The Paper Currency of England Dispassionately Considered / With Suggestions Towards a Practical Solution of the Difficulty

by John Haslam

Of the preceding provisions, it is that which prescribes £14,000,000 as the maximum of unrepresented notes, to be issued by the Bank of England, that has chiefly awakened discussion since the passing of the Act. The effect of this inflexible limitation during the commercial pressure of October, 1847, was so disastrous that nearly every authority of any eminence, except some few of the original promoters of the measure, has fully admitted that, but for the interposition of Government, and the temporary suspension of the bill, the Bank of England would have been compelled to stop payment; and the whole commercial system of the country would have been thrown into ruinous confusion. The general course of trade since that period has been, on the whole, so regular and prosperous, and our monetary system has been, therefore, subjected to so slight a strain from disturbing forces, that it is possible the impression produced on the public mind in 1847, may have somewhat subsided; should this be the case, we must only hope that the present heavy efflux of gold, required by our military operations abroad, will again arouse the slumbering consciousness of the nation, and that the occasion will not be lost of making some effort to remove a restriction which, in the case of every unwonted commercial crisis, is calculated to entail severe distress on every trading interest in the country.

It were much to be deplored, however, if the prominence of one defect in the present system, should exclusively engross the attention of the public, to the disregard of others which, although less disastrous in their consequences, are not in the least degree more reconcilable with correct principles of currency. Our monetary code, and especially the Act of 1844, should be considered as an undivided whole, every one of whose provisions should be brought into the closest possible conformity with true principles. And when so regarded, it is undeniable that it presents a most anomalous appearance, preserving no consistency in its parts; or rather composing an irreconcilable medley of incongruous elements, very few of which will admit of justification, on the hypothesis that the remainder are correct. Thus while the Bank of England, which possesses a bona fide capital of about £18,000,000, is not allowed to issue unrepresented notes to within less than four millions of that capital, the 250 country banks are authorized to issue such notes, to the extent of their average issues in 1844, even though that average should exceed their capital in the proportion of three to one, and though, as the proceedings of the Bankruptcy Court have subsequently brought to light, there have been some cases at least in which it has actually far exceeded this proportion. On the other hand while the country banks are prohibited from issuing a single note in excess upon bullion, there is no limitation to the issue of such notes by the Bank of England, farther than the rule which requires the possession of actual treasure for every note so issued. Again, while the present issuing banks are allowed to retain the privilege without submitting to any test of qualification, no new bank that may hereafter be formed, however extensive its capital, and no existing non-issuing bank, however indisputable its security, must henceforth be endowed with a similar prerogative. And again, though the population of one district may rapidly increase in wealth and numbers, while those of another may undergo as great a diminution, yet the law makes no provision for such contingency, but prescribes the original issues of 1844 as the inflexible rule in both cases, precisely as if no alteration had occurred in the circumstances of either. Or, to regard the limitation under a national aspect, although the banks of issue, considered as a whole, are permitted to contract their unrepresented issues, to whatever extent may seem desirable, at any period in which commerce is stationary, or currency redundant; yet under the opposite circumstances, when business is extremely active, and the demand for accommodation proportionally great, they are absolutely prohibited from increasing their issues to any extent beyond the limit to which they are restricted during ordinary periods. It were easy to multiply similar instances of inconsistency, but the preceding will suffice; and it will be more instructive if we cast a rapid glance at some of the principles which the Act of 1844 most flagrantly contravenes, and point out in what respects our monetary system may now be brought into greater consistency with all or any of those principles.

