A LETTER TO THE RIGHT HONOURABLE LORD VISCOUNT MELBOURNE, ON THE
CAUSES OF THE RECENT DERANGEMENT IN THE MONEY MARKET, AND ON BANK
REFORM
BY R. TORRENS, Esq.,
F.R.S.
LONDON:
LONGMAN, REES, ORME,
BROWN, & GREEN,
PATERNOSTER ROW.
1837.
SOURCE
My Lord,
In the approaching
session of Parliament, our banking system, and its influence upon
commercial credit, will demand the early attention of the
Legislature. Without occupying your Lordship's time with any
preliminary observations, I request permission to offer the following
considerations upon these very important subjects.
In order to
obtain an accurate knowledge of the causes which have produced the
recent disturbance in the money market, it is necessary that we
should have a distinct perception of the several component parts of
which our money actually consists. Now, it will be found, that in
consequence of the system of banking which prevails in this country,
our money is composed of two distinct and different elements, namely,
of circulating money, and of credit money; the circulating money
consisting of the coin and bank notes actually in circulation ; the
credit money consisting of the deposits placed in the hands of
bankers, and of the cash credits granted by them.
The manner in
which that portion of the medium of exchange, which consists of coin
and of bank notes, acts upon prices, and, through prices, upon the
foreign exchanges, is sufficiently apparent, and needs no
explanation. But neither the members of the Government, nor the
directors of the Bank of England, appear to be aware of the extensive
influence which is exerted upon prices, and, through prices, upon the
foreign exchanges, by that portion of the medium of exchange which
consists of deposits and cash credits. This
terra incognita of our
monetary system it therefore becomes necessary to explore.
Bank Deposits
perform the functions of Money.
When a merchant
opens an account with a solvent bank, by depositing cash to the
amount of 1000 £, he has exactly the same command of money, exactly
the same power of making payments, and of making purchases, which he
would have possessed had he kept cash to the amount of 1000 £. in
his own desk. It is evident, therefore, that the 1000 £. Thus
deposited are not withdrawn from circulation, and do not cease to
form a part of the medium of exchange by being transferred from the
desk of the merchant to the coffer of the bank. To a merchant who
has, in a solvent bank, a deposit against which he can draw his
checks, that deposit is money. But the case of an individual merchant
having a deposit with a bank, is the case of all other persons who
keep their cash with bankers. It is evident, therefore, that all the
deposits in all the solvent banks throughout the country perform the
functions of money, form a part of the medium of exchange, and act
upon prices, and upon the foreign exchanges, exactly in the same way,
and to the same extent, in which the same amount in coin and bank
notes would act upon prices and upon the foreign exchanges.
As deposits made
with banks perform all the functions of money, it is necessary to
consider in what way, and to what extent, the practice, now become so
general, of keeping cash with bankers, increases the power of
As deposits made
with banks perform all the functions of money, it is necessary to
consider in what way, and to what extent, the practice, now become so
general, of keeping cash with bankers, increases the power of the
medium of exchange. This is a question which the directors of the
Bank of England appear never to have attended to. Nevertheless, it is
one of the greatest importance; and I therefore solicit your
Lordship's indulgence, while I endeavour to arrive at a correct
solution of it.
When merchants
and others transfer coin and bank notes from their own desks to the
hands of their bankers, the operation would not have the effect of
contracting the currency, even though the bankers should keep the
whole of the coin and notes transferred to their custody, locked up
in their coffers until drawn out by the depositors. The following
illustration will make this apparent.
Let us assume
that the merchants and dealers within the metropolitan district,
require, for the conducting of their business, circulating money to
the amount of 10,000,000 £, and that they actually hold this amount
in coin and Bank of England paper. This being the previous state of
things, let us assume again, that these merchants and dealers open
accounts with the London bankers, and place with them, as deposits,
the 10,000,000 £, in coin and notes, which they before kept in their
own desks. Now this change in the manner of keeping the cash required
to meet the current demands of the market, would not leave the
merchant and dealer with a less command of money, with a less power
of making payments and of making purchases, than they before
possessed. By drawing checks upon their bankers to the amount of
10,000,000 £, they can come into the market just as effectually as
they could before have done by bringing out coin and notes to that
amount from their own cash boxes. If the whole of the 10,000,000 £
in coin and notes, deposited with the bankers, were locked up in
their coffers until drawn out in payment of the checks of the
depositors, this locking up of coin and notes would have no
conceivable effect in depriving the depositors of the power of
drawing checks, and of making payments or purchases to the amount of
the 10,000,000 £. It is evident, therefore, that transferring coin
and bank paper from the desks of merchants and others, and placing
them for safe custody as bank deposits, could have no effect what
ever, either in contracting or in expanding the currency,
even if
the whole of the coin and bank paper so transferred were locked up in
the coffers of the bank, until withdrawn in payment of the checks of
the depositors.
But the whole of
the coin and notes deposited [p.10] with the banks would not be
locked up until required in payment of the checks drawn by the
depositors. Bankers make their profit by lending, upon available
securities, the greater part of the sums deposited with them by their
customers. When our merchants and dealers deposited 10,000,000 £
with the banks, the bankers would retain a part of the sum—say
2,000,000 £ as a reserve, or rest, for the purpose of making
occasional payments over their counters, and would employ the other
8,000,000 £ in the purchase of stock, or of exchequer bills, or in
the discount of bills of exchange. Now, it is self-evident that this
would occasion an extension of the general medium of exchange.
The merchants
and others, who had deposits with the bankers to the amount of
10,000,000 £, would be just as able as they were before to come into
the market, and make payments and purchases to the amount of
10,000,000 £ ; while the persons who sold the stock, and the
exchequer bills, or who obtained the discounts, would be able to come
into the market, and effect payments, and make purchases, to the
amount of 8,000,000 £. Thus, in this case, which has been taken for
illustration, the operation of the private banks in receiving
deposits, and in investing [p.11] them in available securities, would
have the effect of increasing the circulating medium by 8,000,000 £.
By the foregoing
illustrations, two important principles have, as I believe, been
established.
1st. —That
deposits with solvent banks form a component part of the general
medium of exchange, and perform the functions of money just as
effectually as the coin and bank notes actually in circulation.
2nd—That the
practice of merchants and others, in keeping their cash with bankers,
and the practice of bankers in employing the cash thus placed in
their hands, have the effect of increasing the general medium of
exchange, by the amount of that portion of the cash of their
customers, which bankers may find it prudent to employ. These
principles being established, it will be necessary, in order to
obtain a distinct and complete view of the effect produced upon the
currency, by the system of banking which prevails in this country, to
consider the circumstances which determine the proportion between the
amount of deposits standing in the books of bankers, and the amount
of the coin and bank notes which they employ in meeting occasional
demands.
In periods of
confidence and high commercial credit, a small amount in coin and
[p.12] bank notes, may serve as the basis of a large amount of bank
deposits.
It follows, that in
such periods, the circulating medium may expand, without any increase
in the amount, either of coin or of bank notes; and that, while the
amount of coin and notes remains undiminished, the circulating medium
may suffer contraction.
The expansion and
contraction of the currency, resulting from an increase or diminution
of bank deposits, is a subject of the greatest practical importance;
and as it is a subject which appears to have been overlooked by every
writer upon the science of money, with the single exception of Mr.
Pennington, I am under the necessity of again soliciting your
Lordship's attention, while I endeavour to explain it.
A given amount
of circulating Cash becomes the basis of a much greater amount of
Bank Deposits.
In order to place
the effect of bank deposits in enlarging the medium of exchange, in a
clear and let us assume distinct point of view, that there are no
bank notes employed in the district of the metropolis, and that, in
this district, the coin retained in circulation amounts to 15,000,000
£, of which, 5,000,000 £ are in the hands of [p.13] persons who do
not employ bankers, and 10,000,000 £ belong to merchants and others,
who do employ bankers. In this case, if the bankers kept the whole of
their deposits of 10,000,000 £ locked up in their coffers, the
currency of the metropolis would still amount to 15,000,000 £ ; and
would consist of 5,000,000 £ of coin, circulating amongst those who
did not keep their cash with bankers, and of 10,000,000 £ of
deposits, belonging to merchants and others, who did employ bankers.
