MANAGEMENT OF THE CURRENCY BY THE BANK OF ENGLAND.
IT is now nearly a twelvemonth since several pamphlets on the state of the Currency and the conduct of the Bank of England were reviewed in this journal*. Among them was one by Mr. SAMUEL JONES LOYD, distinguished by a penetrating and philo- sophic spirit, and a clear and intelligible array of facts in support of the position be took up. Mr. LOYD contended that the cha- racter of the Bank was anomalous—that its functions as a bank of issue and a bank of deposit were incompatible. To the attempt to reconcile clashing duties and interests, were traced the fearful fluctuations of the currency. Mr. Lovv, with the benefit of another year's experience, re- sumes his pen. He finds confirmation of the soundness of his views in the course which the Bank has been compelled to take during the last twelvemonth. He is enabled, by the published accounts of the Bank itself, utterly to demolish the statements and arguments of the Bank's great champion, Mr. HORSLEY PALMER. The principle on which the Bank professed to manage the cur- rency was, to keep the securities fixed, and to meet fluctuations in the amount of bullion by corresponding fluctuations in the circu- lation and deposits. How carefully this principle has been ad- hered to, appears from the fact, that in January 1837, the securi- ties were 30,3C3,000/.—in December 1937, 22,7271. During the last four months there has been a gradual, steady diminution of the securities. Then as to the corresponding fluctuation of bul- lion and circulation and deposits : on the 7th March 1837, the circulation and deposits were 31,438,0001., the bullion 4,048,0001. —on the 14th December 1837, the circulation and deposits were 28,194,0(!0/. and the bullion 8,172,0001. Thus, the bullion was increased by 4,124,0001., during the period that the joint liabilities Vac diminished by 3,244,0001. But the Bank could not have acted otherwise with prudence— "It will be remembered, that during the year 1836 the Bank was urgently called upo, to support public credit ; and, in consideration of her position as a great bank of deposit and discount, and of the strong tone of public expecta- tion on the subject, it was deemed by those who managed her affairs that this could not ho roused. Hence arose an increase of her circulation whilst her bul- lion was rapidly diminishing, and an exchange of convertible securities for others which were of a differeut description. As manager of the circulation, this was au unwarrantable trausaction on her part : it placed her, both as re- garded the amount of her circulation and the nature of her securities, in an improper position. It was necessitated by her character of a bank of deposit and discount. " But the evil did not terminate here. In the following year (1837), after the convulsion had taken place, the position of the Bank and her duties as ma- nager of the currency became altered; the exchanges turned in our favour, and the bullion in the Bank began steadily to increase. Against this increased amount of bullion there ought of course to be issued a corresponding amount of notes; and this would necessarily take place did the Bank act solely in her capa. city of manager of the currency. But the very circumstances which turned the exchanges, and thus increased the bullion, have tended also to relieve those concerns which in the previous year were obliged to resort to the Bank for sup- port ; and the securities taken from them now come into a course of rapid die- charge. To this the Bank cannot object ; and the consequence is, that her secu- rities are inevitably reduced at a time when circumstances render it peculiarly requisite that their amount should be kept up ; and the increase of her circula- tion effected b) the issue of notes against the bullion brought in to her is more than compensated by the payments made to her in redemption of the securities
increasing amount question. Hence a diminishing amount of circulation with an ncreasing amount of bullion, and all the recognized rules for the management of the cur- rency unavoidably violated.
Such are the consequences of uniting the functions of banking with the niansge.,,ent of the currency ; the steady and unbending course which ought to be pursued with respect to the latter is necessarily interrupted by any connexion with the former. it compels an increase of the circulation, and a change from convertible to inconvertible securities, at a time when the state of the exchanges requires a diminution of the circulation, and renders it expedient that the ma- nager of the currency should have all its resources at its free disposal. And again, when the altered state of the exchange, requires and naturally tends to bring about an increase of the circulation, it th meta that tendency, renders it impracticable to maintain the proper amount of circulation ; and thus brings the Bank and the circulation into their present anomalous and unsatisfacttry rsition." ! See Spectator, 5th March1837, Mr. LOYD states that the only safe principle on which a paper currency can be substituted for coin, is that of making the amount of paper in circulation correspond with that of the bullion in hand- " The steady influx of gold may be taken as a sure indication that the cur- rency is deficient in amount, i. e. less in amount than it would be with a me- tallic currency ; and therefore it is that the gold comes in. Was the currency metallic, this continuous influx of gold, by augmenting the circulation, would gradually remove the cause of, and therefore put a stop to the influx. If with a paper circulation the notes be similarly increased as gold conies in, the effect will be the same • but if as the gold comes in the circulation be not increased, then the cause Which produces the influx is left in full operation, and gold may continue to come in to an unlimited amount. We may by this process arrive at a state in which the whole circulation will be represented by bullion in de- posit, and thus the main object of a paper currency may be neutralized. " But under no management of the currency will matters be suffered to reach this point. At some stage in the progress, that step, which is improperly called a forced issue of notes, will certainly be resorted to ; and in proportion as this step is delayed, will its effect, when resorted to, be found to he both sudden and violent : the effects urged as objections against the present adoption of the measure will all occur with increased intensity and suddenness. By a timely adherence to the rule contended for, these effects, which must occur to some extent, and would equally occur under a metallic currency, will, by their gradual introduction, be rendered moderate and comparatively insensible in their consequences."
Having explained the principle on which he would regulate issues of paper money, and having proved that the regulator of those issues should not be embarrassed by the performance of duties incompatible with its chief function, Mr. LOYD arrives at these conclusions-
" First, That the management of a paper-currency ought to be intrusted to one body only, invested with full power, and made exclusively responsible for the regulation of its amount.
" Secondly, That such body ought to be restricted to the discharge of that one duty, and not be permitted to unite with it any other functions.
" The issue of a paper-money being in fact the substitution of that which only represents value in the place of that which intrinsically possesses it, and that which is thus substituted being necessarily the common medium of ex- change for the whole community, it seems preposterous to intrust a power so delicate and obviously so capable of abuse, to more persons or bodies than are absolutely necessary for the accomplishment of the end in view.
" For maintaining the value of the paper-money thus substituted for the precious metals, it is absolutely necessary that those who issue that money should regulate the amount of it by a steady and uncompromising adherence to a certain and defined rule. It seems obvious that the obligation to do this can be more effectually imposed upon one than a multiplicity of issuers."
But, unhappily, the Bank will have for some years to come the staff in its own hands. For this the country may thank the in- capable Whigs. Fearful of offending a powerful money interest, conscious of inability to deal like statesmen with the question, they took the mischievous and contemptible course of renewing the monopoly of the Bank of England on the monopolist's own terms, leaving the public interest to shift for itself. Their conduct contrasts most unfavourably with what, as the Times reminds us, would probably have been the Tory management of the same question. One passage from the correspondence of Lord LIVER- POOL with the Bank Directors, in anticipation of the renewal of the Batik charter, seems fully to warrant this conclusion- " With respect to the extension of the term of their exclusive privileges in the metropolis and its neighbourhood, it is obvious from what passed before, that Parliament will never agree to it. Such privileges are out of fashion; and what expectation can the Bank have, under preseut circumstances, that they will be renewed?"
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