In the discussions, too, which have been for so many years carried on respecting the operations of the Bank of England, and the effects produced by those operations on the state of credit, though for nearly half a century there never has been a commercial crisis which the Bank has not been strenuously accused either of producing or of aggravating, it has been almost universally assumed that the influence of its acts was felt only through the amount of its notes in circulation, and that if it could be prevented from exercising any discretion as to that one feature in its position, it would no longer have any power liable to abuse. This at least is an error which, after the experience of the year 1847, we may hope has been committed for the last time. During that year the hands of the Bank were absolutely tied, in its character of a bank of issue; but through its operations as a bank of deposit it exercised as great an influence, or apparent influence, on the rate of interest and the state of credit, as at any former period; it was exposed to as vehement accusations of abusing that influence; and a crisis occurred, such as few that preceded it had equalled, and none perhaps surpassed, in intensity. $5. Before quitting the general subject of this chapter, I will make the obvious remark, that the rate of interest determines the value and price of all those saleable articles which are desired and bought, not for themselves, but for the income which they are capable of yielding. The public funds, shares in joint-stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase money, with allowance for all differences in the risk incurred, or in any circumstance of convenience. Exchequer bills, for example, usually sell at a higher price than consols, proportionally to the interest which they yield; because, though the security is the same, yet the former being annually paid off at par unless renewed by the holder, the purchaser (unless obliged to sell in a moment of general emergency), is in no danger of losing anything by the re-sale, except the premium he may have paid. The price of land, mines, and all other fixed sources of income, depends in like manner on the rate of interest. Land usually sells at a higher price, in proportion to the income afforded by it, than the public funds, not only because it is thought, even in this country, to be somewhat more secure, but because ideas of power and dignity are associated with its possession. But these differences are constant, or nearly so; and in the variations of price, land follows, cæteris paribus, the permanent (though of course not the daily) variations of the rate of interest. When interest is low, land will naturally be dear; when interest is high, land will be cheap. The last long war presented a striking exception to this rule, since the price of land as well as the rate of interest was then remarkably high. For this, however, there was a special cause. The continuance of a very high average price of corn for many years, had raised the rent of land even more than in proportion to the rise of interest; and fall of the selling price of fixed incomes. Had it not been for this accident, chiefly dependent on the seasons, land must have sustained as great a depreciation in value as the public funds: which it probably would do, were a similar war to break out hereafter; to the signal disappointment of those landlords and farmers who, generalizing from the casual circumstances of a remarkable period, so long persuaded themselves that a state of war was peculiarly advantageous, and a state of peace disadvantageous, to what they chose to call the interests of agriculture. CHAPTER XXIV. OF THE REGULATION OF A CONVERTIBLE PAPER CURRENCY. § 1. THE frequent recurrence during the last half century of the painful series of phenomena called a commercial crisis, has directed much of the attention both of economists and of practical politicians to the contriving of expedients for averting, or at the least, mitigating its evils. And the habit which grew up during the era of the Bank restriction, of ascribing all alternations of high and low prices to the issues of banks, has caused inquirers in general to fix their hopes of success in moderating those vicissitudes, upon schemes for the regulation of bank notes. A scheme of this nature, after having obtained the sanction of high authorities, so far established itself in the public mind, as to be, with general approbation, converted into a law, at the renewal of the Charter of the Bank of England in 1844: and the regulation is still in force, though with a great abatement of its popularity, and with its prestige impaired by two temporary suspensions, on the responsibility of the executive, the earlier of the two little more than three years after its enact ment. It is proper that the merits of this plan for the regulation of a convertible bank note currency should be here considered. Before touching upon the practical provisions of Sir Robert Peel's Act of 1844, I shall briefly state the nature, and examine the grounds, of the theory on which it is founded. It is believed by many, that banks of issue universally, or the Bank of England in particular, have a power of throwing their notes into circulation, and thereby raising prices, arbitrarily; that this power is only limited by the degree of moderation with which they think fit to exercise it; that when they increase their issues beyond the usual amount, the rise of prices, thus produced, generates a spirit of speculation in commodities, which carries prices still higher, and ultimately causes a reaction and recoil, amounting in extreme cases to a commercial crisis; and that every such crisis which has occurred in this country within mercantile memory, has been either originally produced by this cause, or greatly aggravated by it. To this extreme length the currency theory has not been carried by the eminent political economists who have given to a more moderate form of the same theory the sanction of their names. But I have not overstated the extravagance of the popular version; which is a remarkable instance to what lengths a favourite theory will hurry, not the closet students whose competency in such questions is often treated with so much contempt, but men of the world and of business, who pique themselves on the practical knowledge which they have at least had ample opportunities of acquiring. Not only has this fixed idea of the currency as the prime agent in the fluctuations of price, made them shut their eyes to the multitude of circumstances which, by influencing the expectation of supply, are the true causes of almost all speculations and of almost all fluctuations of price; but in order to bring about the chronological agreement required