaxa- tion of this Bill would be a cure for the evils which press upon us, I repeat, that I would not oppose its relaxation on account of the part whicli I took in intro- ducing that measure to Parliament ; but it is my firm belief, founded upon the information in my possession, that a temporary issue of some 2,000,000/. of paper would not increase that capital, which, in point of fact, is the source from which you can command the pro- duce of other countries." * I beg to make, with due deference, some remarks upon these " great truths " propounded by Sir Robert Peel. I submit, that trade is carried on with paper-money, resting upon confidence in the " fortune, probity, and prudence " of the banker : that this confidence is the foundation of credit to a much greater extent than capital ; a confidence grounded upon the opinion en- tertained of the " probity and prudence" of the * Hansard. ciJAP. XVI. KEMAEKS ON " THE GREAT TRUTHS." 5G5 banker or merchant, as much, or more, than upon his " fortune," or capital. That the " arbitrary issue of ]mper money " will not increase the amount in circulation, or to a very limited degree; that will be determined by the wants of the connnunity in the exchange of goods bought and sold : the excess will be returned to the issuer. That the rate of interest is not determined by the value of money^ of the " sovereign " which has been declared by Act of Parliament the only money in Great Britain (see p. 445 ante)^ the rate of interest will be determined, in an uncontrolled state of the currency, by the profit to be made by the use of money, and not by the value of the money itself ; it would be measuring the value of money by money^ which is not possible. The Bank of England may not be able permanently to regulate the rate of interest ; but in the absence of the Usury laws, it has the power to raise the rate to any extent needful to procure bullion or Bank-notes, as the wants of the Bank may require : and the Joint Stock Banks are governed in the rate they charge, and other bankers in a great degree, by the rate of interest of the Bank of England. Fixity in the value of the currency depends upon the coin being free from adulteration, and the Bank note being paid in that coin. The maintenance of the standard of value depends upon the " sovereign " being free from adulteration. Sir Robert Peel seems fully aware of the evil consequences of the depreciation of the Bank-note raising the prices of goods, but comparatively takes little notice of the evil consequences of an artificial scarcity of Bank-notes, distressing commerce, and lowering the prices of commodities and securities: these low prices of goods reducing, and perhaps destroying, the profit of the manufiicturer, and his ability to give the same wages to the labourer which he 566 THE ACTION OF THE BANK OF ENGLAND, chap. xvi. had been accustomed to receive, and, possibly, throw- ing him out of employment altogether ; at the same time causing great loss to the holders of securities. There is no " guarantee" required that the " Bank " note shall be, at all times, convertible into the |?re- cious metals^ uncoined gold. The Bank of England is under no obligation to pay its notes with that " bul- lion alternately imported and exported for the foreign trade."* That bullion is quite independent of the national circulation of coin and notes ; and as the Bank has no means of procuring this bullion from abroad, is it not the duty of the Bank of England not to pay its notes with bullion, and to repudiate every demand of the kmd from the great mercantile Rej^ublic, who should themselves provide " the precious metals," the bullion they require, and at their own cost? Referring to the last paragraph of Sir Robert Peel's speech, p. 564 a7ite.) it may be asked what capital and wliose capital is to command the produce of other countries ? The Bank of England employs no capital to command it. Pressure upon the capital, or pro- perty of others^ lowering the value of their goods or securities, supplies the place of capital in the action of the Bank, who want the produce of other countries, that is, the bullion, which, by the Bank Act, is made needful to the Bank, and which by^r^sszer^? it procures at the cost of others. * See p. 536, ante. 5G7 CHAP. XYII. SUSPENSION OF THE BANK CIIAETER ACT.* STATEMENT OF THE GOVERNOR AND DEPUTY GOVERNOR OF THE BANK OF ENGLAND THE GOVERNMENT LETTER — MR. WATKIN MOVES FOR A COMMISSION OF INQUIRY — DEBATE UPON THIS MOTION MR. AKROYD ON THE FRENCH COMMISSION — SIR STAF- FORD NORTIICOTE APPROVES OF INQUIRY, BUT DISAPPROVES OF THE MOTION EXPRESSES THE GENERAL CONSENT OF THE GOVERNMENT TO THE PRINCIPLE OF THE BANK ACT MR. FAWCETT ON THE NATURE OF THE CRISIS — MR. HUBBARD ON THE BANK ACT, AND SEPARATION OF DEPARTMENTS — MR. GLADSTONE ON THE BANK ACT, PROMISSORY NOTES, AND FOREIGN DRAINS OF BULLION MR. HENLEY ON THE ACTION OF THE BANK— THE DEBATE ADJOURNED BUT NOT RESUMED. A LETTER having been addressed by the Governor and Deputy Governor of the Bank of England to the Government on Friday, which stated that in con- sequence of the failure of Messrs. Overend, Gurney, and Co., they had advanced to the bankers, bill- brokers, and merchants in London, during the day, upwards of 4,000,000^. sterling, upon the security of Government stock and bills of exchange, and that they could not calculate upon having so much as 3,000,000/. next evening, making a fair allowance for what might be remaining at the branches, a reply to this, signed by the Premier and the Chancellor of the P^xchequer, was immediately forwarded to the Bank of England. It said : " The accounts and representations which have reached Her Majesty's Government during the day exhibit the state of things in the City as one of extraordinary distress and apprehension. Indeed, * From the Times money article, Friday, May 11, 186G. 568 THE GOVERNMENT LETTEE. chap. xvii. depntations composed of persons of the greatest weight and influence, and representing alike the private and joint-stock banks of London, have presented theni- seh^s in Downing Street, and have urged, with unanimity and with earnestness, the necessity of some intervention on the part of the State, to allay the anxiety which prevails, and which appears to have amounted through great part of the day to an abso- lute j)anic. Her Majesty's Government cannot doubt that it is their duty to adopt, without delay, the measures which seem to them best calculated to com- pose the pul^lic mind, and to avert the calamities wliich may threaten trade and industry. If, then, the Directors of the Bank of England, proceeding upon the prudent rules of action, by which their ad- ministration is usually governed, shall find that, in order to meet the wants of legitimate commerce, it is requisite to extend their discounts and advances upon approved securities, so as to require issues of notes beyond the limits fixed by law. Her Majesty's Go- vernment recommend that this necessity should be met immediately upon its occurrence, and that m that event they will not fail to make application to Par- liament for its sanction. No such discount or ad- vance, however, sliould be granted at a rate of interest less than ten per cent., and Her Majesty's Government reserve it to themselves to recommend, if they should see fit, the imposition of a higher rate. After deduc- tion by the Bank of whatever it may consider to be a fair charge for its risk, expense, and trouble, the profits of these advances will accrue to the public." In the late debate on the laws afi'ecting " currency and banking " on the 31st July, of which the follow- ing is a short summary, when Mr. Watkin moved for a Royal Commission of loquiry, with an instruction to the Commissioners to present their repoi't, and the evidence taken by them, on or before the 1st February, 18G7: cuAP. XVII. MR. WATKIN ON THE RATE OF INTEREST. 5G9 He stnted that, " the nunimnm rate of tlic Bank of England was still 10 per cent., while the rate of dis- count in Paris was only 3J per cent. ; in St. Peters- burg 54 ; in Brussels G ; in Amsterdam 7 ; and in Vienna 5 per cent." He advanced as an argument why a Commission should be granted, that there had been three Com- mittees granted. "In 1837, after the deep distress and panic, a Committee of that House was appointed, presided over by the present Lord Plalifax. After the panic of 1847, there was a Committee presided over by Sir F. Baring; and after 1857, there was a Committee presided over by the late secretary of the Colonies." He stated, " if report spoke truly, the Bank of the nation, for the first time in its history, refused to lend money upon Consols." " What was meant by a rate of 10 per cent, dis- count ? it meant a tax of more than double the usual amount upon 300,000,000/. of current bills, or a transfer of many millions sterling from trade and manufacturing profits to money dealing profits. It meant a depreciation in the value of commodities and securities which had been estimated at above 100,000,000/."—" AVhile large numbers of the labour- ing classes had been thrown out of employment, the profits of the Bank had largely augmented." — " The price of Bank of England stock had greatly advanced," " so that it was perfectly clear, that whatever the effect of the legislation of 1844 might have been on com- merce, its action had largely increased the resources of the Bimk of England stock-holder." — " During the last twenty years there had been three panics, ^dz. in 1847, in 1S57, and again in ISGH, and they would find that every succeedmg panic was of greater se- \erity than its predecessor. In 1847, the penal rate of discomit fixed by the Government letter, and acted upon, was 8 per cent., which endured for four weeks. 570 MR. AKROYD ON THE MODE OF INQUIRY, crivp. xvii. and was followed by a rate of 3 per cent, within three months of the date of imposing 8 percent. In 1857, the j^enal rate of discount was 10 per cent, for a period of six weeks, and it was down again to 3 per cent, in three months from the date of imposing 10 per cent. In 1866, the rate of 10 per cent, had continued for about three months. He said, therefore, there must be at work some cause or law which, at every recur- rence of these crises, aggravated their pressure." " Gentlemen in business knew that a large number of loans in this country were borrowed at a per cent- age called the Bank rate ; the assumption being that the Bank rate was, on the average, something like 5 per cent. Consequently if the Directors of the Bank of England, from a mistaken policy, kept the rate of interest at 10 per cent., it was quite clear that the lender of money gained an advantage over the bor- rowers which was not in contemplation when the loan was contracted. That was a question which ought to be inquired into." The honourable member alluded to the facility of obtaining Acts of Parliament for the construction of railways, without a suitable guarantee for their com- pletion. Mr. Akroyd, who seconded the motion, observed : " He should suggest that any inquiry that took place should be conducted on the plan adopted by the French Government in 1865, when tlie Imperial Com- mission sent a circular, containing forty very searching questions, to the most important commercial bodies in France, and to the various Chambers of Commerce in this country. It would be a very important branch of the inquiry whether the high rate of discount no^v maintained tended to brino- back the flow of bullion to the Bank of England. In his o[)inion the measures taken by the Bank of England to liring back the flow of bullion into tliis country had had a contrary effect to that desired." cii.vp. xvii. SIR S. NOUTHCOTE ON THE INQUIRY. 