concert. When confidence is increasing, the spirit of enterprise beginning to expand itself; when hope in all its forms is coming into active operation; when prices are rising, profits increasing, and every merchant and tradesman, with a view of benefiting by these circumstances, is desirous of extending his operations, the banker is looked to by his customers to act in concert with them; to facilitate their operations, and to distribute amongst them all the aid which the extent of his resources enables him to command. It would be difficult to show that it is not his duty, properly understood, to obey this call, and to assist the expanding energies of trade. At all events, it would be practically impossible for him to act otherwise he must conform to the tendency of circumstances about him; he must breathe the atmosphere of opinion which surrounds him, and suffer himself to be moved onward by the stream of events in which he is placed. For the practical truth of this view, we may safely appeal to the experience of all those who are concerned with business of this nature. A banker cannot contract, by operations in a period when the whole trading and mercantile world are acting under one common impetus of expansion. If, under these circumstances, the banker, in addition to what may be properly called his ordinary and legitimate resources, is also intrusted with the power of issuing paper money ad libitum, is it not inevitable that he should abuse that power? Can we expect, under such circumstances, while all his other resources are strained to the utmost for the accommodation of his customers, he will still keep a firm and unyielding restraint over the amount of his issues? Will he, under such temptations, in no respect confound or compromise his respective duties as a banker of issue and a banker of deposit and discount? Or must we not rather conclude, whether we look to the principles of human conduct or draw our conclusions from the lessons of experience, that he will certainly blend together his deposits and circulation on the one side, and his gold and securities on the other; and thus produce an account which shall throw a plausible appearance over the abusive use which he is making of his power as an issuing banker? Look to the published accounts of the Bank, and to their avowed rule of conduct, Habes confitentem reum.' The effect, of course, of such an application by the banker of his power of issue will be to give a further stimulus to the existing tendencies of the trading world, and ultimately to aggravate the convulsion to which they must lead. . . ... 6 "With this view, it seems important to direct the attention of the public to the following points: "1. The propriety of securing and strengthening, and, if possible, of extending the monopoly, as regards the currency, of the central issuer, with a view of rendering the indirect control which she can exercise over subordinate issuers more powerful and effectual. "2. The propriety of making some gradual approach toward the separation of the banking functions from those of the management of the currency, with the view of rendering the body that undertakes the latter duty free from all conflicting interests and motives, and at the same time making her responsibilities distinct and complete, and the nature of her proceedings simple and easily understood. "3. The propriety, in the mean time, of a distinct separation in the accounts of the Bank of the management of currency from every other branch of business; of subjecting the superintendence of this department to a 'separate committee of currency,' and of associating with this committee a representative of the government whose presence should be always requisite to constitute this committee efficient for business. . . . The presence of a member of the government in all the deliberations of this committee would prevent the Bank in any tendency to abuse her power over the currency, for the promotion of her banking purposes, and the Bank would exercise a similar restraint over the government." 99 1 An examination of Lord Overstone's reply to Mr. Palmer, and of the doctrines or propositions set forth in the same, will more appropriately follow the extracts which will be given from his evidence before the Parliamentary Committee of 1840. The crisis past, a return flow of specie set in. On the 31st of August, 1837, the Bank held £6,548,000 of specie, against £4,077,000 on the 28th of February of that year. On the 28th of February, 1838, it held £10,471,000 of coin; its liabilities at that time amounting to £29,800,000. On the 31st of August, 1838, its specie was reduced to £9,540,000; its liabilities, to £28,410,000. On the 28th of February, 1839, its specie was reduced to £6,773,000, and its liabilities to £25,837,000. On the 31st of August of that year its specie stood at £2,420,000; its liabilities, at £24,471,000. As it appeared to be drifting toward bankruptcy, it was driven to the mortifying necessity of making large loans in Paris and Hamburg. In July, 1839, Messrs. Baring Brothers & Company made an arrangement with twelve of the leading bankers of Paris, by which that house was to draw for £2,000,000; the Bank of France undertaking to see that the acceptances were paid. A similar arrangement was made with the Bank of Hamburg for £900,000. With every bill drawn, the Bank put up with trustees, securities as collateral for its payment. These loans served not only to increase largely the means of the Bank, but to allay, in a great measure, the alarm which had prevailed. A return flow of specie soon set in, increasing the amount in the Bank on the 28th of February, 1840, to £4,311,000; its 1 Reflections Suggested by a Perusal of the Pamphlet of Mr. J. Horsley Palmer. liabilities at that time standing at £23,060,000. The recovery of the Bank, however, was much more gradual than from previous panics. The amount of gold held by it for 1840, averaging the amounts for February and August, equalled only £4,305,000; and for 1841, only £4,528,000; against liabilities for £23,282,000 for the former and £23,575,000 for the latter year. In 1842 it increased its coin to £7,924,000; and on the 28th of February, 1843, to £11,016,000, its liabilities at that time standing as high as £31,738,000. - It is impossible, in a work of the character of the present, to enter into a full discussion of the alleged causes of the violent fluctuations in the currency, and in production and trade, during the period referred to. The real cause was an excess of paper money; or, to state the case more accurately, of paper money that did not symbolize merchandise, — paper that did not seasonably return to its issuers their own liabilities. As already stated, and perhaps more than once, there can be no considerable inflation or contraction where the currency is merchandise or the representative of merchandise. There may, in such case, be