Part 1

THE PAPER CURRENCY OF ENGLAND

Dispassionately Considered.

WITH

SUGGESTIONS TOWARDS A PRACTICAL SOLUTION OF THE DIFFICULTY.

BY JOHN HASLAM, LATE “TURGOT.”

LONDON: EFFINGHAM WILSON, ROYAL EXCHANGE. DUBLIN: M‘GLASHEN AND GILL, 50, UPPER SACKVILLE-STREET. 1856.

DUBLIN: PRINTED BY ROBERT CHAPMAN, TEMPLE-LANE, DAME-ST.

PREFACE.

The following pamphlet was designed for insertion in a periodical devoted to industrial and commercial purposes, which was to have appeared on the 1st of January. As owing to unavoidable circumstances the publication of this journal has been postponed, the writer has thought it better to present his views to the public in their original form, than to incur the delay that would be necessary if he were to recast the essay and expand its scope so as to embrace the consideration of the Scotch and Irish issues. He trusts that this explanation will serve as an apology for the extreme compression which he has been obliged to exercise in treating of several departments of the subject, as well as for his having neglected to fortify his reasoning by citations from other writers, in many instances in which he might have done so with unquestionable advantage to the reader.

19, CULLENSWOOD-AVENUE, RANELAGH, DUBLIN, Jan. 1856.

THE

PAPER CURRENCY OF ENGLAND

DISPASSIONATELY CONSIDERED,

&c.

Amongst the many debatable clauses contained in the Bank Charter Act of 1844, there is one at least the practical expediency of which will scarcely be called in question. It is that which provides for the redemption of the privileges enjoyed by the Bank of England, “at any time upon twelve months’ notice, to be given after the first day of August, 1855.” A similar provision had been inserted in the Act of 1833, so that the decennial expiration and revision of the Bank of England Charter, may be regarded as a positive feature in the banking system of Great Britain. The advantages resulting from this periodical revision of our currency code with respect both to the public generally and to bankers in particular are very considerable. The investigation of the laws of monetary phenomena forms undoubtedly the most abstruse and intricate department in the whole range of political economy. In no other section of the science are the ultimate conclusions more liable to be vitiated by any error in the leading principles, or any false step in the process of deduction; and in no other is it more difficult either to trace an error through all its mazes to its real origin, or to present its refutation in a form adapted to the popular intelligence. It not unfrequently happens, therefore, that some plausible fallacy becomes generally accredited, and is adopted by our statesmen as a basis for legislation, either before the materials have been collected for its successful exposure, or before the knowledge of such exposure has had time to circulate through all the channels of the public mind. In such cases the experience of a few years’ operation of the measure, suffices to explode the fallacy, and when, at the succeeding expiration of the Bank of England Charter, the subject is presented to parliament for reconsideration, our legislators are enabled to disentangle themselves from the errors which had previously misled them, and to bring their enactments into greater conformity with the principles that should regulate a well conducted currency. And were it not for this arrangement, there is great reason to apprehend that our banking laws would present as many obstacles to their amelioration, as now unfortunately oppose themselves to the reform of so many other departments of our legislative system.

There is a second beneficial purpose no less eminently subserved by this arrangement. At present, the privilege of issuing paper money, unrepresented by bullion, is a highly profitable and closely protected bank monopoly. Now the undisturbed enjoyment of a monopoly, as is well known, has sometimes the effect of impressing its possessors with a conviction, that they hold their privilege by a sort of inalienable right, irrespective of the public welfare. And were it not for the provision which subjects our whole monetary system to a periodical investigation and revision, the existing banks of issue might naturally share in this feeling, and come to regard any interference with their privilege, as an unwarrantable exercise of state prerogative. Under the actual circumstances of the case, however, they can advance no valid plea for the retention of the right of issue, any longer than may be deemed consistent with the interests of the community at large. For if the Bank of England, which has advanced eleven millions of its capital to the nation, for fiscal purposes, is liable to have the right of issue withdrawn upon the single condition of repayment of the debt, with all arrears of interest, how much more is it incumbent upon those banks which have rendered no such service to the State, to hold themselves prepared for a similar surrender. And if they have neglected to make any provision for such possible contingency, it has not been for want of warning, that they do not enjoy their monopoly by any indefeasible claim to its possession in perpetuity.

