But there is another principle, not hitherto propounded, to which such a system, as well as that at present in existence, would be just as forcibly opposed as to those which have already been advanced. For if it is clearly demonstrable, that the issue of paper money should be a function of the State, and should be exercised exclusively with a view to public interests, it is no less rigidly deducible from the best established data of monetary science, and no less agreeable to the spontaneous conclusions of common sense, that there should only be a single bank of issue. If no other reason for this could be adduced, save that already intimated, viz. that the existence of various descriptions of paper money has the direct tendency to lead to forgeries, this consideration alone would have sufficient weight to prove our proposition. But indeed its truth has long been fully proved on other grounds. It is a well known fact, that in the course of trade there are certain periods when it is desirable that the currency should expand to meet unusual requirements, and certain other periods when it should contract, in order to prevent undue speculation. The former case in general presents but little difficulty. At such times the rate of interest is usually high; and as it is for the pecuniary advantage of the banks of issue to enlarge their circulation as much as possible, the desire to increase their profits will induce them to extend their issues to the highest limits. In this case, therefore, the operation of a plurality of issuing banks may not be injurious. But in the opposite circumstances, when it is expedient that the circulation should contract, the effect is precisely the reverse. During such periods the rate of interest is generally low, and the profits made by the banks proportionally small; so that it is only by retaining as large a number of notes as they possibly can in circulation, that the banks of issue can obtain their ordinary amount of profits. Whenever a contingency of this sort arises, the momentary advantage of the banks of issue, and the permanent interests of the community at large, are brought into direct collision. For should some of the issuing banks postpone their own advantage to that of the public, and contract their issues, there will always be found some other banks, which, instead of following their example, will embrace so favourable an opportunity of enlarging their transactions at the expense of their more conscientious rivals, and fill up the vacancy by an increased issue of their own notes. And the ultimate effect of this course, is to compel the former, in self defence, to again expand their issues in order to retain their customers, who would otherwise transfer their accounts to the bank which would make the largest advances at the lowest rate of interest. Thus the existence of a plurality of issuers has the inevitable tendency to throw obstacles in the way of a contraction of the currency, at periods when the peculiar circumstances of the country, may render such contraction a measure absolutely necessary for the public welfare.
In applying this principle to the case of the existing system, it will be seen that the limitation of the country issues to little more than one half the authorized unrepresented issues of the Bank of England, has greatly minimized the evils that would otherwise result from the existence of so great a multitude of issuers. At the same time, by throwing the whole responsibility of the management of the circulation upon the Bank of England, it has practically conferred a very undue advantage on the country banks. And on the other hand, it has confessedly provided no machinery for producing a uniform contraction of the issues, when desirable, in any districts, save the metropolitan, and those where only Bank of England notes circulate. In every other part of England and Wales, it lies completely within the power of some one or two of the local banks to prevent the circulation from contracting, no matter how essential may be such contraction to the general prosperity of the district.
The natural inference to which the preceding data directly lead, is, that either a State Bank should be formed for the issue of treasury notes, or that the privilege of issue should be exclusively confined to some one of the existing banks of issue. It may easily be shown that no insuperable obstacles exist to prevent the establishment of a State Bank. The only practical difficulty would arise out of the necessity of paying off the eleven millions due to the Bank of England; and this could readily be effected either by a direct sale of the debt, or by the contraction of a new loan for the same amount, neither of which operations need entail any considerable expense, present or prospective. The management of the issues would demand no greater degree of care than those of the Bank of England. A sufficient portion of the notes issued might be retained for the payment of the dividends, and for making any other necessary disbursements on account of Government; and the remainder might be loaned at their market value to such banks as might have valid securities to offer in exchange; but no advances should be made to private individuals, or in any way that would interfere with the ordinary business of the banks of deposit and discount. The amount of profit that would be derived from the notes advanced to the banks, would necessarily depend on both the number of the notes and the rate at which they were loaned; but there can be little doubt, that if the present issues of England and Wales were entirely replaced, the nett profit would not be less than half a million sterling.
To this plan, however, there is one cardinal objection, at least at the present, and perhaps for many years to come; such a bank would necessarily be directly or indirectly subject to the control of whatever Government might happen to possess the seals of office. And although it is to be hoped that no Ministry which is ever likely to be entrusted with the executive in the United Kingdom, would so far descend from the dignity of their high position, as to tamper with the integrity of the monetary system of the country for any unworthy purpose, whether party or personal, yet it is not so certain that in the heat of parliamentary conflict, such tampering might not be ascribed to the Government of the day; and even the suspicion of any misdirection could not fail to be prejudicial to that feeling of public confidence which is so essential to the well-being of every paper currency. In these circumstances, therefore, it seems preferable that the issue of paper money should be preserved entirely free from any possible entanglement with the strife of party politics.
