20 JUNE 1840, Page 11


OLTI'lliFIn n g 011 roar o a t-ica sc,sonsl IC to fidloa. out iles train or thought already .1-1 Io those

patsages of my former letter whose Illc!!!"I'l!!`.,t1-.';''`I t-i • It IV, in a certain degree misapprehended. 1 cannot deny, boded, that ;.v.ition,-; are for the most part ; Mit I think that tiii force of mine will 11.- more fully felt, after the perusal of what is here stiltioihod. The term dvpo• 'As," it may be observed. lets Imo) used in the cossr...e. of the dbmersibut itt tlilIerent sema.s. From referring to moist' than one of these, witlionr making a forroal statement

to that elfeet, I have failed to render myself suflieiently tttcIliiiihe. u esse laboro—obseurns tilt,''

I mu speaking of its •• liabilitiess," the Bank of I•kigland affixes the to.rm '• 4ie- posits to the muninal slim elitcred in its liaoksiq lcii, Ii It depositad,


iitimlieiiytt by the amount drawn out again by lb.. dip o:t•o.,.. 1.14...a.I of the

term "deposits," 1 have taken the liberty to substititte Ilse pltras. I. I he 13.Inles liabilities In depwits ; " but, owing: perhaps to a Ind take its the word " in " less, in the beginnimss of the 11111 parmraph, been changed into it and." To " de1lo:11s," taken in this sense, the conclusions drawn in para- graph 12.th, and the reasoning front which thQ. were dedussed, were designed to he applied.

But the term " deposits " may also be employed to designate the identical leink -notes and coin deposited, whatever may have afterwards become of then.

Tlic, I call otherwise " money deposited. in which light deposits are consi- dered iii paragraphs 0th mid 10,1i, which oittlit to Lave been pbseed after the others. The actual " intd.ey depo,ited " limy Ise %cry different from the no-

minal sum called liabilities 1st (I.-posit% he one may be greater or less than the other. The very salve p'usces of money or itmk-notes may be deposited and reissued, and then again ileposit,A and reissued. atul so on for a great num-

ber of times. In this case, the nominal sum called " in deposits " would 110 inereie,ed every time, whil,t the aettial" "ow!' tki"'sit " w"la main unaltered in amount. tht the other hand, it' different coins or bank- notes had been depsit,d on cavil of these teieasions, and the whole amount afterwards redrawn, the " money dcpo-ited." might have licen out siderable, although the " liabilities in deposits" would he hunt thug the " money deposited" generally dividv-s itself into three distinct part S. one of which is redrawn), another reissued, and the remainder 1•0111IIIII,s 11111,111elicd. The last of these sums (if any such exist) is ;t1.0 called dep,sits, but 1110TC correctly " deposits on hand." It may c...,:s1st of ltnik• notes, or of specie', or of both. The first of these may, thereffire, 1 e 1011,1•1111:IIed 64 deposits of bank-notes on hand," and the second " .,•i,• .,o hand"; and to either or both or' these is sometimes applied lb.. :1-: •• !" • , I ,•." SlIppOSC that the i 1111..11.11-111,1"ca. having got: possessioo of them, and of 10/.1..1 .1 ' ..1, .1- : but pre- notes to 13. Il""! it , sently rolrates :10/. 1:1 pap. r. Tim 11-.1:1, ..t !F, a they are -,'/. 11.-t, remains its

again deposited. 111 !Tel 11 !" • •• liabilities

in eirenlation '' will I.., re.lins.il to 2./.. s. its .• .1- s, ill amount to 1701.; the money 11t4),,it C.! " remains Ilea.: al It daim.i.; in hand Consist of t.t.I/. in hank-notes, and itc

It has ,ilremly 12,eit that 11,, 11•,,....... Ott any prett•nes• .1 to its eireuiasion currency. '1'et do 111: yowl.' be to place in the s generic name different 1. precision, aml put- a Amp to all accurate The amount of " mosiey deposited " Batik's circulation, nuy inore than the .1. ;.

cause considerable hit trill of the Molloy 1111.5'C been, redrawn :rod

sent afloat, included t"... acconnt the head o( hluitEt is.. The "des:„.-:•

item in an .teeemo ' ss only remain s, 11.. 7' !.