571 Sir Stafford Northcote, the President of the Board of Trade : — He stated that the Government was desirous that an inquiry should take place as to the cause of the com- mercial distress, and the prevalence of the high rate of discount, but he did not think a Royal Connnission with an instruction to report before the 1st February was the best measure they could take, to which lie advanced many objections. With respect to the French Commission, " the inquiry was begun nearly two years ago, and as yet, their labours have had no result." " There arc circumstances which distinguish this panic from the panics of 1847 and 1857. We have new facts before us, and it is undoubtedly rea- sonable to inquire how far the experience we have of the practical working of the Act renders it necessary, if we are to mamtain the principle of the Act, that we should attempt to improve its machinery." — "I am bound to say that though the present Government are in no particular sense bound to defend the Act of 1844, that is to say, they have no particular parental interest in that Act, yet, upon the whole, they do believe that the principles upon wdiich the Act of 1844 is based are the sound and true principles upon which our currency should rest." — " It must be ob- vious that if any inquiries of this sort are to be of real use, they ought to be guided by some general principle upon which we are tolerably agreed, and this is especially true of a subject like this, upon which so much controversy and difference of opinion has existed." "The honourable member (Mr. Watkin) had stated that this is what is called a credit panic, and the honourable member for Halifax has very correctly, I think, described what the peculiar features of a credit panic are, and how at the moment, when what is called the credit currency of the country collapses, there is a pressure upon the ordinary currency of the 572 ON THE CAPITAL OF THE COUNTRY. chap. xvii. country, and the Bank Act of 1844, to a certain ex- tent, prevents tlie expansion of currency, just at the moment when such an expansion is most desired by the pul)lic." "Although the loanable capital of the country is large, it is not unlimited ; and if a demand is made for loanable capital out of proportion to its amount, great as that may be, it is impossible it should not become scarce, and, being scarce, that it should not be high in price. That, I believe, is the real explanation of what has recently taken place." " Setting apart altogether for a moment any ques- tion about imprudence or unsound speculation, that is in itself, I believe, the explanation of the circum- stances in which we are placed, that an enormous })roportion of the capital of this country, and a yearly increasing proportion is locked up in securities from which you cannot immediately withdraw it." After observing that " the amount of capital authorized to be raised by the railway and other Bills which have been passed this year and last is 176,000,000/," he proceeded : " The savings of the country are some- times estimated at not more than 100,000,000/. a year ! Obviously the capital to be raised must come out of the savings of the country." — " The question arises, ought anybody, and if anybody, who is it that ought to provide the trading interests with money to meet their demands? Can you or ought you to make money when money is scarce? I believe that is the real question at the root of these difficul- ties." — " There are those who say that the money which there is in the country represents the capital, tlie loanable capital, or gold, or this, that and the other; for there are different theories as to what money exactly is. They say that when there is little, you must cut your coat according to your cloth, and that if you have little money, you cannot expect to be able to get a great deal of money cheap. There CHAP. xvii. GOVETiNMENT APPROVES THE ACT. 573 is the other school which says that when this is the case you ought to look to your credit, that money is only a form of credit, and that you ought to attempt to cut your coat not according to your cloth, but that you ought to make your coat of the size convenient to you, and that if you cannot get the cloth, you ought to get something which looks like it. These are, I believe, the real differences which exist between opposite schools upon this question, and it is hopeless for you to investigate practical questions tending to U\gislation, unless you have made up your mind on which of the two theories you intend to proceed." " I have no hesitation in saying, on the part of the Government, that they are not of opinion that it is possible, or, if possible, that it is desirable, to meet the difficulties which arise when money has been used up, and there is not a sufficiency of loanable capital in the country, by any fictitious creation of money." It is impossible to deny that " this peculiar kind of jDanic affects the credit of England, and that the operation of the law, and tlie necessity of authorizing the suspension of an Act of Parliament, have had a serious and prejudicial effect upon the credit of England." " I am anxious to impress upon the House and the country that the Government does not believe, and we earnestly ho2:>e the country will not believe, that the difficulties under which our credit labours, and the want of confidence that has been engendered is to be removed, or is capable of being removed, by any tampering with your currency and banking laws." " If we were everywhere to unshackle the limits of enterprise, there is too much danger of enterprise ra- pidly growmg into insane speculation." — The honour- able baronet concluded by pressing upon the honour- able mover to withdraw^ his motion, on his assuring liim that the Government would carefully investigate the matter, and either legislate upon the subject or 574 MR. FAWCETT ON "MODERN FINANCING." chap. xvii. invite the attention of the House to it on the com- mencement of the next session. Mr. Fawcett considered the recent crisis a credit panic, " produced by the reckless spirit of com- mercial gambling which had spread itself over the country." — "A new school had grown up of late years which encouraged the idea that wealth was not to be made in the old-fashioned steady way, but by modern financing, or, in other words, a skilful manipulation of pieces of paper called bills of exchange." — " There was one gratifying fact in connexion with our commer- cial difficulties. It was that during the crisis not one laro'c commercial concern which carried on a leofitimate business had succumbed." Mr. Hubbard : " It could not be denied that while on the one hand the subject of the administration of the Bank, and the laws of currency did aiFect the interests of tens of thousands of industrious people, on the other hand we might deal with the question in such a way as to impair and shake the confidence in a matter of primary importance, namely, the integrity of our system of currency." " He admitted that variations in the rate of interest were not desirable. The more equally we could maintain the value of money in loans, the better for the commercial community and the progress of in- dustry." — " There could be no douljt that to arrest the employment of the labouring classes was a very great evil," but " there must be something exceedingly unsound in the adventure or business in which an employer was engaged, if it (a high rate of interest) exposed him to a sudden cessation of his operations." " Let it not be supposed that difficulties, the existence of which he did not deny, were attributable either to the Bank of England, or to a high rate of mterest." " If the honourable member attempted to charge the present difficulties of the country upon any legislation with regard to the currency, he must entirely differ ciivr. xvir. MR. TIUBBAKD ON THE BANK ACT. i) i !) from liini." The honourable mciiil)er then dilated u])on the large loans made ])y the Bank of England durhig the crisis. " According to the lionourable member, one of the objects of the Bank Act was convertibility of Bank notes, another the convenience of trade, and a third tlie avoidance of panic." — " Let it for once 1)e understood what the l>ank Act really was. The Bank Act said not a word about panics — not a word aljout the convenience of trade." — " Its provisions were ex- ceedingly brief and clear. It drew, not one day too soon, a legal separation between the two distinct offices of bankino; and of issue — while bankinf>: oudit to be as free as air to everyone, the province of issuing or coining paper into money was an imperial function." " It was necessaiy as a rule to limit the issue of credit paper — the issue had been so limited to 15,000,000?. the workiiio' of the Bank under the Act had shown tliat it was so ]ierfectly master of its position, so capable of bearing the weight thrown upon it, that it could be subjected to an extra strain without fear. The Act could not in that case be described as an obstruc- tion but the very reverse." lie then compared it to a bridge. " The Bank of England was the bridge ; the Bank Charter Act the regulation limiting the traffic. The Bank, under the Act, had been able to bear the whole burden imposed upon it, and with such effect, that when a suspension of commercial credit had arrived it was possible to impose upon the Bank a subsidiary currency without that subsidiary currency being exposed to inconvertibility." " The averaofe amount of bullion held in the last five years of the old system was no more than G, 700,000/., while during the last five years the amount of bullion held was upwards of 15,000,000/. If the reserve of the present year had not exceeded 7,000,000/., and it had been subjected to the in- fluences which had recently been brought to bear r r 576 MR. GLADSTONE ON THE COMMISSION. chap. xvir. upon the Bank, the panic would not have been ar- rested by the issue of something less than a million ; the internal drain would have been much greater, and the occurrence of so many bank casualties would probably have resulted in the suspension of cash payments by the Bank of England. Therefore, he ventured to affirm that the principle of the Bank Act had been victorious : it had triumphed over great difficulties." — " Nor did he insist that pressure and panic would result only from our system of currency. In the town of Hamburg, with only a silver currency, a crisis occurred in 1847, which resulted in the failure of a hundred and forty commercial houses, and he was of opinion that no system of currency could avoid panic and failure." — " In no case should encouragement be given to the banking w^orld to assume in any emer- gency that they had a right to ask the Government to supply them at any price with a reserve which they should in common prudence have secured for them- selves." Mr. Gladstone concurred with the Government in the propriety of declining to appoint a commission, and said : " I think that the whole of the remarks of my right honourable friend, the President of the Board of Trade, upon the subject were as eminently satisfactory as they were clear." — " I don't suppose there is one of us sanguine enough to believe that the proceedings of such a committee would lead to mutual conversion or conciliation on the part of the distinguished professors of the different schools. But, whatever the nature of the report, I am quite sure that as far as it dealt with the principles and causes it would not weigh with this House." "At an)'- rate, the convertibility of the Bank note — the ■first object of currency laws — has been placed beyond the smallest question, not only beyond the reach of absolute danger, but beyond the shghtest taint of danger or suspicion. The whole system of meeting CHAP. XVII. ON PROMISSORY NOTES AND BANKING. 