THE BANKING SYSTEM OF THIS COUNTRY IS THE REAL CAUSE

OF THE LABOURING POPULATION BEING SO FREQUENTLY THROWN OUT OF EMPLOYMENT.

TO THE EDITOR OF THE SPECTATOR.

Edinburgh, 8th January 1844.

Stn—I have endeavoured in my two last letters to explain the circumstances which regulate the employment of the people. I have proved, I flatter myself, that as long as the working-classes are properly distributed throughout the different departments of industry—that as long as the balance of labour is maintained—there never can be want of employment. I have pointed out that commercial crises and stagnations of trade arise solely from the balance of labour being disturbed, and overproductions taking place in particular depart- ments of trade, by which gluts are occasioned and a derangement caused in those departments, and which necessarily reacts on the whole industrial system of the community ; and in my last letter I have shown that those partial overproductions generally take place in the great branches of our manufac- tures, and are caused by overspeculation and overtrading. Having traced things so far, it now only remains for me to point out what it is that occasions this overtrading and overspeculation ; and in doing this, I at last arrive at what may be called the real and primary cause of the people being so frequently thrown out of employment. Of course, it is out of the question to think of restraining by any legislative enactment improper speculations. Indeed, the ambition and enterprise ot commercial men, and others intent on making rapid fortunes, is one of the principal causes of our greatness and immense accumulation of capital. From such a source may be traced most of our inventions and improvements in ma- chinery and the arts. But certainly, the Legislature, without interfering with men in the free disposal of their property and energies, is fully entitled to refuse its aid to the encouragement of dangerous speculations; and this is all I would suggest as a remedy for the evils I have been describing.

The commercial and manufacturing speculations which have proved so dis- astrous to the country, and especially to the labouring population, by depriving them of work, are to be attributed, I am of opinion, entirely to our banking system. It is not my intention to enter at present into so wide and compli- cated a subject as our currency or our banking system in general. I shall only notice this in so far as it relates to the point to which I now refer—the obstacle it opposes to the people being kept in constant employment, by the undue en- couragement it affords to overtrading and overmanufacture.

The trade and commerce of the country may be said to be in a great mea- sure dependent on our banks; as it is by means of them that a man is enabled at once to realize his capital for the purposes of manufactures and commerce, and to convert it into pounds, shillings, and pence, by obtaining credit on the faith of what his property is worth : and were the banks confined to what may be said to be the proper province of banks—that of discounting bills and lending money on as high an interest as they could obtain' and of borrowing it on as low an interest as they could get it for—they would be of the greatest advan- tage to the industry of the country. But, in addition to this, which I consider their legitimate profits, the banks, especially the Bank of England, upon which all the other banks in the country are in a great measure dependent, have obtained from the Legislature the power of issuing as many notes as they please, and arc thus enabled to create for themselves a fictitious capital for the encouragement of speculation ; from which they derive a large profit, drawing as much interest from their paper-money as they do from their real property. They are allowed to act at the same time both as banks of discount and of issue.

The profits of the bankers depending on the extent of business they transact, and to which there is no limit as long as they can issue at will their promises to pay, it is easy to account for overtrading. The bankers have a direct inte- rest to accommodate with loans and to discount bills to the greatest possible extent, as their profits depend on this. Of course, should the parties with whom they transact business fail, or should there be a run upon them for gold, they may suffer loss; but during what are called the periods of prosperity— those which precede the periodical crises—there is not so much danger of this. During those periods there would appear to be a competition among them which shall do the greatest possible amount of business, which shall issue the greatest number of notes. During those periods swarms of adventurers obtain credits and set up as manufacturers—creating those overproductions which are sure to terminate in glut and long periods of stagnation and want of employ- ment—who, had the banks been COIlfined within real capital, would have been obliged to work with their bands or to fill subordinate situations.

