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merable depôts, not in France only, but all over the Continent, where banking institutions are still either entirely wanting or very imperfectly organized, is not merely immense in itself, but admits of being largely drawn upon, and transferred even in vast masses from one country to another, with very little, if any, effect on prices, or other material derangements, we have had some remarkable proofs:" among others, "the signal success which attended the simultaneous efforts of some of the principal European powers (Russia, Austria, Prussia, Sweden, and Denmark) to replenish their treasuries, and to replace with coin a considerable portion of the depreciated paper which the necessities of the war had forced upon them, and this at the very time when the available stock of the precious metals over the world had been reduced by the exertions of England to recover her metallic currency.

There can be no doubt that these combined operations were on a scale of very extraordinary magnitude, that they were accomplished without any sensible injury to commerce or public prosperity, or any other effect than some temporary derangement of the exchanges, and that the private hoards of treasure accumulated throughout Europe during the war must have been the principal source from which all this gold and silver was collected. And no person, I think, can fairly contemplate the vast superflux of metallic wealth thus proved to be at all times in existence, and, though in a dormant and inert state, always ready to spring into activity on the first indication of a sufficiently intense demand, without feeling themselves compelled to admit the possibility of the mines being even shut up for years together, and the production of the metals altogether suspended, while there might be scarcely a perceptible alteration in the exchangeable value of the metal."*

Applying this to the currency doctrine and its advocates, one might imagine,' says Mr. Fullarton,+" that

* Fullarton on the Regulation of Currencies, pp. 71-4.

Ib. pp. 139-42.

they supposed the gold which is drained off for exportation from a country using a currency exclusively metallic, to be collected by driblets at the fairs and markets, or from the tills of the grocers and mercers. They never even allude to the existence of such a thing as a great hoard of the metals, though upon the action of the hoards depends the whole economy of international payments between specie-circulating communities, while any operation of the money collected in hoards upon prices must, even according to the currency hypothesis, be wholly impossible. We know from experience what enormous payments in gold and silver specie-circulating countries are capable, at times, of making, without the least disturbance of their internal prosperity; and whence is it supposed that these payments come, but from their hoards? Let us think how the money market of a country transacting all its exchanges through the medium of the precious metals only, would be likely to be affected by the necessity of making a foreign payment of several millions. Of course the necessity could only be satisfied by a transmission of capital; and would not the competition for the possession of capital for transmission which the occasion would call forth, necessarily raise the market rate of interest? If the payment was to be made by the government, would not the government, in all probability, have to open a new loan on terms more than usually favourable to the lender?" If made by merchants, would it not be drawn either from the deposits in banks, or from the reserves which merchants keep by them in default of banks, or would it not oblige them to obtain the necessary amount of specie by going into the money market as borrowers? "And would not all this inevitably act upon the hoards, and draw forth into activity a portion of the gold and silver which the money-dealers had been accumulating, and some of them with the express view of watching such opportunities for turning their treasures to advantage?

"To come

to the present time

[1844], the balance of payments with nearly all Europe has for about four years past been in favour of this country, and gold has been pouring in till the influx amounts to the unheard-of sum of about fourteen millions sterling. Yet in all this time, has any one heard a complaint of any serious suffering inflicted on the people of the Continent? Have prices there been greatly depressed beyond their range in this country? Have wages fallen, or have merchants been extensively ruined by the universal depreciation of their stock? There has occurred nothing of the kind. The tenor of commercial and monetary affairs has been everywhere even and tranquil; and in France more particularly, an improving revenue and extended commerce bear testimony to the continued progress of internal prosperity. It may be doubted, indeed, if this great efflux of gold has withdrawn from that portion of the metallic wealth of the nation which really circulates, a single napoleon. And it has been equally obvious, from the undisturbed state of credit, that not only has the supply of specie indispensable for the conduct of business in the retail market been all the while uninterrupted, but that the hoards have continued to furnish every facility requisite for the regularity of mercantile payments. It is of the very essence of the metallic system, that the hoards, in all cases of probable occurrence, should be equal to both objects; that they should, in the first place, supply the bullion demanded for exportation, and in the next place, should keep up the home circulation to its legitimate complement. Every man trading under that system, who, in the course of his business. may have frequent occasion to remit large sums in specie to foreign countries, must either keep by him a sufficient treasure of his own or must have the means of borrowing enough from his neighbours, not only to make up when wanted the amount of his remittances, but to enable him, moreover, to carry on his ordinary transactions at home without interruption."