577 foreign drains has been so completely established, and is now SO generally understood, that so far as those drains are concerned, tliere is no longer any appre- hension or difficulty, eitlier in the present or the future. The solution of that problem is of itself a most important fact. The Bank Act of 1844 livd down a principle of great importance, which I hope will never disappear from our Statute Book, that the whole business of issue is the business of the State, and that Avhere that function is exercised by any body other than the State, it must be considered as exer- cised by delegation only. The profit of issues belongs to the State, and, what is much more important than the profit, the responsibility of issue, also belongs to the State." " What have we been labouring under? Why is the rate of discount charged by the Bank kept up at 10 per cent.? Because of the limited condition of the reserve, consequent upon banking discredit, and the immense demand made upon its notes and coin to supply this want." " We have actually seen the country bank circula- tion diminished by not less than 1,000,000/. at the very time of this drain on the Bank of England; and how has the place of this 1,000,000/. been sup- plied? By an enhancement of the drain upon the Bank of England. That 1,000,000/. of notes in the cofi'ers of the Bank of England would have been a valuable addition to the reserve of the Bank." " I hold that no Bank note ought to circulate in the country unless it is just as secure to the holder as a sovereign." — " Undoubtedly it is a fact that this letter (the Government letter) was understood abroad — acting upon a more susceptil3le state of mmd — as amounting to a suspension of cash payments. And I think that no later than by return of post there came an offer, a most friendly ofter, from the French Government to assist us with a supply of bullion." — p r 2 578 MR. HENLEY ON THE BANK ACT. chai-. xvii. " The working of the Bank Act may be a fair subject of Parliamentary inquiry." " Tlie character of this crisis has been a bank- in"* crisis. We have been, I think, a little too severe throughout the discussion, upon the general commerce of the country. That commerce has been, so far as I have observed, in a sound and satisfactory state." " It has been a crisis mainly connected, not so much with the conduct of commerce, properly so called, as with the employment of money. And I think upon that ground alone, if it should be the general desire of the House, and if the Government do not at once make any proposal of their own — which I should prefer — the Government would be justified in bringing the whole case before a Committee of this House." Mr. Henley : " Had or had not the system which had grown up from extensive banking, and which was called ' financing,' been operated upon, and partially, if not mainly increased by the working of the Act of 1844?" — Immediately after the passing of the Bank Act, the action of the Bank of England then changed ; that whereas before that time the Bank of England were somewhat above the market rate of interest, after that period, directly money was cheap, they became such competitors in the open market, that they went below the market rate." " The Governor and Deputy-Governor of the Bank also stated that they did not at all look at the nature and origin of the transactions connected with the paper ofl:ered to them, but only to the security ; and it was perfectly clear from the evidence that the great money houses which dealt in all that questionable })aper and upheld all those questionable finance houses, instead of being checked by the Bank of England, were so strong from the peculiar position of the Bank, tliat they took that paper to the Bank, and they were ctiAP. XVII. DEBATE ADJOURNED: NOT RESUMED. 579 forced to discount it." " All these were questions which must arise." . Mr. J. B. Smith moved the adjournment of the debate, which was agreed to, but which did not take place, the House being counted out on the Friday following, when the debate was to be resumed. 580 CHAP. XYIIL MR. WATKIN's motion — INTEREST TEN PER CENT. M. CHEVALIEr's OPINION — GOVERNMENT APPROVES OF THE PRINCIPLE AND OP INQUIRY RESPECriNG THE MACHINERY OF THE BANK ACT RELIEF TO THE BANK OF ENGLAND SUGGESTED ADAM SMITH ON SUMPTUARY LAWS GREAT POWERS OP THE BANK BULLION PROCURED BY PRESSURE LORD KING ON BANK RESTRICTION IN 1797 SIR S. NORTHCOTe's STATEMENT ON SUSPENSION OF THE CURRENCY LAWS — ON MONOPOLY — CAPITAL — MONEY BULLION — CIRCULATION — COMPETITION — BULLION WAREHOUSE — BANKING AND ISSUE — FOREIGN DRAINS OP BULLION — GO- VERNMENT BANK — LORD ALTIlORP. Mr. "Watkin, in moving for the appointment of a Royal Commission to investigate the causes of the late financial crisis, and the laws affecting currency and banking, observed, that a Committee had been appointed on the occurrence of three former crises, viz. in 1837, 1847, and 1857, that the minimum rate of interest was 10 per cent., still charged by the Bank of England, and had continued three months; that the rate on the continent was much lower, and, if report spoke truly, the l^ank of the nation had, "for the first time in its history, refused to lend money upon Consols," and he compared the high rate of mterest to a tax of the same rate of 10 per cent, on 300 millions of current bills. It appears to me to be a fair inference from the unsatisfactory result of former Committees, that they are not the proper tribunal ; as the promissory note of the Bank of England is simply an acknowledg- ment of a debt, and a promise to pay it, I submit that the more proper tril)unal would be a Court of Justice, or a Court of Equity, to determine the mean- ing and obligation of the contract. With respect to CHAP, xviii. REMARKS ON THE BANK ACT. 581 tlie liigli rate of interest, that should be controlled by declarmg all interest beyond a certain fixed rate to be usury, and punishable by a fine proportioned to the ofience. There is this distinction between the rate of inte- rest and a similar rate of tax, that the tax is paid by all who are liable by law to the assessment, while the high rate of interest is profitable to the banker, tlie buyer, the exporter of goods, and the creditor; and hurtful to the debtor, the holder of goods and securities lowered in price or value, and to the importer of goods : the refusal to lend upon Con- sols shows that it is not the wants of " leijitimate commerce " which mfluence the Bank, which prevent " their extendmg their discounts and advances ujDon approved securities," but some other want of the Bank itself, and that want is the want of bullion, which the Bank has no other means of obtaining than by a shock to credit, lowermg the prices of other people's goods and securities. With respect to increasing the reserve by taking a portion of the bullion from the issue department, it should be recollected that the whole of the bullion in the issue department was already appropriated to tlie depositors, either by Bank-notes or by Bank credits, and was not the property of the Bank ; on which I have remarked, pp. 55G, 557, 558, ante. He quotes the opinion of a celebrated French writer, M. Chevalier, who condemns the present system. " It ofi'ends the soundest ideas in regard to credit ; it entirely prevents the use of the invaluable auxiliary of credit in surmounting difiiculties." My opinion has been sufiiciently sho-\\m as to the injustice and inconvenience of interfering with credit, and, with respect to the foreign drain, I submit the Bank has nothing whatever to do with it ; it should be met by the foreign merchants who want the bullion. Mr. Akroyd, wlio seconded the motion, recom- 582 OPINIONS OF THE GOVERNMENT. ciiai-. xviii. mended tlic mode of collecting information which liad been adopted by the French Government, which is similar to that formerly recommended by the Cour des Monnoies in France, to which 1 have alluded, p. 550, anth. Sir Stafford Northcote admitted the propriety of the inquiry in order to see, after the additional experience we have had, if we are to maintain the prmciple of the Act, how far the machinery might be improved. A distinction is here justly draAvn be- tween machinery and principle — but neither the one nor the other is ex[)lained — the machinery employed by a banker, ^vdiether the Bank of England or a private bank, or a joint-stock bank, would appear to consist in the means at his connnand honestly to meet his engagements, and the law should enforce the pay- ment of the debt agreeably to the contract. 'I'he President of the Board of Trade is careful to inform the country that "the Government l)elieve tliat the principles upon wliich the Act of 1844 is l>ased are the sound and true principles upon which our cm-rency should rest;" at the same time he ob- serves, "they ought to be guided by some general |)rinciple on Avhicli we are toleral^ly agreed." — It should ne\'er be forgotten that all the controversy is founded upon tlie meaning of the words of the Bank of Eiighmd note, upon the construction to be put upon that contract — that construction should be con- sistent v*dth truth and justice, the only obligations in- curred by a " promise" and a " debt." No machinery, no Act of Parliament can, with impunity, control or change these eternal and immutable principles of (jeneral application, wliether it be the promise and the (h'ht of a national bank, or the enii:a<2:emcnt of an (■ni])loyer witli his daily labourer. The argument n])out tlie loanable capital of the coun- trii l)eing limited, 1 sid)mit, is not applicable; that capital belong; to individuals ;ind not to tlie country. nor exclusively or principally to the Bank of England. cii\i>. xviii. LIMITATION: SUMPTUARY LAWS. 583 Witli respect to money being " used up :" there was no scarcity of gold and silver money, the only money of Great Britain, and declared to be the only money by Act of Parliament ; the value of that was not changed by scarcity, nor the value of the Bank-note ; the value of the loan by " discounts and advances upon approved securities " was increased by the high rate of interest charged; the Bank-note is not money, it is payable in money ^ and cannot itself be money. " If we were everywhere to unshackle and set no limits to enter- prise, there is too much danger of enterprise rapidly growing into insane speculation." This paternal solicitude of the Government mani- fested in the "very salutary and protective influence " exercised over the currency in order to check " un- shackled enterprise," might very consistently be extended to that extravagance in expenditure in furniture, dress, and equipage which too often is the cause of " insane speculation." Should not Govern- ment re-enact the sumptuary laws ? Let us listen to Adam Smith on this subject. Adam Smith, b. ii. c. iii. : " This frugality and good conduct, however, is upon most occasions, it appears from experience, sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extrava- gance of Government. The uniform, constant, and uninterrupted eifort of every man to better his con- dition, the principle from which public and national as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of Government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite not only of the disease, but of the absurd prescriptions of the doctor." 