*ttfator

JANUA1L1 23, 1858.

BOOKS.

.1.0CULLOCH ON MONEY AND BANKING.*

Tun Indian mutiny, and the anticipation of stirring work in the coming session, seem to have removed from the general public all serious thought of the late monied disasters, followed as they have been by an " easy " state of the money-market not very readily explainable. This indifference is only for a while. As no practical attempt has been made to find a remedy for the evil, or apparently to consider the subject at all, other panics will turn up again, and perhaps again, till the via inertice of the public and Parliament be roused to action. The appearance of Mr. M'Cul- loch's Treatise on Metallic and Paper Money and Banks, written for a forthcoming volume of the" Eneyclopiedia Britannica," and published in a separate form is therefore a work to be wel- comed. It calls attention to the subject in a more authoritative way than by nameless writers ; it furnishes ample means for studying the principles both of money and banking, as well as of acquiring much information thereupon ; if it does not always offer suggestions that (according to our ideas) are the best adapted to settle the subject, it at least gives some preparatory stirs ; and we fancy a good deal of stirring will be necessary before the whole subject can be brought to a state .fit for settlement.

It is not, of course,, to be expected that much of the treatise on: Money is absolutely new. The leading facts on the origin of metallic money and paper money, and the laws that regulate the circulation of the latter, are received economical truths. The salient facts connected with the history of coins and coinage, a large portion of which is the story of depreciation by governments, are accessible. Indeed, the author had already handled those subjects in the last edition of the Encyclopaedia though the matter has been revised. To any one wishing to inquire into the subject this information is absolutely necessary ; and we might as well ask for novelty in the alphabet as novelty in the elements of a science. What can be done the author has done : the necessary points are selected with judgment ; the whole is stated with broad clearness and vigorous condensation. The faots of the text and the numerous tables, especially the latter, are of great importance to the inquirer, or to any one as a thesaurus for reference. In deed, they fully suggest one great feature of the Enoydopiedia itself--utility as a book of reference. The practical interest of the treatise relates to the principles of banking as applied to the Act of 1844 and the late monied crisis, and to notices of the various monied disturbances, which, whether of necessity or not, have certainly accompanied the cur-. rency management of the Bank of England from the Restriction Act of 1797 to the present day. I. This began in the gradual de- preciation of the bank-note, which in 1814 reached the enormous amount of 251. 28. M. per 1001. 2. It was continued in the Bank's application of "the screw" to restore the value of its notes and- prepare for a return to cash payments after the peace ; during which process, no fewer than two hundred and forty private banks stopped payment—many, no doubt, rotten enough, but their rot- tenness had. been -fostered if not in part created by the Bank of England's system. 3. Under the action of Peel's Bill of 1819,. proceedings in this line were impossible; but the panic of 1825 bore testimony either to a kind of Greek tragic Destiny in our money matters, or to some strange error in management. The Bank then attributed part if not the whole of their troubles to their notes not being a legal tender, which compelled the country bankers to drain Threadneedle Street of gold, at the very time that a foreign demand was exhausting their treasure in another direction. 4. When they got the legal-tender privilege in 1833, it did not mend matters. In 1837 and 1839 there were great monied disturb- ances; not so bad as 1825, when society was "within twenty-four hours of barter," but very bad. In reality the troubles extended- from 1836 to 1839; the Bank—it is affirmed by the highest au- thorities as a fact—being saved from stoppage only by the aid of the Bank of France ; and this would not have been the stoppage of the Bank as a bank of deposit, but a national act of bankruptcy. 5. This led to the law of 1844, whose primary object was to se- cure at all events the convertibility of the note, that you might be sure of getting sovereigns on demand. It was expected by most, if not by all, that the A.cit of 1844 would have put an end to panics for the future. Vain hope ! the Bank kept down her charge for discounts in defiant* of the warning from facts; and in three years the act had to be suspended., owing, as Mr. M'Culloch seems re admit, to misconduct as bankers: "It would be easy to show that the embarrassment of the banking department was mainly a consequence of the injudicious proceedings of the Directors." 6. The Pressure and suspension of last autumn are in every one's reoollec- * A 7'reatise on Metallic and Paper Money and Banks. Written for the En- cyclopedia Brinumica. By .1. It. ht'Culloch, Esq. Published by Black. tion ; and there our author does not say, what we said at the timetT that the suspension was necessary to save—not the convertibility of the note, but the Bank of England from stopping. There is, however, Bomething like an admission to that effect. " The reserve in her possession was reduced on the 11th November to 1,462,1531. ; and it was the general belief that this inadequate reserve would be forthwith either much reduced or wholly swallowed up. [It was sassi

reduced next day, the 12th, the day the letter of suspension

BB ssued, to 581,0001.] To avert the possibility of such an event occurring, the Di- rectors were authorized, on the 12th November, to issue notes without being bound by the conditions of the Act of 1844."

