8 AUGUST 1840, Page 13



THE proceedings of the Comtnittee now sitting upon Banks of Issue are made the subject of frequent allusion and comment in the

City articles of the morning papers, and various conjectures as to the probable results and recommendations of the Committee are broached. For the present, however, all such conjectures must be idle and pre mature ; for the duties of the Committee embrace a review of the en tire circulation of the kingdom, and not one single witness connected with the provincial circulation of England, or with the Scotch and Irish circulation, has as yet been examined. The inquiry must necessarily be resumed, and we trust will be brought to a close, during the next session.

The evidence hitherto taken hefbre the Committee has had reference principally to the Bank of England; having been derived

either from gentlemen who are well known to have studied and criticized the managetnent of the Bank, or from Bank Directors themselves. We await with some interest the publication of this evidence, which we presume that the Committee will think it their duty to publish, together with such documentary returns as the Bank Directors will in all probability have laid before them; for

we are persuaded that the public will now be put for the first time in a situation to form an exact and comprehensive estimate of the actual management of the Bank since 1833. Looking at the names of the witnesses who have been examined, it is certain that the rule proper to be adopted by the Bank in the management of' its circulation must now be made a distinct and prominent subject of consideration with the public as well as with the Committee. It will be recollected, that Mr. HORSLEY PALMER, in his evidence before the Committee which sat in 1832 respecting the renewal of the Bank charter, then about to expire, delivered for the first time what has since been called the rule of 1831,—namely, that at the period of a full currency, or when the exchanges arc favourable and the stock of gold high, the Bank should invest two-thirds of its liabilities in productive securities, and hold the remaining third in bullion ; that it should then remain perfectly passive so far as regarded its securities, neither adding to them nor diminishing them; and that it should let the public and the depositors act upon it, without any interference of its own, either by demanding gold in exchange for notes or by drawing out deposits. This rule found much favour in the Committee of 1832, and is understood to have had considerable effect in conciliating the opinions of the Government of that day in tlivour of the renewal of the charter. Three different judgments have been expressed concerning the rule of' 1832. I. That of the author of numerous and elaborate articles on currency in the Times newspaper, generally supposed to be Mr. PAGE ; W110 is an unqualified eulogist of the rule, and chiefly finds limit with the Bank for having so often deviated from it. 2. That of Mr. Honsf.ny PALMER; who, although the original enunciator of the rule, and still generally approving of it, has in his subsequent pamphlets admitted numberless cases of special exception, in which he affirms that it ought to be disregarded. 3. The opinion of Mr. LOYD and Mr. NORMAN; who have in their pamphlets defended the rule as good for the management of circulation simply, but have denied its applicability to the business of deposit-banking, and have therefore rejected its authority in regard to the Bank of England—a body combining the functions of issue and deposit. All these gentlemen have been examined as witnesses before the Committee now sitting ; and they will no doubt have enforced their separate views in detail, illustrated with reference to the actual conduct of the Bank during the last eight years. It will thus be incumbent on the Committee, at the final close of their inquiry, to pronounce some decided opinion of' their own respect iui,g the soundness of the rule of 1832; and the evidence when published will probably lend to much public discussion on the same subject.

Our views in regard to this rule coincide generally with those of Mr. Loyo and Mr. NORMAN. For a body which issues papernotes purely and simply, without exercising any other functions, the system of bolding a fixed amount of securities, and of paying out either notes in exchange for gold or gold in exchange for notes, according as individuals may demand, appears to us judicious and useful. For a deposit-bank, it is a system utterly indefensible. The amount of productive securities which a deposit-bank can atthrd to hold, must vary as its deposits vary, increase when its deposits increase, diminish when its deposits diminish. If when the deposits increase the bank does not increase its securities, it deprives itself of a legitimate gain, besides occasioning a certain degree of public inconvenience from unnecessary hoarding of curvolley. If when deposits diminish, the securities be not diminished also, there is danger—we might almost say certainty, if the diminution of deposits be considerable— that suspension of payments will be the consequence. Now the Bank of Englsnd, besides its functions as the sole issuing body in the Metropolis, is likewise a deposit-bank on a great scale. Considered, therefore, in this latter capacity, the rule of holding a fixed amount of securities is totally inapplicable to its management. And such is the injurious working of the rule in regard to its deposit business, that the beneficial action of the same rule in regard to its issues is frustrated and nullified ; so that the results of the system as it bears upon the combined functions of the Bank are irregular, mischievous, and even pregnant with danger to the constant maintenance of convertibility.

