In the first place, the common notion that the draining of gold out of the country is intrinsically, and in all cases, an evil, is nothing but a political superstition—a superstition in part descended from the antique fallacy that money is the only wealth, and in part from the maxims of an artificial, law-produced state of things, under which the exportation of gold really was a sign of a corrupted currency: we mean, during the suspension of cash-payments. Law having cancelled millions of contracts which it was its duty to enforce—law having absolved bankers from liquidating their promises-to-pay in coin, having rendered it needless to keep a stock of coin with which to liquidate them, and having thus taken away that natural check which prevents the over-issue and depreciation of notes—law having partly suspended that home demand for gold which ordinarily competes with and balances the foreign demand; there resulted an abnormal exportation of gold. By-and-by it {342} was seen that this efflux of gold was a consequence of the over-issue of notes; and that the accompanying high price of gold, as paid for in notes, proved the depreciation of notes. And then it became an established doctrine that an adverse state of the foreign exchanges, indicating a drain of gold, was significant of an excessive circulation of notes; and that the issue of notes should be regulated by the state of the exchanges.
This unnatural condition of the currency having continued for a quarter of a century, the concomitant doctrine rooted itself in the general mind. And now mark one of the multitudinous evils of legislative meddling. This artificial test, good only for an artificial state, has survived the return to a natural state; and men’s ideas about currency have been reduced by it to chronic confusion.
The truth is that while, during a legalized inconvertibility of bank-notes, an efflux of gold may, and often does, indicate an excessive issue of bank-notes; under ordinary circumstances an efflux of gold has little or nothing to do with the issue of bank-notes, but is determined by merely mercantile causes. And the truth is that far from being an evil, an efflux of gold thus brought about by mercantile causes, is a good. Leaving out of the question, as of course we must, such exportations of gold as take place for the support of armies abroad; the cause of efflux is either an actual plethora of all commodities, gold included, which results in gold being sent out of the country for the purpose of foreign investment; or else an abundance of gold as compared with other leading commodities. And while, in this last case, the efflux of gold indicates some absolute or relative impoverishment of the nation, it is a means of mitigating the bad consequences of that impoverishment. Consider the question as one of political economy, and this truth becomes obvious. Thus:—The nation habitually requires for use and consumption certain quantities of commodities, of which gold is one. These commodities {343} are severally and collectively liable to fall short; either from deficient harvests, from waste in war, from losses abroad, or from too great a diversion of labour or capital in some special direction. When a scarcity of some chief commodity or necessary occurs, what is the remedy? The commodity of which there is an excess (or if none is in excess, then that which can best be spared) is exported in exchange for an additional supply of the deficient commodity. And, indeed, the whole of our foreign trade, alike in ordinary and extraordinary times, consists in this process. But when it happens either that the commodity which we can best spare is not wanted abroad; or (as recently) that a chief foreign customer is temporarily disabled from buying; or that the commodity which we can best spare is gold; then gold itself is exported in exchange for the thing which we most want. Whatever form the transaction takes, it is nothing but bringing the supplies of various commodities into harmony with the demands for them. The fact that gold is exported, is simply a proof that the need for gold is less than the need for other things. Under such circumstances an efflux of gold will continue, and ought to continue, until other things have become relatively so abundant, and gold relatively so scarce, that the demand for gold is equal to other demands. And he who would prevent this process, is about as wise as the miser who, finding his house without food, chooses to starve rather than draw upon his purse.
The second question—“Shall the Bank have permission to let its reserve of gold diminish so greatly as to risk the convertibility of its notes?” is not more profound than the first. It may fitly be answered by the more general question—“Shall the merchant, the manufacturer, or the shopkeeper, be allowed so to invest his capital as to risk the fulfilment of his engagements?” If the answer to the first be “No,” it must be “No” to the second. If to the {344} second it be “Yes,” it must be “Yes” to the first. Any one who proposed that the State should oversee the transactions of every trader, so as to insure his ability to cash all demands as they fell due, might with consistency argue that bankers should be under like control. But while no one has the folly to contend for the one, nearly all contend for the other. One would think that the banker acquired, in virtue of his occupation, some abnormal desire to ruin himself—that while traders in other things are restrained by a wholesome dread of bankruptcy, traders in capital have a longing to appear in the Gazette, which law alone can prevent them from gratifying! Surely the moral checks which act on other men will act on bankers. And if these moral checks do not suffice to produce perfect security, we have ample proof that no cunning legislative checks will supply their place. The current notion that bankers can, and will, if allowed, issue notes to any extent, is one of the absurdest illusions—an illusion, however, which would never have arisen but for the vicious over-issues induced by law. The truth is that, in the first place, a banker cannot increase his issue of notes at will. It has been proved by the unanimous testimony of all bankers who have been examined before successive parliamentary committees, that “the amount of their issues is exclusively regulated by the extent of local dealings and expenditure in their respective districts;” and that any notes issued in excess of the demand are “immediately returned to them.” And the truth is, in the second place, that a banker will not, on the average of cases, issue more notes than in his judgment it is safe to issue; seeing that if his promises-to-pay in circulation, are much in excess of his available means of paying them, he runs a great risk of having to stop payment—a result of which he has no less a horror than other men. If facts are needed in proof of this, they are furnished by the history of both the Bank of England and the Bank of Ireland; which, {345} before they were debauched by the State, habitually regulated their issues according to their stock of bullion, and would probably always have been still more careful but for the consciousness that there was the State-credit to fall back upon.
