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formation of joint-stock banks was but a feeble palliative of inveterate disorders. It was quite illusory to expect to make any real improvement upon the system of country banking in England, by the mere introduction of a plan for allowing banking establishments with large capitals to be set on foot. There had always been, and were at the moment, a great number of such establishments in England. What we really wanted was the adoption of a system that should suppress all local issues, or exclude the possibility of notes being discredited, by preventing all individuals or associations from issuing such as had not been previously guaranteed.
Besides attempting to lessen the frequency of bankruptcy among the country banks by repealing the law limiting the number of partners, it was further resolved, in 1826, to prohibit the issue of ll. notes. The policy and effects of this measure gave rise to much dispute. It seems clear that it went far to shut up one of the most convenient channels by which the inferior class of country bankers contrived to get their notes into circulation, and must, in so far, have done good. But there were many other channels still open to them; and to imagine that this measure was to place the provincial currency on that solid basis on which it should be placed, was quite visionary. There were no notes under 51. in circulation in 1792; and yet fully one third part of the country banks then in existence became bankrupt! The truth is, as already stated, that it is not possible to guard against loss and fraud from the proceedings of the country bankers, otherwise than by compelling them to give security for their issues ; and as security may as easily be given for 11. notes as for those of 5l., the suppression of the former does not appear to be essential. No doubt can, however, be entertained, that the representations of the extreme injury occasioned by the withdrawal of 1l. notes were greatly exaggerated ; -- though it is at the same time obvious that the means of the bankers to make advances, as well as the profit derived from making them, must both have been diminished by the suppression of the small notes ; and it would be foolish to deny that this circumstance must have occasioned some loss and inconvenience to many individuals.
These remarks are meant to apply only to the case of the country banks. The extraordinary extent to which the forgery of the Il. notes of the Bank of England was carried affords a sufficient vindication of the policy of their suppression. But the comparatively limited circulation of the country banks, and perhaps we may add the greater attention paid to the manner in which their notes were engraved, hindered their forgery from becoming injuriously prevalent.
(2.) New System of 1844. — The defects inherent in the old system were again fully developed in 1836 and 1837. It is needless now to enter upon any investigation of the circumstances which led to the overtrading of these years; but it was carried to a great extent both here and in the U, States. In nothing, however, was this more strikingly evinced, than in the rapid increase of joint-stock banks; their number, which in 1834-35 had amounted in England and Wales to 55, having risen in 1835-36 to no fewer than 100! Many of these were banks of issue, and in consequence of the large additions that were thus suddenly made to the number of notes afloat, and still more to the number of bills, checks, and other substitutes for money, the currency became redundant and the exchange depressed; and the deficient harvests of 1838 and 1839, conspiring with this redundancy, occasioned a farther fall in the exchange, and a severe drain upon the Bank of England for gold. But while the latter was narrowing her issues by supplying the exporters of bullion with gold in exchange for notes, the country banks went on increasing their issues! What the former did by contracting on the one hand, the latter more than undid by letting out on the other. The vacuum created by the withdrawal of Bank of England paper, was immediately filled up, and made to overflow, by the issue of a more than equal amount of provincial paper; so that had it not been for the rise in the rate of interest, and the other repressive measures adopted by the Bank, the probability is that she might have gone on paying away bullion for notes, till she was drained of her last sixpence, without in any degree affecting the exchange; and as it was, the bullion in her coffers in August 1839 was reduced to 2,420,0001, so that we narrow'y escaped a tr. mendous crisis.
This perilous experience having again forcibly attracted the public attention to the state of our banking system, Sir Robert Peel was encouraged to attempt its improvement. The clause in the act 3 & 4 Will. IV. c. 98., for the renewal of the charter in 1833, which gave to parliament power to revise or cancel it in 1845, afforded a legitimate opportunity for the introduction of the new system. But, however desirable, the total suppression of the issue of notes by joint stock and private banking companies, would have been a measure too much opposed to popular prejudices, and to the real or supposed interests of a large and powerful class, to have had any chance of being carried ; and there also would have been great, though inferior, difficulties in the way of the plan for taking security. It was, indeed, indispensable in attempting to obviate the defects inherent in our banking system, to proceed cautiously, to respect, in as
far as possible, existing interests, and to avoid taking any step that might excite the fears or suspicions of the public; the grand difficulty being to reconcile the introduction of such a course with the adoption of any plan that would obviate in any considerable degree the defects complained of. Happily this difficult problem bas been dexterously and satisfactorily solved by Sir Robert Peel; the measures he introduced and carried through Parliament in 1844 and 1845, for the improvement of our banking system, having been so skilfully contrived as to provoke little opposition, at the same time that they effected very extensive and (as we think) most beneficial changes.
