25 SEPTEMBER 1847, Page 9

THE ANSWER.

Bank-notes in circulation, December 1839 414,732,000 Possible amount of notes in banking-till 3,000,000 Total notes out of Issue Department, in December 1839 £17,732,000

Now, of this total amount, to which, judging by former experience, the notes are liable to be reduced, if 14,000,0001. be permitted by the pro- visions of the act to be issued without a corresponding reserve of bullion, there will only remain, under these circumstances, an amount of bullion retained to protect the convertibility of the notes-3,732,0001. This is a very low amount; below which, I apprehend, no prudent person, es- pecially no responsible Minister, would wish to see the bullion reduced. This, I think, is a satisfactory explanation of the principle upon which the bill of 1844 proceeded with respect to this point; and at the same time a clear proof that in fixing the amount of notes unrepresented by bullion in deposit, the highest sum was taken which previous experience would sanc- tion as consistent with the safety of the measure.

It is true that subsequent experience of events which have occurred since the passing of the bill would lead to the conclusion that a higher -amount might safely be taken. But upon this point these remarks may be made. I. That it is essential, in fixing the amount, to keep on the safe aide: that no very important advantage is secured by taking a higher athount, whilst the most fatal mischief might arise from taking as amount so high as to admit of the possible exhaustion of the bullion or of an alarming approximation to it. 2. That our experience since the passing of the bill is at present very short and incomplete, and conse- quently far from sufficient to justify an alteration of the provisions of the bill on the point in question. 3. That the trial to which the bill has re- cently been subjected, has been accompanied by circumstances peculiarly calculated to generate apprehension and early want of confidence on the part of the public, and thus to prevent the circulation being reduced to so low a point as that which it may possibly reach on the occasion of some future drain of bullion, when the public, having become more accustomed to the provisions of the bill, shall be less timid and apprehensive when those provisions first come into practical operation in the early stages of a drain of bullion.

It was with great satisfaction I read the sound and judicious remarks on the Bank Charter Act of your correspondent A. B., in the Spectator of the

21st September 1847. SIR—The question has been put, upon what principle the framers of the Bank Charter Act of 1844 proceeded, in fixing the amount of Bank-notes -to be issued, unrepresented by bullion in deposit, at fourteen millions. I think this question admits of a clear and satisfactory reply. The bill of 1844 is founded upon three principles. First, that the mixed circulation of gold and notes shall at all times be equal in amount, for the purpose of maintaining it at all times equal in value, to what would have been the amount of a circulation purely metallic. gecond, that that portion of the circulation which consists of notes shall be at all times convertible at the will of the holder into gold. Third, that for the sake of economy, that portion of the circulation which all past experience assures ns is never converted into gold, shall not be represented by bullion in deposit; but that the' bullion which would otherwise remain unprofitable in deposit, repre- venting the same amount of notes in circulation, shall be applied to the pubs lio purposes of the country. Now, in determining the amount of notes ' which might be safely issued unrepresented by a corresponding amount of .gold in deposit, it was of course incumbent upon those concerned in framing the act to take care that the amount was fixed at a point sufficiently low to afford the utmost certainty that the demand for converting the notes in- to gold could never reduce the notes in circulation below the amount to be to fixed. Past experience, therefore, must be carefully consulted. Now, upon reference to the Report of the Select Committee on Banks of Issue, (1840,) Appendix No. 12, it will be seen that in December 1839, the Bank-notes in circulation were reduced to 15,532,0001. But this return included the Bank post-bills, amounting to about 800,0001., which are not included in the returns upon which the act of 1844 is founded. Therefore, making the proper deduction on this account, the Bank-notes in circulation in December 1839 (Bank post-bills not included) must have been 14,732,0001. To this amount, however, must be added the amount of notes reserved in the banking-till of the Bank. Those, we know, have on a recent occasion been reduced below 3,000,0001.; therefore, putting these two sums together, we shall have-

21st August; and I shall be much gratified if these explanations are con- sidered to add anything to the clear and conclusive explanation which he has given of the principles upon which that measure is founded.