Were the banks restrained to their real funds, they would have no temptation to lend to those by whom there was a considerable chance of their never being repaid. In this case, their power of accommodation being limited by the amount of their real property, they would take care to choose for their cus- tomers those alone who had capital, and the trade of the country would thus be kept within wholesome and reasonable bounds. But the bankers being able to coin (if I may use the expression) to any extent their paper-money, they are tempted by the chance of great profit to lend their notes to men who are pos- sessed of no capital; trusting that the bills which they have discounted will be retired before the crash takes place, and that they will be able to extricate themselves without loss during the continuance of the artificial prosperity. And this they generally succeed in doing, by taking the alarm first, and thus throwing the whole losses upon the industrious and honest trader, who has been led solely to deal and to give credit to the men of straw from seeing that they had credit with the banks. Thus is that spirit of enterprise and speculation, which if properly regulated would be so beneficial to the country, converted into a mere system of gam- bling; the effect of which is to cause for a time a certain degree of artificial prosperity, attended by overproduction in particular departments of trade, and followed, as certainly as night follows day, by glut, depression, and misery to the working population : and when the turn takes place, the very banks which have been the means of originating and fostering the undue speculations—acted on by their interests—are the parties who do most to precipitate the trade in its downward course. This also is the natural consequence of the note -system. During the periods of artificial prosperity, the banks as I have already pointed out, accommodate with credits or discount bills almost to any extent, by means of the issue of their paper-money. When the turn takes place, ac- companied as it always is by a certain degree of panic, the banks become apprehensive of a run upon them for gold. Most of them have notes out to a much greater extent than they have the immediate means of paying in coin. They perhaps hold bills and other assets sufficient to answer all their obliga- tions; but the amount of those bills cannot be realized for some time. They are therefore driven to the greatest shifts to meet the demands upon them, and are necessarily obliged to refuse all accommodations, even to parties whose capi- tal is undoubted. They refuse to discount bills altogether, or do so at such a high rate of interest as to preclude dealing with them. The whole trading interest is thus thrown into the greatest confusion : merchants and manufac- turers who had engaged in undertakings on the faith of those accommodations become bankrupts; and thousands of workmen, who were enticed to the mills during the prosperous periods, are thrown entirely out of employment. The trade of the country, after being pushed forward by the banks into an unnatu- ral state of activity, is deserted by them at the moment of its utmost need—at the very time when support is necessary to its very existence. The industry of the country is thus subjected to continual ups and downs. At one time credit is almost unlimited, and shortly afterwards it is nearly anni- hilated. As well might you expect a man to be in good health, who after sweating in the Torrid Zone was in a moment conveyed to the regions of per- petual snow, and after remaining there for some time was conveyed as suddenly back to the Tropics, as you could expect the trade of the country under such a system to exist for any length of time in a really prosperous condition.

1%-e hear a great deal about the injury done to the trade of the country by the exportation of gold to pay for corn. This, we are told, forces the bankers to contract their issues and to refuse to discount the bills of the manufacturers, and is generally attributed to the Corn-laws. This ought not, however, to be imputed to the Corn-laws, but to the note system. It is entirely owing to the banks, and especially to the Bank of England, overextending their operations by means of their paper-money. When, on such occasions, gold is suddenly required for any particular purpose, there must always be a run upon the banks for the exchange of paper for real money. This necessarily creates a certain degree of panic, and induces the banks to contract their issues as much as possible, and to refuse to discount bills. This undoubtedly must prove injurious to trade. But, had the banks been carrying on their operations with real /money or with Government notes, these consequences would never have ensued. Of course, in this case there never could have been a run upon them or any in- ducement for them to contract their operations and the trade of the country would not have been in any way subjected to the pernicious effects of a mone- tary panic. In the complicated state of the commerce of this country, embar- rassed by so many hostile tariffs, there must always be from time to time expor- tation of the precious metals to pay for commodities required by us—not only for corn but for u.any other articles. We are also frequently obliged to send out of the country considerable quantities of gold and silver for the purposes of emigration. But this exportation of the precious metals c ould never injure our trade if it were not for the false system of banking which at present exists. With our great industrial resources and manu- facturing capital, it is always easy for us to supply the drain of gold to one quarter by an importation front another quarter. There is no more diffi- culty in our buying gold and silver by means of our manufactures, than there is in our buying flax and cotton. It is not, I repeat, the exporta- tion of a million or two of gold at a time to pay for corn, which injures trade. This of itself would never be felt ; and the gold would soon be brought back in some other way. The injury consists entirely in the effect which the exporta- tion produces on our banks, by creating, under our note system, a monetary panic, and inducing them to withdraw suddenly a large quantity of their paper from the circulation, and to contract all their operations.

