16 MAY 1840, Page 12


WE publish another letter frotn a correspondent on the subject of our recent remarks upon Deposits in Banks of Issue. For the sake of convenient reference, we have numbered the separate paragraphs.

We are glad to observe that RUSTICT'S agrees in our main con- clusion; though we find some difficulty in reconciling the expres-

sions in paragraph 0th, either with the supposition that he does so agree with us, or with the tomtir of his own reasonings. Nor can we clearly apprehend the commencement of paragraph 10th,

in which it is stated, that " deposits are a component and not a distinct part of the currency." In a metaphysical discussion such as that respecting the significance of abstract terms, we can under- stand the meaning of a distinction between component parts and distinct parts—distinct parts being such alone as can be separately exhibited to the senses or imagination. But with regard to cur- rency, each and every part must of necessity be a distinct part, capable of being locked up separately, or handed over separately in exchange for a horse or a coat or some other distinct commo- dity of a definite value. To use the language of paragraph 3d, it must be " a tangible thing, having a real identity." Runlet-5 thinks (see the first paragraph) that we have "ne- glected to separate the truth contained in the arguments of our opponents from the errors combined with it, and to lay bare the good as well as the bad side of their case." We cannot admit that we are open to such a charge. We presume that the points which Res- awes supposes us to have omitted, ate those which he has himself supplied in his letter; and if so, we deny altogether that they belong to the case of those parties whose doctrine we were ex- amining. Rearicts goes into an explanation of the effects of' de- posit-banking: he shows that it increases the efficiency of a given amount of currency—that it increases, further, the amount of ac- commodation attainable by borrowers in time form of loaned capi- tal—and that it exposes both the mercantile community and the banks to certain risks of occasional derangement. All this is very true, but it is not truth " contained in the arguments of our oppo- nents "—it is truth foreign to their case, but perfectly consistent with ours. The Manchester Chamber of Cotnmerce contended, that in estimating the aggregate of currency at any given moment, it was proper to include the deposits in the Bank of England as a distinct and substantive item, over and above notes in circulation and coin. On this question we joined issue with them. They did not contend that the deposits in the Bank of England were to be treated as equivalent to a certain amount of currency, on the ground that these deposits increased the efficiency of the currency already existing : nor is it possible that this emid have been the proposi- tion really present to their minds; tar if it had been, they would not have drawn the distinction, which constitutes one of the main features in their case, between deposits in issuing-banks and de- posits in non-issuing banks. All the effects which Rumens

ascribes to the habit of deposit-banking, in respect to " facilitating exchanges and influencing prices," are produced just as much whe-

ther deposits arc made in issuing-banks or in non-issuing banks; while these two classes of deposits, in the theory which we were combating, are treated as essentially and generically distinct. Ros- racrs therefbre is mistaken in supposing that his letter presents "the good side " of the theory of the 'Manchester Chamber of Commerce respecting the nature and functions of nvosits: it pre- sents a totally different line of argument, which Le has derived from some other source, and which it was no part of our business to notice, since ire did not profess to trace out all the financial and commercial results produced by the habit of deposit-banking. Et slices lays down very correctly (paragraph I lib) that the deposits in the Bank of England " indicate impalpable rights, not substantial things." Now the legal right to demand currency which is under the lock of another man, is not itself a portion of .currency. The depositor has a legal right to call for so much but be has not yet thought proper to exercise that right: * Despatch from Lord NORMANDY to Captain HOasON 15th August 1839.

he has not got the currency in his possession ; and until he get the currency in his possession, he cannot either pay a debt or make a purchase. But the moment that he does so get the currency,

the deposit is a'/ISO jitrto extinguished. In truth, the very defini- tion of a deposit comprehends a legal right vested in the depositor, but a right not yet exercised—and a legal liability incumbent on the bank, but a liability not yet performed. The bank may make

use of the portion of currency deposited with them, if they please, the deposit still continuing : but the depositor cannot use it, so long as this condition is maintained. When a man deposits 1,000/. with the Bank of England, which the Bank invests in the purchase of an Exchequer Bill, this transaction does not create 2,0001. of currency where there was but 1,000/. before—there is still but 1,0001. of' currency : the difference is, that it is employed by the Beek, instead of being employed by the depositor. To those who, like the Alanchester Chamber of Commerce and Messrs. COBDEN and SA11T11, draw this special distinction between deposits in banks of issue and deposits in non-issuing banks— that the former are portions of currency, and the latter not—we submit the following (else.

The London bankers (independent of the Bank of England) issue no notes ; therelbre the deposits in their hands are now not portions

of currency, as it is admitted on all hands. Let us suppose that the Legislature shall think fit to prohibit private deposit-banking in London, and to direct that the whole of this description of busi- DM should be carried on exclusively by the Bank of England. We assume that all the London bankers have their business in a per- fectly sound and satisfactoq condition ; that the securities which they hold arc all unexceptionable both in kind and individually ; and that the reserve of bank-notes retained by each et' them is as large as iu prudence it ought to be. Now, how would such a change be effected, in the state of things here supposed ? The Bank of England, having thoroughly satis-

fied themselves as to the good condition of having other London

bankers, would receive with one hand the cash reserve and securi- ties belonging to each, and would with the other hand give credit in the books of the Bank of England to every depositor in each private bank for a suns equni to that which stood to his credit at the time in the books of such bank. All these deposits would thus cease to be deposits in private banks and would become deposits in the Bank of England.