But it is quite certain, that the bankers would not keep the whole of
the 10,000,000 £ deposited with them, locked up in their coffers.
They would re-issue the greater part of the sum, say 8,000,000 £, in
the discount of mercantile bills, or in the purchase of government
securities; and therefore the money of the metropolis, instead of
being, as before, 15,000,000 £, would be 25,000,000 £ viz.
£
Coin in the hands of
persons not keeping cash with bankers
........................5,000,000
Deposits placed to
the credits of persons employing bankers
......................10,000,000
Coin issued by the
banks upon securities……………………………………8,000,000
Coin resting in the
banks ...............………………………………………….2,000,000
£ 25,000,000
[p.14]
Under the
circumstances which have been assumed for the sake of illustration,
the persons not employing bankers, and requiring, for their purchases
and payments, money to the amount of 5,000,000 £, are already in
possession of that sum; and this being the case, the 8,000,000 £
which the bankers took from their deposits, and issued upon
securities, would be immediately returned upon them, in the form of
new deposits. Taken collectively, the liabilities and assets of the
banks would now stand thus: –
|
Deposits.
£
|
Coin.
£
|
Securities.
£
|
Liabilities
|
18,000,000
|
|
|
Assets
|
|
10,000,000
|
8,000,000
|
The 10,000,000 £
which the banks would now again possess, would be found more than
sufficient to meet the occasional demands of the customers, who owned
the 18,000,000 £ of deposits; the bankers would feel themselves
fully justified in employing a considerable portion, say 6,000,000 £
out of 10,000,000 £ upon securities, and in retaining a rest of only
4,000,000 £ to meet occasional demands.
Now, as the persons
who do not keep cash with bankers, already have the 5,000,000 £ of
currency, which is sufficient for their [p.15] transactions, the
whole of this second re-issue of coin by the banks would be again
returned to them in the form of new deposits. Therefore, the
aggregate account of the liabilities and assets of the bankers would
now be as follows:—
|
Deposits.
£
|
Coin.
£
|
Securities.
£
|
Liabilities
|
24,000,000
|
|
|
Assets
|
|
10,000,000
|
14,000,000
|
The bankers would
still find that a reserve or rest of 10,000,000 £ in coin would be
more than sufficient to meet the occasional demands of the customers
who had credit on their books for the 24,000,000 £ of deposits. A
part of this coin would be again advanced upon securities, and would
be again returned upon the banks, in the form of new deposits,
restoring their reserve or rest to the original sum of 10,000,000 £.
The
modus operandi is sufficiently obvious. Whatever may be
the amount of the circulating money, one portion of it will be in the
hands of those who do not keep their cash with bankers; while the
remaining portion will be in the hands of those who do keep their
cash with bankers. Now, if that portion of the circulating money
which is at the command of those who keep their cash with bankers,
amounts to 10,000,000 £, the bankers, at the close of each day's
business, will have 10,000,000 £ in [p.16] their coffers. Whatever
sums they may advance upon securities in the morning, the same sums
will be returned to them in the evening, in the form of new deposits;
and in this way the amount of their deposits must continue to
increase, until they bear that proportion to the fixed amount of the
returning cash, which the experience of the bankers may suggest as
safe and legitimate. In the case which I have taken for illustration,
the bankers of the metropolis have coin constantly returned to them
to the amount of 10,000,000 £ ; and should they consider it safe to
re-issue this returning coin upon securities, until their liabilities
bore to their cash the proportion of ten to one, then their aggregate
account would stand thus:–
|
Deposits.
£
|
Coin.
£
|
Securities.
£
|
Liabilities
|
100,000,000
|
|
|
Assets
|
|
10,000,000
|
90,000,000
|
But should the
bankers deem it unsafe to let the amount of their liabilities exceed
that of their returning cash, by a greater proportion than five to
one, then the aggregate account of their liabilities, cash, and
securities, would be as follows:—
|
Deposits.
£
|
Coin.
£
|
Securities.
£
|
Liabilities
|
50,000,000
|
|
|
Assets
|
|
10,000,000
|
40,000,000
|
[p.17]
Thus we see that,
in consequence of the system of banking prevalent in this country, a
fixed amount of circulating money may be the basis of a fluctuating
amount of credit money, even though the circulating money should be
purely metallic. It would be difficult to say in how great a
proportion, during periods of high commercial confidence, the amount
of credit money might exceed the amount of the circulating money on
which it is based; and we can imagine extreme cases of general panic,
in which the superstructure of credit money might almost entirely
disappear. The medium of exchange in this country is a complicated
and delicate machine, requiring, for its due regulation, the
strictest application of scientific principles.
No accounts are
published, showing the proportion which the deposits made with
private bankers, bear to the cash which such bankers hold, for
meeting occasional demands; this proportion will necessarily vary
with the variations of commercial confidence. When trade is
prosperous, when few failures are occurring, and when commercial
bills are promptly paid as they fall due, bankers might consider it
safe to continue to re-issue, upon securities, the cash returning
upon them as deposits, until the proportion between their [p.18]
deposits and their cash, became as fifteen to one, or even as twenty
to one. In periods of commercial pressure, on the other hand, bankers
would be disposed to contract their liabilities, until the deposits
which they might be called upon to pay on demand, bore to their cash
a proportion, not exceeding seven to one, or even five to one. We
have, however, no precise data enabling us to ascertain, at any
particular period, the proportion which private bankers maintain,
between their deposits and their cash. Mr. Clay, whose practical and
scientific knowledge of the money market, renders him a high
authority upon such subjects, stated, in the House of Commons, when
moving for the appointment of the Select Committee upon Joint-Stock
Banks, that, in ordinary times, one tenth, or even one twentieth, of
the money deposited with a banker, is a sufficient rest for meeting
occasional demands; and that nine-tenths, or even
nineteen-twentieths, of the sums deposited with a bank, may be lent
out on securities, bearing interest. This is sufficient proof that I
should not be arguing on an extreme case, were I to assume that the
cash originally deposited by those who keep their accounts with
bankers, will be successively re-issued upon securities, by the
banks, and [p.19] successively returned to them, in the form of new
deposits, until the proportion between the amount of the deposits,
and the amount of the cash, is as ten to one. But though it might be
justifiable, yet it is unnecessary, to resort to a case so strong.
The charge of mismanagement which I have to prefer against the bank
directors, will be sufficiently made out, if we take the proportion
as low as five to one.
Effect of the
Foreign Exchanges upon a Currency consisting of Circulation and
Deposits.
It will now be
necessary, before I proceed to state and establish the charge of
mismanagement, to examine the effect of the foreign exchanges, in
contracting and expanding a currency consisting of coin, and of bank
deposits.
Let us assume, as
before, that the reserve, or rest, in the hands of the bankers of the
metropolis, amounts to 10,000,000 £ in coin; that the proportion
which they usually preserve between their deposits and their reserve
of cash, is as five to one; and that, therefore, the whole amount of
the money, including cash and deposits, at the command of the
bankers, and of their [p.20] customers, amounts to 60,000,000 £.
This being the
previous state of things, let us suppose that the exchanges become
adverse, and that the merchants withdraw from the banks 1,000,000 £
of gold for exportation. By this withdrawal and exportation of
specie, the reserve of cash in the hands of the bankers will be
reduced from 10,000,000 £ to 9,000,000 £; and the bankers, in order
to protect themselves, will find it necessary to reduce their
liabilities, in a similar proportion. Assuming that five to one is
considered as the proper proportion to be maintained between the
amount of deposits and the amount of rests, then the bankers, in the
case just stated, would proceed to reduce their deposits from
50,000,000 £ to 40,000,000 £. This they would be able speedily to
effect. As cash came in, in payment of the bills they had discounted,
they would not re-issue it upon new discounts, and therefore could
not receive it back in the form of new deposits; they would abstain
from discounting, until their advances to their customers were
reduced from 50,000,000 £ to 40,000,000 £; and until, by a
necessary consequence, the cash which their customers could command
and deposit, was reduced by a similar amount.