It is the same vicious system which is doing so much injury to America. The United States, notwithstanding their free institutions, their light taxation, and their great command of the necessaries of life, do every few years come to a regular stand-still in their progress towards a high state of prosperity and greatness; and this entirely owing to their banking system, which is even worse than ours. It is true, the effects are not so disastrous to the working classes in America as in England ; because in America the factory interest, upon which the banking system acts with the most pernicious effect, is but a small and subordinate interest compared to ours, and the workmen thrown idle have the boundless unappropriated lands of the far West to fall back upon as an im- mediate source of employment and of livelihood. The banking system as existing in England and America has very consider- able charms, especially to such a people as the inhabitants of the United States, who are so much influenced by the go-ahead principle. It enables men of enterprise to carry on their operations beyond the extent of their funds, and even to launch out into commercial speculations without being possessed of funds at all; and there is no doubt that, notwithstanding the misery it entails on the millions, a great many individuals have by means of it risen to wealth and distinction. The young, enterprising, and speculative, both in England and America, are likely to be opposed to the abolition of the note system, as this would greatly diminish the chances of making large fortunes by .a lucky stroke, and compel men to the exercise of prudence, intelligence, mid economy, as the principal means of becoming wealthy. But the Legisla- ture ought not on this account to be prevented from doing what is required for the prosperity of the country at large. It put down the state lotteries some years ago, although this was opposed at the time by many persons who liked

the excitement occasioned by the chance of getting a 20,000/. prise. It ought for the very same reasons to abolish the privilege which the banks at present enjoy of an unlimited issue of paper-money. I do not intend to enter here into the question whether there should be a Government bank of issue, or whether the currency should be a metallic, a

paper, or a mixed currency. All that I stand up for is, that the banks, and especially the Bank of England, which discount bills and accommodate with credits, should not be allowed to issue paper-money at all, but should be strictly confined to what I have already explained to be the proper province of banks. I maintain that, until there be a complete separation betwixt banks of issue and banks of discount, our trade will never be in a really prosperous condition, and our labouring population will be always liable to be thrown out of em- ployment. It will perhaps be said, that by depriving the banks of the power of issuing paper-money, we will prevent them from giving is to such an extent as are at present afforded by them. There s no doubt that such would be the case ; but that is the great advantage which I consider would attend the change. The object of the Legislature ought to be to prevent the banks from giving such accommodations as would enable men to carry on their commercial operations beyond their capital. But, by depriving the bankers of the power of issuing notes, we would not place any barrier to that wholesome and safe system of credit which is necessary for the carrying on of industrial operations; we would only restrain it within proper bounds. The banker is a dealer in capital, who borrows from one party and lends to another; and his profits consist in the

difference betwixt the rate of interest at which he borrows and that at which he lends. Be may be compared in this respect to a "shopkeeper, who buys goods from one party and sells them at a higher price to another party. Such are his legitimate profits; and such profits are quite sufficient to induce a• sufficient number of men of capital to become bankers for all the proper purposes of trade, without its being necessary to eke out those profits by leaeing, them the privilege which they now possess of issuing notes.

