Finance-Public & Private

The Bank Notes Fusion

ON the 22nd of this month, the fusion of the Treasury Notes with the Bank of England Issue will take place. In some respects the change then to be effected is one which concerns the general public very little and when the date arrives the man in the street will be eonscious of no change whatever in the currency arrangements, the present £1 and 10s. notes remaining of course legal tender, just as they arc to-day, though at the same time new Bank of England £1 and 10s. notes will be issued and the other notes will gradually be called in. The new notes, however, it is generally understo(xl, while they may differ in colour, will be of the same size as the present ones and will, of course, also be legal tender.

WHY TILE FUSION IS GOOD.

* But while. in some respects the change over of the former notes is a matter of little concern to the general public, the principles underlying the fusion are of the greatest importance and because of that fact I should like to try and express in as simple terms as possible just where the importance lies. I do not propose to go into all the intricacies of currency, but merely say enough to explain the general principles underlying the fusion of the notes. Previous to the War our currency consisted of the current coins of the Realm and Bank of England Notes, supplemented in ninny ways for purposes of convenience by cheques and postal orders, while, of course, Scotland had its own issue of hank-notes. So far as the paper currency of the Bank of England was concerned there were what was known as fiduciary limits, that is the limit of notes which could be issued without a gold backing. Thus, if we look at the latest Bank of England Return we shall find that the total of notes issued was £183,206,840. Against these Notes the Issue Department held in Gold coin and bullion £163,456,810 and the balance, £19,850,000 was represented by securities of which £11,015,100 represented the debt of the Govern- ment to the Bank and E8,734,900 Other Securities held by the Bank-of England. It is this figure of £19,850,000 which represented what was known as the fiduciary issue. This fiduciary portion of the issue was absolutely fixed and consequently the Note issue as a whole expanded or contracted from week to week according to the actual Gold movements. And behind those Gold movenicith it must be remembered that the actual economic develop. meats of the country were represented. That is to say apart from the seasonal movements of Gold for interim; circulation at holiday times or when trade was particularly brisk, the real large and permanent movements of Gold were determined by the power on the one hand of foreign countries to take our gold, or on the other hand by the power of this country to command gold, that power being determined largely by our actual trade position.

- ENTER TI1E TREASURY NOTES. - Immediately following on the outbreak of War, there were two important developments affecting the currency arrangements. One of these was the immediate supple- menting of the currency by an issue of £1 and 10s. Treasury Notes and the other, which followed however somewhat later, was the gathering up of the gold in the pockets of the people for centralization in the general store at the Bank of England. At the outset, the osten- sible cause for the Treasury Note issue was the fear lest extra demands for currency impelled by War apprehension and other causes might exceed the supplies, for it must be remembered that the Bank of England had no power to issue 0 Notes and later the volume of Treasury Notes increased by -reason of the fact that with the general inflation of credit, more currency was required for currency use than could ever have been supplied by the previous sovereigns in circulation. ,

DUAL CONTROL. •

In fact, during the War period and the years immediately following two kinds of inflation went hand in hand, one being the general expansion in credit and the other being its corollary, the increased demand for . . currency. At the 'outset there was no limit to the powers of the Treasury for issuing new Notes and the figure rose to prodigious heights. Then came a gradual return to sanity, and its development ineluded a kind of self-imposed regulation on the part of the Government which took the form of a Treasury Minute enacting that the actual maximum Treasury Note circulation in any one year should mark the legal maximum for the year following. As a consequence of that Minute and the fall in prices zenerally, following upon a sound monetary policy, the volume of Treasury Notes has tended to contract. Nevertheless, the fact remains that we have been working upon a dual control of the currency and there was nothing to prevent the Government from making a fresh Treasury Minute empowering a great expansion in the Treasury Note circulation. Not only so, but while the Bank of England continued to possess great responsibilities with regard to the safeguarding of the Gold Reserve, they had no responsibilities whatever with regard to the Treasury Notes, and there was in fact a complete departure from the pre-War system under which the Bank of England's responsibility included that of seeing that the Note issue was regulated according to the requirements of a Parliamentary Act.

110W THE FUSION IS EFFECTED.

Under the new Currency Bill, the whole of the Treasury Notes outstanding on the 22nd inst. will be transferred to the Bank of England and just how the operation would work out may be gathered by noting what would have happened had the transfer been made, say, on the occasion of the publication of the weekly Return of the Currency Note Department and that of the Bank of England last Wednesday._ On that date the total Note issue of the Bank of England was /183,206,840 for which the gold backing was 1163,456,840, the balance representing the fiduciary issue. On the same date the total volume of Treasury Notes outstanding was 1290,319,379 and it will be seen that if that total had been added to the £183,206,840 in the Bank of England issue department, the approximate figure would have been £473,526,219. The Currency Note Department, however, contained on the Assets side a holding of Bank Notes to the amount of _156,250,000 and those Notes being now cancelled can be deducted from the Treasury Notes outstanding, thus further reducing the total to £417,276,219. We now obtain a total which apparently shows that the fiduciary limit of 119,850,000 had been greatly exceeded as a consequence of this transfer.

NEW FIDUCIARY LIMIT.

Under the new Currency and Bank Note Bill, however, the new fiduciary Note issue limit has been fixed at /260,000,000 and inasmuch as in the Bank Return of last week, there was a Gold holding of £163,456,840, the total representing the difference between the holding of .Gold and the Note issue was only 1253,819,379 or 16,180,621 short of the fiduciary limit. Accordingly, that amount of 16,180,621 would have been issued and placed in the Banking Department to the credit of the Reserve and thereafter the whole regulation of the -margin of safety in the matter of the fiduciary limit .would be regulated by the ordinary movements each week in the Bank of England Reserve, which, had the transfer to the Treasury Notes taken place last Wednesday, would have amounted to nearly £55,000,000.

BANK CONTROL RESTORED.

In other words, not only has the entire control of the Note issue of the country now passed into the hands of -the Bank of England, but it has also passed out of the control of the State, save in so far as the Bank of England's .own actions are regulated by the Parliamentary Bill. The net results of this are of a twofold character : In the first place it prevents any Government from tampering with the currency, expanding or contracting it at will, While- in the second place the control both of credit and currency is concentrated on the Bank of England and should make for the smoother working of our Banking -and currency svstem. - A PRACTICAL POINT.

I do not propose to go further into the matter at this stage, other than by commenting upon one practical point. Some controversy has raged around the question of whether the figure of £260,000,000 for the fiduciary limit is or is not too rigid and too small a total. It has been mainly based upon the experience resulting from the working of the dual system of Treasury and Bank Notes over a good many years and there are few critics who consider that the total is excessive, the greater number asserting it is of an insufficient size to cope with any sudden or great revival in trade. That point, however, has evidently not been lost sight of for it has been enacted that on the representations of the Bank of England, in consultation with the Treasury, the limit can be raised or lowered for a period if required, but it should be carefully noted that the initiative has to come from the Bank of England and not from the Treasury.

TRANSITION PERIOD.

The plain fact of the matter is that those most closely in touch with the Banking and Currency situation arc fully conscious of the fact that we are passing through a transition period and that it may be some time yet before a fiduciary limit can be fixed with that precision which was possible under the Act of 1844, the soundness of which has since been demonstrated by the great number of years during which the Act operated beneficially to our Banking system. Nevertheless, I think that this latitude which has been arranged should relieve traders and others from all apprehension that any undue check will ever be imparted to trade through an insufficiency of credit or currency, while, as I have already said, the actual smooth working of the Banking system will be helped by the termination of the dual system of control of the past fourteen years.

Anniutt W. KIDDY.