A favourable
exchange would produce opposite [p.21] results. Should the influx of
gold increase the cash in the hands of the bankers from 10,000,000 £
to 12,000,000 £, the bankers would discount more freely, and the
cash successively advanced in discount, would successively return in
the form of new deposits; and thus the increase of the reserves or
rests in the hands of the bankers from 10,000,000 £ to 12,000,000 £
would be speedily followed by an increase of the sums paid in to them
as deposits from 50,000,000 £ to 60,000,000 £.
And now the
ground has been sufficiently cleared, to enable us to trace the
manner in which the directors of the Bank of England have mismanaged
the currency.
The Directors of
the Bank of England have departed from the sound principle of leaving
the Currency to expand and contract under the action of the Foreign
Exchanges.
The directors of the
Bank of England profess to act upon the principle of regulating their
issues so as to allow the currency to expand and contract, as the
foreign exchanges become favourable or adverse. It is unquestionable
that this is a sound principle; and that, were it acted upon, the
currency would always be maintained in the same state, with [p.22]
respect both to amount and to value, in which it would exist were the
circulation composed exclusively of the precious metals. If the
circulation were purely metallic, and consisted of 30,000,000 £ of
sovereigns, a favourable exchange, causing an importation of gold to
the amount of 2,000,000 £, would increase the circulation from
30,000,000 £ to 32,000,000 £; while an adverse exchange, causing an
exportation of gold to the amount of 2,000,000 £ would contract the
circulation from 30,000,000 £ to 28,000,000 £. In like manner, if
the circulation consisted of 30,000,000 £, in bank notes, and if the
principle of allowing the circulation to expand and contract under
the influence of the foreign exchanges were acted upon, a favourable
exchange, causing an importation of gold to the amount of 2,000,000 £
would cause bullion to the amount of 2,000,000 £ to be poured into
the Bank in exchange for notes, and would thus increase the
circulation from 30,000,000 £, to 32,000,000 £; while on the other
hand, an adverse exchange, causing an exportation of gold to the
amount of 2,000,000 £ would cause Bank notes to the amount of
2,000,000 £ to be returned upon the Bank in exchange for the gold
required for exportation, and would thereby reduce the circulation
from 30,000,000 £ to 28,000,000 £, as certainly [p.23] as if the
circulation had consisted exclusively of gold.
Thus it is
strictly demonstrable, that if the directors of the Bank of England
acted upon the principle by which they profess to be guided, of
allowing the currency to expand and contract under the action of the
foreign exchanges, the circulating medium would be maintained in the
same state, both with respect to volume and to value, in which it
would exist were there no Bank notes in existence, and were the
current money exclusively metallic. Now the charge which I bring
against the directors of the Bank of England is, that in stead of
conforming to the sound principle by which they profess to be guided,
they act in systematic violation of it. The proofs of this grave
charge are exhibited in the accounts published under the authority of
Parliament. These accounts, therefore, I proceed to examine.
The following table,
showing the liabilities and the assets of the Bank of England, from
December 1833, to June 1836, is printed in the Report of the Select
Committee of the House of Commons, on Joint-Stock Banks, &c.
[p.24]
|
Circulation.
|
Deposits.
|
Bullion.
|
Securities.
|
28 Dec. 1833
|
17,469,000
|
15,160,000
|
10,200,000
|
24,567,000
|
29 Mar. 1834
|
18,544,000
|
13,750,000
|
8,753,000
|
25,787,000
|
28 June
|
18,689,000
|
15,373,000
|
8,885,000
|
27,471,000
|
27 Sept.
|
18,437,000
|
12,790,000
|
6,917,000
|
26,915,000
|
28 Dec.
|
17,070,000
|
13,019,000
|
6,978,000
|
25,551,000
|
28 Mar. 1835
|
18,152,000
|
9,972,000
|
6,295,000
|
24,533,000
|
27 June
|
17,637,000
|
11,753,000
|
6,613,000
|
25,221,000
|
26 Sept.
|
17,320,000
|
13,866,000
|
6,284,000
|
27,724,000
|
26 Dec.
|
16,564,000
|
20,370,000
|
7,718,000
|
31,764,000
|
26 Mar. 1836
|
17,669,000
|
12,875,000
|
8,014,000
|
25,521,000
|
25 June
|
17,184,000
|
15,730,000
|
6,868,000
|
28,847,000
|
An inspection of
this table will convince your Lordship of the correctness of my
assertion, that the Bank directors act in systematic violation of the
principle of leaving the currency to contract and expand under the
action of the exchanges. In December 1833, their circulation was
17,469,000 £, and their bullion 10,200,000 £; in March 1834, their
bullion was reduced to 8,753,000 £; and if they had acted on the
principle of leaving the currency to contract under the action of an
adverse exchange, their circulation would have been reduced to
16,022,000 £.
But what was the
fact? In utter disregard of the only sound principle upon which a
paper currency can be regulated, the Bank directors, while bullion
was thus flowing from their coffers, increased their circulation to
[p.25] 18,544,000 £; and thus threw upon the money market an excess
of circulating money to the amount of 2,522,000 £.
In March 1835, the
treasure in the coffers of the Bank was reduced from 10,200,000 £,
its amount in December 1833, to 6,295,000 £ ; and if the directors,
during this continued adverse exchange, had allowed their issues to
contract as their gold was withdrawn, their circulation would have
been reduced from 17,469,000 £, its amount in December 1833, to
13,564,000 £. Yet, incredible as the fact may appear (and utterly
incredible it would be, if not established by authentic official
returns), the directors kept out a circulation of 18, 152,000 £, and
thus created in the money market an excess of paper to the amount of
4,588,000 £.
The continuance of
the adverse exchange, was the necessary result of this excess in the
circulation. The Gazette account of the quarterly averages of
liabilities and assets of the Bank of England, from the 23rd of
August to the 15th of November, 1836, gives the following results:—
Liabilities.
|
Assets.
|
Circulation
£ 17,543,000
|
Securities
£
28,134,000
|
Deposits
12,682,000
|
Bullion
4,933,000
|
Total
£ 30,225,000
|
Total
£ 33,067,000
|
Taking these figures
as they stand, without [p.26] troubling ourselves to inquire how much
the actual quantity of bullion, held by the Bank during the last week
of the quarter, fell short of the average of the whole quarter (which
is all the return gives), we shall still have sufficient data to show
the monstrous extent to which principle has been departed from in the
regulation, or rather, in the no regulation, of the currency. Between
December 1833, and November treasure in the coffers of the 1836, the
Bank was reduced from 10,200,000 £ to 4,933,000 £; while the issues
of the Bank of England paper were increased from 17,469,000 £ to
17,543,000 £ ! How did the directors contrive to get out more paper
while the adverse exchange was depriving them of gold ? Simply by
violating the principle by which they profess to be guided.
While the adverse
exchange was reducing their treasure from 10,200,000 £ to 4,933,000
£; and while, on every sound principle, they should have allowed
their paper in circulation to contract from 17,469,000 £ to
12,202,000 £, they increased their securities from 24,567,000 £,
their amount in December 1833, to 28,134,000 £, their average amount
for the quarter ending the 15th of November, 1836; and by issuing
paper on the increased amount of securities, succeeded in causing the
currency to expand, [p.27] under the action of a decided and
protracted adverse exchange.
The Bank
Directors have failed to distinguish between the different effects
produced upon the medium of Exchange by a contraction of their
Issues, and by a contraction of their Deposits.
