FREE BANKING.
TEN per cent. is a nuisance to everybody except bank share- - holders. We may admit that much, we suppose, without much risk of raising a hornet's nest, but then so is the cholera. It is very unpleasant to know that while one's profits are, say 20 per cent., 10 per cent. will disappear in getting cash. for the bills which in modern business are supposed to be money; and it is equally unpleasant to know that one's chance of dying is suddenly doubled because the administration of London is intrusted to greengrocers instead of statesmen. - But the point for Mr. Watkin to prove is that either unplea- santness has any connection with the Bank Charter Act, and. this on Tuesday he certainly did not do. He did show a strong prima' fade case for believing that the unusual circular from the Foreign Office had done mischief, the Continent having interpreted it, as they interpret all official acts, as intended to gloss over an impending catastrophe. The Treasury wanted to explain, and good Frenchmen or Germans thought it wanted to extenuate, as their own Governments would have done. They thought Earl Russell had said as little as he dared say, and consequently "ran for gold." There was a run on the "bank of the world "—England, and of course the- bank, though solvent in sixty shillings in the pound, keeps its- gold where it grows, not in cellars where it does not grow, and so has been in visible straits. But all that is a reason for moving a vote of censure on Earl Russell for his imprudent honesty, not on the late Sir Robert Peel for insisting that a pound meant a certain weight in gold, and not a vague promise to pay. Commissions of inquiry are all very well—we should not object to a commission on tides if that could stave off an Act for abolishing the moon—but if this Commission is meant to do anything, we should like to hear first precisely what it is meant to do. To "secure a change in the banking system," say speculators, but what change is it they want ? There are just four systems of banking, the establishment of which in England is within reasonable probability. The first is "free banking," as we understand it, that is, the total abolition of all laws whatsoever connected with the subject. There is no earthly reason why, if people were decently sensible, John Smith, "practical trousers-maker," should not issue a pro- missory note and pay it to anybody who thinks he would like to have it. Why not, as well as a cheque to bearer, or a bill, or any other document, the value of which depends on John Smith's credit It may be good or it may be bad, and so may the trousers, but supposing people all sensible, what has the State to do with that ? It is a matter between Smith and his creditor and Smith's creditor's creditor, and so on ad infinitum, not between Smith and the State. Such a system could not injure the nation, and might benefit it, for as all property would be mobilized from land to eggs, many enterprises would get themselves done which now will not be attempted. It would only be horribly injurious to individuals. The mass of people in England are fools, and innocent persons would take rotten notes, knowing nothing about them, and would lose by them till we were reduced to a state of barter again. The great mass of people in fact, who know nothing about a note, e.xcept that it is usually as good as gold, would be swindled in their ordinary transactions, being paid for sound goods in notes the payer knew to be very doubtful. Moreover, names would suddenly acquire a frightful value. We have little doubt that with absolutely free banking the Rothschilda could in- stantly obtain the bulk of the note circulation. Not one man in ten thousand has the faintest idea why he believes the Rothschilds the richest firm in the world, but not one man in a million would dream. of objecting to their notes, not one in a thousand would read them to see that they were issued by the Lombard-Street firm, and no other of the same name. That advantage would be injurious, because the country would then be dependent on individual firms even more than it is now. People being ignorant, the wise have decided to prohibit free banking, and we think they are right.
The second system is what is called "free banking," but is not free, which would allow every registered bank, and only a registered bank, to issue notes at discretion. This system would in England be rather worse than the other, inasmuch as ignorant people believe that there is less risk of insolvency with a " bank " than with any -other tradesman, whereas there is really a great deal more. Hence frequent failures among such banks would shake confidence in an. extreme degree, and private information would enable rich debtors to swindle poor creditors at discre- tion. They would pay in doubtful notes bought cheap.
The third system, also called sometimes "free banking," is to allow any bank to issue notes, in a fixed proportion to the gold in its coffers, such notes to be convertible on presenta- tion under pain of bankruptcy. That system has the advan- tage that it helps to keep a large reserve in bankers' hands, scattered throughout the country, but it has the disadvantage that while it looks secure it is just as unsafe as any other. A note for which he keeps gold is of no use to the banker, and if he has twice the amount of his gold out in paper the run is pretty sure to exceed his reserve, in which case he goes down just as quickly as if he were absolutely free, while credit is more injured, because stupid people have trusted him on the faith of a law, really meaningless, which they think a strong protection. Moreover, no system of inspection yet devised can wholly prevent false returns, the temptation to which would be very great indeed. If the public is not to be trusted out of the financial go-cart, and it cannot be trusted yet awhile out of the financial go-cart, that system is, we conceive, the most dangerous of all.