584 GOOD CONDUCT OF INDIVIDUALS. chap. xviu. " The capital, therefore, annually employed in culti- vating this land, and in maintainmg this labour, must likewise be much greater. In the midst of all the exactions of Government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has main- tained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws or by pro- hibitmg the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will." Let Government be cautious how they check this " universal, continual effort of individuals to better their own condition." Can it be said that this effort is " uninterrupted," is " protected by law and allowed by liberty to exert itself in the manner that is most advantageous," while the " great powers " of the Bank of England exist ? The Committee of the House of Lords observe (p. 311, ante) : — ■ " To the Bank of England Parliament has confided great privileges and exclusive powers ; for the exercise of these CHAP, xviii. rOWEKS OF THE BANK OF ENGLAND. 585 powers the Bank is responsible. In these respects the Bank of England differs from an ordinary trading corporation ; and consequently is bound always to keep in view the real and permanent interests of the commercial classes, and of that great community of which it forms a part. The true interests of the proprietors of Bank stock can never be prejudiced by being considered in connexion with those larger principles." The Committee of the House of Commons (p. 321, ante) observe : — " The Bank is a public institution possessed of special and exclusive privileges, standing in a peculiar relation to the Government, and exercising, from the magnitude of its re- sources, great influence over the general mercantile and monetary transactions of the country." " These circumstances impose upon the Bank the duty of a consideration of the public interest, not indeed enacted and defined by law, but which Parliament in its various transac- tions with the Bank has always recognized, and Avhich the Bank has never disclaimed." " It is unnecessary to impose such duty by law, as there can be little doubt that the permanent interests of the Bank are identified with those of the public at large." Speaking of the banking trade, Adam Smith, who wrote during the existence of the Bank of Amster- dam, which he described as " the great warehouse of Europe for bullion" (see p. 76, cmte), says : " The prin- cipal banking companies in Europe, accordingly, are joint-stock companies, many of which manage their trade very successfully without any exclusive privilege. The Bank of England has no other exclusive jH'ivilege, except that no other banking company in England shall consist of more than six persons. The two Banks of Edinburgh are joint-stock companies, with- out any exclusive privilege." This was written about 1775. B. i. c. V. I submit that the Bank of England should be re- lieved from the exercise of such " great privileges and exclusive powers" — from the duty of " keeping in view 586 CHANGE OF SYSTEM SUBMITTED. chap, xviii. the real und permanent interests of the commercial classes and of that great community of which it forms a part " — from " the duty of a consideration of the pub- lic interest" — and from " exercising from tlie magni- tude of its resources great influence over the general mei'cantile and monetary transactions of the coimtry." I would submit that the Bank of England should exercise only the same influence which it possessed during the existence of the Bank of Amsterdam — the great warehouse in Europe for bullion ; that the Bank should be relieved from furnishing bullion to the members of the great mercantile republic ; that it should be relieved from the necessity of providing this bullion, the painful necessity of lowering the prices of goods and securities, the property of others, in order to procure this bullion from abroad — that this great country should never have presented the humili- ating spectacle of its National Bank resorting to the Paris bankers for the loan of 2,000,000 sterling (see p. 279, ante) ; and of being under the apparent want of assistance, kindly ofi:ered 'by the Government of France durino; the late crisis : least of all should this "country" or the "trade" of this country, make enor- mous sacrifices of property to enable the Bank to pro- vide bidlion for the foreigner, with which those who make these sacrifices may have had nothing to do : and more repugnant still should this proceeding be, when eftected by a concealed operation — by the intro- duction ol' a new phraseology — by the mild epithet of ''^ piressurey 1 submit, is it not time to discard a system, involv- ing such mortifying circumstances? and is it not most extraordinary that the amount of currency, or the ability to discount bills, should be in any way depen- dent upon the acquisition of a commodity, of bullion, whicli the Bank cannot obtain from abroad, with its own nutans of paying for it — and wliich, by pressure, it obliges others, at their great loss, to procure for them? CHAr. xviii. ON LOWERING PRICES. 587 Lord King, in his paini)lilet on the Bank Restriction, observes (see p. 357, ante) : — " A due regard to general rules, and especially to tlie great rules of property, fomis a most ini])ortant part of the duty of a legislator. They are the foundation of all private and political security." " Had Parliament been called upon to authorize any of those direct frauds upon the currency which have often dis- graced arbitrary governments, had it been recommended to them to raise the denomination, or to diminish the value of the current coin, there can be no doubt that such a proj^tosal would have been rejected with indignation." It rests with the advocates of the present banking system to show the difference Ijetween the power " to raise the denomination or to diminish the value of the current coin ; " and the power to lower the prices of goods or securities by a control over the currency — by a contraction of the circulation ; or by an exorbi- tant rate of interest : in both instances it is an etfect upon tlie prices of goods, and a violation of " the great rules of property," and there can be no doubt that Parliament would have rejected with indignation a proposal to confer such powers on the Bank of England or on any other corporation. The President of the Board of Trade understands the nature of the case to be something like this : " A merchant or manufacturer is enabled to invest the whole of his capital in business, and, to a certain ex- tent, to borrow the unemployed or loanable capital of others, in order to enable him to await the return of investments he has made." * But credit is loanable as w^ell as capital ; the Bank of England, when it discounts bills or affords accom- modation with its notes, lends its credit only: the operations by credit are much more extensive in commerce than the operations by capital ; that credit whether of the Bank of England or of any other bank, of a merchant or of any other individual, rests * Hansard. 588 capital: credit: loan. chap. xvm. upon confidence that the note or l^ill will be paid when due : with respect to the Bank of England, that confidence of the borrower does not rest upon the Bank possessing any particular asset, but upon the " fortune, probity, and prudence" of the Governor and Company of the Bank, with a guarantee against auy possible loss, of Government securities and the " rest" to the amount of about 17,000,000/. " But we must remember that although the loan- able capital of the country is large, it is not un- limited, and if a demand is made for loanable capital out of proportion to its amount, great as it may be, it is unpossible it should not become scarce, and, being scarce, that it should not be high in price. That is, I believe, the real explanation of what has recently taken place." " The savings of the country are sometimes esti- mated at not more than 100,000,000/. a year. Ob- viously the capital to be raised must come out of the sa"\dngs of the country." I consider the whole of this reasoning, as applied to the loanable capital or the savings of the country^ to be erroneous : each merchant, banker, tradesman, or country gentleman should look to his own capital, his o^svn credit, and his own means of fulfilling his eno^ao-ements, without troublino; himself about the loanable capital, or the annual savings of the country. Was the loanable capital or the annual savings of the country increased by the " Government letter," by a suspension of the lunitation of Issue, to the extent of five or ten millions employed in addition, by the Bank of England in discounting bills, &c. ? The loan- able power of the Bank was increased, and the power of individuals to borrow was increased, upon approved securities, and nothing was changed, except the with- drawal of the limitation. The Honourable Member is anxious to impress upon the House and upon the country that the CHAP. xvTii. monopoly: currency laws. 589 Government does not believe that "the difficulties under which our credit labours and the want of confi- dence which has been engendered can be removed by any tampering with your currency and banking laws." J3ut those " difficulties " and that " want of confi- dence " icere removed by " tampering with our cur- rency and banking laws," by removing or dispensing with " the limitation of Issue ; " by dispensing with the rule of " pressure " — limitation and " pressure " being the fundamental laws of our present system of currency. " In the great success of our commercial enterprize there is soinethino- that is fascinatino; to us." But there is something quite as fascinating in the success attending the enjoyment of a monopoly, whether that monopoly exist among the commercial, manu- facturing, or banking community ; nor does experience warrant an implicit faith in the judgment or moral sensibilities of monopolists when treating of their peculiar interests. Adam Smith observes, b. iv. c. viii. : " The cruellest of our revenue laws, I will venture to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature for the support of their own absurd and oppressive mo- nopolies. Like the laws of Draco, these laws may be all said to be written with blood." We cannot doubt that these monopolists supposed, as they persuaded the legislature, " that the prosperity of the nation depended upon the success and extension of their particular business." The Honourable Member observes : " The question arises, ought anybody, and, if anybody, who is it that ought to provide the trading interests with money to meet their demands? The question is, can you, and