It may be objected
to the view which I have here taken of the conduct of the Bank, that
its liabilities consist of its circulation, and of its deposits; and
that the practical rule adopted by the directors, is, not to allow
their circulation to contract and expand under the action of the
foreign exchanges, but to keep their securities even, and to allow
their whole liabilities, including circulation and deposits, to
contract and expand under the influences of the exchanges.
Now it certainly
does appear, from the published accounts, that when the circulation
of the Bank has been increased, their deposits have generally been
diminished by an approximating amount; and it is therefore only fair
to infer, that the practical rule adopted by the directors, is to
keep their securities even, and to allow, not their circulation, but
their whole liabilities, including both circulation and deposits, to
expand or [p.28] contract under the action of the foreign exchange.
But this is no answer to the grave charge of mismanagement, which I
prefer against the Bank directors; because the adoption of such a
rule is contrary to the principle (see Note at the end) of leaving
the currency to expand or contract under the action of the foreign
exchange, and is, in itself, as decisive a proof of mismanagement,
and of departure from principle, as it is possible to conceive. The
currency, or general medium of exchange, is composed of two distinct
and different elements, namely:-of the circulating money, consisting
of coin and Bank notes, and of the credit money, consisting of all
those deposits and credits which stand in the books of bankers, and
which are available in effecting purchases and payments. Now if these
two elements were constantly equivalent, if the amount of the
circulating currency were always equal to that of the credit
currency, then it would be a matter of indifference, whether the Bank
directors allowed the foreign exchanges to act upon their
circulation, or to act upon their deposits. But, as has already been
demonstrated, a given amount of circulating currency becomes the
basis of a far greater amount of credit currency [p.29]
Therefore, the Bank
directors, in allowing the foreign exchanges to act, not upon their
circulation, but upon their deposits, exhibit a lamentable ignorance
of the principles upon which the issue of Bank paper ought to be
regulated.
It is universally
admitted, by persons acquainted with monetary science, that paper
money should be so regulated as to keep the medium of exchange, of
which it may form a part, in the same state, with respect to amount
and to value, in which the medium of exchange would exist, were the
circulating portion of it purely metallic. Now, it is self-evident,
that if the circulating currency were purely metallic, an adverse
exchange, causing an exportation of the metals to any given amount,
would occasion a contraction of the circulating currency to the same
amount; and that a favourable exchange, causing an importation of the
metals to any given amount, would cause an expansion of the
circulating currency to the same amount.
Therefore, when the
directors of the Bank of England allow, not their circulation, but
their deposits, to contract and expand under the influence of the
foreign exchanges, they depart from the only sound principle upon
which paper money can be regulated. If the circulating currency of
the metropolis consisted of gold, an adverse exchange, causing an
exportation [p.30] of gold to the amount of £1,000,000 would
withdraw from circulation one million of sovereigns; and therefore,
as the circulating currency of the metropolis consists of Bank of
England notes, an adverse exchange, causing one million in bullion to
be withdrawn from the Bank, would require to have 1,000,000 £ of
Bank notes withdrawn from circulation.
As often as an
adverse exchange abstracts any given amount of treasure from the
Bank, without a withdrawal to the same amount of Bank of England
notes from circulation, so often do the directors of the Bank of
England exhibit a practical proof of their incompetency to perform
the important function of regulating our monetary system. To say that
their rule is to keep their securities even, and to allow the
exchanges to act upon their whole liabilities, is not a defence, it
is an admission that they do not understand their business.
In order to obtain a
correct view of the extent to which the mismanagement of the affairs
of the Bank of England has been carried, it will be necessary to
state, in figures, the difference between the effects produced by a
contraction of the circulation of the Bank, and those produced by a
diminution of its deposits. I have already shown, that under the
existing system of London banking, a given amount of circulating
currency forms [p.31] the basis of a much larger amount of credit
currency. On the principle stated by Mr. Clay, that, in ordinary
times, bankers may employ upon securities nine-tenths, or even
nineteen-twentieths of the sums deposited with them, a circulating
currency, consisting of Bank notes to the amount of 1,000,000 £, may
be the basis of a credit currency, consisting of deposits to the
amount of 10,000,000 £, or even to the amount of 20,000,000 £.
I do not, however,
avail myself of the very competent authority of Mr. Clay for the
purpose of giving a highly coloured picture of Bank of England
mismanagement. I take as the datum of my reasonings the moderate
supposition that bankers employ, upon securities, only four fifths of
the sums deposited by their customers; and that, consequently, a
circulating currency, consisting of 1,000,000 £ of Banknotes, forms
the basis of a credit currency of 5,000,000 £.
When the treasure in
the coffers of the Bank, decreased from 10,200,000 £, its amount in
December 1833, to 8,753,000 £, its amount in March 1834, the
diminution of treasure to the amount of 1,447,000 £ should have been
accompanied by a withdrawal of Bank of England notes from circulation
to the amount of 1,447,000 £.
Had this been done,
the aggregate amount of circulating cash returning [p.32] upon the
private banks of deposit at the close of each day's business, would
have been reduced by 1,447,000 £ ; and therefore these banks,
supposing that they acted upon the principle of not allowing the
amount of their liabilities to exceed the amount of their daily
returning reserve of cash by a greater proportion than that of 5 to
1, would have reduced their advances upon securities, until the sums
advanced, and again returned to them in the form of deposits, had
been reduced by an amount five times greater than the amount of the
Bank of England notes withdrawn from circulation.
Hence, while the
amount of the circulating currency was reduced by 1,447,000 £, the
amount of the credit currency would have been reduced by 7,235,000 £
; and the total reduction in the general medium of exchange, which
acts upon prices and on the foreign exchanges, would have been
8,682,000 £.
But the directors of
the Bank of England, instead of withdrawing 1,447,000 £. Bank notes
from circulation, as treasure to that amount was abstracted from
their coffers, increased their circulation by 1,075,000 £ and
(bankers preserving the proportion of 5 to 1 between their cash and
their liabilities) this extension of the circulating currency would
have occasioned an extension of the credit currency to the amount of
5,375,000 £, being an [p.33] enlargement of the general medium of
exchange to the amount of 6,450,000 £. But from this we have to
deduct 1,410,000 £, for the reduction in the amount of the deposits
of the Bank of England from December 1833 to March 1834; and
therefore the aggregate increase in the general medium of exchange
effected by the operations of the Bank of England between December
1833 and March 1834, was 5,040,000 £.
From the analysis
now given of the accounts of the Bank of England, published by order
of the House of Commons, the charges against the directors amount to
this. By departing from the only sound principle upon which paper
money can be regulated, they occasioned, between December 1833 and
March 1834, an undue extension of the medium of exchange, which, at a
moderate estimation, may be taken at 13,600,000 £. Had they allowed
the adverse exchange to contract their paper circulation, to the same
extent to which it would have contracted a metallic circulation, the
circulating currency would have been reduced by the actual amount of
1,447,000 £ ; while the credit currency would have been reduced by
the probable amount of 7,235,000 £.
But, disregarding
this legitimate rule, and allowing the adverse exchange to act upon
their deposits, instead of upon their circulation, the Bank [p.34]
directors increased the circulating currency to the actual amount of
1,075,000 £ ; and the credit currency by the probable amount of
5,375,000 £.
It is painful but
necessary, to pursue the analysis. In March 1835, the treasure in the
coffers of the Bank, was reduced from 10,200,000 £, its amount in
December 1833, to 6,295,000 £, and, on all sound principles, the
Bank directors ought to have reduced their issues from 17,469,000 £,
their amount in December 1833, to 13,564,000 £, This would have
effected a reduction in the circulating currency to the actual amount
of 3,905,000 £, and a reduction in the credit currency, to the
probable amount of 19,525,000 £, making a total reduction in the
medium of exchange, of about 23,430,000 £.
