THE UNIVERSITY OF ILLINOIS LIBRARY 352 hQ7S V34. ECONOMICS ^ REFLECTIONS V SUGGESTED BY A PERUSAL OF MR. J. HORSLEY PALMER'S PAMPHLET CAUSES AND CONSEQUENCES PRESSURE ON THE MONEY MARKET. By SAMUEL JONES LOYD. LONDON: PELHAM RICHARDSON, 23, CORNHILL. 1837. Price One Shilling. PRINTED BY W. MARCHANT, I^GRAM-COX^aT, FENCHURCH-STREET. Thp: Writer of the following Reflections is fully conscious of the extent to which he exposes him- self to the charge of presumption in venturing to break the bounds of his usual occupations and trespass upon the public attention. He throws himself entirely upon the kindness and forbearance of those who may read these pages. " Optat ephippia bos." A Banker attempts to philosophize. London, 25th February, 1837. A 2 REFLECTIONS, ETC, ETC. I. The Legislature, in ordering the publication of the accounts of the Bank, had two objects in view : first, To enable the public to exercise some judg- ment upon the general course pursued by the Bank Directors, and thus to place their proceedings to a certain extent under the control of public opi- nion; and, secondly, By furnishing the public with a knowledge of the fluctuations which were taking place in the amount of Bank-notes in circulation or of specie in deposit, to enable them to foresee approaching pressure, and by timely precautions to diminish the intensity of its action and to mi- tigate its effects. Now, from the accounts as pub- lished, it appears that the Bank has deviated from 6 ^ all the rules by which it professes to be guided, and which a regard to sound principle requires it to adhere to. By these accounts it appears that the amount of securities, so far from being kept at a fixed point, has fluctuated largely ; it also ap- pears that the circulation has in some instances increased whilst the specie has been diminishing ; and from the same accounts it will be very difficult to make out that steady and continual contraction of the circulation month by month during the diminution of specie in store, upon which alone any plausible ground of censure upon the proceedings of the Joint- Stock Banks can be founded. But we are told in a pamphlet, explanatory of the action of the Bank, and written by one of the most influential of the Directors of that Establishment, that, upon the data furnished by the accounts as published, no safe conclusions can be founded ; that other ex- planatory circumstances and considerations, not officially laid before the public, must be taken into the account ; and that, when due allowance has been made for these, conclusions will arise not only differing from, but diametrically the reverse of those to which every person must come upon the inspection merely of the published accounts. It will, in fact, according to the additional ex- planations given by Mr. Palmer, be found that the Bank has strictly adhered to the rules which it laid down for its own guidance, tiat its securities have been, as was proposed, kept at an invariable amount, that its liabilities have been diminished in strict correspondence with the diminution of its specie, and that the contraction of its circulation has been of that steady and regular character which justifies the Bank in complaining of the counter-action, in this respect, of the Joint-Stock Banks. In short, the explanations of Mr. Palmer are all directed to show that the conclusions to which the public ought to come, with respect to the conduct of the Bank, are the very opposite of those to which they cannot but come upon the examination simply of the published accounts. Those have undoubtedly led active and inquiring minds, as is abundantly shewn by various pub- lications (of which it is hardly necessary to enumerate more than the Letter of Colonel Torrens, and the laboured and ingenious articles on this subject which occasionally appear in the Times,) to conclusions the very reverse of those which are established, according to Mr. Palmer, 8 by a full exposition of the accounts of the Bank. That the published accounts are not only insufficient for the purpose of instructing and guiding the public, but that they are, when unaccompanied with further explanation, the actual means of mis- leading them, is the fundamental proposition of Mr. Palmer's pamphlet ; and unless this be fully admitted, his defence of the Bank must at once fall to the ground. Surely this is an evil of no trifling magnitude, requiring immediate correction ; in effecting which the Bank ought to be the pro- minent agent. If the accounts, as now published, are, according to their own statement, a false repre- sentation of the action of the Bank and calcu- lated only to mislead, it is a duty incumbent upon the Directors of the Bank to take some means of laying before the public such accounts as shall give a correct view of their proceedings, and be calculated to lead the public to safe and true con- clusions. II. But it may not be amiss to examine a little more closely into the nature of those explanatory circumstances and considerations upon which Mr. Palmer relies for the correction of the conclusions which obviously arise from the published accounts. The principle upon which the Bank professes to be guided in the regulation of the currency is this: to meet its outstanding liabilities consisting of circulation and deposits, it holds at its disposal securities and specie, and its principle of action is, to keep the amount of its securities fixed, and to leave any variation in the amount of circulation and deposits to be balanced by a corresponding variation in the amount of specie. This principle was set forth by the BankDirectors in their evidence before thePar- liamentary Committee previous to the last renewal of the Charter, and was recommended principally upon the ground that the effect of it would be to render the Bank a passive agent, and that all vari- ations in the amount of specie would thus become the result not of any direct action on the part of the Bank, but solely on that of the public. If they demanded specie, it could be obtained only by paying in notes or diminishing deposits ; and if, on the other hand, the specie was increased, there must at the same time be a corresponding increase in the amount of circulation or deposits. Under this view of its probable action, the principle above stated met with a degree of acquiescence 10 which a more close examination of the subject will hardly warrant. The Bank, it must be observed, acts in two capa- cities ; as a manager of the circulation, and as a body performing the ordinary functions of a bank- ing concern. The duties of these two characters, though 'very often united in the same party, are in themselves perfectly distinct. In the principle laid down by the Bank for its own guidance, the sepa- rate and distinct nature of these two characters has not been sufficiently attended to. The rules applicable to its conduct as a manager of the cur- rency are mixed with the rules applicable to its conduct as a simple banker, and the rule or prin- ciple under discussion is the result of this mixture. As a manager of the currency it is undoubtedly a sound rule by which to guide itself, that against the amount of notes out it shall hold at its disposal securities and specie ; that the amount of securities shall be invariable, and that consequently all fluc- tuations in the amount of notes out shall be met by a corresponding fluctuation in the amount of specie in deposit; thus the public and not the Bank will be made the regulators of the amount 11 of the circulation, and that amount will by this principle be made to fluctuate precisely