11811.1 1111z4llt fitt • -. purpose it is sented to lie limb r If no such rt.:. •• • t., determine what the eirettlai,,,, as the

Bank of England is if • •• into account) consisted of, or what it .It i - -t-ttuld be tootle up of the sum of all t ' ,k except those

returned to it its Hint po,scssion, autul of nothing else.* 1,-- - it, unless the bank-notes :31)01110 1... • • ,liy lost or de-

stroyed, and al..- .- important to ascertain. I\ for.. 11 -1 .s there would he no deposits of ••••.:,- ...sunned into

the colliers of the hank i hu---Ming vir- tnally it' not in reality e 1- adions

.1, caimut

II. • mount of the .1 by the same its all logieul s the subj‘,.1. ..1 t.s what is called the -.1 the former settee; he- II, or actually been thus beitlation under cannot form au s Ivoik-notes. It 'sink-notes ou ' It : for w111,•11 :1;11,..1••s or is tepee-

reserve in cash or bank-notes, it could profitably employ the remainder. These deposits of' bank-notes on hand in the coffers of the deposit-banks would still be included in the returns of the circulation as before. They would, notwith- standing, appear to be more inert than formerly, although, in reality, the arrange- ments which had laid them by should have prevented a much greater amount from being virtually in the same state. The portion outstanding would cir- culate more rapidly, and become the instrument of a greater number of ex- changes, or interfere more or less with the adjustment of prices and the rate of interest under certain circumstances. As a set-off to this a greater amount of liabilities would be incurred, accompanied by a corresponding increase of risk ; which, if provided against, would be followed by a diminution in the amount of specie afloat, until the place of that should be replenished if necessary by some new investment of capital, procuring a fresh supply. There would be the greatest possible temptation also to infringe upon the ordinary principles of banking. Since bank-notes would he equivalent to specie in the hands of the deposit-bankers, they might pr6.r retaining their reserves in the former ; and as the bank of issue svould scsrcely think it necessary to look to any thing but its own liabilities, an action upon the deposits would, from hying disregordell, produce the greater mischief.

If, instead of' establishing separate banks of deposit nml n I ne, the functions of both were united in the SPIIIC bank, the statement of the zonount of circula- tion would be different. In drawing lip en account of its liabilities, it would subtract the amount of deposits in bank-notes on hand as well n9 the bank- notes returned for securities or cash from the amount of original issues, and the remainder would be called its eicculation. Neither of the sums subtracted could be included in that called the batik's liabilities in circulation, because the one would be virtually mid the other really cancslled. But if dm functions of banks of issue and of deposit had not been united tsgetlter, the former of those two stuns would have been reckoned a part of the eirenlatioo, svhcreas on the present supposition it is excluded from it. Not only therefore would the effici- ency of' the amount circulated be increased, but the amount producing the Caine effect as in the previous case put, would aprear to be diminished by at least as much as the bank retained in " deposits in bank -notes on hand." The deposits in cash on hand would he added to the general reserve iu specie, and the proportion between that and the entire of the banli's liabilities appear at once.

Let us now inquire into the result of having separate banks of' deposit established along with a bank of issue and depesit. In the returns made of the liabilities, the deposits in bank-notes on hand of the former would be reckoned as a part of the eirculntion, being still outstomling in regurd of the