In order to test the goodness of this or of any other rule for the management of the circulation of the Bank, we must consider what is the supreme and binding obligations under which the paper circulation of the country is conducted.

The supreme obligation under which our paper circulation is placed, is that of being convertible into gold at the will of the holder. This is the mode adopted by the Legislature for insuring its constant conformity of value to gold, by empowering the public at large to limit its quantity, and to adjust its increase and diminution to that which would be the increase and diminution in the metallic circulation if our money were id! composed of gold coin. To keep the value of the paper constantly on a par with gold, there is but one way—that of maintaining its quantity always equal to the quantity of gold which would be in circulation if there were no paper. Conformity of quantity is the cause of conformity of value ; and even an inconvertible paper, if its quantity could be kept constantly equal to that which would be the quantity of gold in circulation, would maintain its par value with gold. But as no inspiration can be obtained to determine befbrehand what this quantity ought to be, the Legislature decrees the convertibility of the paper as the only means of putting a proper and constant limit upon its quantity. The Bank of England and the other issuers of paper have undoubtedly a discretionary powar of issuing as much paper-money as they choose, subject to the check of convertibility ; but if they knowingly issue a greater amount of paper than there would be of gold in circulation under a metallic currency, they are virtually counterworking the purposes of the Legislature in rendering the paper convertible, and their conduct tends in the most direct manlier to endanger the continuance of .specie payments. For let the Legislature enact what it pleases, the actual capacity of the country to maintain specie payments must depend upon the sufficiency of the stock of gold in the Bank of England, together with such aid as may be derived from the coin in circulation, to meet both a severe foreign drain and that extent of internal drain which often follows in the wake. Any proceedings on the part of the Bank, therefore, which waste or misemploy this stock of gold so as to render its sufficiency less complete, expose the country to the risk of a suspension of specie payments, in spite of the proclaimed resolution of the Legislature to maintain them. 'We have no hesitation in saying, that in our view a suspension of specie payments would be one of the greatest of nil public calamities.

We repeat, therefore, that the prime and peremptory condition by which any rule for the management of the Bank ought to be tried, is the completeness of the security which it affords for the constant maintenance of specie payments. The way to make such security complete, is to cause the aggregate paper circulation of the country to diminish at such times and in such proportions as a metallic circulation would have diminished, and to increase only at such times and in such proportions as a metallic currency would have increased. This is the only legitimate rule which flows from the principle of convertibility. When notes are brought in to obtain bullion for a foreign drain, let these notes be cancelled and no new notes issued in their place : when gold is brought in, but not till then, let additional notes be issued in exchange fur it. The paper currency will then vary exactly as a metallic currency would have varied.

Now, how far does the rule of 1832 conform to this prime and governing obligation of all paper issues? The conformity between the two was supposed to be sufficiently exact at the time when the rule was first proposed ; and this was the main reason why it was so well received. To restrain the Bank from increasing its issues through the medium of additional securities, was assumed as practically tantamount to a restraint upon increase in any jiwm: the deposits were either overlooked in the reasoning, or the variations in their amount were supposed to be not sufficiently considerable to affect the result. For of those who approved originally of the rule of 1832, we believe that a very small proportion will be found to have adopted the doctrine held by Mr. Paula namely, that deposits in the Bank of England are items of currency just as much as bank-notes in the hands of the public, and that a decrease of deposits in the Bank of England produces as powerflil an effect, in arresting a foreign drain for gold, as a decrease to the like amount in the bank-notes in circulation. We have already in former numbers examined this theory of Mr. PAGE respecting the functions of deposits in th6 Bank of England, and have endeavoured to show that it is altogether erroneous. The practical results to which it leads appear to us to be of the most fatal import, and to conduct by the most direct road to the suspension of specie payment. For, according to Mr. PAGE'S theory, if during the time that the Bank has been paying out 5,000,000/. of bullion to meet a foreign drain, it shall also have paid out 5,000,000/. of notes to meet the drafts of depositors, keeping the amount of its securities unaltered—the joint effect of these two processes would be to diminish the currency by 10,000,0001., and to act just as efficaciously in checking the foreign drain as if 10,000,000/. of the notes in circulation had been cancelled. We maintain, on the contrary, that the joint effect of the two would be to leave the currency in point of amount exactly as it stood when the drain began—to abstract a very large amount front the Bank reserve of bullion, but to render the continuance of the foreign drain hardly less probable at the end of the fifth million than it was at the end of the first, since no precautions will have been taken to counteract it. If Mr. PAGE'S doctrine about deposits were admitted as the basis of Bank management, and if the rule of 1832 were in consequence literally carried out, we should hold the occurrence of a suspension at the end of no very long period to be a matter of high probability.