, Thus, we have had six money derangements in sixty years, Fiving an average of one to every decade. All admit that five out of these six were more or less chargeable on the Bank of Eng- land's conduct. We entertain the same opinion as to the suspen- sion of the sixth crisis, though we believe on that point we stand almost alone. We further thank, that if each convulsion be closely inquired into, the Bank, whether from fate or perversity, will be found to have gone wrong in the only path that was left open to them. They depreciated the currency when the Restriction Act left them nothing else to do ; they risked the convertibility of the note when the national solvency was put into their keeping ; they produced the imminent danger of their own bankruptcy when the Act of 1844 had removed the national credit beyond their power. For these facts and reasons, we cannot go with Mr. M'Oulloch in his rather optimist view of the Bank of England, or indeed in his quiescent satisfaction with the Act of 1844, and everything con- nected with the Bank and the Act. At the same time, if it can- not be made better, we think he is quite right in maintaining that it should not be abrogated or made worse. "The Act of 1844 had nothing whatever to do with the late revulsion. It did not occasion the American stoppage, and under its operation the foreign drain for gold had been entirely stopped ; and though it could not prevent the abuses in banking, and the system of rediscounting and over- trading in which so many banks and firms have been engaged, it contributed in no ordinary degree, by preventing the issue of spurious paper, to confine them within comparatively narrow limits, and to lessen the violence of the crisis.

"The Act of 1844 is a rule to be enforced in all but extraordinary and un- foreseen emergencies the urgency of which cannot be appreciated before- hand, but must be 'determined at the moment. But when these oceur, it -May, like the Habeas Corpus Act, be properly suspended. It is mainly cal- culated to regulate our currency by the exchanges, or through our corn- Menial intercourse with other countries ; but it is not applicable, nor is any system of which the convertibility of paper into coin makes a part, appli- cable to a state of internal discredit or panic. Had it existed in 1797, it must have been suspended ; and its suspensions in 1847 and 1857 are only. to be justified by the state of our domestic affairs making an adherence to pnn- eiple inexpedient and impracticable. But, whenever the circumstances re- ferred to, that is, when the panic and distrust that occasion the suspension of the Act subside, then it should be revived in its pristine rigour. The Habeas Corpus Act is not the leas efficient at this moment that it has been repeatedly suspended in periods of danger and difficulty. Inasmuch, however, as the Act of 1844 has been suspended in cases of 'emergency, and as there can be no doubt that it will be suspended, if occa- sion require, in time to come, it may be supposed, perhaps, to be indifferent whether such suspension should be effected as hitherto by the pro re nata in- terference of Ministers, or whether a suspensive power should be embodied in the Act. We believe, however, that the present plan is much the best of the two. When Government interferes to suspend the Act, the necessity under which they are now placed of applying to Parliament for an indemnity, and the discussions thence arising, are the best securities that can be ob- tained for the measure not being resorted to rashly, or without a reasonably good cause. But it would be quite another thing did the Act contain a clause authorizing suspensions. This would show that they were expected, and, indeed, almost invited. Under such circumstances, they would soon come to be regarded as matters of course, and to be resorted to whenever a com- plaint or cry of monetary pressure was got up. And were such the case, it would be idle to suppose that either the Act or the convertibility of notes should be maintained for any considerable period. The millennium of the papermongers would be at hand. When the checks which with difficulty restrain over-issue, depreciation, and fraud, are repealed or rendered in- efficient, what are we to expect but that they should extend their baleful influence on all sides ? "

Theoretically speaking, the opinion of Lord Overstone and Earl Grey may be true, that an act which is frequently suspended is a mockery that might as well be abolished. But in this work-a-day World we must do as we can :

Men do their broken weapons rather use Than their bare hands.'