by their theory, between the variations of bank issues and those of prices, they have played such fantastic tricks with facts and dates as would be thought incredible, if an eminent practical authority had not taken the trouble of meeting them, on the ground of mere history, with an elaborate exposure. I refer, as all conversant with the subject must be aware, to Mr. Tooke's History of Prices. The result of Mr. Tooke's investigations was thus stated by himself, in his examination before the Commons Committee on the Bank Charter question in 1832; and the evidences of it stand recorded in his book: "In point of fact, and histori cally, as far as my researches have gone, in every signal instance of a rise or fall of prices, the rise or fall has preceded, and therefore could not be the effect of, an enlargement or contraction of the bank circulation." The extravagance of the currency theorists, in attributing almost every rise or fall of prices to an enlargement or contraction of the issues of bank notes, has raised up, by reaction, a theory the extreme opposite of the former, of which, in scientific discussion, the most prominent representa. tives are Mr. Tooke and Mr. Fullarton. This counter-theory denies to bank notes, so long as their convertibility is maintained, any power whatever of raising prices, and to banks any power of increasing their circulation, except as a consequence of, and in proportion to, an increase of the business to be done. This last statement is supported by the unanimous assurances of all the country bankers who have been examined before successive Parliamentary Committees on the subject. They all bear testimony that (in the words of Mr. Fullarton*) "the amount of their issues is exclusively regulated by the extent of local dealings and expenditure in their respective districts, fluctuating with the fluctuations of production and price, and that they neither can increase their issues beyond the limits which the range of such dealings and expenditure prescribes, without the certainty of having their notes immediately returned to them, nor diminish them, but at an almost equal certainty of the vacancy being filled up from some other source." From these premises it is argued by Mr. Tooke and Mr. Fullarton, that bank issues, since they cannot be increased in amount unless there be an increased demand, cannot possibly raise prices; cannot encourage speculation, nor occasion a commercial crisis; and that the attempt to guard against that evil by an artificial management of the issue of notes, is of no effect for the intended purpose, and liable to produce other consequences extremely calami tous. * Regulation of Currencies, p. 85, § 2. As much of this doctrine as rests upon testimony, and not upon inference, appears to me incontrovertible. I give complete credence to the assertion of the country bankers, very clearly and correctly condensed into a small compass in the sentence just quoted from Mr. Fullarton. I am convinced that they cannot possibly increase their issue of notes in any other circumstances than those which are there stated. I believe, also, that the theory, grounded by Mr. Fullarton upon this fact, contains a large portion of truth, and is far nearer to being the expression of the whole truth than any form whatever of the currency theory. There are two states of the markets: one which may be termed the quiescent state, the other the expectant, or speculative state. The first is that in which there is nothing tending to engender in any considerable portion of the mercantile public a desire to extend their operations. The producers produce and the dealers purchase only their usual stocks, having no expectation of a more than usually rapid vent for them. Each person transacts his ordinary amount of business and no more, or increases it only in correspondence with the increase of his capital or connexion, or with the gradual growth of the demand for his commodity, occasioned by the public prosperity. Not meditating any unusual extension of their own operations, producers and dealers do not need more than the usual accommodation from bankers and other money lenders; and as it is only by extending their loans that bankers increase their issues, none but a momentary augmentation of issues is in these circumstances possible. If at a certain time of the year a portion of the public have larger payments to make than at other times, or if an individual, under some peculiar exigency, requires an extra advance, they may apply for more bank notes, and obtain them; but the notes will no more remain in circulation, than the extra quantity of Bank of England notes which are issued once in every three months in payment of the dividends. The person to whom, after being borrowed, the notes are paid | usual hopes of profit, gives increased briskness to business: for example, a sudden foreign demand for commodities on a large scale, or the expectation of away, has no extra payments to make, and no peculiar exigency, and he keeps them by him unused, or sends them into deposit, or repays with them ait; such as occurred on the opening of previous advance made to him by some Spanish America to English trade, and banker in any case he does not buy has occurred on various occasions in commodities with them, since by the the trade with the United States. supposition there is nothing to induce Such occurrences produce a tendency him to lay in a larger stock of com- to a rise of price in exportable articles, modities than before. Even if we and generate speculations, 'sometimes suppose, as we may do, that bankers of a reasonable, and (as long as a large create an artificial increase of the de- proportion of men in business prefer mand for loans, by offering them below excitement to safety) frequently of an the market rate of interest, the notes irrational or immoderate character. they issue will not remain in circula- In such cases there is a desire in the tion; for when the borrower, having mercantile classes, or in some portion completed the transaction for which he of them, to employ their credit, in a availed himself of them, has paid them more than usual degree, as a power of away, the creditor or dealer who re- purchasing. This is a state of business ceives them, having no demand for the which, when pushed to an extreme immediate use of an extra quantity of length, brings on the revulsion called notes, sends them into deposit. In a commercial crisis; and it is a known this case, therefore, there can be no fact that such periods of speculation addition, at the discretion of bankers, hardly ever pass off without having to the general circulating medium: been attended, during some part of any increase of their issues either their progress, by a considerable incomes