as it would have fluctuated had the currency been purely metallic. For the regulation of the conduct of the Bank as a manager of the currency, this rule is perfectly unobjectionable, and rests indeed upon the soundest principles. But when the same rule is further applied to the regulation of its conduct as a banking concern, it is necessarily found to be wholly impracticable. It is in the nature of banking business that the amount of its deposits should vary with a variety of circumstances ; and as its amount of deposits varies, the amount of that in which those deposits are invested (viz. the securities) must vary also. It is therefore quite absurd to talk of the Bank, in its character of a banking concern, keeping the amount of its securities invariable. The reverse must necessarily be the case. The proof of this is very striking in the case now under our considera- tion. In the published account the variation in the amount of securities held by the Bank is very great; and when we turn to Mr. Palmer's pamphlet to 12 learn bow this is to be reconciled with the principle of action professed by the Bank, we are told that to understand this we must look much further than to the published accounts ; that we must analyse the nature of the deposits against which the securities are held, and that one class of those deposits being peculiarly of a temporary nature, must on that account be entirely thrown out of the account, and of course also the securities held against it. By this process a new table of securi- ties is produced which exhibits their amount much more nearly approaching to steadiness. But this mode of getting rid of a certain part of the deposits and securities with the view of ob- taining a table which shall exhibit a desired result is not satisfactory, because it does not rest upon any distinctive principle. The deposits in the hands of the Bank left there by different classes of the community, and arising out of different circum- stances, may no doubt differ in respect to their probable permanency and variation of amount, but these are only differences of degree, and make no essential difference upon principle in their nature or character. They are all equally banking depo- 13 sits, liable to those variations in a greater or less degree which are incidental to sucli deposits. The course adopted by Mr. Palmer is a mere arbitrary mode of making up an account to exhibit a desired result. There is no real distinction between these deposits by which he can justify the plan of removing one class of them from the ope- ration of a principle to which he still holds the other classes to be subject ; the fact is that the principle is applicable only to the management of the currency, and is totally inapplicable to the management of banking deposits. By applying the principle to the aggregate result of the two classes of business, the Bank arrives at a rule the possible consequences of which are of the most serious nature. The rule is, " that the securities being kept equal, any diminution in the amount of specie may be met by a corresponding decrease in the aggregate amount of circulation and deposits." The possible consequence is, that a large diminution of specie may take place, and be met, not by a corresponding decrease of circulation, but solely by a decrease of deposits. Thus a heavy drain upon the treasure 14 of the Bank might take place under this rule with- out any contraction of the currency by which that drain is to be checked or the Bank to be pro- tected. To those who are practically conversant with banking business, or who have reflected upon the nature of it, it can hardly be necessary to point out the simple consideration, that banking deposits are necessarily variable in their amount and dura- tion, and that with such variations the amount of securities held by the Bank will also fluctuate. It is therefore unreasonable to talk of the invariable amount of a banker's securities, and this observa- tion is equally applicable to banking business when conducted by the Bank of England, as when it is conducted by any other body. On the other hand, I apprehend there will be no difference of opinion amongst those who have re- flected upon the principles of paper currency, as to the soundness of the rule — that the amount of paper issued shall be represented by an amount of securities which never varies, and an amount of specie which is left to fluctuate with the fluctua- tions of the amount of notes out. 15 If tliese views hv correct, it follows that the rule now adopted by the Bank is incorrect and cannot be safely relied upon in the management of the currency. The rule ought to be, That the varia- tions in the amount of circulation shall correspond to the variations in the amount of bullion, and the adherence of the Bank to this rule ought to be obvious upon the face of the published accounts. By this means, and by this means only, can we obtain "a paper circulation varying in amount exactly as the circulation would have varied had it been metallic;" and in addition to the establish- ment of this only sound principle of currency, we shall obtain a simple and intelligible account, re- quiring no further explanations nor the production of any information not at the command of the public, to enable them to come to a correct under- standinof of it. Was the management of the currency entrusted to a body established exclusively for that purpose, this is the rule by which such body must govern its operations. It is only by an adherence to such a principle that a paper-circulation can be made to vary in amount precisely as the circulation would 16 have varied had it been exclusively metallic. The importance of a rigid adherence to this rule cannot be over-estimated : and if it be incompatible, as is alleged by some, with the mixed functions of the Bank of England, it seems to become a very serious question, w^hether it is not better to separate altogether the business of banking from that of regulating the currency, rather than suffer so essential a rule to be in any degree com- promised. It is not, however, very easy to per- ceive any insuperable difficulty in rendering the currency department of the Bank of England totally distinct and separate from the management of its other business ; so that the one should not interfere with or affect the other more than they would do were they under the control of different bodies. In proportion as these two functions are kept distinct, will each be rendered more effectual for its proper purpose. The two branches of the business of the Bank thus divided will proceed with equal efficiency and without mutual inter- ruption. Like those animals described by natu- ralists, whose peculiar property it is that, when cut into two parts, they move off in opposite di- rections, eacli half equally full of life and energy; tlius, if the two natures of the Bank of England were completely dissociated, each would proceed to the discharge of its respective functions with more simplicity and efficiency, unencumbered by the conflicting tendencies and opposite action of its former companion. III. Another important topic alluded to in Mr. Palmer's pamphlet, and certainly entitled to very serious consideration, is — The effect of the Joint-Stock. Banks, to whose misconduct in the regulation of their issues he attributes the peculiar severity of the pressure upon the mercantile world during the last few months, when contrasted with the very different result in this respect which occurred under a similar loss of bullion and contraction of Bank issues in 1832. Indeed