The aggregate deposits of the London private bankers must un- doubtedly be very large—probably not less than 20,000,000/. ster- ling. Let us suppose that the aggregate of the reserves which they keep, in Bank of England notes, is 5,000,0001. In the transfer of business here supposed, therefore, the Bank of England would give credit in its books to various new depositors to the ex- tent of 20,000,0001.: it would at the same time receive 15,000,0001. of new securities, and 5,000,000/. of its own notes. A return of its affitirs, made immediately afterwards, would exhibit an increase of 20,000,000/. in the deposits, an increase of 15,000,000/. in the securities as well as in the liabilities, and a diminution of 5,000,000/. in the circulation.

Now what would be the effect of this transfer of deposit-business upon the aggregate amount of currency in the country ? According to the theory of the Manchester Chamber of Commerce, there would be a new amount of additional currency created to the amount of 15,000,000/. And we maintain that this of itself proves the theory to be an illusion. For in what form and in whose hands will any additional currency be found ? The depositors would have neither more our less than they had before : each of them would be precisely in the same position, except that in paying a debt or making n purchase, he would have to sign a draft upon the Bank of England instead of a draft upon Courrs or Dat•nirtoNn. We say that this alleged increase of current money is an impossi- bility, because no definite form can be pointed out in which it takes place, nor any individuals to whose stock it is added.

We contend that this transfer of deposit-business will occasion a diminution of 5,000,001)/. ; and we can point out the persons on whom such diminution will fall. The London bankers would have 5,000,0001. of currency less than they have at present : they would pay over to the Bank of England that amount Of bank-notes which they now hold as reserve against their liabilities in the ibrnt of de- posits. In point of fact, the existing business of the country would be carried on with 5,000,000/. of currency less than that which is now necessary : the London bankers would lose a profitable trade, and the proprietors ofIlank Stock would acquire it. We have shown that the transfer of all the deposit-banking, in London from private bankers to the Bank of England exclusively, instead of producing—as it ought to produce, according to the theory which we are confuting—an increase in the currency of 15,000,000/., would really occasion a diminution of currency to the extent of 5,000,0001. Now let us reverse the supposition ; and let us assume that the Legislature shall determine to interdict the Bank of England altogether from carrying on the business of de- posit-banking, so that all that description of business now trans- acted at the Bank of England shall conic to lie distributed among the private London bankers. We will take the aggregate deposits held by the Bank of England at 8,000,000/. ; and we will suppose that they manage their deposit-business upon the same principles as we have previously supposed with regard to private London bankers,---that is, that they hold profitable securities to the extent of three-fourths of their deposits, or 6,000,000/. The Bank of England, obliged to relinquish its deposit-business, would pay out to the various London bankers 8,000,000/. of bank-notes in dis-

charge of the claims of depositors; at the same time, it would offer for sale the 6,000,0001. of profitable securities which it had hitherto held. The London bankers, enriched by 8,000,0001. of new de- posits, would purchase these 6,000,000/. of securities, and would thus return to the Bank of England 6,000,000/. of the 8,000,0001. which the Bank of England had just paid out. The remaining 2,000,000/. of bank-notes would be retained unemployed by the London bankers as a necessary addition to their cash-reserve. If' the Bank of England published a fresh return of its affairs immediately after this transaction, it would exhibit a diminution of deposits to the extent of 8,000,0001., a diminution of securities to the extent of 6,000,000/., a diminution of liabilities to the extent of 6,000,0001., and an increase of circulation to the extent of 2,000,000/.

Now, according to the theory of the Manchester Chamber of Commerce, the effect of the proceeding which we have described, inasmuch as it would transfer 8,000,000/. of deposits from the Bank of England to the private bankers of London, while it added only 2,000,000/. to the circulation of the Bank, would diminish the aggregate currency of the country to the extent of 6,000,000/. In our view of the case, there neither would be nor could be any such diminution, because no man can specify either the form in which the diminution would take place, or the particular persons upon whose stock of currency it would full. The private bankers of London would have more currency by 2,000,000/. than they had beibre, and every other person in the country would have just as much : it is thcrcKire impossible that the diminution assumed by the Manchester Chamber of Conuncrce can be real, or the theory from which it is deduced correct.

In the first of the two hypothetical cases above described, we have stated that there would be a diminution of currency ; in the second of' the two, an increase. This arises from the blending together of issue and deposit business in the same hands, whereby notes, when deposited in the bank which issued them, are cancelled and cease to exist, until that bank shall think tit to reissue them,— leavieg behind them, indeed, a liability of the bank to an equal amount, but in a form which excludes the possibility of its serving as currency. RusTicus says (paragraph 3d) that the number of bank-notes can be diminished solely by loss or destruction : we think that it may also be diminished by their being deposited in

the bank which, issued them. For when thus deposited, they seem to us to be exactly in the same condition as newly-finished notes, received complete out of the printing and stamping office, but yet

unused, and waiting to be issued when the bank shall choose. The reissue of a note which has been lodged in deposit, is just as

much a new issue as the original emission of a note which has never seen the light. It is true that in reference to the note deposited, there exists a right vested in the depositor to call for the amount When he pleases ; but so long as he declines to exercise his right, the note while lying in the bank is practically non-existent for all purposes of currency, in the same manner as a new note not yet

taken out of the closet of the bank. Currency is diminished when

bank-notes arc deposited in the Bank of England ; it is increased when these deposits are drawn out : and this, as we have before remarked, explains the variations its the amount of aggregate cur- rency occasioned by the transfer of deposit-business from the Bank of England to private non-issuing bankers. Variations of this kind and arising from this source can have no abet either upon prices or upon the rate of interest,