banks of issue whilst those a the latter n would not, because, o account of being in the Lands of the bank, they would he virtually cancelled. The de- posits in cash on hand or the former woubl not be included in the account given of the Speck reserve, whilst those of the latter would, Bence the ac- counts c,f the amive snit inert circulation, as well as of the cash afloat and in reserve, would be obscure and confused; nor would the proportion between the last of them and the sum of the liohilities in all the banks be easily discernible. There might be a great apparent alteration in the circulation and specie re- serve, whilst none took place hi reality, and vice versa. Thus, if the deposits on hand in the deposit-banks amounted to 1,000,000/. in bank-notes, and this 1,000,000/. should. be transferred to the coffers of the honk of issue as deposits on hand, no change would in reality take place in the active circulation, although there would he the difference of 1,000,000/, in the returns. Again, if 1,000,000/. in cash, coustit ming deposits on band in the bank of issue, were transferred to the coffers of' the banks of deposit as deposits on hand, no essential change would take place in the amount of specie-reserve available to meet the sum of the liabilities in all the books, and yet the amount of reserve returned would appear to be diminished bv so much. There would, however, be a por- tion of the reserve solely applleable to a part of the liabilities. Various other Cases might he put, from all which it would appear, that the amount returned at any time as its circulation by a bank of issue placed in the ch. munstnnces at present contemplated, and more correctly called its liabilities in circulation, might or might not be equivalent to its net active circulation,— that is to say, might or might not include an amount of bank-notes fully as much inert as " the deposits in bank-notes on hand" in its own cottirs, which would be actually excluded from the return, namely, the bank-notes retained as a reserve in the coffers of banks ofdeposit : for it is evident that the deposits in bank-notes on hand in the coffers of the latter, and the remainder of their reserve in laink-uotes obtained in lieu of value on securities, are equally inert ; and if banking transactions were carried on solely with banks of issue, would be equally excluded from the amount of circulation returned. It is, however, impossible to form a correct estimate of the circa of the currency on prices and business (vaunt ions by comparing, the amount of banking circulation at different times, without accurately ascertaining the amount of' net active as well as of inert circulation, and also that of specie reserves existing at such periods, unless it he taken for granted that bank -notes and specie are equally effective in the banker's drawers and Whelk actively employed. It follows, therefore, that from the suns returned as circulation by the Bank under the head of liabilities, ought to be subtracted all the hulk-notes (which in the case put would be entirely its own) in the coffer:3 of the hanks of deposit, for its net active circulation; that which was inert in its own hands having been already excluded from the amount returned. The inert circulation will consist, first, of that which is liable to be made active by operations independent of the bank of issue, or for which, though inert, the bank of issue is liable,—namelv, the bank-motes whether deposited in or given for securities or value to the banks of deposit, nod retained by them as a reserve; and secondly, or that which is vir-

tually or really cancelled, viz. the deposits in lank-nit ss in Lind, nod the bank-notes returned tbe value or securities, in the callers of the bank of issue itself; nod which need not, sinless at the pleasure of the honk, be brought again

into active 119e, diminished by the amount of the new notes issued since the former were replaced iii the bank, provided such issue he not greoter than the amount of

bank-notes returned mat deposited. The issue or new batik-notes is precisely equivalent to the reissue of the same amount of old bon k-noles. When a parallel is instituted, therefore, ii hick incholes the inert cirenlotion, it ought to comprise the inert circulation of' the bank of issue thus diminished. The entire circulation of the Bank, made out in the Islamics described, will con- sist of-

1. The net active eirculatiim ; viz, the circulation returned as liabilities, diminished by the reserves in bank-notes in the coffers or the deposit-banks, whether obtained as deposits or (hr securities or value. 2. The inert circulation still constituting liabilities; viz. the reserve in bank- notes, whether obtained as deposits or for securities or %able in the coffers of the banks of deposit : and the inert circulation not co»stit:qing ; viz.

"the deposits in banls-notes on hand" in the callers of the I a al: of issue, added to the bank-notes returned to it for value or securities, diminishes' by the amount of nets' notes issued since the deposit or return of those, but not ex- ceeding them in amount. If seventh banks of issue exist at the sante time, the amount of the circulation of each may be made out by disregarding the bank-notes of the rest, and con- sidering all the other banks for the time as being in respect of it banks of deposit. The sum of all the items added together under their respective heads, will give the whole circulation of bank-notes existing in the country. The amount of specie in circulation will consist of-1st, the cash afloat ; and, 2d, the cash reserves in the banks of' issue and those in the several banks