Mr. Palmer goes the length of doubting whether the Joint-Stock Banks in their present form and the Bank of Eng'land can co-exist. It is not intended in these remarks either to make a general attack upon the conduct of the Bank of England, or to undertake the defence of the Joint- Stock Banks : whatever may be the evil conse- quences to the public interest arising from the 18 errors of either party, it will probably be found upon an impartial investigation that those errors are more justly attributable to the false position in which the respective parties have been placed by unwise legislation, than to the want of that degree of vigilance, knowledge, or integrity which might be reasonably expected from them. For instance, we impose upon the Bank of England the duty of regulating the value of the cur- rency, and providing for the payment of the whole of it in specie, without giving to that body the exclusive power of issuing the paper-money, or investing it with any direct control over the con- duct of rival issuers. We look to the Bank for a strict regulation of the amount of its issues accor- ding to the state of the exchanges and the drain for bullion, whilst at the same time we very incon- sistently look to it also as responsible for the maintenance of public credit in a period of pres- sure. We thus unite in the same body functions which, it can be easily shewn, are in many cases conflict- ing, and therefore, incompatible, viz. those of ordinary banking business and of regulating the amount of a paper-currency. And lastly, to per- 19 form these very delicate duties, in every step ot" which the personal interests of the mercantile, trading-, and money classes must be immediately affected, we select, not a body of individuals qua- lified (by their total separation from all such interests) to exercise a dispassionate and disinte- rested judgment ; but on the contrary, men the most largely engaged in mercantile and monied operations, and therefore more than any other class exposed in their private interests to the immediate effects of any action upon the currency. Again, with respect to Joint-Stock Banks, we create by law large and powerful establishments, to which is given the right to issue paper-money without any absolute restriction ; and even that knowledge of the action of the Bank which is essential to enable them to take a just view of the condition of the currency and of their correspond- ing duty, is afforded to them only through such imperfect and delusive accounts as those published by the Bank are represented by the Bank Directors themselves to be. Such is the imperfect and inconsistent nature of our legislation with regard to these respective bodies. We impose upon them different and often B 2 20 conflicting- duties ; we withhold from them powers commensurate with the duties required ; we place them in circumstances which necessarily give rise to interests and motives at variance with the strict discharge of these duties ; and yet whenever these duties are in any respect imperfectly discharged, we are too ready to direct against the administra- tion of these bodies that censure which ought more properly to fall upon that short-sighted legis- lation which has placed such bodies in a false position. If the Bank of England has not contracted its issues in strict and undeviating conformity with the diminution of its specie, how can we reasonably be surprised at or complain of this result when we have suifered that body to blend with this simple and distinct duty a variety of other very different and in some respects conflicting functions, and have exposed it to the action of influences and temptations which are calculated to divert it from the sole contemplation of that purpose ? Or if the Joint-Stock Banks have failed to regu- late their issues by the state of the exchanges, and the drain for bullion upon the Bank, can we be surprised at this when in legislating for these con- 21 cerns we have neither subjected them to any ade- quate motive for so regulating their issues, nor afforded them any certain means of obtaining tliat knowledge (respecting the state of the Bank ac- counts as regards currency) which is absolutely necessary for enabling^ them to do so ? The action of both these bodies appears to have been perfectly consistent with that which might fairly be anticipated as the almost certain result of the nature of our legislation respecting them. Their conduct may fairly be said to be that which legislation has made it ; and in examining its defects, it is of the utmost importance that we should keep our attention steadily fixed upon the true cause of those defects. IV. But in the present case it is necessary to examine a little more closely the evidence by which the charge against the Joint-Stock Banks is sup- ported. The charge is of a very serious nature ; that of being on the present occasion the sole and entire cause of the peculiar pressure on the mercan- tile community, and of being incompatible in their nature with the existence of the Bank of England. The only fact stated by Mr. Palmer in support of these assertions is, that between the periods of 23. March 1834 and July 1836 the issues of the Joint- Stock and Private Banks had been increased 25 per cent, while those of the Bank of England had been diminished in a nearly equal proportion. This fact is here stated in rather too general a manner to enable us to deduce from it any very certain conclusions ; it would have been more satisfactory had Mr. Palmer given us a more detailed statement of the progress, month by month, or even week by week, of that diminution of the Bank issues, with a corresponding table of the state of their bullion. More especially, such a statement would have been desirable for the last year (1836), that being the period during which the proceedings of the Bank require to be most minutely scrutinized. The reduction in the bullion of the Bank prin- cipally took place from April to September last. What was the action of the Bank week by week during that period and for some months previous to it ? This information Mr. Palmer does not give us, and without this it does not seem possible to decide how far his charge in the present instance against the Joint-Stock Banks is sustainable. They may very possibly for a time expand their circula- 23 tion, whilst that of the Bank is undergoing con- traction, and so far we may admit that their power is a vicious one ; but the really serious and vital question is somewhat different from this. Is it possible for the Joint-Stock Banks to maintain an expansion of their issues for any permanency in the face of a regular, steady, and undeviating course of contraction on the part of the Bank ; or will such a course on the part of the Bank bring the subordinate issuers into such a situation that a corresponding change in their issues becomes inevi- table ? A correct determination of this question is a matter of the greatest importance, and it is much to be regretted, witli this view, that Mr. Palmer has not furnished us with minute and detailed ac- counts of the action of the Bank, from December 1835, to the present time. Such accounts when produced may possibly substantiate his case. But the information to be derived from the very imper- fect statements given us, does not tend to this con- clusion : — Dec 29, 1835 London circulation £13,800,000 March 29, 1836 Do. 14,400,000 June 28, 1836 Do. 14,200,000 This statement does not look like that steady and 24 undcviating contraction of their issues which can justify the Bank in complaining- of any counteraction on the part of the Joint-Stock Banks as a thing entirely beyond their control, and so independent of them as to menace their existence. This view of the matter seems to gain additional strength when we look to the issues of the Branch Banks : — Dec. 29, 1835.