We are fully aware that some eminent public men in England have long been, and perhaps still are, averse to the issue of small notes; but we cannot discover much force in the reasons which they advance for justifying their apprehensions. It is not unfrequently assumed, for instance, that the issue of such notes would necessarily lead to a great increase of forgeries; as they would be likely to pass into the hands of persons who could not have much experience in the detection of counterfeit paper. This objection owes its whole force to the defectiveness of the present system. If all the present banks of issue were allowed to issue small notes there can be little doubt that such permission would lead to extensive forgeries, as the numberless descriptions of such notes that would be in circulation, would be quite sufficient to baffle the discernment of even the most experienced persons. But if the privilege of issue were withdrawn from all its present possessors except the Bank of England, and if the latter were allowed to issue small notes, which would in that case be the only small notes that could ever become disseminated amongst the public, there is not the slightest reason to suppose that this would have any other effect than that of reducing the attempts at forgery to the very smallest minimum. It has likewise been objected, that inasmuch as such notes would come into the possession of a lower class of persons than those who can ever now receive paper money, a class liable to be seized by panic in times of pressure, the effect would probably be to increase the dangers of the Bank in periods of difficulty. Whatever influence this consideration may have in respect to an increased issue of unrepresented notes, it is altogether void of weight as opposed to the extension of bullion notes. For as we have already seen, an increase of bullion notes implies a corresponding increase of treasure in the Bank, for the payment of those notes, and the invariable effect of an increase of bullion is to augment the confidence of the public in the Bank’s security. And even supposing the very improbable occurrence of a run upon the Bank to the full extent of the additional bullion notes that might have been sent into circulation, the only injurious result that this could have, would be the reduction of the treasure in the custody of the Bank to the same amount as it originally held previously to making the extended issues. But lastly, it has also been advanced, that inasmuch as small notes could be directly employed in the payment of wages, any increase in their issue during periods of speculation would exercise an injurious influence in stimulating excessive production. Like the preceding, however, this objection is exclusively applicable to the unrepresented issues. For, as bullion notes are only the representatives of treasure that is actually retained in the coffers of the Bank, and which either consists of or is readily convertible into coin, those notes can exert no influence different from that of the coins themselves, and cannot therefore be held responsible for contributing in any degree to the extension of undue speculation.
It may perhaps be retorted, that if small notes were allowed to be issued, no practical distinction could be enforced between the unrepresented issues and the bullion notes, and that therefore the necessary effect of such permission would be to increase the former as well as the latter. But this objection would involve a total misconception, as the consideration of the present system will at once make apparent. For, so long as the unrepresented issues of the Bank of England are limited to £14,000,000, as under the Act of 1844, they cannot possibly exceed those £14,000,000, whatever may be the denomination of the notes so issued; and even though the restrictive clauses of the Act should be repealed, and the Bank should be allowed to replace the country issues, an arrangement can readily be devised, as we shall presently show, which would at once permit of an indiscriminate issue of notes of all denominations from one pound and upwards, and yet preclude the possibility of the unrepresented issues ever exceeding a safe and salutary maximum. If, however, it should still be apprehended that any danger would result from the complete abrogation of the prohibition of small notes, the expedient might be adopted of allowing a certain maximum issue of such notes for the next ten years, after which experiment, if the change proved beneficial, the restriction might be removed unconditionally. But for rendering such an experiment effectual a smaller issue than £5,000,000 to £10,000,000 would be of little service.
The preceding considerations have not tended to weaken, but rather to confirm the force of our conclusion, that it is now desirable that the whole paper issues of England and Wales should be entrusted to the Bank of England, subject to the condition that the profits of such issue should be equitably participated between the public and the Bank. As has already been pointed out, the present banks of issue which would be deprived of their privilege would have no ground for complaint on the score of such deprivation, as they have long had reason to be aware that they owe their privilege entirely to the favour of the State, and that they are liable to have it withdrawn whenever it may be found inconsistent with public interests. There is one case indeed in which they might not unfairly consider themselves aggrieved, and that is, if the privilege were withdrawn so suddenly as to cause any serious depreciation in the value of their property. And in order to avoid such a result, it would certainly be expedient that sufficient time should be allowed them to contract their issues, and replace them by Bank of England notes, with the smallest disadvantage both to the public and themselves. For this purpose, a less period than ten years would scarcely be sufficient. But there are several modes in which the transition might be effected with very trifling dislocation. One of these would be extremely simple as well as feasible. The country banks might be permitted to issue their own notes for the next ten years on condition of contracting the amount of their authorized issues by one-tenth annually. An arrangement might at the same time be made which would induce the Bank of England to increase its issues in a corresponding proportion, so that the total amount of currency in the possession of the public need undergo no actual diminution; while both to the country banks and the Bank of England, the change from the present system would be so gradual as to produce no serious inconvenience to either. Should this plan be adopted, and we know of no practical difficulty to oppose it, the authorized maximum of the country issues during the next ten years, together with the maximum profit derived therefrom, at an average rate of 4 per cent., would, in round numbers, diminish according to the following series:—
| Years. | Issues. | Profits. |
|---|---|---|
| 1856 | £8,000,000 | £320,000 |
| 1857 | 7,200,000 | 288,000 |
| 1858 | 6,400,000 | 256,000 |
| 1859 | 5,600,000 | 224,000 |
| 1860 | 4,800,000 | 192,000 |
| 1861 | 4,000,000 | 160,000 |
| 1862 | 3,200,000 | 128,000 |
| 1863 | 2,400,000 | 96,000 |
| 1864 | 1,600,000 | 64,000 |
| 1865 | 800,000 | 32,000 |
| 1866 | 000,000 | 00,000 |
| £1,760,000 |
thus allowing the country banks a total profit of £1,760,000, or nearly two millions out of the privilege of issue before their entire surrender of it. And this appears to us as liberal an arrangement as they could have any reason to expect.
