CHAPTER XII

FROM THE BANK ACT OF 1844 TO THE PRESENT TIME

1. On the 6th May, 1844, Sir Robert Peel moved a resolution of the House, that it was expedient to continue for a limited time certain of the privileges then enjoyed by the Bank of England, subject to any conditions that might be passed by any Act for that purpose. In bringing this resolution forward, he gave a preliminary sketch of the evils of the paper currency as it then stood, and the methods he proposed for placing it on a sounder footing. After dwelling on the importance of a metallic standard and exposing the absurdity of the theories which were so prevalent during the Restriction Act, and the advantage of having a single standard of value, he addressed himself to the more immediate subject of consideration-the state of the paper circulation of the country, and the principles which ought to regulate it—“I must state, at the outset, that, in using the word money, I mean to designate by that word the coin of the realm, and promissory notes payable to bearer on demand. In using the words paper currency, I mean only such promissory notes. I do not include in these terms bills of exchange, or drafts on bankers, or other forms of paper credit. There is a natural distinction, in my opinion, between the character of a promissory note payable to bearer on demand, and other forms of paper credit, and between the effects which they respectively produce upon the price of commodities, and upon the exchanges. The one answers all the purposes of money, passes from hand to hand without indorsement, without examination, if there be no suspicion of forgery; and it is, in fact, what its designations imply it to be, currency, or circulating medium I think experience shews that the paper currency, that is, the promissory notes payable to bearer on demand, stands, in a certain relation to the gold coin and the foreign exchanges, in which other forms of paper credit do not stand. There

are striking examples of this, adduced in the Report of the Bullion Committee of 1810, in the case both of the Bank of England and of the Irish and Scotch Banks. In the case of the Bank of England and shortly after its establishment there was a material depreciation of paper in consequence of its excessive issue. The notes of the Bank of England were at a discount of 17 per cent. After trying various expedients, it was at length determined to reduce the amount of Bank notes outstanding. The consequence was an immediate increase in the value of those which remained in circulation, the restoration of them to par and a corresponding improvement in foreign exchanges.

In

the case of Ireland, in 1804 the exchange with England was extremely unfavourable. A committee was appointed to consider the causes. It was denied by most of the witnesses from Ireland that they were at all connected with excessive issues of Irish notes. In the spring of 1804 the exchange of Ireland with England was so unfavourable, that it required £118 10s. of the notes of the Bank of Ireland to purchase £100 of the notes of the Bank of England. Between the years 1804 and 1806 the notes of the Bank of Ireland were reduced from £3,000,000 to £2,410,000, and the effect of this, taken in conjunction with an increase of the English circulation, was to restore the relative value of Irish paper and the exchange with England to par. In the same manner an unfavourable state of the exchange between England and Scotland has been more than once corrected by a contraction of the paper circulation of Scotland. In all these cases the action has been on that part of the paper credit of the country which has consisted of promissory notes payable to bearer on demand. There had been no interference with other forms of paper credit, nor was it contended then, as it is now contended by some, that promissory notes are identical in their nature with bills of exchange, and with cheques on bankers, and with deposits, and that they cannot be dealt with on any separate principle

2. There is no need now of saying anything more regarding the unhappy heresy with which Sir Robert Peel was then infected, that nothing but Bank notes are paper currency, because we have nothing new to say. But it is impossible to imagine anything more inaccurately stated as historical evidence

to support his ideas. In the first place, he committed the immense error of omitting to consider that, in the English and Irish cases, these things happened when the English and Irish Bank notes were not payable to bearer on demand, when they were, in fact, inconvertible. In his statement regarding the Bank of England he relied upon the Bullion Report. Now, we have shewn, by the most incontrovertible evidence, in Chapter IX., that this passage of the Bullion Report is the most amazing mass of chronological error and confusion that can be imagined. It was not the profuse issues of Bank notes that depressed the exchanges, but the badness of the coin; it was not taking Bank notes out of circulation that brought the exchanges to par, but the restoration of the coinage, and the exchanges were brought to par nine months before the Bank note was brought to par. Hence, in this case, the statement that the excessive issues of Bank notes caused the exchanges to fall, and the withdrawal of them restored them to par, has not a shadow of a foundation in truth. Hence, there is no truth whatever in saying that the action was upon the Bank notes-the action was simply and solely on the silver coinage. The Irish case is equally inapplicable, because the notes were then inconvertible, and they were the medium in which payment of bills of exchange was made; and then, unquestionably, an excessive quantity of them depressed the exchanges prodigiously; but how does such a case apply to notes strictly convertible? The Scotch case is equally inapplicable-which will be explained in the following chapter, for the notes were not payable to bearer on demand, but six months after demand. Consequently, of these three examples, the first is wholly inaccurate, and the other two are wholly inapplicable to the case he had in hand

