|An inquiry Into The Currency Principle|
CHARGES AGAINST THE MANAGEMENT OF THE BANK OF ENGLAND.
The foregoing extracts from the examinations of the country bankers give the evidence of witnesses who, while explaining the working of the country bank system, offer no opinion, adverse or otherwise, as to the management of the Bank of England. But there are witnesses before that Committee who, while giving very elaborate evidence, comprising highly interesting details, serving to exhibit what, from their regularity, may be deemed to be laws determining the variations of the country circulation, change the whole course of their reasoning when they give their opinion upon the conduct of the Bank of England.
They charge that institution with being the main cause, by undue expansion and subsequent contraction of its issues, of causing the alternations of excitement and depression which have characterised the commercial state of this country of late years. And a whole host of writers, some as partisans of the joint stock banks, others unconnected with any banks, are loud in their declamations against what appears in their eyes the monster monopoly of the Bank of England; con- tending, as they do, that whereas the country banks of issue are limited as to any power of adding to the circulation, no limitation exists to the power of the Bank of England to make any addition to its issues, which a view to the interests of its proprietors may dictate; that it can purchase exchequer bills and other government securities and bullion, and discount bills, and make advances to any amount that may suit its convenience, against issues of its notes; and that if then the exchanges become adverse, and its bullion goes out, it puts on the screw, to the great derangement of all commercial operations.
The evidence of Mr. Hobhouse and Mr. Gilbart furnishes striking instances of the made of reasoning by which it is attempted to be shown that, while the country banks are perfectly powerless in any attempt to regulate their issues, the Bank of England is all powerful, and can enlarge and contract its circulation at pleasure, subject only to an ultimate limitation by the exhaustion of its treasure.
H. W. Hobhouse, Esq.
158. (Mr. Gisborne.) Can you state any marked distinction between the Bank of England and country bankers as issuers?
I think the banks in the country are banks of issue to a very small amount compared with the Bank of England. The Bank of England deals with nothing but its own currency; it is always buying and selling circulation, if I may use the expression; it issues circulation against gold, which I consider to be a very unwholesome thing, whether London or the country wants the circulation or not. Then, again, they lend their notes for circulation in the country, which a country banker never does; he would lose his credit if he did that: he could never hold up his head afterwards, if he attempted to put out his circulation as the Bank of England does; then the Bank of England are buying and selling securities, and acting upon the circulation, whereas the country bankers are entirely passive, and that is the great distinction which I should draw: they carry on the business of issuing to an infinitely smaller extent than the Bank of England, and therefore that is not a fair measure to judge them by.
159. (Mr. Hume.) Are the Committee to understand that you object to the Bank of England issuing notes for gold?
If there is no actual demand for purposes of circulation, it increases the circulation when it is not wanted. If a person were to come to my bank and put a quantity of gold into my bank and ask me to issue notes against it, I would not do it, for I could not make them stay out unless they were wanted; they would come back; therefore, as I say, I could not con- duct my business in the same way as the Bank of England does. If a person brought gold to me I should have to pay coin for it.
160. (Mr. Grote.) And the person who brings to you bullion might go and get that coined at the Mint?
Yes, but if there is no demand for circulation he does not do it; but in the case of the Bank of England he puts it in for a temporary purpose, and out come the bank notes; it may be a very wholesome thing for the Bank of England to have that power, but I could not do it. I know that the notes would return upon me immediately; in short, I have no power over the circulation.
J. W. Gilbart, Esq.
1015. (Chairman.) What are the other tests by which you ascertain whether the issue of bank notes was or was not required?
Besides the rate of interest, I consider the amount of money in circulation, as far as regards the Bank of England, as a test.
