CHAP. VIII.

REGULATION OF THE CIRCULATION BY THE FOREIGN EXCHANGES.

All the country bankers examined concur in stating that they have not the power by loans or discounts beyond the ordinary transactions of the neighbourhood to extend or contract the local circulation or to influence prices. They could, indeed, refuse to issue their own notes in answering the demands of their `depositors, but such refusal must be accompanied by offering Bank of England notes or coin, and thus the local circulation would be equally filled up; they may curtail or call in their advances and so diminish their engagements, and eventually render a smaller amount of circulation necessary; but the immediate demands for notes for local purposes must still be satisfied.

It appears by that evidence, that their circulation is devoted and confined to local purposes, chiefly in small amounts, for the retail trade; and in the rural districts, in advances to farmers for the purchase of stock and seed, and to cattle dealers and provision merchants: but that when called upon to make advances by way of loan or discount on a larger scale, it is always by a draft or order upon London, or upon such of their correspondents in other towns as happen to suit the borrowers such loans or discounts being invariably made out of capital, or, in other words, out of the general resources of the bank.

Among the country bankers of England I have selected the evidence of Mr. Stuckey, the head of the admirably conducted banks of Somersetshire under his firm, because there is no one more conversant, both theoretically and practically, than he is with the subject of banking. By his position formerly he was in intimate communication with Lord Liverpool and Mr. Huskisson. He was examined by the Bullion Committee in 1819. He was an adherent to the principles of the late Mr. Ricardo; and he expressed opinions of the desirableness of having the circulation of bank notes regulated by a view to the foreign exchanges. But what is the result of his very large experience as a banker?

477. (Chairman.) Do you conceive that, generally speaking, there is an insuperable difficulty in country banks exercising such a controul over their own issues, as to reduce them to some extent during a period of adverse foreign exchange?

I really do not see how that is to be done.

478. Then what is the practical effect of the regard to foreign exchanges, which you think all country bankers ought to pay?

The practical effect is to make them more cautious and circumspect in the management of their money transactions; but I should not state, that in the agricultural districts, the circulation would be altered by the foreign exchanges.

479. Do you conceive, that although the country bankers ought to pay regard to the state of the foreign exchanges, it is not in their power to bring that regard into practical effect by reducing the amount of their issues during the period of adverse exchange?

I do not see how it could be done.

480. Will then the regard which you recommend they should pay to the foreign exchanges produce any practical effect whatever upon their issues?

Yes, it would produce effect in the management of their monied concerns.

481. What practical effect would it produce on their issues?

Very little; my own opinion is, that country issues have very little to do with exchanges.

482. Would the regard which you recommend to the foreign exchanges produce any effect upon their issues?

Very little; it would produce some effect upon the management of their monied concerns.

483. (Sir T. Fremantle.) Upon their liabilities?

Yes.

484. But comparatively little on their issues?

Yes: particularly in the agricultural parts of the country.

485. Upon what do you think the issues of the country bankers depend?

More on the state of agriculture than any thing else. When the landed interest is in a comfortable state, I consider the issues to be increased.

491. (Sir T. Fremantle.) The advance which you make to the agriculturists is an advance of capital, whether it is paid to them in your own notes, or Bank of England notes or gold?

Yes; the advance is generally made to agriculturists in our own notes.

492. But if the state of the country is such as not to require an increase of your own issues, you are quite sure that those notes will come back to you in the course of a short time?

Exactly.

493. Therefore the advance that you make in that case is an advance of capital, and not an advance of mere issue?

Exactly; it is made out of our resources.

501. (Chairman.) Will you state how you are affected by foreign exchanges?

I think the London banker is affected by them, there- fore I am affected; I naturally know that if my deposits are withdrawn, and any demand is made upon me, I must sell my securities; therefore I look to the foreign exchanges in order to ascertain how the money market is, that I may know what securities I shall dispose of.

524. (Chairman.) Suppose the case of an adverse foreign exchange, when, according to your own opinion, the paper circulation of the country ought to be reduced, would you, on a depositor asking for the payment of a deposit in notes, be at all guided by the circumstance of the foreign ex- changes, as to whether you paid that deposit in Bank of England notes, or in your own local notes?

I admit that I should not be guided by the foreign exchanges, but I should be guided by knowing where the deposit money was to go to.

525. (Sir T. Fremantle.) You have stated that when you have observed gold going out of the country, and money becoming tight in London, you have been in the habit of issuing directions to your different branches, to be more circumspect in the advances they make; has the effect of that been practically to diminish the amount of your notes in circulation in those districts?

I do not think it has; I am not aware that it has.

526. What has the effect been?

To make them more cautious in their advances, keeping our resources more within our own command instead of discounting a bill, which we should discount under some circumstances, we have refused it; and instead of advancing 1000 l. or 2000 l., we have desired the person to take 5001.; therefore we keep our banking capital and banking resources more under our own command.

527. But are you prepared to say that the circulation of your own notes has not been affected by that course of con- duct?

I am not aware that it has.

527. Supposing, for instance, it should ultimately be thought that it is desirable that the country circulation should have a general conformity to the state of the foreign exchanges, do you conceive that this could be in any way effected by the country bankers?

I do not at present know how it could be accomplished; and I may take the liberty of going further in that question, and saying that it appears to me that the country issues, as conducted in the west of England, have very little or nothing to do with the foreign exchanges.

538. Do you conceive then that the only circulation which ought to have reference to the foreign exchanges is that of the Bank of England?

I do conceive that it is the only thing which ought to have reference to them, being the circulation of London, and London being the spot where the foreign exchanges are generally effected.

539. (Mr. Grote.) Do you mean to state that you think the circulation of the Bank of England ought to be made to vary in conformity with the foreign exchanges, but that the circulation of the country banks ought not to be affected by the foreign exchanges?

No, I do not go so far as that; my opinion is that the country circulation does not affect the foreign exchanges, because it is a different kind of circulation; the foreign exchanges are, we all know, affected in various ways, but I do not think they are affected by the country circulation, and I have looked attentively at that question.

The evidence of Mr. Gilbart, of the London and Westminster Bank, of Mr. Hobhouse, of a bank at Bath, and of Mr. Rodwell, of a bank at Ipswich, is full of information as to the circumstances which in- fluence and limit the country circulation without the possibility of reference to the exchanges. But as these gentlemen do not profess ever to have entertained an opinion of its being desirable, if it were practicable, to regulate the country circulation by the foreign ex- changes, I have preferred a reference to Mr. Stuckey's evidence, he having entertained and professed an opinion that it was desirable, but had made the discovery, confirmed by long experience on a very extensive scale, of its utter impracticability.

Mr. Gurney was examined on this point by the Committee on the Bank Charter in 1832. I have before had occasion to notice his evidence at some length, and will now only refer to the concluding part of it:

Does it not follow from what you have said, that an over-issue of notes of country bankers cannot easily be effected?

My belief is that it cannot be effected by any act of the country bankers.

As far as this point is concerned, it might perhaps be deemed to (be sufficiently proved by the evidence already adduced. But not the evidence only on this point is confirmed, but also much additional light is thrown on the distinction between capital and currency, by a view of the Scotch system of banking. The examinations of some of the managers of the Scotch banks by the Committee in 1841, are accordingly well worthy of attention as illustrative of that distinction.