Your correspondent " C. D." suggests a further question in connexion with this subject- " As the nation increases in wealth and population, the necessary amount of circulation must be enlarged, and with this the issuing power of the Bank (un- founded on bullion) should be extended: I would inquire, how are such enlargement and such extension to be determined? how are their limits to be defined, and within what periods ought the readjustments to take place? " To these questions also, it appears to me, an equally satisfactory reply may be given. As the transactions of the country increase in number or amount in consequence of an increase in the population or wealth of the community, it is highly probable that the banking facilities and other pro- cesses for economizing the use of the circulating medium will also increase to at least a corresponding extent. The quantity of money requisite for adjusting the transactions of a country does not increase in the same, or in anything like the same ratio, as the population, the wealth, and the activity of intercourse increase. The growth of credit, and of the various substitutes for the actual use of money which arise out of extended credit, are the invariable concomitants of increasing wealth and progressive civi- lization. Even in this country, in which the contrivances for economizing the use of money have already been carried to an unusual extent, it would not be difficult to suggest further means of a very simple and practical character, by which the present amount of Bank-notes in circulation may be made efficient for the adjustment of a largely increased amount of transactions. To some of those I can hardly doubt that we shall have recourse at no distant period.

But let it be assumed that the increased transactions of the country ren- der necessary an increase in the amount of the circulation. This neces- sarily involves the assumption that the circulation in this country no longer bears the same proportion to the transactions to be adjusted as it does in other countries. The consequence will be, that a portion of the precious metals hitherto retained by other countries will pass into this country, un- til by such new distribution of the precious metals the proportion of cir- culation to transactions has been rendered the same in this as in other countries. This increased quantity of precious metals or bullion will be deposited in the Bank of England, and an additional amount of Bank-notes will be issued against it. Thus, the amount of the circulation will be in- creased in proportion to the increase of legitimate demand for it; and both the period of this increase and the extent of it will be determined, as it ought to be, not by the fallible judgment or fancies of any individuals, but• by the legitimate operation of natural causes. The effect of this process will be a permanent increase in the amount of bullion held in deposit by the Bank of England: and when that amount shall have been found by lengthened experience and under every variety of circumstances to remain invariably at a higher point than is deemed necessary for the effectual maintenance of the convertibility of the notes, it may then become expe- dient to revise that provision of the act which fixes the present amount of notes to be issued, unfounded on bullion, at fourteen millions. This state- ment, I trust, conveys a full reply to the very natural and reasonable in- quiry of C. D.

It is important, however, whilst discussing this subject, to guard against any misconception of the real benefit to the country which can arise from any extension of the issuing power of the Bank, unfounded on bullion. I have already shown, that according to former experience, no increase of the present amount of 14,000,0001. could take place without involving dangers to the convertibility of the notes; and that an increase of that amount at any time must be the consequence of a permanent increase of the quantity of bullion remaining in this country. The general laws which regulate the distribution of the precious metals throughout the various countries of the world must determine the quantity of the precious metals, i. e. the quantity of money or circulation (I am of course speaking of a convertible currency) which this or any other country can possess. This amount of circulation, being determined by laws which have no connexion with the amount of notes issued by the Bank unfounded on bullion, will of course remain the same whatever regulations may be adopted on that point. Thus it appears, that the amount of circulation which this country can retain is wholly independent of the amount of notes which the Bank of England may be permitted to issue unfounded on bullion. An increase of the power of the Bank in that respect can in no degree tend to increase the total amount of the circulation; it can only enable the Bank to transfer to active and profitable employment a certain amount of bullion which would other- wise remain dormant in deposit. This may be an object of some import- ance, although the value of it is usually much over-estimated; but it is essential to draw a clear distinction between this result, whatever may be its value, and that which is too often confounded with it—viz. an actual in- crease in the amount of the circulation. The former is within the sphere of and may be the fit subject for legislative regulation, resorted to with ex- treme caution; but the amount of money, metallic or paper money con- vertible into metallic, which a country can retain, is not subject to any such regulations: it is the necessary result of general laws, which no legis- lative regulations can control; and the attempt to alter or modify this re- sult by any empirical process must always terminate in mischievous failure.

I have the honour to be, Sir, your obedient servant,

MERCATOR.