PAPER MONEY: THE BANK CHARTER ACT.
On most points relating to the principles of paper circulation on all rea- sonable persons nowadays are agreed. In particular, there is no difference of opinion that bank-notes must at all times be convertible into specie, and that the issue of bank-notes must therefore be regulated with a constant view to the inviolable maintenance of that principle. But it is very fre- quently argued, that, as the amount of bank-notes which may be issued with that principle steadfastly in view is not a fixed quantity, it may safely be allowed to fluctuate so as to meet the public convenience. The case is alleged to be one for the exercise of discretion, not for the application of a rigid rule. Notwithstanding the enforcement of the principle of converti- bility, the Legislature has authorized the Bank of England to issue fourteen millions of bank-notes for which it has no gold to exchange; and has granted a similar authority to certain other banks to the extent of eight millions more. The inference is drawn, that convertibility does not imply the means of absolute conversion; and that the degree to which the princi- ple ought to be put in practice, virtually rather than actually, should from time to time be governed by circumstances. Loud complaints therefore are made, that, however urgent may be the demand of the public for money, it
is met by stern refusal, if the optional or fanciful limit to the issue of bank- notes has already been reached.
The whole of this reasoning, which is listened to with a ready ear, as falling in with the wishes and apparent interests of those persons to whom it is addressed in a season of severe pressure, proceeds on the gratuitous assumption that the office and functions of paper money are essentially distinct from those of a metallic currency. Nobody pretends that either the Government or the Bank of England is able to increase the supply of gold in proportion to the demand for money. With only a metallic cur- rency, the National Bank, like any other, would have no choice but to re- fuse assistance when its funds were expended. But it is urged that paper is always forthcoming, though it is not so with gold; and that the amount of paper circulation ought to be increased on an emergency. Let it, how- ever, be borne in mind, that a sound paper currency discharges no other office than that which belongs to a metallic currency, although (as far as it is sound, and no further) it performs its functions with greater convenience and economy. When paper is circulated as possessing value of its own, it serves no other purpose but to delude and defraud. It is true that a very large amount of bank-notes (fourteen millions by the Bank of England and eight millions by other banks) are circulated on the guarantee of the Le- gislature, without being the representative of any actual deposit of gold. This is done on the assumption that there is no possibility of the circulation under any circumstances being so contracted as to throw back that amount of bank-notes. Experience may prove that the estimate is incorrect. If it exceeds the truth, then the Bank Charter Act has in that respect failed to put the circulation on a sound footing; and a suspension of cash pay- ments is liable to occur. But the reasoning above adverted to would rather take for granted that the estimate falls short of the mark, and that an in- creased amount of paper circulation might be sanctioned with perfect so- curity. On either supposition, the estimated amount is not arbitrary or discretionary. It may prove erroneous on one side or the other; but it is computed according to actual results, not under the control of the Legis- lature, and its accuracy can only be tested by experience. Whatever be the amount of bank-notes, thus ascertained, which may with perfect safety be circulated without a corresponding deposit of gold, it is obvious that no resource of that nature can be kept in reserve to be drawn upon in a season of emergency. Whether the amount be twenty-two millions, as at present, or be greater or less,—to that extent, be it what it may, bank-notes will have already been put in circulation on the guarantee of the Legislature; and there will remain no security except that of a deposit of gold on which any further issue of bank-notes can with safety be made. This can admit of no dispute, unless it be maintained, by way of paradox, that the time for tampering with the currency is during a pressure on the money-market, and that the safeguards expressly provided for such an occasion may, when it arrives, be dispensed with.
To show the fallacy of such a notion, let us only attend to the natural laws by which a metallic currency must, in this respect, of necessity be governed, and apply them to a mixed currency like ours, in which the cir- culation of paper is incorporated and assimilated with that of gold. With a currency entirely composed of the precious metals, the nation sets apart so much of its capital as is required to provide a sufficient circulating me- dium for ordinary circumstances. When any portion of that circulating medium is withdrawn, either for payments to foreign countries or for the purpose of hoarding under the influence of a panic, money becomes propor- tionately scarce, and continues to be so until the enhanced value which it has acquired brings back the portion which had been withdrawn from cir- culation. The pressure on the money-market thus effects its own cure. With a currency composed partly of the precious metals and partly of bank-notes convertible into the precious metals at the option of the holders, the first object is to ascertain, as well as can be done, (but taking care to keep on the safe side,) what amount of the currency is not liable under any circumstances to be withdrawn from circulation. That amount may with not less safety, and with greater convenience and economy, be issued in bank-notes than in gold and silver. The nation will be saved the ex- pense of providing that amount from its capital. But the remainder (in point of fact, about two thirds of the currency of England) must be pur- chased by so much capital, and must consist of the precious metals, or (which is the same thing) of paper for which an equivalent deposit of the precious metals is made. When any portion of the currency is withdrawn from circulation, either to be exported or to be hoarded, it is taken from the stake, not from the counters—from the precious metals not from the guaranteed amount of bank-notes. The natural law by which a metallic currency is governed comes into operation. The value of money is en- hanced. The price of commodities is reduced. Commodities are exported and money returns. But if, instead of leaving the pressure on the money- market to effect its own cure, as it must be left to do with a metallic cur- rency, the pressure were for a time relieved by an issue of bank-notes excess of the guaranteed amount, two consequences are evident and inevi- table. First, the precious metals would have no tendency to come back into circulation. Second, a suspension of cash payments would every mo- ment be liable to happen. It also deserves consideration, that if the only safe and reasonable test for regulating the issue of paper circulation were wilfully violated, there is no other rule to be adopted in its stead. The pressure on the money-market and the demand for fresh issues of bank- notes would continue to be urged as reasons for pursuing the same course, until, at no remote period, the nation would become a prey to all the havoc of a depredated currency.
During a period of general pressure, it is no wonder, perhaps, that so many persons shculd join in the cry for an increased issue of bank-notes to meet the public convenience. But such a measure assuredly would not cure the evil, but at best would only put it off for the present, to aggravate it—if the causes of the pressure should continue, to aggravate it fearfully— in the end. The natural course of things, on the contrary, keeps the evil (for a great evil it is) within its proper limits, and gradually works out its
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