1016. Will you explain that answer more fully?
An increase in the circulation of the Bank of England, I conceive, differs from an increase in the circulation of the country banks, because the increase of the circulation of the country banks is drawn out by the state of trade in their respective districts. The country bankers having no power to purchase stock, or exchequer bills, or bullion, with their notes, an increase of circulation by them is indicative of an increase of trade in their districts; either that there is a greater briskness of trade, and a greater quantity of commodities bought and sold, or else, from some other circumstance, there is an advance in the price of those commodities, and, therefore, I do not consider that any positive increase in the amount of the circulation of the country banks is any absolute proof of excess of issue; if that were the case, it would appear that the circulation of Ireland, which was very much larger in December, is a proof of an excessive issue of notes in that country, whereas the fact is, that a larger number of notes at the end of the year are drawn out by the produce of the harvest being brought to market. But an increase of the Bank of England circulation arising from an issue of its notes against bullion, or against purchase of government securities, would be an increase not required by trade, and would necessarily reduce the rate of interest and lead to speculation in trade, and investments in foreign securities.
1017. Do you mean, then, that any increase of issue of bank notes against bullion, or by the purchase of securities, is, in your opinion, an excess of issue?
I must again guard myself; I am very averse to universal propositions, because I believe there are no universal propositions in the science of political economy; that they are all subject to exceptions, and may be modified by circumstances. But taking it as a general rule, and, referring to experience, I think that an issue of notes against a lodgement of bullion will be usually found to be an excess of issue.
From the tenour of these answers it might be inferred that every purchase of securities or of bullion by the Bank of England is made in bank notes which remain out and add to the amount of the circulation; and if they do not remain out, how can they be said to add to the circulation? As to the buying and selling of securities, this, the Bank, having a large capital and deposits, might do if it were not a bank of issue. But, say Mr. Hobhouse and Mr. Gilbart, the country banks, if they buy securities, cannot pay for them in their notes, the demand for these being limited; they must therefore pay for them in an order on London. But what is that order? It enables the holder of it to get gold for it, if he has occasion for or can make use of the gold. And what does the Bank of England do, more or less, when it makes advances by loan or dis- count, or buys securities? The seller of the securities or the borrower may claim bank notes or gold as he might claim Bank of England notes or gold from any other bank of issue. But he may not, and in most cases does not, want the bank notes or gold. He may require only the power of passing a cheque against the amount, which he pays into his banker. And, in point of fact, unless there is a demand for gold, the great bulk of the transactions of the Bank of England, whether in the purchase or sale of securities or of bullion, is accompanied with as little effect upon the amount of bank notes in the hands of the public are the transactions of the country banks of issue
The most extraordinary part of the charge against the Bank of England is, that it issues its notes in excess by its purchases of bullion. In the first place, there is no more reason for supposing that bank notes of necessity actually pass out of the Bank for purchases of bullion than for purchases of securities; but, in the next place, the Bank cannot help purchasing gold. The gold comes into the Bank sometimes from the internal circulation, and in that case it is paid in as a matter of course; sometimes it comes in as bullion from abroad in the shape of sovereigns which had been previously exported, there being no seignorage; and in such case also it is quite obvious that the Bank must be passive in receiving them and in paying for them either in notes or in a book credit. But take the case of uncoined gold. If the Bank objected to buy it, it might be taken to the Mint by the importer, and when coined paid into the Bank. Mr. Hobhouse says that it would not be taken of necessity to the Mint, because there might be no want of it in the circulation. This would be true if it could only find vent in the circulation as currency, meaning for retail purposes, those being the only purposes for which coins circulate. But the importer requires the use of it as capital, and if the Bank will not buy it as bullion he must submit to the delay of having it coined, so that he might pay it into the Bank, and thus by a small sacrifice of interest get the command of his capital. The Bank, therefore, in buying the bullion at 3 l. 17s. 9d. per ounce spares the importers this round-about process. It is, moreover, to be ob- served, that the Bank is by its constitution a dealer in bullion, and if it were not, some other establishment would be.
So inconsistent, indeed, are the charges against the Bank of England with reference to its supposed management of the circulation, that while the country bankers are charging it with issuing its notes in excess by purchases of bullion, the partisans of the currency principle, that is, of a metallic variation, consider it to be an imputation upon the present system or upon the management, that an import of bullion is not attended with a corresponding increase in the circulation.