In a country in which credit is

a

carried to so great an extent as in England, one great reserve, in a single establishment, the Bank of England, supplies the place, as far as the precious metals are concerned, of the multitudinous reserves of other countries. The theoretical principle, therefore, of the currency doctrine would require, that all those drains of the metal, which, if the currency were purely metallic, would be taken from the hoards, should be allowed to operate freely upon the reserve in the coffers of the Bank of England, without any attempt to stop it either by a diminution of the currency or by a contraction of credit. Nor to this would there be any well-grounded objection, unless the drain were so great as to threaten the exhaustion of the reserve, and a consequent stoppage of payments; danger against which it is possible to take adequate precautions, because in the cases which we are considering, the drain is for foreign payments of definite amount, and stops of itself as soon as these are effected. And in all systems it is admitted that the habitual reserve of the Bank should exceed the utmost amount to which experience warrants the belief that such a drain may extend; which extreme limit Mr. Fullarton affirms to be seven millions, but Mr. Tooke recommends an average reserve of ten, and in his last publication, of twelve. millions. Under these circumstances, the habitual reserve, which would never be employed in discounts, but kept to be paid out exclusively in exchange for cheques or bank notes, would be sufficient for a crisis of this description; which therefore would pass off without having its difficulties increased by a contraction either of credit or of the circulation. But this, the most advantageous dénouement that the case admits of, and not only consistent with, but required by, the professed principle of the system, the panegyrists of the system claim for it as a great merit that it prevents. They boast, that on the first appearance of a drain for exportation, (whatever may be its cause, and whether under a metallic currency it would involve a contraction of credit

take its separate precautions for its own safety. Whatever measures, therefore, on the part of the Bank, would have been required under the old system by a drain of six millions, are now rendered necessary by a drain only of three. The Issue Department protects itself in the manner prescribed by the Act, by not re-issuing the three millions of notes which have been returned to it. But the Banking Department must take measures to replenish its reserve, which has been reduced by three millions. Its liabilities having also decreased three millions, by the loss of that amount of deposits, the reserve, on the ordinary banking principle of a third of the liabilities, will bear a reduction of one million. But the other two millions it must procure by letting that amount of advances run out, and not renewing them. Not only must it raise its rate of interest, but it must effect, by whatever means, a diminution of two millions in the total amount of its discounts, or it must sell securities to an equal amount. This violent action on the money market for the purpose of replenishing the Banking reserve, is wholly occasioned by the Act of 1844. If the restrictions of that Act did not exist, the Bank, instead of contracting its discounts, would simply transfer two millions, either in gold or in notes, [from the Issue to the Banking Department; not in order to lend them to the public, but to secure the solvency of the Banking Department in the event of further unexpected demands by the depositors. And unless the drain continued, and reached so great an amount as to seem likely to exceed the whole of the gold in the reserves of both departments, the Bank would be under no necessity, while the pressure lasted, of withhold