Let us trace how the rule of 1832, or the maintenance es unaltered amount amount of securities, will work in its effects urn the

Bank of England as a joint body for issue and deposit, hot in the case of an influx of gold from abroad, and in the case of an efflux, 'fake first the case of efflux.

Three suppositions may be made with regard to the deposits: either they remain stationary, or they increase, or they diminish.

If they remain stationary, the Bank is in the same condition, 30 flu as the rule is concerned, as if it had no deposits. The rule 1832 will then act upon the circulation exactly as it would act upon an issuing body only ; and it therefore works perfectly well. And this ought carefully to be noted as a possible source of error; fir it may perhaps happen that the rule shall work well for a certain time even with the Bank of England in its joint capacity, pre. vided its deposits happen to remain stationary ; but such a result would be no proof of the goodness of the rule during a period when the deposits might undergo considerable variation. Suppose, however, that the deposits shall diminish during the period of a foreign drain. Bullion to the amount of 5,000,000/As taken front the Bank and exported ; while the depositors on their part draw out bank-notes to the amount of 5,000,0001., the Bank not realizing any securities to meet the deposits so lost. The aggre. gate circulation will in this case be undiminished : the bank-notes which have been drawn away from the private bankers of London, and from the general circulation, in order to obtain bullion from the Bank, will have been replaced by the like amount drawn from the Bank in the shape of deposits paid. The means possessed by the private bankers of London, and by the community generally, of holding productive securities, are just as great as they were before, while the Bank of England are supposed not to part with any securities ; so tlmt the price of marketable securities has no tendency to fidl, nor the rate of interest to rise. Not the smallest action will have been resorted to by the Bank fbr the purpose of checking the drain, in spite of their large loss of bullion : not the smallest reason can be given why the drain should not proceed still further. It is impossible to conceive any line of proceeding more directly tending to the exhaustion of the store of bullion in the Bank, and to the consequent suspension of specie payments. Suppose, on the contrary, that the drain of bullion for export should be accompanied with an increase of deposits in the Bank of England—either from an accumulation of balances belonging to Government, or from an increased disposition on the part of private individuals to transfix their accounts from private London bankers to the Bank. While one set of persons are bringing in 5,000,000/. of bank-notes in order to obtain bullion, another set are bringing in 5,000,000/. more of bank-notes for the purpose of paying them into the account of Government, or to the accounts of new depositors. What is the result ? Why, the currency is contracted not by 5,000,000/. only, but by 10,000,0001.—much more than it would be if it were metallic. The pressure would be much sharper than would be either inflicted or required by a metallic currency. Perhaps the foreign drain might be checked more speedily, but it would be checked at the cost of' a far greater amount of inconvenience than the natural circumstances of the case require.