But, in their
systematic disregard of principle, the Bank directors increased their
issue of Bank notes, from 17,469,000 £ to 18,152,000 £, and thus
added 683,000 £ to the actual amount of the circulating currency,
and 3,415,000 £ to the probable amount of the credit currency; they
caused a total expansion of the medium of exchange, to the amount of
4,098,000 £, under circumstances which, had the circulating currency
been metallic, or had the issue of Bank paper been regulated on sound
principles, would have [p.35] occasioned a contraction to the amount
of 23,430,000 £.
From the 23rd of
August, to the 15th of November, 1836, the average amount of treasure
held by the Bank of England was 4,933,000 £, being less, by
5,267,000l £, than the amount held in December 1833, while the
amount of Bank of England notes in circulation, was increased to
17,543,000 £, being more by 74,000 £ than the amount of Bank of
England notes in circulation in December 1833.
By the gazette
account of the assets and liabilities of the Bank of England, from
September 20th to December 13th of the present
year, it appears that the average amount of treasure during the
quarter, had declined to 4,545,000 £, being less by 5,655,000 £
than its amount in December 1833, and that the average amount of Bank
of England notes in circulation during the quarter was 17,361,000 £,
being less by 108,000 £., than the amount in circulation in December
1833.
Thus, the directors
of the Bank of England, after losing 5,655,000 £. Of their
treasure—urging the Chancellor of the Exchequer to raise the rate
of interest upon exchequer bills, because the currency was in
excess—paralysing our export trade, by refusing American bills, in
order to check the exportation of gold to the United States —
[p.36] and spreading distrust and alarm throughout the country, until
we approached the verge of a domestic panic, which threatened to
destroy the whole superstructure of credit currency, and brought the
Bank of England itself in danger of stopping payment – at length
adopted the precaution of contracting their circulation to the amount
of 108,000 £ !!
Insufficiency of the
Defences set up for the Bank Directors.
The advocates of the
Bank of England bring forward a variety of statements, for the
purpose of showing, that the directors cannot always conform to the
principle of leaving their circulation to expand and contract under
the action of the exchanges; and that if they were to conform to this
principle, derangements in the money market would be occasioned, by
the operations of other parties, for whose errors the Bank directors
cannot be held responsible. The insufficiency of defences, resting
upon such statements, I will endeavour to make manifest.
1st.—It may be
urged in refutation of the charge of mismanagement here brought
against the Bank directors, that the foregoing calculations,
respecting the extent to which their adherence to sound principles
would [p.37] have contracted the medium of exchange, are overcharged,
and extravagant in the highest degree ; and that, on whatever
principles the Bank directors might have acted, it would have been
utterly impossible for them to have effected, between December 1833
and March 1836, a contraction of the medium of exchange to the
enormous extent of 23,000,000 £ ; because, before a contraction
approaching to this extent could have been effected, there would have
been such a fall of prices, and such a decrease of imports and
increase of exports, as must have turned the exchanges in our favour,
and have caused an influx of the precious metals, requiring the issue
of an increased amount of paper in exchange for the gold poured in
upon the Bank.
This argument proves
too much; and, by proving too much, serves, not to refute, but, on
the contrary, to confirm the charge of mismanagement brought against
the Bank. It is quite true, that, between December 1833 and March
1836, a contraction of the medium of exchange to the extent of
23,000,000 £ could not by possibility have been effected; but then
it is equally true, that had the Bank directors regulated their
issues upon sound [p.38] principles, the circumstances indicating
such a degree of contraction never could have arisen. If the
directors had withdrawn their notes from circulation, as bullion was
with drawn from their coffers, it is probable that, before their
treasure could have been reduced from 10,200,000 £ to 8,000,000 £,
the exchanges would have been turned in our favour. Had the first
exportation of gold, to the amount of 2,000,000 £, been accompanied
by a withdrawal of Bank of England notes to a like amount, the amount
of the cash returning to the banks of deposit, at the close of each
day's business, would have been reduced by 2,000,000 £, and this
contraction of the circulating currency would have occasioned, in the
manner already explained, a contraction of the credit currency,
amounting, it is probable, to 10,000,000 £. Thus there would have
been a total contraction of the medium of exchange to the amount of
12,000,000 £., and it cannot be doubted but that this contraction
would have been sufficient to have brought our currency to par with
foreign currencies, and to have arrested the efflux of the precious
metals. The considerable and long-continued drains to which the
coffers of the Bank of England [p.39] have hitherto been liable,
could never have occurred, had the Bank directors regulated their
issues upon sound principles.
2nd. — It has been
urged, in defence of the conduct of the directors of the Bank of
England, that they have two separate and opposite functions to
perform ; namely, to regulate the currency, and to support commercial
credit; that, in the performance of these opposite functions, it is
found impossible to act upon the same uniform system; and that, in
particular states of the money market, it becomes necessary to depart
from general principles, and to avert a domestic panic, by issuing an
increased amount of Bank paper, even during the continuance of an
adverse exchange.
This defence of the
Bank requires to be scrutinised.
As the directors
consider it to be a part of their duty to watch over, and sustain the
commercial credit of the country, it becomes necessary to examine
under what circumstances, and in what manner, they can be required to
perform so important a function.
It is evident that
the directors of the Bank of England can have no power to relieve any
species of commercial pressure, except that which may be occasioned
by a derangement of [p.40] the currency.
The cessation of
foreign consumption; the springing up of foreign rivals; the
deterioration of domestic industry; errors in commercial and
financial legislation; may each, and all, occasion a temporary
depression, or a permanent decline of trade, unconnected with the
state of the currency, and incapable of correction by any banking
operation. Nor is this all. Commercial pressure, even when solely
occasioned by a contraction of the circulating medium, cannot, in the
majority of instances, be removed by any measure, which it is within
the province of the Bank of England to adopt. A convertible paper
currency must conform to the standard of value which it represents.
While gold at a mint
price of 3 l. 17 s. 10½ d. per ounce, continues to be our standard
of value, every cause which raises the value of gold, must have the
effect of contracting the currency, and of producing that pressure
upon trade, which results from a fall of prices. Now the value of
gold may be raised in a variety of ways; by alterations in the import
duties, either of this or of other countries; by changes in the mint
regulations of foreign states, or by a loss of that relative
superiority, in producing articles of export, which enables us to
command a [p.41] larger proportion of the precious metals, than is
commanded by other countries. Now it is self-evident, that the Bank
of England cannot supply a remedy against contractions of the
circulating medium, proceeding from causes such as these. What, then,
is the nature, and what the cause, of that contraction of the
currency, and of that pressure upon commercial credit, against which
the Bank of England can supply a remedy ? To this question, which is
an important one, I shall endeavour to give a distinct answer.
When an excessive
issue of Bank paper has rendered our currency redundant, in relation
to foreign currencies, the exchanges turn against us, and gold is
demanded for exportation; and when, at the same time, the Bank
directors, disregarding the only sound principle upon which a paper
circulation can be regulated, do not draw in their notes, as their
treasure is withdrawn, the drain upon their coffers is continued
until the Bank is in danger of stopping payment. To avert this
danger, the Bank directors resort to a late and violent action on the
circulation; they disregard the rule of keeping their securities
even; they raise the rate of interest; they refuse bills of
unquestionable character; they sell exchequer bills; and thus create
alarm and distrust, until that credit currency, by means [p.42] of
which the far greater number of our commercial transactions are
effected, begins to give way. The directors now find that danger
approaches from another quarter. The banks throughout the kingdom,
whether of deposit or of issue, feel more or less of pressure, and
become desirous of contracting their liabilities, and of increasing
their reserve of cash; in proportion as confidence is shaken, gold is
. preferred to paper, and sovereigns are held rather than the notes
of the Bank of England; and a domestic drain, more sudden and more
serious than the foreign, threatens to exhaust its coffers.