• The fourth system is to prohibit the issue by private per- sons of promissory notes payable to bearer absolutely through- out the kingdom, and invest the State with the sole right of issue, and this one seems, if we have legislation at all, to be the wisest form of it. A note of some sort is a convenience, and if the quantity issued never exceeds the average minimum of gold in the country can do no harm to anybody, will merely facilitate circulation. The State under a Parliamentary Government can be trusted to stick to that minimum, and nobody else can, not to mention that the State is known every- where, in Caithness as well as London, and everybody else is known only in his locality. Within the average minimum the note may as well be made legal tender, for it is sere to.be paid either in meal or malt, i. e, either in gold. or receipts for taxes, or something, and to compel people• to present it for payment ea route from one hand to another, or to allow fools to reject it because they do not understand the security, only diminishes its utility without increasing its security. A strictly limited issue of State paper therefore may be made legal tender safely, and this is precisely what the Act of 1844 did. To introduce the Bank of Engiand into the discussion ' only complicates_ a very simple matter. 'The Bank is used
as the issue office instead of the Treasury for the public couveuience, but the note is a State note, which must be taken in payment of taxes, which is a legal tender for debts, and which therefore must either be cashed, or supported by the credit of the State which compels people to take it. If the note is worth nothing neither are Consols, and England is bankrupt simply. It is a State note just as much as if it bore interest, and were signed by the Chancellor of the Exchequer instead of an agent of the Bank of England.
Now what does Mr. Watkin want? That the Bank should always discount good bills at 5 per cent. ? If so., what does he mean ? That the Treasury should become a discount house, a Mont de Piete on a gigantic scale, where everybody could pledge Consols, or gold, or first-class bills ? or does he mean that widows, and children, and all manner of unknown share- holders in the big Bank should lend their money against their will, and below its value, to people they care nothing about ? He must mean one of these two things if he wants an artifi- cial rate at all, and we want to know which. EF the latter, he is simply proposing confiscation, if the former, he is asking the State to perform an operation which is just as much its busi- ness as providing everybody with cheap- shoes. He will answer that the State does do it when the -Chancellor of the Exchequer "relaxes " the Charter Act, and so it does, and so as a matter of principle it ought not to do. Government has no more business to be re-dis- counting bills for a few millions in order to save mer- chants from failure than to be buying John Tomkins' un- saleable stock of shoes in order to save his credit. But though this is the principle, we quite admit that statesmen must -be guided by expediency, and that if Tohn Tomkins' failure is to be the cause of a national calamity they may justifiably buy or lend money upon Tomkins' shoes. This has actually, we believe, been done once or twice, direct loans having been made to firms whose stoppage would have produced national embarrassment—the East India Company, for example, and even private houses. But it ought to be done to the smallest extent compatible with utility, ought not to be done to make money cheap any more than to make shoes cheap, and ought to be invariably followed by the Parliamentary explanation involved in a demand for a bni of indemnity. It is done now under just those restrictions, and we want to know what change it is Mr.'Watkin or the “free4raders " desire. If it is real free banking, we understand them, and if they are • likely to succeed shall charge a shilling for the Spectator immediately, a double price about meeting the inevitable inflation of wages, prices, and bad debts which must follow ; but if they do not want this, they ought to explain themselves. No other scheme has any principle in it except State issne, and that other is just what we have got now.
Be it observed we have nothing to say as to the wisdom of the amount of State issue now fixed by statute. It was fixed a great many years ago, when trade was a great deal more limited than at present, and may now be much too small. We rather incline to think it is too small, and to believe that it should be modified, tithe fashion, every seven years, so as to bear some proportion to a seven years' average of trade, and this is a matter for inquiry. But this, which is a definite point capable of investigation, is a very different matter from an inquiry into the endless subjects of currency, banking, and the management of the Bank of England, which, except so far as its issue department is concerned, is neither more nor less than a very big private concern, surrounded no doubt from its State connection with a halo of public confidence, but able to lose all its capital if it likes in discounting forged bills, with- out bringing ruin on either the Treasury or the people. ,A.t all events, if we are to be worried with that discussion, let us at least know why.
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