The most prominent, and perhaps the most important of these is the well established doctrine, that the issue of paper money should be a function of the State, and should be exercised exclusively with a view to public interests. This is a conclusion on the truth of which the common sense of practical men, and the philosophic insight of the best instructed authorities, are in perfect harmony. It has long been undisputed that coining is a legitimate or rather essential function of the State, and the reasons for comprehending the issue of notes under the same prerogatives are not less forcible. There is no evil that may befall the public from the circulation of base coin, that may not arise to an equal, if not aggravated, extent from the issue of counterfeit paper. Indeed the issue of paper money is liable to risks exclusively its own and which require far more ingeniously devised safeguards than the issue of coin. The person who receives gold or silver in payment may sometimes be under the necessity of employing a few easy tests in order to prove its genuineness, but if he apply these with the most ordinary circumspection, he can successfully protect himself from loss by imposition. Now, he who receives paper money, is often placed under circumstances precisely the reverse. For, where the number of banks of issue is considerable, and the varieties of paper money in corresponding proportion, there are no valid tests within the reach of an average capacity, by means of which he may verify the genuineness of every note which he may happen to receive in the course of his transactions with the public. But even if there were such tests, and if he exercised the greatest possible care, in their application, they would not suffice to protect him from losses, arising out of the unexpected insolvency of some of the banks of issue. In order to guard efficiently against risk of this description, he would require an accurate acquaintance with the actual position and stability of every bank whose paper may at any time come into his possession; and in the case of nearly every private bank, this knowledge is obviously unattainable. In the absence of this desideratum, his only means of protection appear to consist in the prompt presentment or exchange of every description of paper, on the perfect security of which he does not possess some valid reasons for reliance.

It must, we think, be conceded, that under the present point of view, the state of the English paper issues is liable to very grave objections. In Ireland, where the number of issuing banks is only eight, all of which are public banks, the cases of forgery are comparatively few, and a very high degree of confidence in the currency, is entertained by the public generally. Even in Ireland, however, that confidence is not so implicit or so universal as it would unquestionably be, if there were only one description of paper. A similar observation, though with some qualification, may be applied to the issues of the banks in Scotland. But in England, where, as has been said, the number of issuing banks amounts to about 250, and where at least 150 of these are private banks, it is obviously impossible that adequate safeguards can be provided against either the occasional dissemination of fictitious paper, or the not unfrequent infliction of severe pecuniary losses, through the failure of some of the banks of issue. We are fully aware of the high reputation which a vast majority of the country banks in England deservedly bear, both for stability and integrity; but the failure of several issuing and non-issuing banks, since the passing of the Act as well as previously, suffices to prove that this high character cannot be predicated of all of them indiscriminately. And when a single bank of issue fails to meet its liabilities, it always tends to throw a partial discredit over the whole paper circulation of the kingdom.

Whatever may be the other qualities desirable in a paper currency, it appears to us to be almost axiomatic, that it should, if possible, be rendered as secure as a currency purely metallic—as stable as the Government itself. But this we contend can never be accomplished, so long as the privilege of issue is conceded to any very considerable number of separate banking companies. The evils requiring to be guarded against, have been shown to be two-fold; the circulation of counterfeit notes, and the insolvency of some of the banks of issue. The former of these, in such a case, appears to admit of no infallible means of prevention; the latter can only be provided for by the State’s becoming the guarantee of all the paper money in the hands of the public. But this is a course which few, even of the most sanguine advocates of a plurality of issuers, would be bold enough to recommend. The amount of evil which it would generate, through acting as a bonus upon every species of mismanagement would be far greater than any which it could remove. But the principle itself, involved in the adoption, would be altogether inadmissible. It assuredly forms no part of the functions of Government to guarantee the solvency of an indefinite number of banking companies. At the same time, we consider it no less demonstrable, that the Government has not the right to authorize the issue of notes, without fully guaranteeing their payment in cases of insolvency.

But if the issue of notes should be a function of the State, it is equally evident that the profits derived from such issue should be appropriated to the service of the nation generally. We do not contend that the Government of the country, whatever may be the mode of its formation, has the right to interfere with any legitimate department of trade or manufacture; nor do we propose that banking should be considered an exception to the general rule. But the issue of unrepresented paper money is, in its nature, essentially distinct from the ordinary operations of banking. The banker, in common with the merchant or manufacturer, derives his profits from the reproductive employment of his own capital, together with as much of the capital of his customers, as he can induce them to entrust to his care. But unrepresented paper money is not capital, and is no more the property of the banker or his customers, than it is of the merchant and manufacturer, or their respective customers. In effect however it is equivalent to capital, and its employment is equally profitable; any transfer, therefore, of the profits arising out of its issue to a number of private individuals, is not only an act of injustice to all the rest of the community, but is a real source of injury to every banker or dealer in money, who is excluded from the enjoyment of the privilege. For it is clearly impossible for one who is limited to the employment of his capital and credit, to compete on equal terms with rivals who are thus authorized to operate, not only on their capital and credit combined, but also on a species of fictitious capital, which they are permitted to create at pleasure. And the only mode in which this injury can be successfully averted, is by securing the profits arising out of the privilege of issue to the general body of the community at large.