We trust that the approaching session of Parliament will furnish a striking exemplification of both these advantages. The Bank Charter Act of 1844, is precisely one of those measures which have been based upon a fallacious interpretation of the principles of monetary science. A few of the more far-sighted of our economists and practical statesmen, were fully cognizant of the fact at the time of its enactment; but the principle on which it rested was extremely plausible, and a large majority of our public men assented to its adoption. That measure has now received its ten years’ ordeal, and it is time that the judgment of the nation should be formally pronounced upon its merits. Nor can there be much difficulty in arriving at that decision. Few measures have ever been condemned by a more general verdict. It is true, that the Committee of the House of Commons on Commercial Distress in 1848, delivered a report in its favour, by a majority of two; but, if so, that report was framed in deliberate opposition to the opinions of nearly all the witnesses examined; while even of the remainder the evidence, though intended to be affirmative was inadequate and self contradictory. The Acts of 1845, for the regulation of the paper issues of Scotland and Ireland, were supplementary to that of 1844, and more or less participate in all its imperfections; but neither of them was put to the crucial test, during the commercial difficulties of 1846-7; and further than by occasional reference for the sake of comparison and illustration, we shall not treat of them here, but shall confine ourselves exclusively to the laws which affect the paper circulation of England and Wales. It has long been desirable that all the United Kingdom should be subject to a uniform currency code; nor do any insurmountable obstacles appear to oppose the establishment of one consistent system; but the subject is too extensive for discussion in our limits; and, in any case, the pre-eminent importance of the English circulation, would justify a separate and exclusive treatment.

The leading provisions of the Act of 1844, are too well known to require much elucidation. They may in general be arranged under two divisions; those relating to the limitation of the right of issue, and those assigning the conditions under which that right should alone be exercised. The former have at least the merit of being extremely simple. They merely continue the privilege to all the issuing banks in existence at the passing of the Act, viz. about 250, and prohibit the formation of any new banks of issue. The latter, so far as the country banks of issue are concerned, are equally simple. They do no more than assign a maximum limit to the issues of each--that maximum being equal to the average issues, during a certain period, previous to the enactment, and amounting to nearly £8,000,000 in the total. The conditions imposed on the issues of the Bank of England, are more complicated. Those issues are divided into two classes--the issues on gold and silver, compactly denominated _bullion_ notes, and the issues on the Government debt, and other securities; which, as they are not represented by any gold or silver in the coffers of the Bank, may properly be designated _unrepresented_ notes. Of the latter, the authorized issue is limited to a maximum of £14,000,000, viz. £11,015,100 on the Government debt, and £2,984,900 on other securities; the bullion notes, on the other hand, are not restricted within fixed limits, but are subject to the single condition that the Bank must issue notes in exchange for all the gold (and a certain proportion of silver, not to exceed one fourth of the gold) that may be presented for purchase at the rate of £3 17s. 9d. per ounce, and must render gold for all the notes that may be tendered for payment, at the rate of £3 17s. 10½d. per ounce. Thus the total amount of unrepresented notes, which the united banks of issue in England and Wales are authorised to circulate, is about £22,000,000;[A] in addition to which, the Bank of England is allowed to issue bullion notes for every £1 of treasure which it may possess.

[A] Perhaps we ought to mention that under one of the provisions of the Act of 1844, in case any of the banks of issue cease to issue their own notes after the passing of the Act, the Bank of England may be empowered to increase its securities and issue notes against them to an extent not exceeding two-thirds of the amount so discontinued; and that within the last few months the Bank of England has been thus authorized to increase its unrepresented issues by nearly £500,000. This increase, however, is only intended to prevent the unrepresented issues from falling much below the £22,000,000, and leads to no important results.