if you can, ought you, to make money, when money is scarce ? I believe that is the real question at the root 590 money: bullion: circulation. cnAr. xvhi. of these difficulties. It is a question upon which there are two opinions. People are divided into two hoj^elessly antagonistic schools upon the subject." " There are diiferent theories as to what money exactly is." The opinion of the Government is announced to be that " when money has been used up, and there is not a sufficiency of loanable capital in the country, it is not possible or desirable to meet the difficulties by any fictitious creation of money." The difference between the money which is " used up," and "the fictitious creation of money," is not very distinctly drawn. I think the question applies more properly to bullion than to money, " ought any]~»ody, and if anybody, who is it that ought to provide the trading interests abroad with bullion to meet their demands?" — Our pi-esent l^anking system appears to be founded upon the principle that when there is not a sufficiency of hullion in the country, the difficulties which arise should be met by a fictitious creation of bullion for the foreigner; or rather the international traders of the world, the great mercantile republic; fictitious^ as respects the payment by the Bank of England. To provide a cii'culating medium by a substitution of promissory notes for gold and silver money, honestly paid in gold and silver money when demanded, and both circulating together in the country where those notes are issued by a responsible banker, is very different from providing bullion for the foreigner by pressure upon commerce, lowering the prices of other ])eople's goods, and substituting those goods for bullion in the foreign market : and to the question. Who is to provide that bullion? the answer is obvious, Those and those only ^vho want it for their own advantage. We have in our banking system disre- garded the obvious rule that those who want the bullion should pay for it ; and we substitute for pay- CHAP. xvni. competition: warehouse: credit. 591 ment, by those who want it, a jictitious creation of bullion by pressure upon those who do not want the bullion, by pressure inflicted by those who are under no obligation to provide bullion in payment of the Bank of England note, which is a promise to pay money and not merchandise. This, 1 have no doubt, is where the difficulty lies, ind whicli will continue as long as the monopoly of the Bank of England excludes the competition of a multiplicity of bankers in the issuing of promissory notes ; and in the absence of a warehouse for the reception and safe custody of the precious metals, transferable lilvc other bonded goods by the owners of the bullion : and placed on such a footing as to make it the interest of the owner of the bullion, and of the foreign merchants to avail them- selves of the warehouse. Mr. Fawcett did not attribute the disasters to the Bank Act, but to a reckless spirit of gambling which had spread itself over the commerce of this country. " There was a gratifying fact connected with all our commercial difficulties." He challenged any honour- able gentleman of commercial experience in that House to point out to him a single large commercial concern, which, having done a legitimate business, had succumbed in this crisis. This would be little consolation to those who had made great sacrifices not to succumb. Writing on the crisis of 1847, Lord Ashburton ob- served (p. 12) : " To a banker no price is too dear for the maintenance of the purest credit, and even at this moment the public will never know the individual losses occasioned by the present pressure ; these are secrets which few are able to make public with im- punity." The same reasoning applies to the credit of the merchant. Mr. Hubbard observed : " The Bank Act said not a word about panics, not a word about the convenience of trade." B)ut the Bank Act was silent upon more Q Chevalier, M., his opinion re- specting the present system of discounts, 581 Coins, coinage, foi'mation of, 2 ; what is necessary to consti- tute, 2 ; the sovereign the only money in Great Britain as a measure of value, 3 ; the inter- change of coins determined by the rule of profit and loss, 4 ; the integer, or legal tender coin, must be an equivalent, 5 ; our present coinage perfect as a gold standard of value, 7 ; Mr. Haggard on the price of gold coin, and of gold, 7 ; M. de Montesquieu on coins and money, 8 ; efiect of the discovery of the American mines on the value of gold and silver, 10 ; M. de Montesquieu on the African macute, 11 ; Adam Smith, on coinage, 13 ; expenses of coinage in England, 14 ; prices of silver bullion and their effect on the coinage, 17; propoi'tional value of gold to silver, 20, 21 ; opinions en- tertained by some eminent Avriters on the coinage, 22 ; those of the early French writers, 22 ; M. Le Blanc, re- specting the proportional value of gold and silver, 22, 23 ; two-fold ends to be obtained. 23 ; account of the recoinage of 1695-99, 23-25; disappear- ance of the new silver coins, 26 ; exportation and value of the new silver coins, 27 ; Locke, on the coinage, 30 ; Lord Liverpool's views of the meaning of Locke, 30, 31 ; standard in France, 31 ; mode suggested of changing the gold to a silver standard, 56 ; Locke's 0]-)inion stated, 57 ; the principles of the coinage, 65 ; indirectly supplies the whole kingdom with coin, 188 ; vanity of endeiv^ouring to es- tablish a double standard by constituting both gold and silver as measures of value, 252; comparison of the ancient double standard with the mod- ern theory of coins and pro- missory notes, both being money, 365 ; neither Locke nor Sir I. Newton, nor A, Smith, nor Lord Liverpool, propound the true principle of the circulation of gold and silver coins, 366 ; author's view of the principles on which the coinage should be founded, 369 ; gold required for expor- tation, 502 ; Adam Smith on coins, 536 ; Blackstone on coins, 536 Coleman, Mr., his instance of small dividends paid by insol- vents in 1847, 416 Commerce, there should be no antagonism between credit and, 609 Constitutional Treasury, Presi- dent Polk's observations on a, 158, 160 Contraction, Sir Robert Peel on, 564 Convertibility, a novel expres- sion, 242 I INDEX. 619 Cotton, Mr. W., bis remarks on credit before tbe House of Commons, 217 ; bis opinion of tbe causes of the distress in 1847, 272 ; bis ajjprobation of tbe Act of 1844, 312 Credit, tbe greater part of busi- ness carried on on, 216, 217; tbe nature of credit, 217 ; re- marks of Adam Smitb, bow capitals are increased by means of credit, 219 ; tbere sbouldbe no antagonism between credit and commerce, 609 Credits, open, nature of, and fail- ure of the system of, 417 ; con- sequences of tbe abuse of credits, 419 Crises, regularity of tbe return of septennial commercial, 224 Currency, on tbe basis of tbe, 120 ; remonstrance of tbe Court of the Mint to King Henri HI. of France, 120; Adam Smith's remarks on justice in tbe, 121; cause of the redundancy of tbe, 634 DENNISTOUN & Co., failure of, 414 Derwent Iron Company, its in- debtedness to tbe Northum- berland and Durham Bank, 423 Discount, action of the Bank of England with respect to the changes of tbe rate of, 252 ; unexampled fluctuations in tbe rate of, since the Act of 1844, 293 ; a low rate of, tends to encourage a tendency to specu- lation, 296 ; Bank rate of, in 1854 to 1857, 404 ; changes in the rates of, 404 ; oscillations in the rate of discount, 441 ; on the rate of interest indicat- ing tbe value of money, 444 ; the rate kept up to 10 per cent., 577 ; persons to whom the high rate is profitable and hurtful, 581 Disraeli, Mr., on tbe memorial from the London bankers, 228 Domingo, St., cause of tbe fall of prices in the revolution of, 277 EAST India monopoly, con- demnation of the, 505 England, crises in, 244 ; causes and extent of tbe distress of 1847 in, 261, 262 ; failures in, in 1857, 415 England, Bank of, distinction between tbe Bank of England and tbe Bank of the United States, 151 ; Sir R. Peel on the controlling power of a single bank, 163; on tbe issue and banking departments, 163, 164; on the 'Rest,' 164; tbe second section of tbe Bank Act as to the transfer of bul- lion and securities, 165 ; whose property was the gold appro- priated by the Bank for the payment of its promissory notes ? 166 ; Mr. Loyd's opin- ion as to the public having an equivalent for the gold in bank notes, 167, 168 ; the question is whether the bullion is placed in the right store, 169 ; sug- gestion that tbe laank notes are not money, 175; the Bank cannot safely issue notes on bullion, 181 ; since Adam Smith wrote tbe circumstances of the Bank have changed, 183 ; characters of the National Bank and the International Treasury should be distinet, 184 ; indirectly supplies tbe 620 INDEX. whole kingdom with, coin, 188 ; Adam Smith's observations on gigantic banking establish- ments, 190 ; suggestion to di- vide the loan and circulation, 190 ; on lessening the amount of Bank of England notes in circulation, 192; account of notes in circulation in various years, 193; circulation of notes compai'ed with that of private banks, 195 ; suggestions of various authorities as to the Bank circulation, 198 ; weekly statements of the Bank of England, 199 ; statement re- specting the issue of bank notes, 201 ; Mr. J. Horsley Palmer attributes great mis- chief and danger from joint- stock banks to the Bank of England, 214 ; debate in the House of Commons on the Bank Bill, 229 ; are not mer- chandise and manufactures substituted for bullion ? 239 ; Mr. Weguelin's evidence on the Bank keeping the bullion, 251; action of the Bank in changes of the rate of discount, 252 ; powers and position of the Bank in encouraging or check- ing commercial speculation, 260 ; distinction between a pressure and a panic, 268 ; the foreign exchanges in favour of this country in 1847, 265 ; what is meant by the reserve since the Bank Act came into operation, 265, 266; suggested separation between the ' posi- tion of the Bank' and the pros- perity of the empire, 266, 267 ; cflTect of the restrictive clause of the new system on promis- sory notes and bills, 268 ; a common interest established between the Bank of England, the exporting merchant, and the foreigner, 270 ; the conse- quences of the distress in 1847, 271; the Treasury letter of Oct. 25, and its effects, 279- 282 ; Mr. Horsley Palmer and Mr. S. J. Loyd's views of the duties of the Bank, 292 ; un- exampled fluctuation in the rate of discounts since the Act of 1844, 293 ; statements of Mr. Horsley Palmer, of the Governor, and of Mr. S. Gur- ney, 294 ; remarks of the au- thor, 295 ; the reserve em- ployed in the banking depart- ment, 295 ; its accomplishment of its purpose by management, 343 ; remedy suggested, 344 ; the principles advocated are of universal application, 346 ; just sentiments of the Emperor of the French, 347 ; artifice of the Bank in the time of the Pretender, 355 ; despotic and destructive power of the Bank over the commerce providing the bullion, 356; Lord King- on the Bank Restriction Act in 1797, 357 : we have now the periodical return to cash payments, 358 ; stability of the Bank, 506 ; on the security of the Bank of England note, 507 ; cannot purchase the bul- lion abroad, 513 ; on the Bank of England being placed in a false position, 620 ; on the sys- tem before and after the Bank Act, 524 ; simplicity of the bank note, 525 ; on its obli- gation to pay money, 525 ; the Lords Committee on the duty of the Bank, 526 ; remarks on the means proposed to se- cure the payment of the note, INDEX. 