"Until the year 1833, the action of the Banks, as already stated, appears to have been perfectly regular. From that point, the increase in the number of joint-stock Banks in England and Wales, to the 26th November last has been seventy-two, and in Ireland ten; making an aggregate of eighty-two, exclusive of their innumerable branches, formed in almost every town in the two kingdoms, which are, in fact, equivalent to so many additional Banks. "It next remains to be shown what was the amount of paper money in circulation in England and Wales and Ireland, other than that issued by the Banks of England and Ireland. The average in England and Wales, on the 29th of March, 1834, was £10,200,000; and in June, 1836, £12,200,000. In Ireland, the average in June, 1834, was £1,300,000; and in June, 1836, £2,300,000. It thus appears that there was a total increase in this portion of the paper money of the two kingdoms, in 1836 over 1834, of no less than £3,000,000, or more than 25 per cent. "Having thus stated the action of the different bodies through which the extension and contraction of the paper money of England and Ireland have been effected from the year 1833 to the present time, it may be now expedient to show the causes which appear to have occasioned the reduction of the circulation of the Bank of England. It is the more important to submit these causes to the notice of the public, as they seem in no degree to have arisen from over-trading, or from any undue speculative advance in commercial prices. Occurrences of that nature tend to produce an unfavorable foreign exchange; an evil only to be remedied by that contraction of the circulation which eventually restores prices and currency to a level with those existing in foreign countries. If, therefore, upon reference being made to the state of the foreign exchanges during the period to which the inquiry relates, it be found that no material derangement existed, our attention is naturally directed to the consideration of the other causes that have occasioned the demand upon our metallic currency. In order to establish the position that the commercial exchanges were not against England, it may be right to refer to the increase or decrease of gold at the Bank, from which alone any correct inferences are to be drawn as to the state of our currency in comparison with that of foreign countries. "The first period may be taken from October, 1833, to April, 1835, during almost the whole of which time there was a continued purchase of gold by the Bank at £3 17s. 9d. per ounce. The ex change on Paris never fell below 25.35 for short paper, and the premium upon gold remained in Paris at about 9 per mille: thus showing that, during that period, there was no demand upon the Bank for bar gold, and no profit upon the export of that metal or the gold coin of the realm. "The second period was from April, 1835, to April, 1836; during the whole of which time the foreign exchanges were considerably higher than during the preceding eighteen months, and, consequently, the influx of gold correspondingly increased at the Bank. "The third and last period is that from April to December of the past year, during the whole of which time the foreign exchange on Paris was seldom under 25.35. The premium upon gold, however, was for a short time as high as 13 or 14 per mille, which occasioned a loss of about £100,000 of the Bank's stock of gold bullion, - an amount too trifling to establish the fact of an unfavorable commercial rate of exchange. "With this statement of the actual bearing of the foreign exchanges upon the gold currency of the country, it may, perhaps, excite some surprise as to the mode in which the large reduction in the bullion held by the Bank was effected, and which, in its consequences, from that body having been governed by the principle laid down in the evidence of 1832, ought to have had the same effect upon the general currency of the empire, as if the reduction had been occasioned by any cause other than that from which it is believed to have arisen.. ... "According to the principles laid down in the evidence referred to, the rate of interest ought to have been advanced by the Bank, in order to throw back that excess upon the market. It is admitted, however, that we have not been placed in ordinary circumstances since the discredit which occurred in Ireland. In consequence of that event, there was, in the first instance, an undue return of Bank of England notes for coin; and secondly, it is believed, that, in this country, from apprehension of consequences, a much larger amount of bank-notes has been, and still is, retained in reserve by bankers generally, than they are ordinarily in the habit of holding. At any rate, it is evident that the additional issue by the Bank has not caused any foreign demand for gold; and, unless that be exhibited, the Bank ought not, under circumstances of an unnatural pressure, strictly to enforce the principle laid down. . . . "We must keep in mind that England is the centre of the whole commerce of Europe 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 whence we are to obtain that bullion which we have lost. "Allusion has already been made to the effect upon the currency from a deranged state of commercial prices between this and foreign countries. It must be evident to every one reflecting upon the subject, that similar effects may be produced by employing capital in speculative loans to foreign powers, or investing it abroad at a higher rate of interest than the securities of this country may afford. This, it is obvious, may occasion large and sudden foreign payments, without any reference to the exchanges. And it is to payments of that character that we may attribute the loss of bullion which took place from October, 1833, to April, 1835; and to which the public attention should be directed, that remedies may be devised for mitigating the evil which must otherwise attend similar transactions hereafter. . . . "Adverting to the excess of the country issues, and looking to the race running with increased violence in Ireland as well as in England, the Bank was fully justified in attempting to arrest the evil which might attend a continuance of the export of bullion from the redundancy of money, by making an advance in the rate of interest in London and at the branch Banks. In fact, the only question about which there can be any real difficulty is, whether she ought not to have taken this step somewhat earlier. To have acted, however, in anticipation of events likely to occur, would have been in direct violation of that principle upon which the Bank professed to be guided, and which Parliament had tacitly sanctioned. It would, moreover, have established a precedent, and imposed future responsibilities upon the directors, which it is questionable whether they should ever incur, either upon their own account or that of the public. The Bank acted precisely as any board of commissioners empowered solely to issue notes for bullion would have done, and can in no way be chargeable with the consequences... "The demand for bullion continuing, the Bank further advanced the rate of interest in August to £5 per cent per annum, which forced additional securities upon many of those country Banks that adhered to a lower rate. Their surplus funds in London being soon absorbed, they all eventually adopted the rate of interest established in London. There was, however, an effect created by