much waste; but, where equivalents are always present in exchanges, neither consumption nor credit can, to any considerable extent, anticipate future accumulations. Large operations are made upon credit, only when the seller can convert the paper he receives into money. He sells in order to avail himself of the proceeds. If he cannot get his bills discounted, he has, as a rule, no motive to sell. He is much stronger with his merchandise in hand, than with the paper taken for it, but which he cannot convert. He will sell on credit, only when he knows or believes a Bank stands ready to discount the paper. Its issues are to him the equivalent of coin for whatever object he may have in view. By means of Banks, therefore, a very large proportion of the merchandise of a community- whether or not fitted for consumption can be turned into paper money having, for the time, all the potency of coin. Accommodation notes, to a very large amount, may in the same way be turned into money,the equivalent, to the holders, of coin. If a portion of the bills, and not a very considerable one, which have been discounted be not paid by their makers, the Banks must take in their notes and credits, by paying out a corresponding amount from their reserves. So soon as this is done, the cur rency becomes contracted in far greater ratio. Alarm is created lest the Banks themselves should not be able to meet the calls upon them, and a wild rush is made for whatever they hold. The alarm quieted, all attempt to account for the fluctuations and the disasters that have been suffered. Bad crops are the argument of one; excessive importations, of another; foreign loans, of a third; the Bank laying the blame upon the joint-stock and country Banks and bankers, and the latter upon the former. But all such explanations amount to nothing. A bad crop may happen, involving large importations; but, if the currency be capital or the representative of capital, then its amount measures the ability of the country to purchase. So with foreign loans: if the currency be capital, their purchase may involve those who take them in loss, but can involve no others; nor can it anticipate the future earnings of themselves or the country. The disasters of 1839 were well calculated to provoke the attention of government; and, as was its wont on such occasions, the House of Commons, on the 10th of March, 1840, appointed a special Committee, consisting of twenty-six members, to "consider the subject of Banks of issue." Upon this Committee was Mr. Thomas F. Baring (then Chancellor of the Exchequer), Mr. Hume, Sir Charles Wood, Sir Robert Peel, Mr. Grote, with many others almost equally distinguished in financial and political circles. The Committee passed in review before them a great number of merchants. and bankers. It is only important to refer to this evidence as leading to the Act of 1844, and only to that portion of it given by Lord Overstone; which, with the extracts already given from his essay published in 1837, is all that is needed by way of introduction to that Act. The great question discussed by the Committee was the difference or resemblance between the liabilities of a Bank in the form of deposits and its notes in circulation. Lord Overstone's evidence was accepted as conclusive of a radical difference between the two. The Act of 1844 is simply an embodiment of his views. These are sufficiently shown in his answers to the questions put to him by the Committee. Question 2661. "In your definition of the word 'circulation' do you include deposits?"-"No, I do not." Question 2663. "Why do you not include deposits in your definition of circulation?"-"To answer that question I believe I must be allowed to revert to first principles. The precious metals are distributed to the different countries of the world by the operation of particular laws, which have been investigated, and are now well recognized. The laws allot to each country a certain portion of the precious metals, which, whilst other things remain unchanged, remains itself unchanged. The precious metals, converted into coin, constitute the money of each country. That coin circulates somewhat in kind; but in highly-advanced countries it is represented, to a certain extent, by paper notes promising to pay the coin to bearer on demand, these notes being of such a nature, in principle, that the increase of them supplants coin to an equal amount. Where these notes are in use, the metallic coin, together with these notes, constitutes the money or currency of that country. Now, this money is marked by certain distinguishing characteristics: first of all, that its amount is determined by the laws which apportion the precious metals to the different countries of the world; secondly, that it is in every country the common measure of the value of all other commodities, the standard by reference to which the value of every other commodity is ascertained, and every contract fulfilled; and, thirdly, it becomes the common medium of exchange for the adjustment of all transactions, equally at all times, between all persons, and in all places. It has, further, the quality of discharging those functions in endless succession. Now, I conceive, that neither de-. posits nor bills of exchange in any way whatever possess those qualities. In the first place, the amount of them is not determined by the laws which determine the amount of the precious metals in each country; in the second place, they will in no respect serve as a common measure of value, or a standard by reference to which we can measure the relative values of all other things; and, in the next place, they do not possess that power of universal exchangeability which belongs to the money of the country. If the Committee will allow me to refer to it, there is a passage in the Report of the French Chamber, which has recently been appointed to inquire into a subject very similar to that which this Committee is now investigating, which seems to put the point of the universal exchangeability of money in a very striking way : "If we reflect upon the innumerable commercial transactions which daily take place, from those which furnish the most inconsiderable results to those which express the boldest speculations of international commerce, we may readily perceive that they could not be accomplished without the assistance of an intermediate value, which can successively be brought into comparison with all others, and serve among them as a standard and a medium of exchange.' Question 2667. "What are the elements which constitute money in the sense in which you use the expression quantity of money'? What is the exact meaning you attach to the words 'quantity of money, - quantity of metallic currency'?""When I use the wordsquantity of money,' I mean the quantity of metallic coin, and of paper notes promising to pay the coin on demand, which are in circulation in the country." |