There remains, then, as the only alternative, the selection of some one of the existing banks as the exclusive depository of the privilege of issue. The qualifications required by such a bank, are the possession of a capital sufficiently large to form the basis of at least the present paper issues of England and Wales, together with a long experience of business transactions, on a scale proportionally extensive. Now both of these requisites are combined in the Bank of England. Its commercial experience has been greater than that of any other bank in the world. Its capital and rest united, amount to about £18,000,000, and although £14,000,000 of this are permanently invested in the loan to Government and other public securities, and are not therefore available for banking purposes, yet the knowledge that they can be relied on in the case of any possible disaster, has the same effect in inspiring confidence, as if they formed a part of the working capital of the Bank. Now, although the total authorized issue of unrepresented notes in England and Wales amounts to £22,000,000, yet the total average circulation of such notes is only about £15,000,000; and according to the judgment of the best practical authorities, the portion of the united capital and rest, which is not permanently invested, would form a perfectly adequate basis for an average unrepresented circulation of £15,000,000. And if the £3,000,000 that are now permanently invested in public securities, distinct from the Government debt, were set at liberty and employed as working capital, it is equally well established, that the £7,000,000 of which that working capital would then consist, upheld as they would still be, in public confidence, by the £11,000,000 lent to Government, would be quite sufficient as a basis for a circulation of unrepresented notes, to the extent of from £20,000,000 to £30,000,000.
And this brings us to the enquiry, whether the present note circulation of England is as extensive as would be consistent with the stability of our monetary system. It is generally well understood that it is for the advantage of the nation that the unrepresented paper issues should be carried as far as is compatible with their perfect convertibility and security. Every note issued in lieu of gold is obviously equivalent to the creation of so much additional capital; for as it withdraws a gold coin from circulation it enables that coin to become capital, while the note itself discharges the functions of a medium of exchange as efficiently as the coin for which it has been substituted. And from this it clearly follows that unrepresented notes should be issued for every gold coin in the country, with the exception of what is actually required for securing the convertibility of those notes. Whether this point has or has not been reached in the case of the English issues, will depend on the proportion that subsists between the total extent of the gold currency and the amount required as a domestic and foreign reserve. For making this comparison we have no precise data that can be relied on for perfect accuracy, but we can make a rough approximation that will answer our purpose sufficiently well. According to the computation communicated by a late Governor of the Bank of England to the Committee of the House of Commons on Commercial Distress, and which received the sanction of his official approbation, the gold currency of England and Wales may be estimated at from £40,000,000 to £60,000,000, and the silver at £7,000,000 or £8,000,000. It may be observed, that there does not seem to be any excess of silver, as the difficulty of procuring a sufficient quantity for the payment of wages in most of the large towns, is at particular seasons very considerable. On the other hand, the extent of the gold currency, at first sight, appears immoderately great. Assuming £50,000,000, or the medium estimate, to be correct, the metallic currency would be more than three times the amount of the average circulation of unrepresented notes; or even taking £40,000,000 as the more reliable computation, the proportion would still be very nearly three-fold. Or to present the same idea in different words, an average circulation of £15,000,000 of unrepresented notes, is a very small proportion of a total average currency of £55,000,000.
But a closer analysis will bring us to the same conclusion. There are only three purposes for which a metallic currency is absolutely requisite—the payment of small amounts, the discharge of foreign liabilities, and the protection of the convertibility of the paper issues. The first of these is provided for by the silver and copper coin in the hands of the public. The second item is the more important of the remaining two. For the foreign reserve must clearly contain as much gold as is ever likely to be withdrawn from the country in one continuous drain. This has been estimated by Mr. Tooke, a very eminent practical authority, as about £12,000,000; but we think he must have overlooked the possible concurrence of a failure in some staple article of food, with the maintenance of a very heavy military expenditure abroad. Should such a combination ever arise, it would not be impossible that the drain might even exceed the limit of £12,000,000. It is more prudent therefore to err on the safe side, and assign £20,000,000 as the reserve to be maintained for such a contingency. But when these £20,000,000 have been set apart as a foreign reserve, there still remain at least a second £20,000,000 in the hands of the public; and the question arises, what proportion of these £20,000,000 is really required for securing the convertibility of the paper issues. To this enquiry the answer given by eminent bankers is, that £5,000,000 in gold would be more than sufficient to act as a basis for the present average circulation of £15,000,000, and that if that average were increased to £30,000,000, a gold basis of £10,000,000 would still be sufficient to secure the convertibility of the whole. And in confirmation of the truth of this view, the cases of Ireland and Scotland may be referred to, as in both, the paper circulation is considered to exceed the gold currency in about a three-fold ratio. When this domestic reserve of £10,000,000, therefore, is added to the foreign reserve of £20,000,000 there still remain at least £10,000,000 of gold that serve no necessary purpose as currency, and which it would be profitable to replace by paper.