this act on the part of the Bank far more powerful than the actual advance in the value of money. It was a moral apprehension, in all prudent minds, that there was mischief abroad; and those who had been promoting and applauding the action of the joint-stock Banks began to doubt the solidity of the system. The feeling so created was probably further extended by the publication of the evidence already alluded to. The consequence of this altered state of confidence was first shown in Ireland, where the competition had assumed a more violent character than in England. A run upon all the joint-stock Banks in that part of the empire ensued, which terminated in the stoppage of the Agricultural. The direct effect of that discredit upon the Irish Banks was an immediate drain upon the Bank of England and its branches of nearly one million of sovereigns, obtained by the return of notes to that amount. None of these Banks having been previously provided with coin, or the direct means of obtaining it, the only mode of getting possession of it was by forced sales of securities in London. A moment's reflection will show the derangement in the London circulation, necessarily consequent on such proceedings, as well as the difficulty under which the Bank is placed by the total amount of coin or bank-notes on the part of issuing Banks to uphold the credit of their circulation. It may be assumed as a fact, that profit is their only object, and that not a single issuing Bank in England, Ireland, or even Scotland, has ever been provided with bank-notes or coin adequate to meet a demand upon their respective liabilities. Their assets, beyond the ordinary wants of their customers are all vested in securities bearing interest; trusting to the realization of those securities in bank-notes in case of need, which, thus abstracted from the public market, either inflicts a most inconvenient pressure upon London, or, in order to prevent that pressure, the Bank is required to reissue the amount of notes so cancelled, without reference to the amount of bullion in its possession. . . "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 unprotected by an adequate reserve of either Bank of England notes or coin, it certainly is impossible to insure the convertibility of paper even for foreign 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 contracting as the currency may fluctuate in value with reference to foreign countries, there could be no difficulty in preserving it against depreciation for all purposes of foreign payment. If paper money ever become discredited by any internal political convulsion, it can then only be upheld by the power of government; and in such times it becomes the duty of the ministers of the Crown to undertake the responsibility of upholding public credit. For relief against commercial discredit, the issuing body should be so formed as to be able to afford protection. "With reference to the past action of the Bank, there is no reason to doubt that the value of the currency would have been maintained without occasioning any severe pressure upon the money market, had the countervailing issues by other parties not occurred: still, if there exist any well-founded reasons for supposing that the principle explained in the evidence of 1832, and acted upon by the Bank, is not sound, or that the proportion of one-third of bullion with reference to the liabilities of the Bank at the period of a full currency be not sufficient, it merely remains for Parliament to express an opinion upon either of these points, and there can be no question but that the Bank will immediately regulate its course accordingly. The principle referred to was never intended to apply under any extraordinary events that might arise. In such times, it would become the duty of the Bank to reduce their securities without delay, and thus to increase the relative proportion of bullion to their liabilities, prior to the commencement of a foreign demand, which, in such altered state of circumstances, might be expected to occur. "Having thus endeavored to show the rise and progress of the contraction in the circulation of the Bank of England, which has terminated in the pressure upon the money market, it remains to be considered, what are the consequences likely hereafter to ensue from a continuance of the present system. "The consideration of the joint-stock system had been, for some time prior to the year 1825, forced upon public attention by the many failures which had taken place, subsequently to 1810, in private banking-establishments, amounting to more than one hundred and fifty; and, as about eighty private banks suspended their payments in 1825, the government thought themselves then called upon, without further delay, to endeavor to change the system altogether, a sound system of banking being an object of the highest importance to the whole community. The view taken by government was strengthened by observing the little comparative derangement sustained by Scotland under the joint-stock Banks, by which the monetary concerns of that part of the kingdom have been almost exclusively conducted. Looking to that country as an example, it was perhaps natural to conclude that what afforded evidence of advantage in one part of the kingdom would be equally good for all the rest. There is no intention to criticise the Scottish system of banking; but, were it narrowly examined, it might not appear so perfect in all its parts as its many warm advocates are inclined to believe. Suffice it to say, that it has produced great benefit to Scotland, which is a sufficient reason for leaving it untouched so long as it commands public confidence. . . . The two systems were different in origin and principle. That of England had been formed upon the Bank of England, and private establishments precluded by Parliament from embracing more than six partners, while the system of joint-stock Banks had ever been the main support of the circulation of Scotland. Both systems existed with equal advantage in the several districts where established. A change in either could only be accomplished by competition, endangering the credit and currency of the country. . . . So dangerous does this system appear, as it now stands, that it becomes questionable whether the Bank of England and the bodies in question can permanently exist together." Such was the attempted explanation of the abandonment or failure of the rule requiring the Bank, on a full currency, to maintain reserves in coin equalling one-third of its liabilities. In adopting it, it merely followed the dogma of the Bullion Committee, that the condition of the currency was indicated by that of foreign exchange. If the latter were at par, the currency was necessarily in a healthy and normal condition. The Bullion Committee did not attempt to prescribe the requisite amount of coin to be held, when the exchanges were at par, and the currency consequently full. The managers of the Bank adopted the "one-third rule" for no other reason than that, for some time after it recovered from the effects of the panic of 1826, it held specie equalling about one-third its liabilities; the former averaging, from 1827 to 1830, inclusive, about £10,000,000; the latter, about £30,000,000. As the proportion was purely accidental, the rule was equally accidental. The exchanges being at par, the currency was full, and in a 1 Causes and Consequences of the Pressure in the Money Market. |