Of the preceding provisions, it is that which prescribes £14,000,000 as the maximum of unrepresented notes, to be issued by the Bank of England, that has chiefly awakened discussion since the passing of the Act. The effect of this inflexible limitation during the commercial pressure of October, 1847, was so disastrous that nearly every authority of any eminence, except some few of the original promoters of the measure, has fully admitted that, but for the interposition of Government, and the temporary suspension of the bill, the Bank of England would have been compelled to stop payment; and the whole commercial system of the country would have been thrown into ruinous confusion. The general course of trade since that period has been, on the whole, so regular and prosperous, and our monetary system has been, therefore, subjected to so slight a strain from disturbing forces, that it is possible the impression produced on the public mind in 1847, may have somewhat subsided; should this be the case, we must only hope that the present heavy efflux of gold, required by our military operations abroad, will again arouse the slumbering consciousness of the nation, and that the occasion will not be lost of making some effort to remove a restriction which, in the case of every unwonted commercial crisis, is calculated to entail severe distress on every trading interest in the country.

It were much to be deplored, however, if the prominence of one defect in the present system, should exclusively engross the attention of the public, to the disregard of others which, although less disastrous in their consequences, are not in the least degree more reconcilable with correct principles of currency. Our monetary code, and especially the Act of 1844, should be considered as an undivided whole, every one of whose provisions should be brought into the closest possible conformity with true principles. And when so regarded, it is undeniable that it presents a most anomalous appearance, preserving no consistency in its parts; or rather composing an irreconcilable medley of incongruous elements, very few of which will admit of justification, on the hypothesis that the remainder are correct. Thus while the Bank of England, which possesses a bona fide capital of about £18,000,000, is not allowed to issue unrepresented notes to within less than four millions of that capital, the 250 country banks are authorized to issue such notes, to the extent of their average issues in 1844, even though that average should exceed their capital in the proportion of three to one, and though, as the proceedings of the Bankruptcy Court have subsequently brought to light, there have been some cases at least in which it has actually far exceeded this proportion. On the other hand while the country banks are prohibited from issuing a single note in excess upon bullion, there is no limitation to the issue of such notes by the Bank of England, farther than the rule which requires the possession of actual treasure for every note so issued. Again, while the present issuing banks are allowed to retain the privilege without submitting to any test of qualification, no new bank that may hereafter be formed, however extensive its capital, and no existing non-issuing bank, however indisputable its security, must henceforth be endowed with a similar prerogative. And again, though the population of one district may rapidly increase in wealth and numbers, while those of another may undergo as great a diminution, yet the law makes no provision for such contingency, but prescribes the original issues of 1844 as the inflexible rule in both cases, precisely as if no alteration had occurred in the circumstances of either. Or, to regard the limitation under a national aspect, although the banks of issue, considered as a whole, are permitted to contract their unrepresented issues, to whatever extent may seem desirable, at any period in which commerce is stationary, or currency redundant; yet under the opposite circumstances, when business is extremely active, and the demand for accommodation proportionally great, they are absolutely prohibited from increasing their issues to any extent beyond the limit to which they are restricted during ordinary periods. It were easy to multiply similar instances of inconsistency, but the preceding will suffice; and it will be more instructive if we cast a rapid glance at some of the principles which the Act of 1844 most flagrantly contravenes, and point out in what respects our monetary system may now be brought into greater consistency with all or any of those principles.

The most prominent, and perhaps the most important of these is the well established doctrine, that the issue of paper money should be a function of the State, and should be exercised exclusively with a view to public interests. This is a conclusion on the truth of which the common sense of practical men, and the philosophic insight of the best instructed authorities, are in perfect harmony. It has long been undisputed that coining is a legitimate or rather essential function of the State, and the reasons for comprehending the issue of notes under the same prerogatives are not less forcible. There is no evil that may befall the public from the circulation of base coin, that may not arise to an equal, if not aggravated, extent from the issue of counterfeit paper. Indeed the issue of paper money is liable to risks exclusively its own and which require far more ingeniously devised safeguards than the issue of coin. The person who receives gold or silver in payment may sometimes be under the necessity of employing a few easy tests in order to prove its genuineness, but if he apply these with the most ordinary circumspection, he can successfully protect himself from loss by imposition. Now, he who receives paper money, is often placed under circumstances precisely the reverse. For, where the number of banks of issue is considerable, and the varieties of paper money in corresponding proportion, there are no valid tests within the reach of an average capacity, by means of which he may verify the genuineness of every note which he may happen to receive in the course of his transactions with the public. But even if there were such tests, and if he exercised the greatest possible care, in their application, they would not suffice to protect him from losses, arising out of the unexpected insolvency of some of the banks of issue. In order to guard efficiently against risk of this description, he would require an accurate acquaintance with the actual position and stability of every bank whose paper may at any time come into his possession; and in the case of nearly every private bank, this knowledge is obviously unattainable. In the absence of this desideratum, his only means of protection appear to consist in the prompt presentment or exchange of every description of paper, on the perfect security of which he does not possess some valid reasons for reliance.