The third question—“Shall the Bank be allowed to issue notes in such numbers as to cause their depreciation?” has, in effect, been answered in answering the first two. There can be no depreciation of notes so long as they are exchangeable for gold on demand. And so long as the State, in discharge of its duty, insists on the fulfilment of contracts, the alternative of bankruptcy must ever be a restraint on such over-issue of notes as endangers that exchangeability. The bugbear of depreciation is one that would have been unknown but for the sins of governments. In the case of America, where there have been occasional depreciations, the sin has been a sin of omission: the State has not enforced the fulfilment of contracts—has not forthwith bankrupted those who failed to cash their notes; and, if accounts are true, has allowed those to be mobbed who brought back far-wandering notes for payment.[35] In all other cases the sin has been a sin of commission. The depreciated paper-currency in France, during the revolution, was a State-currency. The depreciated paper-currencies of Austria and Russia have been State-currencies. And the only depreciated paper-currency we have known, has been to all intents and purposes a State-currency. It was the State which, in 1795–6, forced upon the Bank of England that excessive issue of notes which led to the suspension of cash-payments. It was the State which, in 1802, forbad the resumption of cash-payments, when the Bank of England wished to resume them. It was the State which, during a quarter of a century, maintained that suspension of cash-payments from which the excessive multiplication and depreciation of notes resulted. The entire corruption {346} was entailed by State-expenditure, and established by State-warrant. Yet now the State affects a virtuous horror of the crime committed at its instigation! Having contrived to shuffle-off the odium on to the shoulders of its tools, the State gravely lectures the banking-community upon its guilt; and with sternest face passes measures to prevent it from sinning!
[35] This was written in 1858; when “greenbacks” were unknown.
We contend, then, that neither to restrain the efflux of gold, nor to guard against the over-issue of bank-notes, is legislative interference warranted. If Government will promptly execute the law against all defaulters, the self-interest of bankers and traders will do the rest: such evils as would still result from mercantile dishonesties and imprudences, being evils which legal regulation may augment but cannot prevent. Let the Bank of England, in common with every other bank, simply consult its own safety and its own profits; and there will result just as much check as should be put, on the efflux of gold or the circulation of paper; and the only check that can be put on the doings of speculators. Whatever leads to unusual draughts on the resources of banks, immediately causes a rise in the rate of discount—a rise dictated both by the wish to make increased profits, and the wish to avoid a dangerous decrease of resources. This raised rate of discount prevents the demand from being so great as it would else have been—alike checks undue expansion of the note-circulation; stops speculators from making further engagements; and, if gold is being exported, diminishes the profit of exportation. Successive rises successively increase these effects; until, eventually, none will give the rate of discount asked, save those in peril of stopping payment; the increase of the credit-currency ceases; and the efflux of gold, if it is going on, is arrested by the home-demand out-balancing the foreign demand. And if, in times of great pressure, and under the temptation of high discounts, banks allow their circulation to expand to {347} a somewhat dangerous extent, the course is justified by the necessities. As shown at the outset, the process is one by which banks, on the deposit of good securities, loan their credit to traders who but for loans would be bankrupt. And that banks should run some risks to save hosts of solvent men from inevitable ruin, few will deny. Moreover, during a crisis which thus runs its natural course, there will really occur that purification of the mercantile world which many think can be effected only by some Act-of-Parliament ordeal. Under the circumstances described, men who have adequate securities to offer will get bank-accommodation; but those who, having traded without capital or beyond their means, have not, will be denied it, and will fail. Under a free system the good will be sifted from the bad; whereas the existing restrictions on bank-accommodation, tend to destroy good and bad together.
Thus it is not true that there need special regulations to prevent the inconvertibility and depreciation of notes. It is not true that, but for legislative supervision, bankers would let gold drain out of the country to an undue extent. It is not true that these “currency theorists” have discovered a place at which the body-politic would bleed to death but for a State-styptic.
What else we have to say on the general question, may best be joined with some commentaries on provincial and joint-stock banking, to which let us now turn.
Government, to preserve the Bank of England-monopoly, having enacted that no partnership exceeding six persons should become bankers; and the Bank of England having refused to establish branches in the provinces; it happened, during the latter half of the last century, when the industrial progress was rapid and banks much needed, that numerous private traders, shopkeepers and others, began to issue notes payable on demand. And when, of the four {348} hundred small banks which had thus grown up in less than fifty years, a great number gave way under the first pressure—when, on several subsequent occasions, like results occurred—when in Ireland, where the Bank of Ireland-monopoly had been similarly guaranteed, it happened that out of fifty private provincial banks, forty became bankrupt—and when, finally, it grew notorious that in Scotland, where there had been no law limiting the number of partners, a whole century had passed with scarcely a single bank-failure; legislators at once decided to abolish the restriction which had entailed such mischiefs. Having, to use Mr. Mill’s words, “actually made the formation of safe banking-establishments a punishable offence”—having, for one hundred and twenty years, maintained a law which first caused great inconvenience and then extensive ruin, time after time repeated—Government, in 1826, conceded the liberty of joint-stock banking: a liberty which the good easy public, not distinguishing between a right done and a wrong undone, regarded as a great boon!