These are the only
circumstances under which it can be necessary that the Bank should
exercise its vaunted function of sustaining commercial credit. When
the directors have neglected to any considerable extent, to draw in
their notes as an adverse exchange draws out their gold, their
establishment becomes exposed to two opposite dangers; and they
cannot avoid the one, without approaching the other. If they do not
contract their issues, their treasure may be exhausted by the
continual action of the foreign exchange; and if they do not increase
their issues, their coffers may be emptied by the immediate action of
a domestic panic. Of the two dangers, that of [p.43] having their
coffers emptied by domestic panic, is the most serious and the most
pressing; and therefore, in an emergency leaving only a choice
of evils, the Bank directors are justified in disregarding the principle of regulating their issues by the foreign exchanges,
and of evils, the Bank in disregarding the their issues by the in
making such advances in making such advances as may be necessary to restore commercial
credit. But does the necessity under which the Bank directors are
occasionally placed, of resorting to extraordinary measures for the
purpose of mitigating a pressing mischief, afford a justification of
the previous deviations from principle by which that mischief was
created ? Could a surgeon, who had wounded an artery, instead of
having opened a vein, vindicate his professional reputation, by
showing that he had secured the blood vessel before his patient bled
to death P Could an incendiary escape condemnation, by proving that
he had laboured at the engine by which the conflagration which he had
kindled was at length subdued ?
When, in 1826, the
Bank directors restored commercial credit, by making extensive
issues, regardless of the state of the foreign exchanges, their
conduct received, as it deserved, the highest praise; but this
conduct, however praiseworthy in itself, cannot be referred to,
[p.44] in justification of the previous mismanagement of the
circulation of the Bank of England, by which the frightful panic of
1826 was occasioned. In like manner, though the conduct of the
present directors, in making liberal advances upon mercantile
securities, and in affording assistance to the provincial banks,
without waiting for an influx of the precious metals, is laudable and
wise, yet this conduct, however calculated to avert a more serious
crisis, cannot remove the responsibility they have incurred by that
earlier departure from principle, which has led to the mitigated
panic of the present year. The only disturbances in the money market,
which the directors of the Bank of England have any power to correct,
are those which their own mismanagement of the currency creates.
If they could be
prevailed upon to attend with strictness, to their essential duty, of
regulating their issues by the course of the foreign exchanges, they
would never be called upon to perform the superfluous duty, of
watching over and supporting commercial credit.
When they cease to
inflict disease, they will no longer be required to administer
remedies.
3rd.—We hear it
frequently and confidently asserted, that the recent disturbance in
the [p.45] money market, has been occasioned, not by mismanagement on
the part of the directors of the Bank of England, but by the
excessive issues of paper thrown into circulation by the country
banks, and particularly by those which have been formed on
joint-stock principles. It is contended that the strictest
application, by the directors of the Bank of England, of the
principle of allowing the amount of their notes to increase or
diminish under the action of the exchange, cannot have the effect of
preventing the currency of this country from becoming redundant, in
relation to the currencies of other countries, while the paper of the
provincial banks, issued without reference to the state of the
exchanges, flows into the channels of circulation, as the paper of
the Bank of England is withdrawn.
The plea thus set up
for the Bank of England, demands serious consideration; because, if
valid, it leads to a very important . practical conclusion. If it be
true, that the principle of leaving the circulation of the Bank of
England to expand or contract, under the action of the foreign
exchanges, can be rendered inoperative by the issuing of paper by
provincial banks, then the necessary inference is, that no provincial
banks of issue should be permitted to exist. If the issuing [p.46] of
paper, by more than one establishment, renders it impossible to
preserve the currency in a sound state, that is, in the same state in
which it would exist were it purely metallic, then it follows, as a
necessary conclusion, that to a single establishment, the exclusive
privilege of issuing paper should be given.
This conclusion is
indeed avowed. The advocates of the Bank of England contend, that its
monopoly, with respect to the issuing of paper, instead of being
confined to the metropolitan district, should be extended to the
country at large.
The assertion that
the operations of the provincial banks counteract, and render
ineffectual the efforts made by the Bank of England to keep the
currency at par with foreign currencies, appears not quite consistent
with the previous assertion, that the directors of the Bank of
England are prevented from regulating their issues according to the
exchanges, by the necessity they are under of supporting commercial
credit. Were it true, that the paper of the provincial banks flows
into the channels of circulation as the paper of the Bank of England
is withdrawn, and thus prevents the currency from contracting under
the influence of an adverse exchange, then there would be no
narrowing [p.47] of mercantile accommodation, and no pressure upon
the money market, requiring advances from the Bank of England in
support of commercial credit.
On the other hand,
the fact, so frequently and so fatally experienced, that a
contraction of the issues of the Bank of England inflicts immediate
pressure on the money market, is a practical demonstration, that the
paper of the provincial banks does not flow into the channels of
circulation as the paper of the Bank of England is withdrawn; and
that the operations of the provincial banks do not counteract the
efforts of the directors to regulate the currency upon sound
principles, and to preserve the medium of exchange from any deeper
fluctuations than those to which it would be occasionally liable were
the circulation purely metallic.
In 1825, the Bank of
England narrowed its issues by upwards of 3,000,000 £. ; but the
provincial banks, instead of being able to counteract the operation,
by increasing their issues to a corresponding amount, were crushed
and extinguished under the calamitous pressure which it occasioned.
And, in the present year, when the directors of the Bank of England
resorted to measures for contracting the currency, the provincial
banks of issue, instead of being able to throw [p.48] increased
supplies of paper into the channels of circulation, were crippled and
paralysed, and compelled to resort to the Bank of England for
assistance.
These facts afford
experimental proof that, in the particular instances in which they
occurred, the directors of the Bank of England had uncontrolled
dominion over the circulation of the kingdom, and that when they
decreed a contraction of the currency, the provincial banks of issue,
instead of resisting, obeyed and suffered. But, upon a subject so
important as that now under consideration, it would be neither
satisfactory nor safe to rest our conclusions on these particular
instances, however striking and decisive they may appear; and I shall
therefore proceed to demonstrate, by a reference to general facts and
principles, that, if the issues of the Bank of England were regulated
by the foreign exchanges, it would be impossible for the provincial
banks to keep an excess of paper in circulation.
It will be evident
that, if the circulating money within sixty miles of London were
wholly metallic, no over-issue of paper, in places exterior to the
metropolitan district, could occasion an extension of the currency
within that district.
In this case, no
conceivable [p.49] increase in the amount of provincial paper could
increase the amount of the circulating money of the metropolis;
because, by the supposition, this circulating money consists
exclusively of coin. But if the increase of provincial paper could
not increase the circulating money of the metropolis, neither could
it increase the credit money of the metropolis ; because, if the
metropolitan banks of discount and deposit did not obtain an
increased amount of circulating money, to serve as their reserve, or
rest, to meet increased occasional demands, they would not be able,
with safety to themselves, to make increased advances to their
customers; and if the customers of the banks did not obtain increased
advances, they could not pay into the banks an increased amount of
deposits. It is strictly demonstrable, that if gold was substituted
for Bank of England notes in the London district, and if the London
banks of deposit and discount were to preserve the due proportion
between their reserves and their liabilities, no over-issue of paper,
exterior to the London district, could increase the amount, either of
the circulating money, or of the credit money, of which the currency
of London would, in this case, be composed.
As an excessive
issue of provincial paper could not, if the circulating money of
London were metallic, occasion a corresponding expansion in the
London circulation, the necessary result of such excessive issue
would be, that the currency of the provinces would be rendered
redundant, in relation to the currency of the metropolis. Prices
would rise in the country markets, without a corresponding rise of
prices in the London markets; a greater quantity of goods would be
sent from London to the provinces, and a less quantity from the
provinces to London; the balance of payments would be turned in
favour of London, and against the provinces; and the merchants and
dealers of the provinces, who had remittances to effect, would return
the excess of paper upon the banks which had issued it, and demand
bills upon London in exchange; and hence, to whatever extent the
undue expansion of the provincial currency might have been carried,
this certain and speedy process of contraction would restore it to
par with the currency of London. While the circulating money of the
metropolitan district continued to be exclusively metallic, an
excessive issue of paper on the part of the provincial banks, could
neither render the currency of London redundant, in relation to
foreign currencies, nor, for any considerable period, render the
provincial currency [p.51] redundant, in relation to the currency of
London.