- Branch Banks £3,400,000 March 29, 1836- • Do. 3,600,000 June 28, 1836- • Do. 3,700,000 By this statement it appears that the country issues of the Bank were themselves increasing at the period during which the Bank complains so se- verely of the increased issues of its rivals. In the face of these statements we are not warranted in coming to the conclusion that the action of the Joint-Stock Banks is utterly beyond the control of the central issuer ; the Bank must first prove that it has really tried the effect of a steady and uninterrupted course of contraction, and that in face of this the issues of the Joint-Stock Banks have as steadily increased. Such may be the case ; but Mr. Palmer's pamphlet has not fur- nished us with any evidence of it, and the infor- 25 niation, imperfect and unsatisfactory as it is, which he does give us, directly tends to the opposite conclusion. V. The followinor is a statement of the circula- tion and bullion of the Bank, as given in the monthly returns which are published in the Gazette, from January 1836 to February 1837 inclusive. 1836. Circulation. Gold. Jan. 12 . .•' £17,262,000 ... • £7,078,000 Feb. 9 .. 17,427,000 ... . 7,498,000 March 8 • ■ .. 17,739,000 ... • 7,701,000 April 5 .. 18,063,000 ... . 7,801,000 May 3 .. 18,154,000 ... . 7,782,000 May 31 . .. 18,051,000 ... . 7,663,000 June 28 • ... 17,899,000 ... . 7,362,000 July 26 . . .. 17,940,000 ... . 6,926,000 Aug. 23 • .. 18,061,000 ... . 6,325,000 Sept. 20 . ... 18,147,000 ... • 5.719,000 Oct. 18 . .. 17,936,000 ... . 5,257,000 Nov. 15 . ... 17,543,000 ... . 4,933,000 Dec. 13 . ... 17,361,000 ... » 4,545,000 1837. Jan. 13 ... 17,422,000 ... . 4,287,000 Feb. 10 . ... 17,868,000 ..• . 4,032,000 Upon an inspection of this table we cannot fail to remark — 1. That the circulation is considerably higher at 26 this moment than it was in January 1836, although during this period the bullion has undergone a very large diminution. 2. That the circulation continued steadily to increase from January 1836 up to May, and tliat even in September it w^as at the same amount at which it stood in May, although the drain of bullion was by Mr. Palmer's acknowledgment in full force from April to September. 3. That there does not appear to have been any effectual reduction of circulation subsequent to the rise of interest upon Exchequer Bills, although this measure was loudly called for as necessary to enable the Bank to realize its securities, and thus reduce its issues. But as the issues do not appear to have been reduced, we must conclude that this measure has only served to enable the Bank to sell its Exchequer Bills and increase its discounts, thus forcing upon the Chancellor of the Exchequer a rise in the rate of interest upon his unfunded debt instead af charging an increased rate of discount upon commercial bills. But to return to the above table : we would ask any re- flecting person to look first to the column of bul- lion, and mark its regular and rapid decrease; 2? then to compare with this the column of circula- tion, terminating with a larger amount than that with which it commences, and having done so, to declare whether he discovers any evidence of the Bank having made the amount of its circulation to fluctuate as it would have done had it been purely metallic ; or whether he can perceive, during the drain of bullion which commenced in April, or during the months which immediately preceded that event, any signs of that steady and unde- viating contraction of circulation on the part of the Bank, on which alone any just objection to the conduct of the Joint-Stock Banks can be founded ? It is not a satisfactory reply to this question to say " that the diminution of bullion has been met by a diminished amount of deposits." If the Joint- Stock Banks see, by the published returns, that the circulation of the Bank is maintained at its full amount, they are warranted in concluding that there is no real call for a diminution of their issues, notwithstanding that some of the depositors in the Bank may have thought proper to draw from it a portion of their funds. Indeed, the Bank is not entitled to calculate at all upon the long-sightedness or prudence of the Joint-Stock Banks, but ought to 2« rely solely upon the influence which a steady and continuous course of contraction on her part must ex- ercise upon the proceedings of her subordinate rivals. This it is clear she has not done from January 1836 to February 1837, and therefore she appears to be without any sufficient ground for attributing the whole or the greater portion of the existing de- rangement to their misconduct. If they have done wrong, it appears to have been from the want of that controlling action on the part of the Bank of England which she might have exerted and has not. Take another instance ; in the quarterly average pnblished on 15th November, 1836, we find Circulation £ 1 7,543,000 Deposits 12,682,000 Total ....£30,225,000 Bullion £4,933,000 And in the quarterly average published on the 7th of February last, we find Circulation £17,868,000 Deposits 14,230,000 Total.... £32,098. 000 Bullion-.. -£4,032,000 29 By contrasting these statements we find an in- crease in the aggregate amount of circulation and deposits to the extent of £1,800,000, an increase in deposits alone of £1,450,000, and on the other side a decrease of bullion £900,000. If a decrease of bullion is to be considered as sufficiently com- pensated by a corresponding decrease in the aggre- gate of circulation and deposits, it must surely follow as a necessary consequence that an increase in the aggregate of these two ought to be met by a corresponding increase of bullion. In this statement we find a remarkable violation of all the supposed rules of the Bank. A large diminution of bullion is met not by a contraction but by an increase of circulation ; and the force of this consideration is greatly augmented by the fact tliat this increase of circulation is accompanied by a remarkable increase of deposits. And again, if we look to the securities, supposed to be kept invariable, we find in the same publica- tions November 15, Securities £28,134,000 February/, „ 31,085,000 notwithstanding that it is generally understood 30 that between these two periods a large sum lent by the India Company to the Bank had been paid off (in January), which repayment ought to produce a corresponding diminution in the amount of secu- rities in the February return. We must remember, however, that between these two periods the Bank had been induced, under very peculiar circumstances, to extend aid to a large amount to embarrassed concerns. The propriety of such interference on her part we will not now discuss ; if it be done out of her own legitimate resources, she is entitled to the free exercise of her discretion ; but if it be done by an abusive use of her power over the circulation, by increasing its amount when all regard to principle would re- quire her to diminish it, her conduct cannot be defended. Upon that supposition it becomes an unfortunate example of the effect of combining banking operations with the management of the currency, and exposing a public body to be drawn by motives arising out of one branch of business from that line of conduct which a due regard to her other duties would dictate. VI. It may perhaps be right to guard against the impression that in any of the preceding remarks 31 it has been intended to countenance the idea, that the country issuers have not been guilty of a mis- management of the circulation, by increasing their issues under circumstances which required an op- posite procedure on their parts. This fact admits of no denial ; it is obvious upon the first view of the returns as published in the Gazette. December 1835. .Bullion- .