We are now almost in a position to determine on what system the Bank of England should be expected to render an equivalent for the exclusive issue of paper money in England and Wales. Prior, however, to entering upon this consideration, it will be necessary to refer to another principle, which the present system infringes no less remarkably than those already instanced. With the exception of a very limited section of currency theorists, it is now universally admitted that a paper currency ought to be so regulated as to contract and expand in conformity with the requirements of commerce; that is to say, to contract whenever trade is stationary and the supply of commodities in the market small, and to expand whenever trade becomes active and the supply of marketable commodities undergoes an increase. By the currency theorists it is still maintained that a paper currency ought to contract and expand exactly as a currency purely metallic would do in the like circumstances. But this is palpably equivalent to asserting, that whatever evils are inseparable from a metallic currency ought to be, not avoided, but perpetuated in a mixed currency. One of the chief defects of a purely metallic currency consists in the very circumstance that it does not contract and expand with the decrease and increase of marketable commodities requiring to be exchanged for each other, but that, on the contrary, through the operation of an influx or efflux of gold, it not unfrequently contracts or expands in a far greater proportion than the state of the markets would justify, thereby producing an excessive depreciation or appreciation in general prices; while sometimes it even expands when the state of the markets would require a contraction, and vice versa. And accordingly, this is the evil against which common sense would desire to contrive peculiar safeguards in a mixed currency. The present system however has most carefully perpetuated the evil. For in the case of every considerable efflux of gold, the circulation—that is the amount of circulating medium, paper and metallic, in the hands of the public—must contract not merely in the proportion required for correcting the unfavourable exchange, but in a much higher proportion; and in every case in which such a drain commences at a period when the Bank’s reserve of unemployed notes is at or near the minimum, the circulating medium must actually contract to an extent precisely equal to the amount of coin exported. Thus supposing the drain to commence when the reserve of notes is at the average of about £6,000,000, an exportation of £10,000,000 of gold would not only reduce this reserve to its lowest prudent minimum of about £3,000,000 but would also contract the amount of gold and bullion notes in the possession of the public by about £7,000,000; while, supposing the reserve to have been already at the minimum of £3,000,000, the exportation of the £10,000,000 of gold would fall entirely on the circulating medium which it would reduce in the proportion of nearly 15 per cent.[C] In addition, therefore, to the measures already proposed, the restrictive clause that limits the Bank of England to any inflexible maximum, must be repealed and the Bank must be allowed to issue unrepresented notes, not only to the extent at present authorized, viz. £14,000,000 together with an additional £8,000,000, as a substitute for the country issues, but also to any necessary amount in excess of those £22,000,000, subject however to certain conditions, required for preventing any possible over-issue beyond the actual wants of the public.
[C] Assuming the given circulation in the hands of the public to be thus composed:
| Gold, and bullion notes issued on gold, &c., | £50,000,000 |
| Silver, | 7,000,000 |
| Bank of England unrepresented notes | 11,000,000 |
| Country notes | 7,000,000 |
| £75,000,000 |
a drain of £10,000,000 of gold would obviously produce a contraction of more than 13 per cent.; while, if the silver be excluded from the computation, the amount of the reduction would be within a fraction of 15 per cent.
We shall now proceed to the consideration of those conditions. It has already been seen that the Bank of England should not be allowed to issue unrepresented notes without participating its profits with the State, from which it derives the privilege of issue. Now there are several methods in which this participation might be effected. For instance, a computation might be made of the probable amount of annual profit that would be derived from the privilege; and the Bank might be required to pay annually into the Treasury, whatever proportion of this profit might be considered equitable. This plan, however, is liable to the fatal objection, that it could hardly fail to operate as a bonus on excessive issue. For, as in this case, the profits of the Bank would rapidly increase in proportion to the greater number of notes that could be kept in circulation, the Directors would be exposed to the continual temptation of resorting to imprudent means for extending their issues. A single illustration will show the force of this. For, supposing that the proportion of the profits set apart for the State, should amount to the total profit arising out of the issue of say some £10,000,000 of notes, then all the profits derived from the issue of notes in excess of those £10,000,000 would go undivided into the coffers of the Bank, so that the Bank would be directly interested in extending the issues as much beyond the £10,000,000 as would be practicable. And the experience of the whole past history of the Bank has proved that such a system as this would be inconsistent with the highest interests of the commercial public. It has been proposed again by some eminent authorities, that the Bank should be allowed to supply the whole paper issues of the country on condition of lending some fifteen or twenty millions of its notes to the Government without interest, which would necessarily give the same pecuniary advantage to the State as if it issued an equal number of its own notes. But this plan would be liable to the same objection as the former. It would make the profits of the Bank depend directly on the amount of unrepresented notes retained in circulation; and under such circumstances the Bank could hardly fail at times to extend its issues beyond the limits which the condition of trade would render advantageous.