That these self-regulating processes act but imperfectly, is doubtless true. With an imperfect humanity, they cannot {334} act otherwise than imperfectly. People who are dishonest, or rash, or stupid, will inevitably suffer the penalties of dishonesty, or rashness, or stupidity. If any think that by some patent legislative mechanism, a society of bad citizens can be made to work together as well as a society of good ones, we shall not take pains to show them the contrary. If any think that the dealings of men deficient in uprightness and foresight, may be so regulated by cunningly-devised Acts of Parliament as to secure the effects of uprightness and foresight, we have nothing to say to them. Or if there are any (and we fear there are numbers) who think that in times of commercial difficulty, resulting from impoverishment or other natural causes, the evil can be staved-off by some ministerial sleight of hand, we despair of convincing them that the thing is impossible. See it or not, the truth is that the State can do none of these things. As we shall show, the State can, and sometimes does, produce commercial disasters. As we shall also show, it can, and sometimes does, exacerbate the commercial disasters otherwise produced. But while it can create and can make worse, it cannot prevent.
All which the State has to do in the matter is to discharge its ordinary office—to administer justice. The enforcement of contracts is one of the functions included in its general function of maintaining the rights of citizens. And among other contracts which it is called on to enforce, are the contracts expressed in credit-documents—bills of exchange, cheques, bank-notes. If any one issues a promise-to-pay, either on demand or at specified date, and does not fulfil that promise, the State, when appealed to by the creditor, is bound in its protective capacity to obtain fulfilment of the promise, at whatever cost to the debtor, or such partial fulfilment of it as his effects suffice for. The State’s duty in the case of the currency, as in other cases, is sternly to threaten the penalty of bankruptcy on all who make engagements which they cannot meet, and sternly to inflict the {335} penalty when called on by those aggrieved. If it falls short of this, mischief ensues. If it exceeds this, mischief ensues. Let us glance at the facts.
Had we space to trace in detail the history of the Bank of England—to show how the privileges contained in its first charter were bribes given by a distressed Government in want of a large loan—how, soon afterwards, the law which forbad a partnership of more than six persons from becoming bankers, was passed to prevent the issue of notes by the South-Sea Company, and so to preserve the Bank-monopoly—how the continuance of State-favours to the Bank, corresponded with the continuance of the Bank’s claims on the State; we should see that, from the first, banking-legislation has been an organized injustice. But passing over earlier periods, let us begin with the events that closed the last century. Our rulers of that day had entered into a war—whether with adequate reason needs not here be discussed. They had lent vast sums in gold to their allies. They had demanded large advances from the Bank of England, which the Bank durst not refuse. They had thus necessitated an excessive issue of notes by the Bank. That is, they had so greatly diminished the floating capital of the community, that engagements could not be met; and an immense number of promises-to-pay took the place of actual payments. Soon after, the fulfilment of these promises became so difficult that it was forbidden by law; that is, cash-payments were suspended. Now for these results—for the national impoverishment and consequent abnormal condition of the currency, the State was responsible. How much of the blame lay with the governing classes and how much with the nation at large, we do not pretend to say. What it concerns us here to note is, that the calamity arose from the acts of the ruling power. When, again, in 1802, after a short peace, the available capital of the community had so far increased that the redemption of promises-to-pay became {336} possible, and the Bank of England was anxious to begin redeeming them, the legislature interposed its veto; and so continued the evils of an inconvertible paper-currency after they would naturally have ceased. Still more disastrous, however, were the results that by-and-by ensued from State-meddlings. Cash-payments having been suspended—the Government, instead of enforcing all contracts, having temporarily cancelled a great part of them, by saying to every banker, “You shall not be called on to liquidate in coin the promises-to-pay which you issue;” the natural checks to the multiplication of promises-to-pay, disappeared. What followed? Banks being no longer required to cash their notes in coin; and easily obtaining from the Bank of England, supplies of its notes in exchange for fixed securities; were ready to make advances to almost any extent. Not being obliged to raise their rate of discount in consequence of the diminution of their available capital; and reaping a profit by every loan (of notes) made on fixed capital; there arose both an abnormal facility of borrowing, and an abnormal desire to lend. Thus were fostered the wild speculations of 1809—speculations that were not only thus fostered, but were in great measure caused by the previous over-issue of notes; which, by further exaggerating the natural rise of prices, increased the apparent profitableness of investments. And all this, be it remembered, took place at a time when there should have been rigid economy—at a time of impoverishment consequent on continued war—at a time when, but for law-produced illusions, there would have been commercial straitness and a corresponding carefulness. Just when its indebtedness was unusually great, the community was induced still further to increase its indebtedness. Clearly, then, the progressive accumulation and depreciation of promises-to-pay, and the commercial disasters which finally resulted from it in 1814–15–16, when ninety provincial banks were broken and more dissolved, were State-produced evils: partly due to {337} a war which, whether necessary or not, was carried on by the Government, and greatly exacerbated by the currency-regulations which that Government had made.