£6,626,000 December 1836 „ 4,545,000 Decrease... .£2,081,000 Here is a large decrease of the amount of bullion between Dec. 1835 and Dec. 183G, and the circu- lation ought to have undergone a corresponding contraction, each issuer diminishing his issues in a due proportion. Now let us turn to the published returns of the issues of the Private and Joint-Stock Banks, December 1835 £11,134,414 December 1836 12,011,697 Increase ••.. £877,283 Here is an increase of the country issues where there ought to have been a decrease, and therefore 32 an abuse of their power over the circulation by the Private and Joint-Stock Banks. Those parties may certainly plead, according to the principle of Mr. Palmer's reasoning, that the mere fact of a diminished amount of bullion is not necessarily a proof of an undue range of prices or of an unfavourable state of the Foreign Exchange ; that it is no conclusive evidence of a state of things requiring a contraction of the circulation ; that it may be caused by an internal demand, or by a peculiar, local, and transient cause, acting in some particular foreign country ; they might even plead that if they have not contracted their issues, they have at all events diminished their deposits. But reasonings of this nature appear to be totally untenable. A decrease in the amount of bullion requires a diminution of the circulation. If the drain has arisen from peculiar or local circum- stances, and whilst the general state of the ex- changes is not unfavourable, a very slight contrac- tion of the circulation will cause an influx of bul- lion and thus remove the evil ; but if the circum- stances of the case should be misunderstood, and the drain, though apparently arising from internal or local causes, should in reality be connected with an 33 improper state of prices and a consequent general tendency to send gold abroad (no improbable sup- position) ; in that case any delay in effecting the necessary contraction of the circulation will only tend to defer and prolong the crisis without dimi- nishing its intensity; and thus the mass of suffer- ing may be augmented, whilst by the temporary abandonment of sound and consistent principles the veiy basis of the circulation may be exposed to danger. There is an old Eastern proverb which says, you may stop with a bodkin a fountain, which if suffered to flow will sweep away whole cities in its course. An early and timely contrac- tion, upon the very first indication of excess in the circulation, is the application of the bodkin to the fountain ; commercial convulsion and ruin in con- sequence of delay, is the stream sweeping away whole cities in its course. There is another line of defence which the coun- try issuers may adopt, and to which it is more difficult to make a satisfactory reply. They may say, " We are entitled to use our powers accordino- to our own discretion, and to pursue our interest in such manner as we think right. Whether we exercise our discretion prudently or otherwise is a c 34 matter between us and our immediate customers only, in wliich the public has no right to interfere." This at once shows the defective state of our legis- lation. The law has imposed no absolute restraint upon the action of the country issuers, nor has it subjected them to any adequate motive for regulat- ing their issues upon sound principles. A voluntary and gratuitous adherence to such principles, at the sacrifice of what appears to be, and in many cases really is, individual advantage or convenience, can- not be reasonably expected from them. The only means which the law has established for controlling their issues is through the action of the Bank of England upon its own circulation, and the influ- ence^ indirect and imperfect, which that action will exert over the proceedings of the subordinate issuers. We must look, therefore, to the action of the Bank between the periods in question, December 1835 and December 1836 ; and doing so, we find that the Bank did not during this period contract its own issues ! December 1835 Circulation £17,321,000 December 1836 Do. 17,361,000 Increase***' £ 40,000 35 Whether this increase of" issues by the Bank during a decrease of bullion be defended as necessary to support public credit, to prevent the occurrence of panic, or as being accompanied by a diminution of deposits, as a substitute; may not the country issuers equally plead the same justification ? VII. An important feature in Mr. Palmer's pamphlet is, the opinion which he seems disposed to maintain, that the late drain of gold from the Bank is not attributable to any derangement of prices and consequent unfavourable state of the exchanges generally ; but that the decrease has been almost exclusively caused by the efflux of gold to the United States, and that we may look for a return of that gold, or a large portion of it, at no distant period. If this be a correct view of the true cause of the late drain, the conduct of the Bank under these circumstances, the pressure upon the mer- cantile world, and the general fall in prices which it is represented to have produced, appear to have been wholly unnecessary ; if the drain has not arisen from the improper state of the exchanges, it does not appear in what way measures, the direct tendency of which is to produce an action upon the exchanges, can be calculated to check c 2 3G that drain. Neither upon this supposition can we clearly understand the justice of the complaints against the action of the Joint-Stock Banks, or the transactions upon the Foreign-Stock Market; if the complaint against them can be maintained at all, it must be upon the ground of their imfavourable effect upon the exchanges ; but if the only or prin- cipal cause of the derangement is not to be found in the general state of the exchanges, then it ap- pears difficult to fix any large share of misconduct either upon the Joint-Stock Banks or upon the Foreign-Stock Market. Our apprehension how- ever is, that a derangement of prices and con- sequent disturbance in the balance of trade is in reality very deeply connected with the late drain upon the Bank ; indeed, we doubt whether a con- tinuous diminution of her bullion can go on except under an unfavourable state of the exchanges ; because, unless such be the case, the drain arising from peculiar circumstances in one direction will soon be corrected by a corresponding influx from other quarters. At all events the only safe course is to consider a continuous drain of gold from the Bank as conclusive evidence, without reference to vague and uncertain speculations as to the precise 37 cause of that drain, of the necessity of eti'ecting a corresponding reduction of circulation. It is of great importance that this question should be clearly understood and settled, as nothing can be more dangerous in the management of the currency than a tendency, upon the ground of supposed pecu- liarities of the circumstances of each case, to suspend the operation of rules which are of a general nature and rest upon unquestionable principles. The expectation that any important portion of the gold is likely to return from America, seems to us to rest upon very doubtful