or not) the Bank is at once obliged to
curtail its advances. And this, be it
remembered, when there has been no
speculative rise of prices which it is
indispensable to correct, no unusual
extension of credit requiring contrac-
tion; but the demand for gold is solely
occasioned by foreign payments on
account of government, or large corn im-
portations consequent on a bad harvest.
Even supposing that the reserve is
insufficient to meet the foreign pay-
ments, and that the means wherewith
to make them have to be taken from
the loanable capital of the country, the
consequence of which is a rise of the
rate of interest in such circumstances
some pressure on the money market is
unavoidable; but that pressure is much
increased in severity by the separation
of the banking from the issue depart-
ment. The case is generally stated as
if the Act only operated in one way,
namely, by preventing the Bank, when
it has parted with (say) three millions
of bullion in exchange for three millions
of its notes, from again lending those
notes, in discounts or other advances.
But the Act really does much more
than this. It is well known, that the
first operation of a drain is always on
the banking department. The bank
deposits constitute the bulk of the unem-
ployed and disposable capital of the
country; and capital wanted for foreign
payments is almost always obtained
mainly by drawing out deposits. Sup-
posing three millions to be the amount
wanted, three millions of notes are
drawn from the banking department
(either directly or through the private
bankers, who keep the bulk of their
reserves with the Bank of England),
and the three millions of notes, thus
obtained, are presented at the Issue
Department, and exchanged against
gold for exportation. Thus a draining
upon the country at large of only three
millions, is a drain upon the Bank vir-
tually of six millions. The deposits
have lost three millions, and the re-
serve of the Issue Department has lost
an equal amount. As the two depart-
ments, so long as the Act remains in
operation, cannot even in the utmost
extremity help one another, each must

from commerce its accustomed amount of accommodation, at a rate of interest corresponding to the increased demand.*

*This, which I have called "the double action of drains," has been strangely understood as if I had asserted that the Bank is compelled to part with six millions' worth of property by a drain of three millions. Such an assertion would be too absurd to

require any refutation. Drains have a

I am aware it will be said that by | tile difficulties of 1847, and not only allowing drains of this character to checked the efflux of gold, but turned operate freely upon the Bank reserve the tide and brought the metal back. until they cease of themselves, a con- It was not, therefore, brought back by traction of the currency and of credit a contraction of the currency, though would not be prevented, but only post- in this case it certainly was so by a poned; since if a limitation of issues contraction of loans. But even this is were not resorted to for the purpose of not always indispensable. For in the checking the drain in its commence- second place, it is not necessary that ment, the same or a still greater limi- the gold should return with the same tation must take place afterwards, in suddenness with which it went out. A order, by acting on prices, to bring back great portion would probably return in this large quantity of gold, for the in- the ordinary way of commerce, in paydispensable purpose of replenishing the ment for exported commodities. The Bank reserve. But in this argument extra gains made by dealers and proseveral things are overlooked. In the ducers in foreign countries through first place, the gold might be brought the extra payments they receive from back, not by a fall of prices, but by the this country, are very likely to be partly much more rapid and convenient me- expended in increased purchases of dium of a rise of the rate of interest, English commodities, either for coninvolving no fall of any prices except sumption or on speculation, though the the prices of securities. Either Eng- effect may not manifest itself with suffilish securities would be bought on cient rapidity to enable the transmisaccount of foreigners, or foreign secu- sion of gold to be dispensed with in the rities held in England would be sent first instance. These extra purchases abroad for sale, both which operations would turn the balance of payments in took place largely during the mercanfavour of the country, and gradually restore a portion of the exported gold; and the remainder would probably be brought back, without any considerable rise of the rate of interest in England, by the fall of it in foreign countries, occasioned by the addition of some millions of gold to the loanable capital of those countries. Indeed, in the state of things consequent on the gold discoveries, when the enormous quantity of gold annually produced in Australia, and much of that from California, is distributed to other countries through England, and a month seldom passes without a large arrival, the Bank reserves can replenish themselves without any re-importation of the gold previously carried off by a drain. All that is needful is an intermission, and a very brief intermission is sufficient, of the exportation.

double action, not upon the pecuniary position of the Bank itself, but upon the measures it is forced to take in order to stop the drain. Though the Bank itself is no poorer, its two reserves, the reserve in the banking department and the reserve in the issue department, have each been reduced three millions by a drain of only three. And as the separation of the departments renders it necessary that each of them separately should be kept as strong as the two together need be if they could help one another, the Bank's action on the money market must be as violent on a drain of three millions, as would have been required on the old system for one of six. The reserve in the banking department being less than it otherwise would be by the entire amount of the bullion in the issue department, and the whole amount of the drain falling in the first instance on that diminished reserve, the pres

sure of the whole drain on the half reserve is as much felt, and requires as strong measures to stop it, as a pressure of twice the amount on the entire reserve. As I have said elsewhere, "it is as if a man having to lift a weight were restricted from using both hands to do it, and were only allowed to use one hand at a time; in which case it would be

necessary that each of his hands should be as strong as the two together."