There is another
important consideration connected with this branch of the subject. If
the circulating money of London were wholly metallic, the currency of
London would in all ordinary times, remain at par with the metallic
currencies of foreign countries; and could never deviate from that
par to a greater extent than that measured by the expense of
remitting gold. Hence, when the currency of the provinces, in
consequence of the over issue of paper, became redundant, in relation
to the currency of London, it would also be come redundant in
relation to foreign currencies. The merchants of the provinces would
import a greater quantity of foreign goods, and export a less
quantity of British goods; and, consequently, would have balances to
remit to their foreign correspondents.
Now, in order to
effect these remittances, they would return provincial paper upon the
banks which issued it, in exchange for bills upon London; and with
these bills they would purchase foreign bills. This might have some
effect upon the exchanges; the increased demand for foreign bills
might raise their price, until it became profitable to export gold in
order to draw against it; and this exportation of gold would occasion
some con [p.52] traction in the amount, and some rise in the value,
of the London currency. This effect, however, could be only slight
and temporary; for the currency of London being previously at par
with foreign currencies, a very moderate rise in its value would turn
the exchanges in our favour, and bring it back to par. Upon the
whole, an over-issue of paper, by the provincial banks, instead of
increasing the volume, and reducing the value, of the London
currency, would, though to a very slight extent, produce the directly
opposite effect, of contracting its volume, and raising its value.
Let us now apply the
conclusions at which we have arrived. That which would be true if the
circulating money of the metropolis were exclusively metallic, would
be equally true if the circulating money of the metropolis consisted
exclusively of Bank of England paper, always maintained in the same
state, both with respect to amount and to value, in which a purely
metallic circulation would exist.
Now, if the Bank
directors were to regulate their issues by the foreign exchanges, the
paper circulation of the metropolis would be exactly equal, both with
respect to amount and value, to a metallic circulation ; and
consequently, every excess of provincial paper would raise prices in
the markets of the provinces, without raising them in the [p.53]
markets of London; would turn the balance of payments against the
provinces; cause the excess of provincial paper to be returned upon
the banks of issue, in exchange for bills upon London; and, by
creating an increased demand for foreign bills, to pay the foreign
debts, incurred during the high range of provincial prices, would
have a tendency to contract the currency of the metropolitan
district, rather than to render it redundant.
If the directors of
the Bank of England were to regulate their issues upon sound
principles, the over-issues of the provincial banks would be almost
immediately returned upon them, and therefore could not, except for
periods too brief to be important, have any sensible effect in
increasing the amount, and reducing the value, of the general medium
of exchange. While the Bank of England retains its exclusive
privileges in the metropolitan district, no considerable or
protracted derangement in the money market can take place, except in
consequence of the failure of the directors to regulate their issues
upon sound principles.
In the actual state
of our monetary system, there is a disturbing circumstance, which it
would be improper to overlook. The notes of the Bank of England
circulate in the provinces to a considerable extent. Hence [p.54]
were the provincial banks to issue to excess, the Bank of England
notes thereby displaced, might be sent to London to pay the balances
becoming due from the provinces in consequence of the high range of
provincial prices.
This would increase
the circulating money of the metropolis, enable the London Bankers
and bill brokers, to rediscount the bills endorsed by the provincial
bankers, and thus occasion an increase of credit money through out
the country. But, for the existence of this disturbing cause, the
directors of the Bank of England are exclusively responsible. They
have established branches in the provinces; they have made contracts
with Joint-Stock Banks for the purpose of inducing them to conduct
their business with Bank of England paper, instead of becoming banks
of issue; and they have prevailed upon the Legislature to make Bank
of England notes a legal tender, so long as they are convertible into
gold at the places where they are issued.
All these measures
are erroneous.
The Bank of England
should either supply the whole circulation of the provinces,
or else should supply no part of it. While the directors adopt
means for the supplying of a part
of the provincial circulation, without being able to secure the
supplying of the whole, they [p.55] must occasionally be
liable to difficulties which they would not have to encounter, were
they to limit their issues to the district over which their exclusive
privilege extends.
4th. - It has been
supposed that the connection which exists between the Government and
the Bank of England, deprives the directors of the power of adhering
with sufficient strictness to the cardinal and essential principle of
regulating the amount of their issues by the course of the foreign
exchanges.
The Bank of England
conducts all the monetary transactions of the Government. “It
acts,” says Adam Smith, “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 the public; it
circulates exchequer bills, and it advances to Government the annual
amount of the land and malt taxes, which are frequently not paid till
some years thereafter.”
Now, it will be
found, upon a careful examination of the matter, that the compound
character of the Bank of England, as thus described by Adam Smith,
creates no real obstacle to the strict and uniform application of the
principle of allowing the amount of its issues to expand and contract
under the [p.56] influence of the exchanges. In order to relieve
themselves from all difficulty and embarrassment in the application
of this principle, the directors have only to adopt in their
establishment, a proper division of employment, and to keep their
functions, as managers of “an ordinary bank of issue,” separate
and distinct from their functions as regulators of an “engine of
state." Let us see in what way the separation of those functions
might be effected.
The business
transactions between the Government and the Bank of England, as far
at least as these transactions can have any influence on the state of
the circulation, are all comprised under two heads, viz. holding
balances of public money; and making advances to Government on the
security of exchequer bills, or on account of the produce of taxes
not yet received.
Now, in order to
present in a palpable and prominent form, the advantage which would
result from making these transactions between the Government and the
Bank, altogether distinct from its peculiar functions as a bank of
issue, and also to show the facility with which such a division of
employment might be effected; we have only to consider the manner in
which the directors would find it expedient to conduct [p.57] the
Government business, if the Bank of England were not a bank of issue.
If the Bank of
England were a bank of deposit and of discount, without being at the
same time a bank of issue, the directors would conduct the business
of the public on the same principles on which a private London banker
conducts the business of a private merchant. In the first place, they
would deal with public deposits in the same way in which private
deposits are dealt with. When the sums paid in on account of the
produce of the revenue exceeded the amount required to defray the
occasional and periodical charges of Government, they would be
employed as a private banker would employ them, - upon available
securities bearing interest; and would be re-issued to the public in
the purchase of exchequer bills, or of stock, or in the discount of
mercantile bills. This branch of the Government business would,
therefore, be conducted without occasioning any contraction of the
circulation.
In the second place,
if the Bank of England were a bank of deposit and of discount,
without being, at the same time, a bank of issue, the directors, when
required to make advances to Government, either for the periodical
payments of the dividends, or for any [p.58] other purpose, would
provide the necessary sums, on the same principles on which a private
London banker would provide the means of making advances to his
customers.
They would realize
the requisite amount of cash, by selling the stock and exchequer
bills they had purchased with the Government deposits; by monies
received in payment of bills discounted; and, if necessary, by
resorting to their own capital.
By these means, the
sums required for effecting the Government payments would first be
with drawn from, and would then be immediately thrown back upon, the
channels of circulation; and therefore this branch of the
Government business would be conducted without occasioning an
expansion of the currency.