reasoning. The demand has been produced by an alteration in the relative value of gold and silver in that country, by which gold is rendered a more ad- vantageous medium of payment than it was pre- viously ; — and as this cause appears to be perma- nent in its nature, we do not see with what reason we can expect that the effect, viz. the detention of gold in that country, will be temporary. If re- mittances in specie are to come from America, may we not more reasonably expect that they will be made in the depreciated metal, silver? VIII. We have already adverted to the in- convenience arising from our bavin": to reason 38 upon very broken and imperfect data. The pam- phlet of Mr. Palmer is far from giving that full and detailed information respecting the ac- tion of the Bank, without which it is impos- sible to form a correct view of the character and effect of its proceedings. In this respect the pamphlet is lamentably deficient and unsatisfactory. We are told that the issues of the Bank have been reduced nearly 25 per cent, between the month of March 1834, and July 1836; but the simple con- trast of the state of the circulation at any two periods, selected with the view of producing a particular result, is far from being sufficient for the intended purpose : we ought to have before us a detailed statement, month by month for the whole of the intervening period, of the amount of the circulation and of the bullion. The one simple duty which the manager of the currency has to perform is, that of making the amount of the paper circulation vary precisely as the amount of the circulation would have varied had it been exclu- sively metallic. Neither the data afforded to us by Mr. Palmer, nor his reasoning, are sufficient to show that such has been the effect of the measures of the Bank within the period to which he refers, and cer- ;3U tainly no reflecting person will be led to such a con- clusion by a comparison of the fluctuations of the issues witli the fluctuations of the bullion as pub- lished in the monthly othcial returns. And yet, unless the Bank can clearly demonstrate that it has acted upon this principle, it must necessarily fail in making out a good defence for itself, and in establishing the heavy accusations it has brought against its rival issuers. We vi^ant more full and complete data; until these are furnished, reflecting persons will suspend their decision, or if com- pelled to give a verdict upon the case of the Bank as set forth in the pamphlet of Mr. Palmer, it must undoubtedly be that of " Not Proven." These discussions respecting the action of the Bank, the doubts so generally prevalent as to the extent to which she has adhered to her strict line of duty in the management of the currency, and the apparent impossibility of coming to a satisfactory decision of this point, may be attributed almost entirely to the very imperfect and irisufficient nature of the information which she lays before the public. To the same cause may be also referred the very unreasonable and inconsistent expectations enter- tained by a large portion of the public with respect 40 to her power and duty in the regulation of the currency and the support of public credit. The system of communicating any information whatever regarding the accounts commenced only with the last renewal of her charter ; and the beneficial eifects of the experiment are already very apparent in the increasing tendency of the public to direct their attention to those accounts, and to watch, with the view to the due regulation of their own transactions, the influence of the exchanges upon the circulation of the Bank. The spirit of inquiry and the desire for knowledge has been awakened ; but to direct these into the right course, and to render them productive of the desired results, information more full and correct than that now afforded is absolutely requisite. Upon the insuf- ficiency of the present accounts, we have already made those remarks which the statements of Mr. Palmer's pamphlet could not fail to give rise to. It only remains for the public to consider whether any reasonable objection can possibly be urged against a full and distinct publication of the accounts of the Bank, so far as they concern their management of the currency. Imperfect, vague, and ambiguous accounts must, under any circum- 41 stances, be mischievous ; from such a source none but conclusions of a similar character can be de- duced. If they are published at all, it certainly ought to be done in such a form as may enal^le the public clearly to understand the action which is really going on upon the circulation of the country. The advantages to arise from such full publication of the accounts, we conceive, are distinct and in- disputable. The public would be enabled to regu- late their course under the full light of truth, instead of proceeding with a doubtful and hesitating step through the delusive twilight which now surrounds them ; the unreasonable expectations of assistance and support from the Bank, which it is impossible for her, without violating more important duties, to satisfy, would rapidly vanish under a more correct conception on the part of the public of her true position ; and every tendency of the Bank itself to yield to importunate demands, and, under the present pressure of circumstances, to deviate from the straight path of duty, would at once be checked by the consciousness that all her acts were under the public eye, and that a firm adherence to the true principles of currency would be rigidly exacted from her. 42 IX. In the course of these observations we have already alluded to the union in the Bank of England of the two functions of managing the currency and conducting Banking business ; to both these functions the term banking is, in common parlance, often applied ; the body which undertakes both classes of duties being called a Bank of Issue, and a Bank of Deposit and Discount. From this use of the common term Bank, it is not unnatural that those who take only a superficial view of questions of this nature, should receive the im- pression that there is some real similarity of character in these respective functions ; and that similar principles of conduct ought to regulate the discharge of them. This impression will of course derive further confirmation from the fact, that these duties are usually united in the same parties, and that not only in this, but in almost every country in which a paper-money exists, the issue of the paper-circulation is in the same hands as are per- forming the ordinary banking business of the com- munity. Can it be necessary, however, to point out to those who have really reflected upon these subjects, the essential difference which exists be- tween these two functions? a difference which not 43 only renders them perfectly distinct from each other, but in many respects of so conflicting a nature, that it seems hardly possible that the admi- nistration of the two can be safely confided to the same hands. A Bank of Issue is entrusted with the creation of the circulating medium. A Bank of Deposit and Discount is concerned only with the use, distribution, or application of that circulating medium. The sole duty of the former is to take efficient means for issuing its paper money upon good secu- rity, and regulating the amount of it by one fixed rule. The principal object and business of the latter is to obtain the command of as large a proportion as possible of the existing circulating medium, and to distribute it in such manner as shall combine security for repayment with the highest rate of profit. That