621 527 ; on the contract of the Bank, 528 ; on payment with bullion, 528 ; equilibrium and equivalency, novel expressions of, 234, 242 Exchange, distinction between bills of, and bank notes, 468 ; Blackstone on bills of ex- change, 505 Exchanges, remarks on the foreign, 66 ; Adam Smith respecting, 66 ; Mr. N, M. Rothschild's views of, 67 ; statement of the Times respect- ing, 68 ; the par of exchange in the language of the Bank of England, 68; Mr. Hubbard's remarks on the par of ex- change, 73 ; Mr. Muntz's views, 73 ; suggestion that every commercial country should have an exchange bank, 82 ; the foundation of the merchant's and banker's cre- dit, 110, 111 ; arguments in favour of an exchange bank, 113, 118 ; inapplicability of the same rule of the Bank of England to periods of favour- able and adverse foreign ex- changes, 284, 287, 288; Mr. T. W. Weguelin on the, 359 ; trade of the country influences the, 359 ; the foreign exchanges rectified or regulated by the money or bullion dealers, 536 Exchange Bank, the establish- ment of an, would remove an element of needless alarm and consequent panic, 264, 351 ; instead of watching the ba- lance of trade, attention is now directed to watching the exchanges, 353 Exports and imports, increase in, from 1845 to 1857, 477 ; the precious metals now in- cluded in, 544 ; exports of various years from 1852 to 1857, 406 FALSEHOOD, mixture of, in civil business compared by Lord Bacon to the mixture of alloy in coin, 355 ; misery caused to the people and dan- ger threatened to royalty by falsehoods in coinage, 372 Fawcett, Mr., on modern finan- cing, and the nature of the crisis, 574, 591 Financing, Mr. Fawcett and Mr. Henley, on modern, 574, 578, 591 Foster, Mr., his remarks on seignorage, 54 France, Bank of, large quantity of the precious metals stored in the, 186 ; reasoning re- specting it, 186 ; variations in the legal rate of interest in, 456 ; views of Adam Smith respecting the seignorage in, 48 French assignats, issue of the, 209 ; their value sunk nearly to nothing, 250 French coinage, analysis of the, of January, 1726, relating to the seignorage, 381 GALLATIN, Mr. Albert, bis remarks on the Bank of the United States, 150 Genoa, wealth of the Bank of, 343 Gilbart, Mr. J.W., his 'History of Banking in America,' quoted, 150 ; his account of the Bank of England in 1697, 173 ; his 622 INDEX. account of the operation of the carrency upon the ex- change in America, 349 Gladstone, Mr., his remarks on a proposed royal commission, 57G-578 ; on the foreign drains of bullion, 593 ; on the 10 per cent, rate of discount, 596 ; discusses the question of the currency, with remarks on the payment of the bank note - with bullion, 597 Glasgow, panic in, 414 Glyn, Mr. G. C, M.P., his sug- gestions as to notes of joint- stock banks, 197 ; his opinion of the cause of the distress in 1847, 269, 270 Gold, adopted as a medium of exchange, 2 ; standard and measure of value in Great Britain, 3 ; Mr. Haggard, on the price of gold coin and of gold, 7 ; propoi-tional value of gold to silver, 20, 21 ; M. Le Blanc, relative to gold and silver, 22 ; a plan proposed of changing the gold to a sil- ver standard, 56 ; on the ap- plication of the bonding sys- tem to gold, 106 ; gold and silver as merchandise, 108; anomalies from the precious metals being lodged with the Bank of England, 110 ; the demand for gold arose from the defective state of the coin, 188 ; depreciation of gold in consequence of the discovery of the American gold mines, 221 ; supposed case of control over pi'ices by an irresponsible board of directors, 221, 222 ; on the reaction consequent •upon the exportation of gold, 222; Adam Smith on the quantity of gold imported from America, 225 ; effect of mi- ning in Australia and Cali- fornia, 226, 227 ; cost of car- riage of gold between various places, 245 ; gold for expor- tation, under what circum- stances, 245, 246, 267; the demand for gold to some ex- tent supplied by notes, 277 ; return of the gold coin in the Bank in 1825, 278 ; causes of the demand for gold in 1836, 278, 279 ; evidence of Mr. Jones Loyd on a drain of gold, 289 ; remarks of the author, 289 ; demand for gold is made to cease ' by getting bank notes out of the market,' 303 ; newly-discovered mines of gold in California and Australia, 400 ; imports and exports of, in seven years, 400 ; declara- tion in the Sydney Branch Mint Actrespecting sovereigns or pounds, 465-467; gold coins declared to be the only legal tender for payments without limitation, and silver coins for 40s., 471 ; on the definition of the Select Com- mittee of sovereigns, 495 Government letter to the Bank of England, 567 ; the penal rate of discount fixed by the, 569 Great Britain, gold, the standard metal and measure of value in, 3 Greece, ancient, barter in, 1 Guilds, distinctions produced by, in former times, 349 Gurney, Mr. S., his suggestions as to the Bank circulation, 198 ; his evidence respecting the 'causes of the distress of 1847, 268, 269, 273 ; his re- marks respecting the panic of INDEX. 623 1847, 283 ; his statements respecting the Bank rate of discounts, 294 ; his evidence respecting bank management, 298-300 HAGGARD, Mr., on the price of gold coin, and of gold, 7 ; on the reaction consequent upon the exportation of gold, 224 ; his reference to a return made in 1825 respecting the stock of gold coin and bullion in the Bank, 278 Hale, Sir Matthew, his opinion as to the legitimation of money, 464 Halifax, Lord, presides over a Committee in 1847, 569 Hamburg, Bank of, Mr. Muntz's evidence on the mode in which it transacted business, 162, 185 ; commercial confidence in 1847 at an end, 424 ; rate of interest at, 457 ; Mr. P. H. Muntz's evidence on the monetary system of, 542 Harris, Mr., on adulterating the measure of value, 529 Henley, Mr., on the action of the Bank of England, 578; on modern financing, 578 Henri HI., King of France, his edict changing the standard of value from silver to gold, 481 Holland, Adam Smith's remarks on the efiect of the republican form of government in, 347 ; position of merchants in, com- pared with that of the mer- chants of Great Britain, 348 House of Commons, reports from the Secret Committee of the, with some observations on the reports and on the evidence, 320 ; second report of the Secret Committee, 327 Hubbard, Mr. J. G., his remarks on the par of exchange, 73 ; his evidence as to the security for the bank note being real- ised, 508 ; on the issue de- partment in the Bank of England, 639 ; his evidence on the Bank Act of 1844, 550 ; on the Bank Act, and on the separation of the departments, 574-576 ; on the Bank Act saying not a word about panics, 591 Huskisson, Mr., his observations, and the answer of the Bank, 285, 286 ; his remarks as to the preservation of the Bank of England, 317 IMPORTS and exports, in- crease in, from 1845 to 1857, 477s.; the precious metals now included in, 544 India, , instrument of commerce and exchange in, 1 Interest, on the rate of, in- dicating the value of money, 444 ; distinction between in- terest and usury, 447, 456 ; in- terest prohibited to be taken in the reign of Edward VI., 456 ; legal rate of interest in the reigns of Henry VIII., Elizabeth, and Anne, 456 ; variations in the legal rate of interest in France, 456 ; opini- ons of various authorities re- specting the rate of interest, 459 ; proposed legal rate qf interest, 460 ; on interest and the currency, 550, 551 ; letter from the Government respect- ing the rate of, 568, 576 ; the rate kept up to 10 per cent., 577 024 INDEX. International Treasury, great ad- vantages of an, 182 ; an In- ternational Treasury and a National Bank should be dis- tinct, 184, 185 Ireland, statement respecting the bank notes in, 192 ; re- turns of the circulation of the Irish banks, 200 ; effects of the Act of 1844 and 1845 on Irish banks, 313; opinion of the Lords Committee respecting, 313 ; report of the Secret Committee of the House of Commons as to the operation of the Act in Ireland, 327, 331 ; on the cii'culation of Irish banks, 370 Issue department of the Bank of England, Mr. J. G. Hubbard's evidence on the, 539 JACKSON, General, refuses to renew the charter of the United States Bank, 152 ; re- moves the government deposit from the United States Bank, 153 Joint-stock banks, returns of the circulation of the, 201 ; statements of capitals and liabilities of six in London, 373 ; admitted to the arrange- ments of the clearing house in 1854, 402 ; mode of transact- ing this business, 402 ; in- crease of their deposits, 402 ; objects sought to be attained by the establishment of, 475 ; Adam Smith on, 585 K ING, Lord, his tables of the prices of silver bullion and the cost of coining silver, 18, 19 ; his tables of the rate of ex- change between London and Paris quoted, 52 ; on the Bank Restriction Act in 1797, 357, 587 Kinnear, Mr. J.G., his evidence on over-issue, 191 LIMITATION, effect of, 509 ; Lord Overstone on, 523 Lister, Mr., his opinion respecting the effect of the Act of 1844, 273 Liverpool, Lord, on the propor- tional value of gold to silver, 21 ; his account of the re- coinage in 1699, 24 ; and of the coins of 1805, 26 ; curious instances mentioned by him of the extent to which the traffic in coins may be car- ried, 29 ; his remarks on Locke's views, 30, 31 ; his opinions examined, 33-41 ; at variance with Sir R. Peel re- specting the paper currency and credit, 142 ; his remarks on the origin of the fortunes of many of the principal fami- lies in Italy, 343 ; does not propound the true principles of the circulation of gold and silver coins, 366 ; his opinion as to paper being issued to so great an extent only by cor- porate bodies under the au- thority and protection of Go- vernment, or directly by the Government itself, 370 Locke, John, on the coinage, 30 ; Lord Liverpool's remarks on Locke's views, 30 ; . Locke's examined, 32 ; his opinions stated, 57 ; on paying foreign debts with scrips of paper, 233; his remarks on mysteri- ous language, 234 ; does not propound the true principles INDEX. 