In this respect, as in the preceding, the English monetary system presents the spectacle of a very wide departure from principle. For not only are the profits derivable from the issue of paper money, almost entirely appropriated by private individuals, but that appropriation has been made upon a most capricious method of selection. The case of the Bank of England is indeed a partial exception to this statement. It must not be overlooked, that, as the Government bank, it has always rendered considerable service to the State, in return for the privilege of trading upon £14,000,000 of fictitious capital. This service is two-fold. In the first place, it has permanently lent the Government £11,000,000 of its capital at 3 per cent. As this, however, is the usual rate of interest paid by Government on its loans, the value of the accommodation conferred by this advance, especially when the security of the investment is taken into account, must not be estimated as extremely high. But secondly, the Bank transacts the banking business of the State, including that of the National Debt, and for this service it may, perhaps, be thought that the £70,000 per annum now allowed by Government, is an insufficient recompense. According to the arrangement made in 1808 the Bank was to receive £340 per million, on the first £600,000,000 of the debt, and £300 per million on the remainder; or in all about £250,000. This was obviously so exorbitant an allowance for the service rendered, that at each of the recent renewals of the charter, the Government have stipulated for a deduction; and in 1844 the abatement mutually agreed on was £180,000. If this deduction should be considered too great, it must be borne in mind, that as the Bank pays no interest on the Government deposits, and as they frequently amount to several millions sterling, the profit which it realizes from their loan, forms no insignificant item to be added to the £70,000.[B] It is also deserving of mention, that by an improved system of accounts, introduced into the Bank some few years since, the expense and trouble entailed by the management of this department, have been reduced to about one half; so that it is not altogether impossible that the £70,000, together with the employment of the deposits, may amount to an equitable recompense for the present value of the service. But whether this be so or not, it is undeniable that neither in this respect, nor in the preceding, nor yet in the two combined, does the Government receive an adequate equivalent for the privilege of issuing £14,000,000 of notes unrepresented by bullion. For a very slight calculation will suffice to show, that those £14,000,000, if advanced in loans or under discount, at the rate of 4 per cent., which is about the average, would return a profit of more than half a million annually; and although the Bank can never retain the whole of those notes in circulation, yet this produces no essential difference in the result, as the notes held in reserve are well known to be just as profitable in increasing the efficiency of the deposits, as if they had formed a part of the circulation itself.

[B] The interest occasionally paid to the Bank for its advances on Deficiency Bills is too trifling in amount to require a reference to it in the text.

The case of the country banks of issue is very different from that of the Bank of England. The only equivalent which they render in return for the privilege of issue, so far at least as we are aware, consists in the payment of stamp duty, and composition in lieu thereof; and the total amount derived from those imposts is less than £40,000 per annum. Now, the employment of the £8,000,000 of country notes, in loans and under discount, at the rate just assigned, would return an annual profit of more than £300,000; and for this amount of profit the payment of £40,000 in stamp duty, must be considered a very inadequate compensation. In like manner, if we extend our view so as to embrace the total authorized issues of unrepresented notes throughout the United Kingdom, it will be seen that while the profits arising out of those issues (which are more than £30,000,000) cannot fall short of one million sterling, the principal equivalent rendered by the banks of issue in the aggregate, consists of the two services just mentioned as performed by the Bank of England, and two similar services performed by the Bank of Ireland; the vast majority of those banks receiving the full benefit of the right of issue, with the exception of a trivial per-centage upon the annual profits. In this respect therefore, as in the preceding, it is abundantly evident that our present monetary system is very much in need of a comprehensive amendment.

There are several methods which might be adopted for rendering the issue of unrepresented notes more decidedly profitable to the State. One of these will readily suggest itself it is that of allowing all the existing banks of issue to retain their privilege on condition of paying Government a certain equitable rate of interest on the amount of notes which they should hold in circulation. This plan would undoubtedly possess the single advantage of producing as small a dislocation in the movements of the commercial machinery of the country generally, as is perhaps consistent with the introduction of any important alteration. In nearly every other respect, however, it would be equally objectionable with the present system. It would furnish no additional guarantee either for the security of the genuine country notes, or against the circulation of counterfeit notes; and these are defects which would alone be sufficient to condemn any system in which they were not satisfactorily provided for.