3. He then proceeded to expatiate on the evils of unlimited competition of issues

"Are the lessons of experience at variance with the conclusion we are entitled to draw from reason and from evidence? What has been the result of unlimited competition in the United States? In the United States the paper circulation was supplied, not by private bankers, but by joint stock banks, established on principles apparently the most satisfactory. There was every

precaution taken against insolvency, unlimited responsibility of partners, excellent regulations for the publication and audit of accounts, immediate convertibility of paper into gold. If the principle of unlimited competition, controlled by such checks, be safe, why has it utterly failed in the United States? How can it be shewn that the experiment was not fairly made in that country? Observe this fact, while there existed a central Bank (the United States Bank) standing in some such relation to the other banks of the United States as the Bank of England stands to the banks in this country, there was some degree (imperfect, it is true) of control over the general issues of paper. But when the privileges of the central Bank ceased, when the principle of free competition was left unchecked, then came, notwithstanding professed convertibility, immoderate issues of paper, extravagant speculation, and the natural consequences, suspension of cash payments and complete insolvency. Hence I conclude that reason, evidence and experience combine to demonstrate the impolicy and danger of unlimited competition in the issue of paper

4. It is impossible to say which is the more remarkable in this extract-the evidence Sir Robert Peel omitted, or the evidence he adduced. The first thing that strikes us is-What was the need of crossing the Atlantic in search of an example of joint stock banks, with unlimited competition of issues? Why did he not cross the Tweed? On the north side of the Tweed there had existed joint stock banks, with unlimited issues, for 150 years, and no central bank to control the others; the principle of free competition was left unchecked, and the natural consequences, "suspension of cash payments and complete insolvency," had never occurred. But Sir Robert Peel carefully avoided saying one word about that case, and the reason was that it militated against the theory he was determined to carry at all hazards, that of one Central Bank of Issue

5. But the evidence he adduced was as great a misrepresentation of historical fact as what we have quoted in Section 2. The American Banks, indeed, established on principles the most satisfactory! why John Law was the parent of American banking!

They were a formal adoption of the wild theories of Law. However, we cannot fully expose the fallacy of Sir Robert Peel's views of American banking until a subsequent chapter; but as to the fact of the Central Bank of the United States exercising any due controlling influence over the other Banks, we will only quote a passage from President Van Buren's message to Congress, 1839

"I am aware it has been urged that the control (over the operations of the local banks) may be best attained and exerted by means of a National Bank. The history of the late National Bank, through all its mutations, shews that it was not so. On the contrary, it may, after a careful consideration of the subject. be, I think safely stated, that at every period of banking excess it took the lead; that in 1817 and 1818, in 1823, and in 1833, and in 1834, its vast expansions, followed by distressing contractions, led to those of the State institutions. It swelled and maddened the tides of the banking system, but seldom allayed or safely directed them. At a few periods only was a salutary control exercised, but an eager desire, on the contrary, exhibited for profit in the first place; and if afterwards its measures were severe towards other institutions, it was because its own safety compelled it to adopt them. It did not differ from them in principle or in form; its measures emated from the same spirit of gain; it felt the same temptation to over-issue; it suffered from and was totally unable to avert, those inevitable laws of trade, by which it was itself affected equally with them, and at least on one occasion, at an early day, it was saved only by extraordinary exertions from the same fate that attended the weakest institution it professed to supervise. In 1837 it failed equally with others in redeeming its notes, though the two years allowed by its charter had not expired, a large amount of which remains at the present time outstanding.'

Such was the language held by the Government regarding that institution to whose abolition Sir Robert Peel attributed the destruction of American credit! and if we were to descend from the evidence of the Executive to that of the most eminent private commercial writers, such as Mr. Galatin, Mr. Lee, Mr. Appleton, and others, we shall find that the most reckless mis-management was the chief characteristic of that Bank. So much for the value of it as an argument in support of Sir Robert Peel's views