these two functions are perfectly separate and distinct, and that there is no connexion be- tween them which renders it necessary that they should be administered by the same parties, is clear. A very short explanation will be sufficient 44 to show that they are in many respects conjikting duties. The history of what we are in the habit of call- ing the " state of trade" is an instructive lesson. We find it subject to various conditions which are periodically returning; it revolves apparently in an established cycle. First we find it in a state of quiescence, — next improvement, — growing confi- dence, — prosperity, — excitement, — overtrading, — convulsion, — pressure, — stagnation, — distress, — ending again in quiescence. Now during the progress of trade through this circular course, what is the necessary situation and the inevitable conduct of the Banker? The con- nexion between him and his customers is necessa- rily very close and intimate, they must sympathise with each other's views and feelings, and act to a considerable degree in concert. When confidence is increasing, the spirit of enterprise beginning to expand itself, when hope in all its forms is coming into active operation, when prices are rising, profits increasing, and every merchant or tradesman, with a view of benefiting by these circumstances, is desirous of extending his operations, — the Banker is looked to by his customers to act in concert with 45 them, to facilitate their operations, and to distri- bute amongst them all the aid which the extent ot" his resources enables him to command. It would be difficult to show that it is not his duty, properly understood, to obey this call, and to assist the expanding energies of trade ; at all events it would be practically impossible for him to act otherwise ; he must conform to the tendency of cir- cumstances about him ; he must breathe the at- mosphere of opinion which surrounds him, and suffer himself to be moved onward by the stream of events in which he is placed. For the practical truth of this view we may safely appeal to the experience of all who arc conversant with business of this nature. A Banker cannot contract his ac- commodation at a period when the whole trading and mercantile world are acting under one common impetus of expansion. If under these circum- stances the Banker, in addition to what may be properly called his ordinary and legitimate resources, is also entrusted with the power of issuing paper-money ad lihitum ; is it not inevitable that he should abuse that power ? Can we expect that under such circumstances, whilst all his other resources are strained to the utmost for the accommo- dation of his customers, he will still keep a firm and unyielding restraint over the amount of his issues ? Will he, under such temptations, in no respect confound or compromise his respective duties as a Banker of Issue and a Banker of Deposit and Discount ? or must we not rather con- clude, whether we look to the principles of human conduct, or draw our conclusions from the lessons of experience, that he will certainly blend together his Deposits and Circulation on the one side, his Gold and his Securities on the other, and thus produce an account which shall throw a plausible appearance over the abusive use which he is making of his power as an Issuing Banker? Look to the published accounts of the Bank and to their avowed rule of conduct. " Habes confitentem reum." The effect, of course, of such an applica- tion by the Banker of his power to issue will be to give a further stimulus to the existing tendencies of the trading world, and ultimately to aggravate the convulsion to which they must lead. Such we conceive to be the inevitable conse- quence of combining the issue of paper money with ordinary banking functions ; and probably much of the intensity which characterises the com- 47 mercial convulsions of this countrry may be justly attributed to this cause. Was the manaofement of our paper issues effectually separated from all other business, and entrusted to a body having no other function to perform, their variations w^ould be wholly disconnected from those sinister influences to which we have alluded ; under such manage- ment the strict rule of principle would not be allowed to bend to the expectations of a sanguine community, and thus one important cause of mis- chief would be altogether removed ; whilst the crisis which must follow would probably be limited in its extent and intensity by an earlier and more steady application of the restrictive power. The tendency, wherever this union of issue and banking- takes place, to produce mutual interference and confusion, is abundantly evident throughout Mr. Palmer's pamphlet. The accounts are not intelli- gible until the separation has been effected, and the reasonings appear unsatisfactory because this distinction is not steadily kept in view. A re- duction of deposits is deemed a sufficient set- off against a reduced amount of bullion ; and the duty of extending aid to the trading world and supporting mercantile credit is deemed a sufficient 48 justification of increased issues in the face of a large diminution of treasure. Let us not, however, be unjust to the Bank ; she is in the situation of the Banker which we have described. She is a public body, performing banking functions, and in that character she must partake of the feelings, attend to the wants, and obey the expectations and demands of the com- munity in which she exists. The calls which have lately been made upon her to support mercantile credit have been urgent and imperative ; in her banking capacity she has been under the necessity of meeting those calls to the utmost extent of her means ; and it would be well for the public interests that she should do so, if among those means there did not unfortunately exist a 'power over the "paper issues of the country. A diminishing amount of treasure requires a diminished amount of circu- lation ; the struggling and convulsive calls of commerce equally demand augmented accommo- dation; how is she to meet these conflicting claims, how is she to perform these opposite and inconsistent duties ? With the view of discharging her first duty, she compels the Government to raise the interest on exchequer bills, and thus realises her securities ; but 4i) lierc Commerce interposes and carries away under the form of discount what was intended to go to the reduction of circulation ; and thus the last condi- tion of the Old Lady becomes worse than her first. Such is the inevitable consequence of entrusting to the same body duties which are different in their nature, which are to be regulated by different rules, and which give rise to conflicting motives. X. In conclusion, — as a means of obviatincr in some degree the recurrence of a state of things similar to that which we are now discussing, Mr. Palmer suggests the necessity of some legislative interference to restrict the operations of the Joint- Stock Banks, and to check the facility of dealing in foreign securities in this country. The transactions on the Foreign Stock-Exchange are objected to, as tending to disturb the state of the exchanges between this and other countries, and thus to embarrass the Bank of England in the management of the circulation, and the propriety of some legislative interference to check this evil is suggested. We are unable to per- ceivt either the reasonableness of the complaint or of the emedial measure called for. The propriety of these transactions in themselves, or their influence D 50 upon the morals or other interests of the