is not too high: nothing less will satisfy the dictates of prudence that dominate the mercantile community. As the "unpreparedness" of the banking world is to be attributed in the first place to the monopoly of "exclusive banking" granted to the Bank of England; resulting in its now being an open question whether the Bank keeps a reserve to supply its own requirements or whether it is keeping a reserve to supply the needs of all the banks; and to an indifference as to the consequences because of an improper reliance upon the Government to come to the rescue of the banking community when it gets into a difficulty by sanctioning a violation of the law; it is preeminently a matter for Parliament to deal with. 165 APPENDIX A. THE following Paper was prepared by Mr. Freshfield for the information of the Chancellor of the Exchequer in Nov., 1856, and opposite is inserted what appears to be a conclusive reply. The question now asked is, whether, in case of the insolvency of the Bank of England, the holders of Bank notes would have any right of payment out of the bullion, and securities held by the Bank in the Issue Department, in preference to the depositors? MR. FRESHFIELD. 8. Or, that the circulation being at an end, the provisions of the Act will no longer apply. 9. I apprehend the last is the true view of the law. 10. That the provisions of the Act are not for the benefit of the note holders, but for ascertaining the limit of issue, is clear, not only from the general policy of the Act, but from the contemporaneous enactments as to banks in Scotland and Ireland, where the issue is equally limited by the amount of bullion without any provisions that could tend to secure that bullion to the note holders. 11. In fact, the provisions of the Act in question are not applicable to a liquidation, and no rights of preference being given by the Act but those flowing only from its provisions, if these latter fail the consequent preference fails. 12. If the Bank were bankrupt, the bullion being less by 14,000,000 than the notes out, the bullion could no longer be issued under the provisions of the Act in exchange for notes without creating a preference among the note holders, or rather a scramble, and therefore must be distributed rateably either to the note holders or to all the creditors. REPLY. 8. Circulation not necessarily at an end. The Issue Department is entirely independent of the Banking Department, and is carried on in a separate building. 9. Join issue. 10. Section 2 as quoted above specially sets apart and appropriates the securities, coin and bullion, in the Issue Department for the benefit of the note holders. 11. Why not applicable to a liquidation? Section 2 does give rights of preference. 12. This is assuming that the securities set apart and appropriated for payment of the notes are not realisable. The directors of the Bank as 66 'managers on behalf of the public of the circulation of the country" (see letter of the Chancellor of the Exchequer quoted in note on p. 44) if a great demand for the payment of the notes arose would take steps to realise the securities before a scramble could take place; and as Sir Robert Peel said, in reply to a question of Mr. Muntz on the 6th January, 1844: "If the 11 millions of Government debt should be required by the Bank, the Government would have no difficulty in raising the amount to pay it off." MR. FRESHFIELD. 18. Nor is it likely that discredit should arise from the state of the deposit accounts. Everyone knows that the Bank has ample means to meet its deposits. The argument that the small amount of notes in reserve tends to discredit the Bank in the Banking Department is an argument against publication, or against the limit of issue, and not against the appropriation of gold in the Issue Department. 19. Assuming, therefore, the extreme case of a suspension, the difficulty would not be the discredit of the Bank, but a want of circulating medium. 20. The Bank note circulation required by the public is about 20,000,000, and if the circulation were reduced to as low as 17,000,000 or 18,000,000, the Bank would still have 3,000,000 to 4,000,000 of gold. 21. The Bank, by extreme pressure on the community, might get in and cancel even more notes. But before this the pressure on the community, from want of circulating medium, would be so severe as to produce universal suspension. The private banks would be stopped, and the whole exchange of the country at an end, and the mercantile community would be reduced to a state of barter. REPLY. 18. The argument that the small amount of notes in reserve tends to discredit the Bank in the Banking Department is not an argument against publication, nor against the limit of issue: it is an argument in favour of increasing the amount of notes in reserve in the Banking Department, which is now better understood and acted upon. It is certainly no argument in favour of appropriating the gold in the Issue Department to supply any deficiency of the Banking Department. 19. A suspension would certainly be the discredit of the Bank. The circulating medium is not a fixed quantity, but can always be increased by the purchase of gold, which can be exchanged for notes. 20. The £3,000,000 or £4,000,000 would be in the Issue Department, specially set aside and appropriated for payment of the notes, and not available for the purposes of the Banking Department. 21. Any of the large joint-stock banks could do the same, but that fact gives them no title to the gold in the Issue Department. |