While the Bank of
England, in consequence of its being a bank of deposit and of
discount, without being at the same time a bank of issue, would be
thus enabled to hold balances for the Government, and to make
advances to the Government, without contracting the currency in the
one case, or extending it in the other, let us suppose a bank
established in London, which is neither a bank of deposit, nor of
discount, but simply a bank of issue. Let this bank possess, as the
Bank of England now [p.59] possesses, the exclusive privilege of
supplying the paper circulation of the metropolitan district; but let
it have neither branch banks, nor contracts with joint-stock banks,
for pushing its notes into circulation in the provinces; let it, when
the exchanges are at par, keep one-third of its circulation upon
securities bearing interest, and one-third upon the security of
treasure in its coffers; let it, when the exchanges become adverse,
contract its circulation by selling gold; and when the exchanges
become favourable, extend its circulation by purchasing gold. In this
case, the circulation of the metropolitan district would be liable to
no greater fluctuations, either in amount or in value, than those to
which a purely metallic circulation would be liable. As surely as
water finds its level, the currency of the provinces would conform to
the currency of London; there would be no periodical scarcity of
money, and curtailment of accustomed accommodation, requiring
occasional departures from principle, in order to support commercial
credit; and the transactions between the Government, and the bank
conducting the Government business, could not, however great their
magnitude, have any effect, either in contracting or in expanding the
general medium of exchange.
Let us now make
another supposition. [p.60]
Instead of there
being one bank of deposit and discount, for transacting the
Government business, and another bank of issue, for supplying the
circulation of the metropolis, let us suppose that the directors of
the Bank of England form their establishment into two separate
departments; the department of discount and deposit, and the
department of issue.
Let the committee of
management entrusted with the department of discount and deposit,
conduct the business of Government, and of individual customers, on
the ordinary principles which are observed by London bankers, and
independently of the department of issue; and let the committee of
management presiding over the department of issue, keep their own
securities at all times even, and allow the circulation to expand or
contract under the action of the exchanges, without reference to the
amount either of the securities, or of the balances, or of the
advances, which the department of discount and deposit might hold or
make.
It is obvious, that
if this principle of division of employment and separation of functions were adopted, and strictly acted upon, by the
directors of
the Bank of England, results identical with those described in the
preceding paragraph would [p.61] necessarily ensue. The circulation,
both of the metropolis, and of the provinces, would be maintained in
the self-same state in which it would exist, were it exclusively
metallic.
Occurrences similar
to that of the great panic of 1826, or even to that of the mitigated
panic of the present year, would become impossible events.
With a view to the
immediate Reform of our monetary system, the practical question for
consideration is, -are there any insuperable difficulties opposed to
the adoption, by the Bank of England, of the division of employment,
and of the complete separation of functions above described ? Some of
the directors of that establishment are masters, not only of the
practical details of the money market, but of the scientific
principles of money and exchange. The opinions of these enlightened
individuals, if known to be sanctioned by the approval of your
Lordship, and of the Government, would probably prevail in the
deliberations of the Bank parlour.
But should the fact
prove otherwise, - should a majority of the directors of the Bank of
England obstinately refuse to introduce a proper division of
employment into their establishment, then the Legislature will be
called upon to determine the question, whether [p.62] the medium of
exchange should continue to be entrusted to the management of twenty
four London merchants, qualified by being proprietors of Bank stock,
elected by their co-proprietors, and having for their first object
and primary duty, the protection, not of the public interests, but of
their corporate property ? Experience would scarcely suggest an
affirmative decision of this question. I shall briefly recapitulate,
and conclude.
The considerations
which I have presented to your Lordship, will, as I venture to
believe, be found sufficient to establish the positions:–
That Bank deposits,
which may be drawn against at sight, perform the functions of money,
and are component parts of the general medium of exchange :—
That a given amount
of circulating money becomes the basis of a much larger amount of
bank deposits, or credit money :
That the recent
disturbance in the money market was occasioned by the error committed
by the directors of the Bank of England, in departing from the
principle, of leaving the currency to contract or expand under the
action of the foreign exchanges:–
That this error
originated in the failure of the Bank directors to distinguish
between effects produced upon the general medium of exchange, by a
diminution of their circulation, [p.63] and by a diminution of their
deposits:–
That if the Bank of
England were to regulate its issues of paper by the course of the
foreign exchanges, the circulation would always remain in the same
state, both with respect to amount and to value, in which it would
exist were it wholly metallic; and that no over-issue of paper by the
provincial banks could have any permanent effect in rendering the
currency of this country redundant in relation to the currencies of
other countries:–
That the
interposition of the Bank of England for the purpose of supporting
commercial credit, is necessary in those instances only, in which a
previous departure from sound principles by the Bank directors
themselves, may have occasioned a sudden contraction of the currency,
and have produced a crisis in the money market:
That if the Bank
directors were to adopt a judicious division of employment, in
conducting the two-fold operations of the Bank, and to establish a
complete separation between its functions as a bank of issue, and its
functions as a bank of discount and deposit, no trans actions, of
whatever magnitude, between the Government and the Bank of England,
could interfere with the strict and uniform application of the only
sound principle upon which a paper circulation can be regulated;
namely, [p.64] that of leaving it to contract or expand, as the
foreign exchanges become favourable or adverse :—
And that should
there exist, under the present arrangements and circumstances of the
Bank of England, any practical obstacle to the establishment of a
complete separation between the business of issuing paper, and the
business of holding deposits and making advances, it will become
necessary for the Legislature to place the medium of exchange under
the management of competent functionaries, appointed, not by the
holders of Bank stock, but by Government; responsible, not to their
co-proprietors, but to Parliament; and having for their first object
and primary duty the protection, not of their own corporate property,
but of the general interest of the nation.
Trusting that the
great practical importance of the subjects which I have now attempted
to illustrate, will be received as my apology for thus addressing
myself to your Lordship, I have the honour to be,
My Lord,
Your Lordship's most
obedient,
Most humble Servant,
R. TORRENS.
NOTE to Page 28.
The rule adopted by
the Bank directors, of keeping their securities even, and of leaving
the whole of their liabilities to be acted upon by the foreign
exchanges, would be conformable to principle, if the Bank of England
were simply a bank of issue, and had no liabilities consisting of
deposits.
But, as the Bank of
England is a bank of deposit, as well as a bank of issue, this
vaunted rule is not only contrary to principle, but is impracticable.
An example will make this palpable. If the circulating money of this
country were so redundant, as to require a contraction to the amount
of 1,000,000 £., in order to bring the currency to par with foreign
currencies; and if the merchants, who, under the adverse exchange,
had remittances in specie to effect, were to return upon the bank
1,000,000 £ of its paper, in exchange for gold, to be exported; then
the requisite contraction of the circulating money would be effected,
and the adverse exchange would cease. But if the merchants, who had
this amount of specie to remit, had deposits, and drawing accounts
with the Bank, and if they were to draw out their deposits in gold,
for exportation, then no contraction of the circulating money would
be effected; the currency would remain in excess, and the exchanges
would continue to be adverse. Let us suppose, that when the exchanges
turn against us, the Bank has a reserve of bullion to the amount of
8,000,000 £; and that the merchants having foreign remittances to
effect, have deposits and drawing accounts with the Bank to a similar
amount. In this case, if the directors were to adhere to their rule
of keeping their securities even, the process of drawing out deposits
in gold, for exportation, might proceed until the coffers of the Bank
were completely exhausted, without a single note being [p.66]
abstracted from the amount of circulating money, and consequently
without any contraction of the currency, or correction of the
exchanges. Under such circumstances, however, the directors would
throw their rule overboard.
Instead of keeping
their securities even, they would sell exchequer bills, narrow their
discounts, and thus suddenly, and rapidly, contract the circulation,
until the superstructure of credit currency began to give way, and it
became necessary, in order to avert a domestic panic, that the Bank
should exercise its otherwise dormant function of supporting
commercial credit.
When Lord Spencer
brought forward the Government measure for renewing the Bank charter,
I endeavoured, in my place in the House of Commons, to explain this
intricate and important subject. But no time for consideration was
allowed; and the most important bill of the session was hurried
through the House with disastrous haste.
Printed by T.
Brettell, Stupert Street, Haymarket, London.
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