back to them, or remains idle in crease of bank notes. the hands of the public, and no rise takes place in prices. But there is another state of the markets, strikingly contrasted with the preceding, and to this state it is not so obvious that the theory of Mr. Tooke and Mr. Fullarton is applicable; namely, when an impression prevails, whether well founded or groundless, that the supply of one or more great articles of commerce is likely to fall short of the ordinary consumption. In such circumstances all persons connected with those commodities desire to extend their operations. The producers or importers desire to produce or import a larger quantity, speculators desire to lay in a stock in order to profit by the expected rise of price, and holders of the commodity desire additional advances to enable them to continue holding. All these classes are disposed to make a more than ordinary use of their credit, and to this desire it is not denied that bankers very often unduly administer. Effects of the same kind may be produced by anything which, exciting more than To this, however, it is replied by Mr. Tooke and Mr. Fullarton, that the increase of the circulation always follows, instead of preceding, the rise of prices, and is not its cause, but its effect. That in the first place, the speculative purchases by which prices are raised, are not effected by bank notes but by cheques, or still more commonly on a simple book credit: and secondly, even if they were made with bank notes borrowed for that express purpose from bankers, the notes, after being used for that purpose, would, if not wanted for current transactions, be returned into deposit by the persons receiving them. In this I fully concur, and I regard it as proved, both scientifically and historically, that during the ascending period of speculation, and as long as it is confined to transactions between dealers, the issues of bank notes are seldom materially increased, nor contribute anything to the speculative rise of prices. It seems to me, however, that this can no longer be affirmed when speculation has pro ceeded so far as to reach the producers. and therefore prolongs and increases the drain of the precious metals for exportation, which is a leading feature of this stage in the progress of a commercial crisis: the continuance of which drain at last endangering the power of the banks to fulfil their en demand, they are compelled to contract their credit more suddenly and severely than would have been necessary if they had been prevented from propping up speculation by increased advances, after the time when the recoil had become inevitable. § 3. To prevent this retardation of the recoil, and ultimate aggravation of its severity, is the object of the scheme for regulating the currency, of which Lord Overstone, Mr. Norman, and Colonel Torrens, were the first promulgators, and which has, in a slightly modified form, been enacted into law.* Speculative orders given by merchants to manufacturers induce them to extend their operations, and to become applicants to bankers for increased advances, which, if made in notes, are not paid away to persons who return them into deposit, but are partially expended in paying wages, and pass into the va-gagement of paying their notes on rious channels of retail trade, where they become directly effective in producing a further rise of prices. I cannot but think that this employment of bank notes must have been powerfully operative on prices at the time when notes of one and two pounds value were permitted by law. Admitting, however, that the prohibition of notes below five pounds has now rendered this part of their operation comparatively insignificant, by greatly limiting their applicability to the payment of wages, there is another form of their instrumentality which comes into play in the later stages of speculation, and which forms the principal argument of the more moderate supporters of the currency * I think myself justified in affirming that theory. Though advances by bankers the real, and only serious, purpose of the Act the mitigation of commercial revulsions is are seldom demanded for the purpose of 1844. I am quite aware that its supof buying on speculation, they are porters insist (especially since 1847) on its largely demanded by unsuccessful supreme efficacy in maintaining the convertibility of the Bank note." But I must speculators for the purpose of holding be excused for not attaching any serious imon; and the competition of these specu-portance to this one among its alleged merits. lators for a share of the loanable capital, makes even those who have not speculated, more dependent than before on bankers for the advances they require. Between the ascending period of speculation and the revulsion, there is an interval, extending to weeks and sometimes months, of struggling against a fall. The tide having shown signs of turning, the speculative holders are unwilling to sell in a falling market, and in the meantime they require funds to enable them to fulfil even their ordinary engagements. It is this stage that is ordinarily marked by a considerable increase in the amount of the bank note circulation. That such an increase does usually take place, is denied by no one. And I think it must be admitted that this increase tends to prolong the duration of the speculations; that it enables the speculative prices to be kept up for some time after they would otherwise have collapsed; The convertibility of the Bank note was maintained, at whatever cost, under the old maintained, and would have continued to be system. As was well said by Lord Overstone in his Evidence, the Bank can always, by a sufficiently violent action on credit, save itself at the expense of the mercantile public. That the Act of 1844 mitigates the violence of that process, is a sufficient claim to prefer in its behalf. Besides, if we sup pose such a degree of mismanagement on the part of the Bank, as, were it not for the Act, would endanger the continuance of convertibility, the same (or a less) degree of mismanagement, practised under the Act, would suffice to produce a suspension of payments by the Banking Department; an event which the compulsory separation of the two departments brings much nearer to possibility than it was before, and which, involving as it would the probable stoppage of every private banking establishment in London, and perhaps also the non-payment of the dividends to the national creditor, would be a far greater immediate calamity than a brief interruption of the convertibility of the note; insomuch that, to enable the Bank to resume payment of its deposits, no Government would hesitate a moment to suspend payment of the notes, if suspension of the Act of 1844 proved insufficient. |