It must, we think, be conceded, that under the present point of view, the state of the English paper issues is liable to very grave objections. In Ireland, where the number of issuing banks is only eight, all of which are public banks, the cases of forgery are comparatively few, and a very high degree of confidence in the currency, is entertained by the public generally. Even in Ireland, however, that confidence is not so implicit or so universal as it would unquestionably be, if there were only one description of paper. A similar observation, though with some qualification, may be applied to the issues of the banks in Scotland. But in England, where, as has been said, the number of issuing banks amounts to about 250, and where at least 150 of these are private banks, it is obviously impossible that adequate safeguards can be provided against either the occasional dissemination of fictitious paper, or the not unfrequent infliction of severe pecuniary losses, through the failure of some of the banks of issue. We are fully aware of the high reputation which a vast majority of the country banks in England deservedly bear, both for stability and integrity; but the failure of several issuing and non-issuing banks, _since_ the passing of the Act as well as previously, suffices to prove that this high character cannot be predicated of all of them indiscriminately. And when a single bank of issue fails to meet its liabilities, it always tends to throw a partial discredit over the whole paper circulation of the kingdom.

Whatever may be the other qualities desirable in a paper currency, it appears to us to be almost axiomatic, that it should, if possible, be rendered as secure as a currency purely metallic--as stable as the Government itself. But this we contend can never be accomplished, so long as the privilege of issue is conceded to any very considerable number of separate banking companies. The evils requiring to be guarded against, have been shown to be two-fold; the circulation of counterfeit notes, and the insolvency of some of the banks of issue. The former of these, in such a case, appears to admit of no infallible means of prevention; the latter can only be provided for by the State’s becoming the guarantee of all the paper money in the hands of the public. But this is a course which few, even of the most sanguine advocates of a plurality of issuers, would be bold enough to recommend. The amount of evil which it would generate, through acting as a bonus upon every species of mismanagement would be far greater than any which it could remove. But the principle itself, involved in the adoption, would be altogether inadmissible. It assuredly forms no part of the functions of Government to guarantee the solvency of an indefinite number of banking companies. At the same time, we consider it no less demonstrable, that the Government has not the right to authorize the issue of notes, without fully guaranteeing their payment in cases of insolvency.

But if the issue of notes should be a function of the State, it is equally evident that the profits derived from such issue should be appropriated to the service of the nation generally. We do not contend that the Government of the country, whatever may be the mode of its formation, has the right to interfere with any legitimate department of trade or manufacture; nor do we propose that banking should be considered an exception to the general rule. But the issue of unrepresented paper money is, in its nature, essentially distinct from the ordinary operations of banking. The banker, in common with the merchant or manufacturer, derives his profits from the reproductive employment of his own capital, together with as much of the capital of his customers, as he can induce them to entrust to his care. But unrepresented paper money is not capital, and is no more the property of the banker or his customers, than it is of the merchant and manufacturer, or their respective customers. In effect however it is equivalent to capital, and its employment is equally profitable; any transfer, therefore, of the profits arising out of its issue to a number of private individuals, is not only an act of injustice to all the rest of the community, but is a real source of injury to every banker or dealer in money, who is excluded from the enjoyment of the privilege. For it is clearly impossible for one who is limited to the employment of his capital and credit, to compete on equal terms with rivals who are thus authorized to operate, not only on their capital and credit combined, but also on a species of fictitious capital, which they are permitted to create at pleasure. And the only mode in which this injury can be successfully averted, is by securing the profits arising out of the privilege of issue to the general body of the community at large.