It may be also said, that the banks would not accommodate at so cheap a rate as at present, when they are allowed the privilege of issuing paper-money. This also may be quite true : it is probable they would demand a higher rate of interest. But the men of property who were accommodated by the banks would be much more than compensated for this by their being freed front the competition of those adventurers who, by their reckless speculation and over- trading, bring on those gluts by which the men of real capital suffer such severe losses. Besides, every note issued by a banker, and which is added to the currency, diminishes the value of thereat money previously in circulation, to the injury of all those who bold that money ; for the value of money always depends upon the amount in circulation. To maintain, therefore, that the bankers should be permitted to dilute the currency by issuing ad libitum their promise to pay, in order to add to their profits and to enable them to afford accommodations at a lower rate of interest, is precisely as if we were to main- tain it would be advantageous to the community that the shopkeeper should water his wine, sand his sugar, and moisten his tobacco, in order that those articles might go farther and that he might be enabled to sell them cheaper.

We frequently bear great blame imputed to the Bank of England on ac- count of the manner in which it injures trade by overissues of paper at one

time, and sudden contractions of the currency at another. But this charge I consider to be in the highest degree absurd : the fault does not lie with the Bank of England, but with the system. The Directors of the Bank of Eng- land are nothing more than a set of mercantile men, appointed by their con- stituents, the proprietors of stock, for the express purpose of attending solely to the interests of the company. It is therefore the duty and the interest of the Directors, who are themselves holders of stock, to consider nothing but that which will add to the profits of the Bank ; and it is ridiculous to suppose that any consideration of the advantage of the community in general will ever for a moment be put in competition in their minds with the great object they have in view—that of transacting the affairs of the Bank so as to be able to declare at the statutory meetings as large a dividend as possible to the shareholders. When the spirit of speculation is abroad, it is quite natural that the Directors

should, as they always do on those occasions, take advantage of this to carry on their operations to the greatest extent, anti to issue as many notes as possible—

in short, to make hay when the sun shines—although by acting in this manner it is certain they become the chief cause of overtradiug and wild speculation. And when the reaction takes place 45 quite as natural that the Directors should be the first to take alarm, an ,licted on by the principle of self-preserva- tion, withdraw their accommodation nd contract their issues, although by doing this they are sure to precipite the crisis and to render it more disas- trous. It is only by acting in this manner that the Directors can secure to their constituents the large dividends which are always paid on Bank Stock. The Directors of the Bank of England, I repeat, are not to be blamed for act- .ing in this manner : but is it not monstrous to think that the Legislature should place the whole of the country, and, above all, the wellbeing of the millions of our working population, at the discretion of some half-dozen of men, whose in- terests are on most occasions directly opposed to those of the community, and who by their privilege of expanding and contracting the currency have also the power of continually altering the standard of value, and of thus tampering with the property of every man in the kingdom? The great difficulty in reforming our banking system is in dealing with the Bank of England. Unfortunately, the Government of the country is in a great measure dependent on that bank for the means of carrying on. The Government is always in arrears: for the taxes are never paid into the Exche- quer in time for the necessary disbursements; consequently, the Government can only be carried on by the issue of Exchequer Bills, which the Bank cashes with its notes. If, therefore, the privilege of issuing paper was abolished, this accommodation could not be afforded; and it is this subserviency of Govern- ment to the Bank which has enabled it to preserve so long its privileges, not- withstanding their being so injurious to the interests of the community. But this difficulty, I conceive, might be easily got over by the floating debt being at once funded, and a sufficient loan raised to enable the Government to get free from the trammels of the Bank.

Until the banking system has been placed upon a proper footing, we may be certain of having the same alternations of unwholesome fictitious prosperity and depression of trade, the recurrence of the same series of events which have regularly taken place for the last thirty years,—first, a revival; next, a great extension of production and what is called manufacturing prosperity ; and then a crash and depression, until the new revival But were our banks placed under proper regulations, I am convinced that our labouring population would have constant employment, and that in spite of the many restrictions to which our trade is subjected. The balance of labour would then be left to the unerring adjustment of demand and supply, and the equilibrium would never for any length of time be disturbed ; and the spirit of enterprise and speculation of owr manufacturers and merchants being kept within proper bounds by their beg no longer accommodated with the loan of fictitious capital, instead of being, as it now is, the continual source of derange- ment of our industrial system, would be the means of steadily increasing the wealth of the country and the prosperity of the whole population.