Before passing to more recent facts, let us parenthetically notice the similarly-caused degradation of the currency which had previously arisen in Ireland. When examined by a parliamentary committee in 1804, Mr. Colville, one of the directors of the Bank of Ireland, stated that before the passing of the Irish Bank-Restriction-Bill (the bill by which cash-payments were suspended) the directors habitually met any unusual demand for gold by diminishing their issues. That is to say, in the ordinary course of business, they raised their rate of discount whenever the demand enabled them; and so, both increased their profits and warded-off the danger of bankruptcy. During this unregulated period their note-circulation was between £600,000 and £700,000. But as soon as they were guaranteed by law against the danger of bankruptcy, their circulation began rapidly to increase; and very soon reached £3,000,000. The results, as proved before the committee, were these:—The exchange with England became greatly depressed; nearly all the good specie was exported to England; it was replaced in Dublin (where small notes could not be issued) by a base coinage, adulterated to the extent of fifty per cent.; and elsewhere it was replaced by notes payable at twenty-one days’ date, issued by all sorts of persons, for sums down even as low as sixpence. And this excessive multiplication of small notes was necessitated by the impossibility of otherwise carrying on retail trade, after the disappearance of the silver coinage. For these disastrous effects, then, legislation was responsible. The swarms of “silver-notes” resulted from the exportation of silver; the exportation of silver was due to the great depression of the exchange with England; this great depression arose from the excessive issue of notes by the Bank of Ireland; and this {338} excessive issue followed from their legalized inconvertibility. Yet, though these facts were long ago established by a committee of the House of Commons, the defenders of the “currency-principle” are actually blind enough to cite this multiplication of sixpenny promises-to-pay, as proving the evils of an unregulated currency!
Returning now to the case of the Bank of England, let us pass at once to the Act of 1844. While still a protectionist—while still a believer in the beneficence of law as a controller of commerce—Sir Robert Peel undertook to stop the recurrence of monetary crises, like those of 1825, 1836, and 1839. Overlooking the truth that, when not caused by the meddlings of legislators, a monetary crisis is due, either to an absolute impoverishment, or to a relative impoverishment consequent on speculative over-investment; and that for the bad season, or the imprudence, causing this, there is no remedy; he boldly proclaimed that “it is better to prevent the paroxysm than to excite it:” and he brought forward the Bank-Act of 1844 as the means of prevention. How merciless has been Nature’s criticism on this remnant of Protectionism, we all know. The monetary sliding-scale has been as great a failure as its prototype. Within three years arose one of these crises which were to have been prevented. Within another ten years has arisen a second of these crises. And on both occasions this intended safeguard has so intensified the evil, that a temporary repeal of it has been imperative.