For these reasons it appears to me, that notwithstanding the beneficial operation of the Act of 1844 in the first stages of one kind of commercial crisis (that produced by over-specula

Evidence before the Committee of the tion), it on the whole materially aggra

House of Commons on the Bank Acts, in 1857.

vates the severity of commercial revulsions. And not only are contractions

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of credit made more severe by the Act, they are also made greatly more frequent. Suppose," says Mr. George Walker, in a clear, impartial, and conclusive series of papers in the Aberdeen Herald, forming one of the best existing discussions of the present question 'suppose that, of eighteen millions of gold, ten are in the issue department and eight are in the banking department. The result is the same as under a metallic currency with only eight millions in reserve instead of eighteen. The effect of the Bank Act is, that the proceedings of the Bank under a drain are not determined by the amount of gold within its vaults, but are, or ought to be, determined by the portion of it belonging to the banking department. With the whole of the gold at its disposal, it may find it unnecessary to interfere with credit, or force down prices, if a drain leave a fair reserve behind. With only the banking reserve at its disposal, it must, from the narrow margin it has to operate on, meet all drains by counteractives more or less strong, to the injury of the commercial world; and if it fail to do so, as it may fail, the consequence is destruction. Hence the extraordinary and frequent variations of the rate of interest under the Bank Act. Since 1847, when the eyes of the Bank were opened to its true position, it has felt it necessary, as a precautionary measure, that every variation in the reserve should be accompanied by an alteration in the rate of interest." To make the Act innocuous, therefore, it would be necessary that the Bank, in addition to the whole of the gold in the Issue Department, should retain as great a reserve in gold or notes in the Banking Department alone, as would suffice under the old system for the security both of the issues and of the deposits.

§ 5. There remain two questions respecting a bank-note currency, which have also been a subject of considerable discussion of late years: whether the privilege of providing it should be confined to a single establishment, such as the Bank of England, or a plurality of issuers should be allowed:

and in the latter case, whether any peculiar precautions are requisite or advisable, to protect the holders of notes against losses occasioned by the insolvency of the issuers.

The course of the preceding speculations has led us to attach so much less of peculiar importance to bank notes, as compared with other forms of credit, than accords with the notions generally current, that questions respecting the regulation of so very small a part of the general mass of credit, cannot appear to us of such momentous import as they are sometimes considered. Bank notes, however, have so far a real peculiarity, that they are the only form of credit sufficiently convenient for all the purposes of circulation, to be able entirely to supersede the use of metallic money for internal purposes. Though the extension of the use of cheques has a tendency more and more to diminish the number of bank notes, as it would that of the sovereigns or other coins which would take their place if they were abolished; there is sure, for a long time to come, to be a considerable supply of them wherever the necessary degree of commercial confidence exists, and their free use is permitted. The exclusive privilege, therefore, of issuing them, if reserved to the government or to some one body, is a source of great pecuniary gain. That this gain should be obtained for the nation at large is both practicable and desirable: and if the management of a bank-note currency ought to be so completely mechanical, so entirely a thing of fixed rule, as it is made by the Act of 1844, there seems no reason why this mechanism should be worked for the profit of any private issuer, rather than for the pub lic treasury. If, however, a plan be preferred which leaves the variations in the amount of issues in any degree whatever to the discretion of the issuers, it is not desirable that to the ever-growing attributions of the government, so delicate a function should be superadded; and that the attention of the heads of the state should be diverted from larger objects, by their being besieged with the applications, and made a mark for all the attacks, which are

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