community, may be a very proper subject of inquiry for the Moralist or the Statesman ; but such considerations are wholly impertinent to the present discussion. We have to consider these transactions only in so far as they tend to interfere with the power of duly regulating the paper-currency of the country. Here we must again advert, even at the hazard of apparently needless repetition, to that great but simple principle, the want of an adequate atten- tion to which seems to us to be the real source of many imperfect views and erroneous conclusions. The sole duty to be performed in regulating a paper-currency is to make its amount vary, as the amount of a currency exclusively metallic would vary under the same circumstances. By what means, or in what respect, do the transactions on the Foreign Stock-Exchange interfere with the performance of this duty? Would such trans- actions take place under a metallic currency? If not, then the paper-currency, which adm its of their existence, must be improperly regulated. But if these are transactions which would take place under a metallic currency, then the effects which they would produce upon such metallic 51 currency, they ought to be permitted to produce equally upon a paper currency. The utmost that can be expected from a paper currency is that it shall be the medium of adjusting the various transactions of a country without greater inconvenience to the community than would arise under a metallic circu- lation. To complain that a paper circulation is unable to sustain itself under circumstances which would equally occur under a metallic circulation, is to acknowledge that the paper circulation is ineffi- cient for its purpose, and therefore that it is under imperfect or erroneous management. On the other hand, to attempt to limit the fluctuations of the paper money to narrower bounds than those within which a metallic currency would have oscillated, is an empirical procedure, not founded upon sound principles, and which could lead to none but the most dangerous results. In the views of Mr. Palmer respecting the influence of Foreign Stock transactions upon the management of the currency, we are mistaken if we do not discover a mixture of both these feelings. He is apprehensive that under its present management the paper cur- rency of this country cannot sustain the violent dis turbance which arises out of Foreign Stock transac- 52 tions ; and he is also under a feeling, vague and undefined perhaps, of desire to protect the paper circulation of the Bank from oscillations, which there is no reason to suppose a metallic circulation would escape. XI. With respect to the other suggestion it may be observed, that undoubtedly an adherence to sound principle would lead to the conclusion, that the issues of paper-money should be confined to one body, entrusted with full power and control over the issues, and made exclusively responsible for the due regulation of their amount. But the prac- tice in this country has deviated so widely from this rule, and has become by long usage so deeply associated with the habits and prejudices of the community, that we fear we must not now attempt altogether to eradicate it. However sound the principle of entrusting the exclusive power over the paper- circulation of the country to one body, the change which the adoption of it would require in our established usages and course of business would necessarily be attended with many very serious incon- veniences, and it seems hopeless to expect that the country can be induced to make the attempt. The peculiar system which has hitherto existed in this o6 country, that of one leading and central issuer surrounded by a multitude of smaller subordinate issuers, must, we presume, be continued ; and all that can now be done is to offer suggestions for the purpose of diminishing the inconveniences which must attend so imperfect a system, and rendering it as effectual for good as possible. With this view it seems important to direct the attention of the public to the following points. 1. The propriety of securing, strengthening, and if possible, extending the monopoly, as regards currency, of the central issuer, with the view of rendering the indirect control which she can exercise over subordinate issuers more powerful and effectual. 2. The propriety of making some gradual ap- proach towards the separation of banking functions from the management of currency, with the view of rendering the body which undertakes the latter duty free from all conflicting interests and motives, and at the same time making her responsibility distinct and complete, and the nature of her pro- ceedings simple and easily understood. 3. The propriety, in the mean time, of a distinct separation in the accounts of the Bank of the 54 management of currency from every other branch of her business^ of subjecting the superintendence of this Department to a separate Committee of Cur- rency, and of associating with this Committee a representative of the Government, whose presence should always be requisite to constitute this Com- mittee efficient for business. The effect of such a regulation would be to check that tendency, which will inevitably exist in every body which combines the functions of bank- ing with the issue of paper-money, to consider the amount of her issues as liable to vary in accord- ance with her own wants, and to be rendered sub- servient to her own convenience; thus neglecting, or at least partially suspending, that one great principle by an exclusive reference to which all paper issues ought to be regulated. The presence of a Member of the Government in all the deli- berations of this Committee would prevent the Bank in any tendency to abuse her power over the currency for the promotion of her banking pur- poses, and the Bank would exercise a similar restraint over the Government. Add to this a full and intelligible publication of the proceedings of this Committee, and the public will thus be enabled bb to exercise a sufficient control over this body in any case in which it may be conceived that the two parties united can have a common interest in neglecting their duty to the public. These suggestions are thrown out for the pur- pose of exciting reflection and discussion, and not under the presumptuous impression that they are in themselves complete. Most happy will the author of them be to find that they have the effect of rousing the attention of more powerful minds to this important but difficult subject. Much na- tional loss, as well as much individual but exten- sive misery, may be prevented by placing the monetary system of this country upon a more sound basis than that upon which it at present rests. The events which have occurred in con- nection with the late pressure upon the monied and mercantile interests are full of instructive illustrations of the effects, both beneficial and other- wise, of our present system, and the evil con- sequences of this pressure will be as nothing com- pared with its benefits, if amongst these we shall be enabled to reckon an increased degree of in- telligence upon subjects connected with currency, and a nearer approximation to sound principles in 5G the management of our paper issues. In the hum- ble but earnest desire of contributing, however feebly, towards this end, these remarks have been penned, and the writer of them, having no object in view but the establishment of truth, as sincerely hopes that their errors may be fully exposed, as he trusts their merits, if they have any, may be fairly appreciated. THE END. MAHCHANT, PRINTER, ING RAM-COU nT.