We should have thought that, even without facts, every one might have seen that it is impossible, by Act of Parliament, to prevent imprudent people from doing imprudent things; and, if facts were needed, we should have thought that our commercial history up to 1844 supplied a sufficiency. But a superstitious faith in State-ordinances disregards such facts. And we doubt not that even now, though there have been two glaring failures of this professed check on over-speculation—though the evidence conclusively {339} shows that the late commercial catastrophes have had nothing whatever to do with the issue of bank-notes, but, as in the case of the Western Bank of Scotland, occurred along with diminished issues—and though in Hamburg, where the “currency principle” has been rigidly carried out to the very letter, there has been a worse crisis than anywhere else; yet there will remain plenty of believers in the efficiency of Sir R. Peel’s prophylactic.
But, as already said, the measure has not only failed; it has made worse the panics it was to have warded-off. And it was sure to do this. As shown at the outset, the multiplication of promises-to-pay that occurs at a period of impoverishment caused by war, famine, over-investment, or losses abroad, is a salutary process of mitigation—is a mode of postponing actual payments till actual payments are possible—is a preventive of wholesale bankruptcy—is a spontaneous act of self-preservation. We pointed out, not only that this is an a priori conclusion, but that facts in our own mercantile history illustrate at once the naturalness, the benefits, the necessity of it. And if this conclusion needs enforcing by further evidence, we have it in the recent events at Hamburg. In that city, there are no notes in circulation but such as are represented by actual equivalents of bullion or jewels in the bank: no one is allowed, as with us, to obtain bank-promises-to-pay in return for securities. Hence it resulted that when the Hamburg merchants, lacking their remittances from abroad, were suddenly deprived of the wherewith to meet their engagements; and were prevented by law from getting bank-promises-to-pay by pawning their estates; bankruptcy swept them away wholesale. And what finally happened? To prevent universal ruin, the Government was obliged to decree that all bills of exchange coming due, should have a month’s grace; and that there should be immediately formed a State-Discount-Bank—an office for issuing State-promises-to-pay in return for securities. That is, having first by its {340} restrictive law ruined a host of merchants, the Government was obliged to legalize that postponement of payments which, but for its law, would have spontaneously taken place. With such further confirmation of an a priori conclusion, can it be doubted that our late commercial difficulties were intensified by the measure of 1844? Is it not, indeed, notorious in the City, that the progressively-increasing demand for accommodation, was in great part due to the conviction that, in consequence of the Bank-Act, there would shortly be no accommodation at all? Does not every London merchant know that his neighbours who had bills coming due, and who saw that by the time they were due the Bank would discount only at still higher rates, or not at all, decided to lay in beforehand the means of meeting those bills? Is it not an established fact that the hoarding thus induced, not only rendered the pressure on the Bank greater than it would otherwise have been, but, by taking both gold and notes out of circulation, made the Bank’s issues temporarily useless to the general public? Did it not happen in this case, as in 1793 and 1825, that when at last restriction was removed, the mere consciousness that loans could be had, itself prevented them from being required? And, indeed, is not the simple fact that the panic quickly subsided when the Act was suspended, sufficient proof that the Act had, in great measure, produced it.
See, then, for what we have to thank legislative meddling. During ordinary times Sir R. Peel’s Act, by obliging the Bank of England, and occasionally provincial banks, to keep more gold than they would otherwise have kept (and if it has not done this it has done nothing), has inflicted a tax on the nation to the extent of the interest on such portion of the gold-currency as was in excess of the need: a tax which, in the course of the last thirteen years, has probably amounted to some millions. And then, on the two occasions when there have arisen the crises that were to {341} have been prevented, the Act, after having intensified the pressure, made bankrupt a great number of respectable firms which would else have stood, and increased the distress not only of the trading but of the working population, has been twice abandoned at the moment when its beneficence was to have been conspicuous. It has been a cost, a mischief, and a failure. Yet such is the prevailing delusion that, judging from appearances, it will be maintained!
“But,” ask our opponents, “shall the Bank be allowed to let gold drain out of the country without check? Shall it have permission to let its reserve of gold diminish so greatly as to risk the convertibility of its notes? Shall it be enabled recklessly to increase its issues, and so produce a depreciated paper-currency?”
Really, in these Free-trade days, it seems strange to have to answer questions like these; and, were it not for the confusion of facts and ideas which legislation has produced, it would be inexcusable to ask them.