It cannot be denied, however, that there are obstacles which forbid the immediate issue of unrepresented paper money to the extent of these £10,000,000. The average unrepresented circulation of the Bank of England is at present only about £8,000,000; and if the bank be likewise entrusted with the issue of paper in lieu of the country circulation, which forms an average of about £7,000,000 more, this would very nearly double its average circulation of unrepresented notes. Now, although, as has just been shown, the £4,000,000 of capital and rest, which are not permanently invested in the loan to government or otherwise, and which therefore form the actual working capital of the Bank, are amply sufficient to act as a basis for securing the convertibility of these £15,000,000; and although the conversion into working capital of the £3,000,000 at present permanently invested in public securities distinct from the government loan, should enable the Bank with perfect security to increase its unrepresented circulation by another £10,000,000, yet, it could hardly be regarded as a prudent course to allow the Bank to extend that circulation in more than a two-fold ratio without some gradual preparation for so great a change. It seems a preferable plan therefore that the Bank should try the experiment of replacing the country issues without any other important increase of its unrepresented circulation for ten or twenty years to come; and there can be little doubt, that after so much experience in managing the enlarged issues, it might safely be entrusted with a still further extension. Meanwhile we think it very desirable that the £3,000,000 invested in public securities, should be withdrawn from the bullion department and incorporated in the working capital. But in this we anticipate.
The circulation of unrepresented notes being thus disposed of, there remains for consideration the expediency of an increase in the amount of bullion notes issued by the Bank. And here, as in the case of the unrepresented notes, it is generally well understood, that it is profitable for the nation that the bullion notes should be extended as widely as possible. There are two points of difference however in the two cases. For every unrepresented note that can prudently be issued, there is a clear addition of an equal amount to the productive capital of the nation; while for every note issued on bullion, there is no other saving than the wear and tear of the metal that is lodged in the coffers of the Bank. But, on the other hand, while unrepresented notes cannot prudently be issued so far as to infringe upon the metallic reserve required for foreign and domestic purposes, there is no such limit to the prudent issue of bullion notes; but the Bank may with perfect security continue to issue notes on gold so long as the gold is presented, even though the amount so presented should comprise every sovereign that is now in the hands of the public. And the reason for this is sufficiently obvious. For if every bullion note that is issued, increases the liabilities of the Bank it likewise increases the assets available for meeting those liabilities, and if £10,000,000 of bullion are sufficient to meet a demand for the payment of £10,000,000 of notes, £40,000,000 of bullion would be equally competent to discharge £40,000,000 of notes. And if we include the £15,000,000 of unrepresented notes amongst the liabilities, it will be seen at once, that if the possession of £10,000,000 of bullion would inspire confidence in the £25,000,000 of bullion notes and unrepresented notes combined, there can be no doubt that the possession of £40,000,000 of bullion would impart a still higher confidence in a total circulation, consisting of £55,000,000 of both descriptions of notes combined. So that from this point of view, it clearly follows that every increase of the bullion notes must necessarily increase the public confidence in, and therefore the security of, the unrepresented issues.
We have just seen that the amount of gold employed in the currency, cannot be estimated under £40,000,000. Now the average portion of this gold which is retained in the Bank, and on which bullion notes are issued, is not more than from £12,000,000 to £14,000,000. It would follow therefore from the preceding, that this might safely and profitably be increased to £20,000,000, £30,000,000, or even £40,000,000. The possibility of effecting such an increase, however, does not depend immediately upon the Bank of England, but upon the public generally, as the Bank can only issue bullion notes on the amount of gold that is presented in exchange for such notes. But it may well be doubted whether any permanent increase can be effected so long as the Bank is prohibited from issuing notes of a smaller denomination than five pounds sterling. The principal reason why so large an amount of treasure remains in the hands of the public, consists in the fact that all small payments, including wages, varying from twenty shillings to five pounds, must be made in gold, and that as a necessary consequence, a very large proportion of the money that is held in the possession of the working classes cannot possibly consist of any other medium. Any considerable increase of bullion notes, therefore, would require that that increase should be effected by means of paper of a smaller denomination than five pounds. And accordingly we deem it a matter of high expediency that the legal restriction upon such issues should be at once removed.