Let us now examine the ease of an /Vise of bullion. It may be accompanied either by an increase or by a diminution of deposits. It' by the former, and if the increase of deposits be equal in amount to the increase of bullion, the aggregate paper-currency will remain unaltered at the very moment when a metallic currency would be very considsrably enlarged. Suppose importers of bullion to the extent of 5,000,000/. : these persons will take out from the Bank 5,000,000/. of new bank-notes. If at the same time new depositors bring in 5,000,000/. of notes to new deposit-accounts, it is plain that the new depositors will contract the currency as much as the importers of bullion had enlarged it. The actual working of this joint process will probably be, to prolong the duration and to augment the amount of the influx beyond what it would have been under a metallic currency. If again an kfiuse of bullion be accompanied by a diminution of deposits, the currency will be enlarged by two perfectly distinct but simultaneously coiiperating causes. Importers of bullion take out 5,000,000/. of notes ; the depositors draw out 5,000,000/. of additional notes : here is a total increase of 10,000,000/. of banknotes under circumstances in which a metallic currency would only experience an increase of 5,000,000/. Probably the actual result will be, that the influx of gold will be arrested before its natural term, and less gold on the whole will be received lama abroad than would have come in if the currency had been metallic. The rule of 1832 will thus be found to act mischievously as well in the period of influx of bullion as in the period of efflux, if we suppose the deposits to vary either in the way of increase or in the way of diminution. More especially will the mischief be felt in the event of an efflux of bullion : for if during that period there should occur any considerable diminution of deposits, the risk of suspending specie payments is greatly aggravated ; it on the other hand, there should be any material increase of deposits, the contraction of currency will be carried further than is necessary, and the pressure will become unnaturally severe.

Deposit-banking and the issue of a convertible paper-money are two functions perfectly distinct and heterogeneous, which may, perhaps, under proper precautions, be carried on by the same body, but which cannot by any constraint be rendered subject to the same rules. That our aggregate paper-currency should be allowed to increase, not in correspondence with the variations which would have taken place in a metallic currency, but in obedience to the

stimulus of banking exigencies and the enlargement of deposits, is one fatal mistake : To determine the amount of securities which a deposit-banker ought to hold, not by the amount of his deposits, but according to some given proportion between bullion and issue, is another mistake no less serious, which leads to the most unfortunate management both of' the function of banking and the function of issuing. Themax.ims announced by the Country Bankers for the regulation of their paper issues, expose us to the of these two mistakes : the rule of 1832 professed by the Bank of England, lays us open to the second.

We are perfectly aware that the Bank of England has not in point of fact acted with any thing like strict conformity to the rule It has acted, speaking generally, according to Mr. Homosnr PALmEte of 1832.

s views—that is, professing to adhere, when practicable, to the rule of 183-2, but admitting numerous exceptions; and those exceptions often so chosen Os to superadd new errors of their own to the error already inherent in the rule. It' we are to choose between the opinion of Mr. PAGE, who enacts of the Batik a literal observance of this rale, and the opinion of Mr. HORSLEY PALMER, who .adviscs the Bank to observe the rule in SO far as it forbids the dinnnution of securities, but to violate it by permitting time securities to be increased whenever strong demands arc made thr aid on the plea of' supporting public credit—if we are to choose between these two, we prefer, on the whole, the opinion ofklr. PAGE. Mr. PALMER'S plan of action appears to us to include one great and fundanamtal error in common with Mr. PAGE, but it also embodies exceptionable consequences peculiar to itself.

The rule of 1832 presents one important excellence, which we believe to have been exclusively present to the minds of those who at first hailed its promulgation. It restrains the Bank Directors, (luring an efflux of bullion out of their coffers, from reissuing any of the notes brought in for bullion in the purchase of new securities.

But the rule has also one great defect. It does not restrain the Bank Directors, during such a period of efflux, from reissuing the notes so brought in, tbr the purpose of discharging the claims of depositors; while it does restrain them from r,Itlizing tow of' their securities to meet a diminution ever so considerable in their deposits. The very same consideratioas—we mean the tacit reference to what would be the variations it, amount of a metallic currency— which constitute the first of these points an excellence, also constitute the second a defect. Prove to us that it is mischievous for the Bank, during a foreign drain of bullion, to augment the number of bank-notes in circulation by the purchase of' new securities ; we engage to prove, by a reference to the saute standard, that it is equally mischievous for the Bank at such a period to increase the quantity of bank-notes in circulation by paying out its deposits without realizing securities.