625 of the circulation of gold and silver coins, 366 Lords, House of, compendium of the report of the Select Committee of the, 259 ; their lordships' report, 259-261 ; observations of the committee, 276 ; their lordships' conclu- sions, 301, 312 ; opinions of the committee and witnesses as to remedial measures, 307 ; some remarks on their lord- ships' report, 314 Lowndes on the coinage, 38 Loyd, Samuel Jones (Lord Over- stone), his opinion of the rule of the Bank of England re- . specting the currency, 134 ; his views as to the public having an equivalent for the gold in bank notes, 167 ; com- mentary on his reasoning, 168 ; his evidence respecting the pressure of 1847 compared with that of former years, 275 ; his remarks respecting the ef- fects of the Treasury Letter of October 25, 281 ; his evidence on a drain of gold, 289 ; his view of the duties of the Bank of England, 292 ; his opinion with respect to bank manage- ment, 298, 299 ; his approba- tion of the Act of 1844, 312 ; his evidence before the Secret Committee of the House of Commons, 323 MACDONALD & Co., of Glas- gow and London, failure of, 414 Macfarlan, Mr. J. F., his evidence on over-issue, 191 ; his evi- dence as to the operation of the Act in Scotland, 329 Macute of Africa, M. de Montes- quieu on the, 11 ; M. de Ba- zinghen's account of the, 12 McCuUoch, Mr., his remarks on seignorage, 54; his remarks on the Bank of Amsterdam, 93 ; his opinions examined, 93- 100 ; his theory of paper money, legal tender the only thing needful, 208 ; his illus- tration from the Russian paper money, 208 ; this a melan- choly instance of the insecurity and mischief of an inconver- tible paper circulation, 209 ; caution against adopting Mr. McCulloch's theory, 210, 211 Measure of value, Sir R. Peel on the, 522 ; Mr. Harris on adul- terating the, 529 Mercantile system, Adam Smith's views respecting the, 101 ; the bank system has succeeded the mercantile system, 103 ; on the application of bonding system to gold and silver, 106 ; the foreign merchants should keep their own gold and silver, 110 ; proposal for the establishment of an international exchange bank, 113-119 ; the control in America to be on the banks, not on commerce, 151; con- fidence in the fortune, probity, and prudence of merchants, 215, 216 ; the greater part of business carried on on credit, 217; commercial panics, 224, 230; a new system suggested, that the members of the 'Great Mercantile Republic ' should keep their own bullion, 231 ; causes of pressure in many branches of commerce, referred to in the report of the Select Committee of the House of Lords, 260 ; suggested im- provement in the establish- 62G INDEX. ment of an exchange bank, 2G4; Mr. G. C. Glyn's evi- dence respecting the distress of 1847, 209 ; the country would cheerfully be taxed to escape from the tampering ■with credit, 338 ; Adam Smith on the 'interested sophistry' of merchants and :nanufac- turers, 345 ; comparison in Holland with the position of the merchants of Great Britain, , 348 ; honorary distinctions proposed for our commercial and manufacturing population, 349 ; the commercial system of the country is in harmony with freedom of commerce, but the monetarij system has succeeded to the mercantile system, 353 ; the mercantile system has disappeared, 450 ; monopoly the sole engine of the mercantile system, 451 Metallic standard and metallic currency, remai'ks on, 171 Mifll, Mr. J. S., on the Bank Act, 541, 542 Mint, value of gold bullion at the, 553 Monetary science, a novel ex- pression, 242 ; remarks on the, 516 Money, 2 ; what is necessary to constitute, 2 ; Sir R. Peel and Adam Smith's remark on the scarcity of, 238, 239 ; Lord Overstone's definition of, 255; Adam Smith's true definition of, 256 ; hoarding of money in 1847, 262 ; Adam Smith on lowering the value of, 354 ; comparison of the ancient double standard with the mo- dern theory of coins and pro- missory notes, being both money, 365 ; Sir R. Peel's de- signation of money, 368 ; Lord Overstone's definition of mo- ney, 441; on the rate of interest indicating the value of money, 444 ; Adam Smith's opinions regarding the rate of mterest, 452 ; definition of money by various writers, 463 ; the author's former definition, 464; Sir R. Peel's erroneous defini- tion of the pound, 465 ; two sorts of, announced by Sir R. Peel, 485 ; three sorts an- nounced by Lord Overstone, 485 ; on the fixed value of money, and on the promise, 521 Monopoly, Adam Smith's con- demnation of, 345, 605 Monteith & Co., failure of, 414 Montesquieu, M. de, on coins and money, 8; on the African macute, 11; his illustration of a despotic government, 356 Morris, Mr. James, his evidence that the pressure of 1847 was no more than necessary, 206 ; his evidence as to the causes and extent of the distress of 1847, 261 ; thinks the Bank notes might have been in , danger btit for the Act of 1844, 274 ; his opinion of the Act, 275 ; his evidence respecting the pressure of Oct. 1847, 291 ; his evidence before the Secret Committee of the House of Commons, 323 ; his evidence on paper money varying in amount as a metallic circula- tion, 452 Muntz, Mr. P. H., his remarks on the par of exchange, 74 ; thinks that pressure is needful, 206; on the Bank of Hamburg, 161 INDEX. 627 NAPOLEON III., Emperor of the French, his just senti- ments, 347 National debts, Adam Smith's views respecting the pretended payment of, 515 Newfoundland, instrument of commerce and exchange in, 1 Newmarch, Mr. W., his remarks on the alterations in the rate of discount, 459 Newton, Sir Isaac, on the pro- portional value of gold to silver in his time, 21 ; his report to the government of Greorge I., 25 ; recommends that the guinea should be worth 2Ls., 27; effects of the adoption of his proposal, 28 ; does not pro- pound the true principles of the circulation of gold and silver coins, 366 Norman, Mr. G. W., his sug- gestions on the Bank circula- tion, 198 ; his opinion of the causes of the distress of 1847, 271 - 273 ; his remarks re- specting the effects of the Treasury letter of Oct. 25, 281 ; his approbation of the Act of 1844, 312 ; on bullion being preferably sent to the Bank instead of to the Mint, 552 ; on the separation of the departments in the Bank, and on the cuiTcncy, 559 Northcote, Sir Stafford, approves of an inquiry, but disapproves of the motion, 571, 582 ; ex- presses the general consent of the Government to the princi- 15le of the Bank Act, 573, 582 : on suspension of the currency laws, 587 ; on monopoly, ca- pital, credit, loan, bullion, competition, &c., 588-591 Northumberland and Durham bank, obtains assistance from the Bank of England, 422; liabilities of the Derwent Iron Company to the, 423 OYERSTONE, Lord, his ap- proval of the Act of 1844, and that the value of money is increased to any extent ne- cessary to bring back the gold, 253, 254, 363 ; his definition of money, 255 ; observations on his evidence, 340 ; on the Bank of England note being a legal tender except at the issue de- partment, and on the imjios- sibility of the Bank being drained of bullion, 341 ; stress laid by him on the Legal Tender clause, 372 ; extracts from his evidence, 439 ; his opinions as to the rate of interest, 448 ; on paper money varying in amount as a metallic circula- tion, 453, 454 ; refers to the increase of the imports and exports from 1845 to 1857, 477 ; announces three sorts of money, 485 ; on the converti- bility of the bank note, 487 ; on the excessive issues by banks, 488-493 ; his views as to the bank reserve, 519 ; on the separation of accounts and limitation of issue, 523; on the bullion in the Bank of England, 531 ; on the wants of customers and the issue of paper money, 534 ; on bank paper, and bullion lying in the issue department, 545 ; the prevention of bullion being sent from Liverpool^ 547 ; his remarks on the increased pro- duction of gold, 558 ; on over- issue, 608 T T G28 INDEX. Overend, Gurney,an(l Co., failure of, 5G7 PALMER, Mr. Horsley, his evidence as regards nice cal- culations of exchange, 69 ; his remarks on the Bank directors' mode of supplying gold, 128 ; his remarks on the depression of trade and fall in prices of almost all the leading articles of raw produce, 12y ; on the currency of the Bank of Eng- land, 132, 133 ; proposes to correct the exchanges by a fall in prices, 207 ; his opinion on the system of the Bank of England, and on joint-stock banks, 212, 213; his statement of the causes of the distress in 1847, 265; his designation of a par of exchange in his evidence in 1832, 266 ; his evidence respecting periods of favourable and adverse foreign exchanges, 285 ; his statement respecting the Bank rate of discounts, 294 ; his remarks , on the Bank rate of interest, 459 Panics, distinction may be drawn between pressure and, 263 ; a suggestion for re- * moving a needless alarm and consequent panic, 264 ; sep- tennial commercial regularity of the return of panics, 224 ; commercial panics compared to sudden explosion, 230 ; panics in 1847, 1857, and in 1866, 269 Paper-money, Mr. McCulloch's account of the, 20S ; legal ten- der the one thing needful, 208 ; illustration from Russia, 208, 209 ; Adam Smith on the paper of the American Colonies, 209 ; caution against adopting Mr. McCulloch's theory, 210, 211 ; Adam Smith's statements re- specting paper money, 257 ; promissory notes rest upon a moral principle, 258 Paper credit, a suggested term for promissory notes, 458 Peel, Sir R., his definition, and ridicule of the standard of value quoted by, 11 ; on the convertibility of the Bank of England note, 114; his speech on introducing the Bank Bill of 1844, 137; remarks on his reasoning, 138 ; his views re- specting Mr. Ricardo's plan of resuming cash payments, 141 ; on the true definition of the paper currency as distin- guished from paper credit, 142 ; Lord Liverpool at variance with Sir R. Peel, 142; on the equivalency of notes to coin, 143 ; his statement of the prmciples of his Bill, 144 ; his remarks on the Central Bank of the United States, 149 ; his speech on the con- trolling power of a single bank, 163 ; on the issue depart- ment, and on the banking de- partment, 163, 164 ; his opi- nions as to the legitimate de- mands of commerce for bank notes, 169 ; his views respect- ing cheap promissory paper, 170 ; the principles of his Bill, 170 ; his view that promissory notes, when paid, may be de- preciated, 172 ; his opinioai that gold may be exported for profit, 174; but the profit is on goods, 175; thinks that the INDEX. G29 over-issue of bank notes would remain in circulation and de- preciate the ciuTency, 204; his statement in answer to the me- morial of the London bankers of 1844, 229 ; his remarks on the importance of the defini- tion of the pound, 235 ; his defi- nition imperfect, 23G ; on scar- city of money, 238, 239 ; and on the metallic currency dur- ing the war, 247 ; certain opi- nions assumed by Sir R. Peel's Bill, 361; his tlesignation of money, including bank notes, 368 ; did not attach much importance to the retention of the legal tender clause, 374; on the rate of interest, 447 ; his erroneous definition of the pound, 235, 465, 469, 470, 512, 522 ; does not allude to the Act of 1816, 471, 472 ; on the meaning of the bank note, 483 ; announces two sorts of money, the coin of the realm, and promissory notes payable to bearer on demand, 485 ; Lord Overstone's decla- ration respecting him and his Bill, 500; on Sir R. Peel's Bill, 500 ; his Bill differs from the Act, 500 ; his opinion of the system then existing, 500; on the real nature and cha- racter of the measure of value in this country, 522 ; his speech on the system before and after the Bank Act, 524 ; his proposal as to notes for bullion in the Bank, 530, 531 ; on redundancy of the currency, on exclusive coinage, and exclusive issue of notes, 535 ; on Adam Smith's and Mr. Ricardo's opinion on bank notes, 561 ; his speech stating the great truths which should govern our monetary system, 563, 564; remai'ks on his great truths, 564 ; opposes any re- laxation of the Bank Act, 564; remarks upon his statement, 565, 566 Polk, President, his wish that New York would become the emporium of the commercial and monetary power of the world, 103 ; his message to Congress as regards a National Bank, 156, 157 ; his observa- tions respecting a Constitu- tional Treasury, 158 Pound, Sir R. Peel's remarks on the importance of a definition of a, 235, 465, 469, 470, 522 ; observations on the definition