Hydraulic works may not fulfil the promises of the engineer or the hopes of his employer, but if they generally keep hack the waters, and lessen the inundation in times of unprecedented floods it would be foolish to remove them. Better be saved practically, than drown to support the perfectness of a theory. Among other practical, or at all events current topics connected with ban, M. ltiTullooh handles limited liability and de- sits. To liability he is opposed, and we agree with : if the scheme had any operation, we believe it would be for evil. Does any one suppose that, had the British Bank been of limited liability, the depositors would have been plc/ one far- thing ?—for we suppose if we are to have limited liability the t Spectator 1857, page ; article "Bank of England's Banking."

4 I 11

shares must be paid up. Payment may be hard upon the share- holders; but the shareholders are the people who set the concern on foot, who take the profits, or at loot the dividends—who have the legal power of controlling affairs, and who use it to silence or put out any sceptic who doubts the prudence of dividi g so high a dividend or intimates any suspicion of the management. The argument is contradictory not to say absurd, that men would be more careful when they had little to lose than when their all was at stake. That customers would be more careful, we can readily believe. Gullible as is the public, we think they would be so careful, that liability would be by no means the only thing "limited" in the concerns.

Mr. M‘Culloch admits the public benefit that has arisen from banks allowing interest on deposits, but dwells upon the evil re- sults that are ascribed to them; which he would remedy bylaw.

"Banks that give interest on deposits must employ the balance at their disposal so as to realize that interest, plus a profit to themselves. Invest- ment is not optional with them, it is indispensable; and they cannot, in seeking investments, look to security only. Profit must be in their es- timation as great, or even a greater consideration. But profit and risk are inseparable, and are always directly proportioned to each other ; and hence it is, that in periods of discredit, or when a revulsion occurs, suspicions may- be expected to arise in regard to the solidity of deposit-banks especially, of those that pay high rates of interest on the sums committed to their custody.

"It may not be practicable to form an accurate estimate of the amount now held as deposits by bankers and money-dealers in Great Britain only, but if we take the entire sum at about two hundred millions, we shall probably be within and not beyond the mark. And of this vast sum more than half is payable' at call,' and more than three-fourths within ten days. But everybody knows that such payments are practically impossible. And hence it is plain, that in the event, which may any day occur, of a bank with a large amount of deposits getting into difficulties, or of any circum- stance occurring that should occasion a distrust of the system and a general panic, the whole fabric would fall to pieces, and we should have an universal

smash. •

"The dangers referred to are so great and imminent, that no time should be lost in adopting measures by which they may be either obviated or miti- gated. Explosions of the credit system are in the commercial and financial what explosions of gunpowder are in the physical world. And it would seem to be quite as necessary to endeavour to lessen the frequency and violence of the former as of the latter. Hence we think it would be good policy to enact, that Jl eunis bearing interest, in the hands of bankers, discount- brokers, and money-dealers generally, should not be legally demandable without a month or six weeks' notice. A regulation of this sort would not interfere with anything that is valuable in the existing system, while it would confer on it some portion of that solidity of which it is at present so miserably deficient. It would protect all classes against the effects of sud- den and unreasonable fears and panics. It would give time to the borrowers to collect their resources, and to the depositors calmly to inquire into the character and situation of those to whom they had intrusted their money. This may not be enough, but some such measure as this appears to be in- dispensable for the security and protection of the public."

We doubt the propriety both in principle and practice of at- tempting to restrict by law the period of loans. It seems to us a less justifiable interference than the usury-laws. In practice, the time is probably longer than bentrers conducting their business properly would require ; and also too long for depositors on the look-out for investment, or holding money they may be called upon to pay within a limited time. If any legal interference took phi:* in the conduct of banking, we would rather compel bankers to stick to their proper business, namely, discounting negotiable instruments at moderate dates, say three or at the utmost four months; and not allow them to lock up their customers' money in dead securities, or instruments payable at so long a date that they are only negotiable in name. At all events, they might be compelled to anneanse to the public whether they are only bank era proper or speeulative money-lenders as well. And this divi- sion of business may have spontaneously to be come to by and by. We are not sure that the prominence given to the evils of " deposits; " in various quarters since the panic is well founded; or that, if they are so mischievous as is said, there is a ready remedy. No doubt, if a banker pays a very high rate of interest on deposits, so as to allow a very narrow margin of profit, say 1 or 1st, per cent, two ill consequences follow. An unduly large portion of these deposits must be employed if he is to escape loss ; and this of necessity involves advances on an inferior class of secu- rities, and too email a reserve to meet customers' demand. This evil, however, seems rather to grow from existing circumstances than from the bankers themselves. Naturally, they would allow as little interest as possible, but competition compels them to bid against each other. That this forcing of business can readily be pushed too far, every one must admit; but it is difficult to see any other remedy than the prudence and caution of bankers, perhaps impelled to the exercise of those qualities by more strin- gent laws against fraudulent banking. Nor has the system of deposits been mischievous. One great diffi- culty that the commercial world has had to contend with of late has been the dearness of capital consequent upon its destruction by the Russian war. This the deposit system somewhat mitigated. The high rate of interest not only drew together scattered amounts of capital, that might otherwise have lain dormant, but prevented its exportation by the larger holders to be wasted, so far as we were concerned, in forming Russianistilweys or less feasible pro- 1r has the system after all had anything to do with the joint- stock bank failures, though, eauld we get at the accounts, it might probably show a loss to solvent beaks through their strug- gle for investaneata. It was not the rate of interest they paid on deposits that stepped the Rritish and Ko.eteen Banks, but a system of swindling that would have been pr.aotised just the same had