of the pound, and the promise, 236 Prescott, Mr., his evidence as to the causes and extent of the distress of 1847, 261 ; thinks the bank notes might have been in danger but for the Act of 1844, 274; his evi- dence before the Secret Com- mittee of the House of Com- mons, 323 Pressure, a novel expression, 242 ; causes of, in many branches of commerce, in 1847, 260, 265 ; distinction may be drawn between pi-essure and panic, 263 ; Mr. Jones Loyd's evidence respecting the pres- sure of 1847 compared with that of former years, 2 75 ; pres- sure of 1783 and 1793, 275; evidence respecting the pi'cs- sure of 1847 and in various former years, 275-279 ; Mr. WegueHn on, 516; Sir R. Peel on, 564 ; on the necessity for, 564 T T 2 630 INDEX. Prices, no bank should be suffi- ciently powei'ful to influence, generally, 21 ; actiou of the Bank of England on, 129 ; natural price and the market price, 133 ; international bul- lion the great instrument in restoring prices to a natural state, 132 ; Mr. J. H. Palmer proposes to correct the ex- changes by a fall in prices, 206 ; reasons why prices of goods may continue to ad- vance, 227 ; remarks on re- duced prices, 228; the natural effect of money being more stringent is to lower the price of goods, 255 ; prices in 1847, 261 ; effects of the evasion of payments on, 355 ; effects of open credits in sustaining the price of commodities, 418 ; on lowering, 587 ; effect of prices on bullion, 609 ; proper corrective for 602 Promissory notes, Blackstone on, 505 EAILROADS, amount of ca- ; pital furnished for con- structing, in Great Britain, 360. Reports from the Secret Com- mittee of the House of Com- mons in 1848, with some observations on the reports and on the evidence, 320 — 331 ; extracts from Lord Over- stone's evidence, 439 ; on the committee's definition of the gold sovereign and Bank of England notes, 495 ; extracts from the report of the com- mittee, 613-515 Reserve, in the Bank of England, governs the action of the Bank, 352 ; what is meant by the reserve since the Bank Act came into operation, 265, 266 ; employed in the banking de- partment of the Bank of Eng- land, 295 ; publication essen- tial respecting it, 306 ; state of the reserve in 1853, 404; on the Bank reserve, 501 ; | remarks on commerce being " governed by the reserve, 518 ; on the reserve being expressed in notes and not in bullion, 519 ; Lord Overstone's evi- dence as to the Bank reserves, 519 ; on the importance of watching the reserve, 516; Mr. Hubbard on the, 517; Mr. Rodwell on the, 518 Rest, the, of the Bank of Eng- land, 164 Ricardo, Mr., his plan of resum- ing cash payments, 141 ; ob- jections to his plan, 141 ; his plan, without result, 481 ; on the currency, 560, 561 ; on competition of issues, 561 Ridley, Sir M. "W., his statement respecting the failures, in 1825 and 1826, of country bank- ers, 275 Rothschild, Mr. N. M., his state- ment of the expense of con- veying gold between Amster- dam, Hamburgh, and Paris, ^nd London, 245 Russia, paper -money of, 208; estimated expenditure of Eng- land in the war with, 404 SALOMONS, Mr. Alderman, approves of the Bank Act of 1844, 548 Scientific truth, a novel expres- sion, 242 Scotland, instrument of com- merce and exchanges in, 2 ; INDEX. 631 statement of tlie circulation of bank notes in Scotland, 195 ; returns of the circulation of Scotch banks, 200 ; effects of the Act of 1844 and 1845 on Scotch banks, 313 ; opinion of the Lords' Committee, 313 ; report of the Secret Committee of the House of Commons as to the operation of the Act in Scotland, 327-330 ; on the cir- culation of Scotch banks, 370; security of Scotch banks, 476 Seiguorage, Adam Smith's re- marks on, 42, 608 ; other authors' views, 54, 55 Silver, adopted as a medium of exchange, 2 ; legal tender limi- tation of silver, 15, 16 ; Acts of Parliament relating to silver coins, 17 ; prices of silver bul- lion, and their effect on the coinage, 17 ; proportional value of gold to silver, 20, 21 ; a plan proposed of changing the gold to a silver standard, 56; Adam Smith supposed we had a silver standard, 66 ; on the applica- tion of the bonding system to silver, 106 ; gold and silver as merchandise, 108 ; anomalies from the precious metals being lodged with the Bank of Eng- land, 110 ; effect of a depre- ciation in property in fixed money-rents and annuities, 221 ; degradation caused by un- successful mining in Peru, 22 6 ; limitation of the amount of silver by the Act of 1844, 302; opinion of Governor of the Bank respecting, 302 ; Mr. G. C. Glyn's remarks at- tending the inconvenience of the present limitation of silver, 303 ; remarks of the author on the subject, 304 ; Act to pre- vent the importation of light silver coin, and restrain the tender thereof beyond a certain sum, 377 ; Act to continue the preceding Act until the 1st day of January, 1799, and to sus- pend the coining of silver, 379 ; Act to make perpetual the Act of 14th Geo. III. c. 42, 380 ; exports and imports of, 401 ; silver coin issued to the public in excess of receipts from the public, 402; Mr. Harris's refer- ence to silver coins, 470; de- claration of the Act of 1816 as to silver as a legal tender, 470 Smith, Adam, quoted, 1 ; on coinage, 13, 14, 19; on the pro- portional value of gold to silver, 20 ; his remarks on seiguorage, 42 ; his views ex- amined, 44 ; supposed we had a silver standard, 66 ; defines the par of exchange, 67 ; his account of the Bank of Am- sterdam, 71, 74 ; on inter- national money and the ' Great Mercantile RepubHc,' 85 ; his remark on justice and truth, 121, 122 ; his account of the Bank of England, 123; his account of the Bank in 1697^ 173 ; his account of the bank- ing companies of Scotland, 174; his view that the profit is on the goods, not on the gold, 176; his views respect- ing banking, and the pro- portion of the issue of gold to promissory notes, 178 ; his account of the Bank of Ayr, 187, 189, 190 ; his remarks on the operations of banking, 192 ; on the policy of not depending too much on paper money, 192 ; his opinion ex- amined that the superfluous 632 INDEX. paper would be exchanged for gold, 203; bis account of tbe paper money of tbe American colonies, '109 ; on banks dis- counting real bills of exchange, 215 ; on confidence in the for- tune, probity, and prudence of bankei's, 215, 216 ; the same may be said of merchants, 21G ; his statement of how capitals are increased by means of credit, 219 ; on the pound sterling, 235 ; what it was in his day, 235 ; on competition of issue by bankers, 237 ; his defijiition of money, 256 ; his remarks on paper money, 257 ; liis opinion that the banking trade may be carried on suc- cessfully by a joint-stock com- pany without an exclusive privilege, 333, 339 ; on the needless solicitude of a go- vernment to increase the quan- tity of gold and silver in a country, 344 ; his remarks on monopoly, 345 ; and on the ' interested sophistry' of mer- chants and manufacturers, 345 ; on the republican form of government in Holland, 347 ; on lowering the value of money, 354 ; does not propound the true principles of the cir- culation of gold and silver coins, 366 ; on the payment of bank notes, 368 ; Sir R. Peel's eulogy of Adam Smith, 369 ; his opinions respecting the i-ate of interest, 445, 447 ; suggests the limitation of bank notes to a certain denomina- tion, 473, 474 ; on a pretended payment of national debts, 515 ; on competition of issue, 561 ; his remarks on sumptu- ary laws, 583, 584; memoir of him, 602-604; on scarcity of money, 607 ; and on seignor- age, 608 Sovereign, the, the only money in Great Britain as a measure of value, 3 Speculation stimulated by a low rate of discounts, 296 Storch, Mr., his Cours d'ficono- mie politique, 93 Sumptuary laws, Adam Smith on, 583,584 Sydney Branch ]\Iint Act, 465- 467 ; important declaration in this Act, 465 TEMPLE, Sir W., his account of the Bank of Amsterdam, 70 Thornton, ]\Ir., his remarks on seignorage, 54 Tooke, Mr., his opinion that in 1847 the time was approaching when 'nobody would pay any- body,' 273 ; his account of the pressure of 1783, 275 ; state- ment of the circumstances at- tending the former crises of 1793, 1825, 1837, 1839, and 1847, 276 ; causes of the fall of prices in 1793, 277 ; his statement of the effect of the currency regulations in 1836, 279 ; his evidence respecting the publication of the Bank accounts, 305 Torrens, Colonel, his theory on the Bank Act, and remarks upon it, 245 ; his remarks on the value of gold in the home market and in the foreign market, 244 ; the profit or loss is on commodities, not on gold, 245 ; on the currency, 560 Treasury letter of Oct. 25, and its effects, 279-282 INDEX. 633 Trottc:*, Sir Coutts, his sug- gestions on the Bank circula- tion, 198 Truth, Lord Bacon's Essay on, 354 Twells, Mr. John, his evidence on the Bank Act of 1844, 549 UmTED STATES of Ame- rica, Sir R. Peel's remarks on banking in the, 149; Mr. Albert Gallatin on the Bank of the United States, 150 ; degree in which the circulation of the United States Bank had increased in proportion to that of the State Banks, 150 ; ad- vantages and objects of the Bank of the United States, 151 ; distinction between the Bank of the United States and the Bank of England, 151 ; the control not to be on com- m.erce, but on the banks, 151 ; General Jackson refuses to renew the charter of the United States Bank, 152 ; he removes the government de- posits from the United States Bank, 152 ; his address to Cono'ress referring^ to the United States Bank, 153 ; failure of the bank, 154 ; com- mencement of the banking mania in the United States, 155 ; remarks of President Polk respecting a National Bank, 156 ; and on a Constitu- tional Treasury, 158 ; on the Treasure being deposited in banks, IGl Usury, Lord Bacon's opinion on, 342 ; distinction between in- terest and usury, 447, 456 ; meaning of the woi'd usui'y in the time of Lord Bacon, 457 VANSITTART, Mr., Ids fal- lacious resolution on the value of the bank note in 1811, 232 Virginia, instrument of com- merce and exchanges in, 1 WAGES, payment of, in cer- tain trades, declared illegal in merchandise, 537 Wallace & Co., failure of, 414 Ward, Mr. William, his state- ment of the expense of con- veying gold from Paris to London, 245 Washington, President, his opi- nion respecting a National Bank, 157 Watkin, Mr., moves for a com- mission of inquiry, 568 ; on the Bank rate of interest, 569 Weguelin, Mr. T. M., M.P., his evidence on the Bank of England keeping the bullion, 251, 252 ; his evidence on the exchanges, 359 ; on pressure, 516 ; on the reserve of bul- lion in the Bank of England, 554, 556 ; his reason why £14,000,000 was fixed on, 655, 556 Western Bank of Scotland, fail- ure of, 420 ; debts due to it, 421 ; branches and connections of it, 422 West Indies, instrument of com- merce and exchanges in, 1 Wood, Sir C, his definition of the standard of value and of convertible paper, 240; com- mentary on his views, 240 ; on paper money varying in amount as a metallic circula- tion, 453 LONDON : PRINTED BY SrOTTISWOODE AND CO., NKW-STRBET SQCARQ AND P^IKI-IASIENT 8TIIEET f f ,^^ V/ '//. »V. , . 9^ ^XC. HDD ADVA. i I'' ^' "^^ '■ ^ I -n O I -n «_J ^ "^/^aaAiNnmv ^-........^ v^i.v.un..^\ 1 ^ rn ^ o , I -n U-> O U. \ cxT ^ "^(JAavaaiii^ L 005 117 787 1 UC SOUTHERN REGIONAL LIBRARY FACILITY AA 001 204198 4 SS? >- L ;i?-ri!i( # iric »iir ci !-!■ 'y:irri\: jn-- (