they paid no interest at all. The Glasgow banks which failed allowed less interest than the London banks which stood. In the Liverpool and Newcastle cases, insolvency was not owing to their allowance of interest, but to their culpably imprudent advances, or to looking up capital in dead securities of an un- marketable if not a worthless kind. Less risk of temporary stop- page would be incurred if the banks extended the period in which large amounts on deposit could be called in. The facts, however, are as yet too imperfectly known to admit of any positive deci- sion on that point. A few returns seem to indicate that the bulk of the deposits consist of large sums. Should the reverse be the case generally—if the aggregate amount of small deposits exceeds that of the large—arrangement or even law would be of little use. If payments were longer delayed in banks than in the saving bank, a certain class of depositors would leave them altogether. The whole subject requires sifting in its facts and in its effects. It is to be hoped it will be searchingly investigated before the Parliamentary Committees. After all, the evil is not so much in the risk to banks and their customers, who moreover are free and willing agents, but in an indirect operation upon trade in general.

"The mischief occasioned by an establishment of this sort, [banks like those that have lately stopped] when perverted from its proper objects and mismanaged, is not to be estimated by the ruin it entails on its partners, and probably also on its customers. It becomes in fact a public nuisance, and entails privations on many who might be supposed to be beyond the sphere of its influence. Within the ten years ending with 1842, it was esti. mated that about 1,500,0001. of banking capital was wholly dissipated in Manchester and its immediate vicinity. And as nine-tenths of this enor- mous loss was occasioned by advances made to manufacturers who had little or no capital of their own, it is not easy to imagine what a ruinous stimulus it must have given to reckless competition, and how very injurious it must have been to parties trading on their own capital."

For this evil, however, there is no legal remedy, or indeed any remedy save prudence enforced by the experience of repeated losses, and a more stringent state of the law.

And we suspect this stringent state will come, for opinion is tending in that direction. Mr. M'Cullooh intimates a wish for other changes besides his suggestion on deposits. One is to com- pel the shareholders of joint-stock banks to pay up their shame in full : and this, no doubt, would be a great improvement. It would not of course make shareholders active and cautious, or boards and managers prudent and honest, because those quali- ties cannot be produced in men by regulation or acts of Parlia- ment. It might not even create a more " respectable " class of shareholders; but they would be a more substantial class—in- vesters, not speculators, and often, it is to be feared, something like gamblers. We would go further in another direction than many perhaps are yet disposed to go, and make the insolvency of a pure banker penal ipso facto. The business of banking is so complete a trust —there is so little risk of ruinous loss when legitimately con- ducted, that from the mere fact of insolvency, at all events be- yond a certain ratio, criminality should be presumed. We do net say stoppage—that may be accident; or the Lms of their capital—that is their own affair ; but we say insolvency accom- panied as it would in practice be by both these contingencies. Of course it is not meant that bankers should be condemned for in- solvency. But it should be for them to establish misfortune; just as a man who kills another must satisfy a jury that his case only amounts to manslaughter. The topics we have touched upon form but a part of those dis- cussed by Mr. M'Cullooh in reference to practical measures, or to current questions challenging solution in this country or Ame- rica. There are also a variety of useful statistics bearing immedi- ately upon banking subjects, SS well as those of a more historical kind already alluded to.