The measures in question consist of the Act 7 and 8 Vict. c. 32., which refers to the Bank of England, and the English country banks; and the acts 8 & 9 Vict. c. 37, 38., referring to the banks of Scotland and Ireland. The principal object of these statutes has been to obviate the chances of over.issue and of sudden fluctuations in the quantity and value of money, by limiting the power to issue notes payable on demand, and by making the amount of such notes in circulation vary more nearly than previously with the amount of bullion in the possession of the issuers. Sir Robert Peel adopted, in dealing with the Bank of England, the proposal made by Mr. Loyd, in 1837, for effecting a complete separation between the issuing and banking departments of that establishment. And while the directors are left at liberty to manage the latter at discretion, their management of the former, or issue department, is subjected to what seems to be a well-devised system of restraint. The Bank is allowed to issue 14,000,0001. of notes upon securities (of which the debt of 11,015,1001. lent hy her to government is a part); and whatever paper the issue department may at any time issue over and above this maximum amount of securities, it must have an equal amount of coin and bullion in its coffers. * Hence it is impracticable for the issue department to increase its issues without, at the same time, proportionally increasing its stock of coin and bullion; or to diminish the latter without proportionally diminishing the amount of paper supplied to the public and the banking department. And, therefore, if the latter issued the whole notes assigned to it, the total amount issued by the issue department and the amount in circulation would be identical ; and it might under such circumstances be truly said that, in so far as the currency consists of Bank of England notes payable on demand, it varied in amount and value as it would do were it wholly me. tallic, and, consequently, by being so closely identified with the standard, realised the beau ideal of a paper currency.
But, though the currency approaches to, it has not arrived at this degree of perfection. The public does not deal alone with the issue, but also, and to a far greater extent, with the banking department. And this latter department retained such a portion of the notes issued to it by the former, under the 2nd clause of the 7 & 8 Vict, c. 32., as was supposed at the time to be sufficient to carry on its business, their amount having since varied with the varying demands for bullion, the sales and purchases of securities, &c. But it is sufficient, in illustration of what is now stated, to observe that during the week ended the 4th of November, 1848, notes to the amount of 26,796,6601. had been issued to the public and the banking department, of which the latter had 8,242,5751. in its coffers, making the sum in the hands of the public 18,554,0851. And as it is sometimes sup: posed that the banking department might issue this sum of 8,242,5751., or the spare notes at any time in its coffers, in the discount of bills, or any other way, it is concluded that there is still room for some, though but little, derangement of the currency from mistaken proceedings on the part of the Bank; and this, no doubt, may be sometimes true, at least to some extent. But it is idle to suppose that the banking department could carry on business without a large reserve of notes or of coin. This department may have, owing to a variety of circumstances, to meet a drain for deposits; and as it is very unsafe to trust to the sale of securities in periods of discredit, a very considerable supply of notes or of bullion, or of both, can never be advantageously or safely dispensed with.
This shows the little weight to be attached to the statements of those who contend that the late measure has laid no real restraint on the issues of the Bank, because, say they, she has a large reserve of unissued notes which she might legitimately throw on the market. But in truth and reality she can do nothing of the sort. A reserve is indispensable, not only to her safety, but to her ability to carry on banking business ; and it is at present (November, 1848) sufficiently narrow. More vigilance and caution are now required on the part of the Bank Directors than formerly; for otherwise the banking department of the Bank may be reduced to the greatest difficulties, without its being possible for it to obtain any assistance from the issue department, how able soever the latter might be to render it. This was strikingly evinced in the autumn of
A clause is inserted in the act allowing the Bank to increase her issue upon securities in the event of her notes being used instead of those of any or all of the existing banks of issue.
1847; and nothing but the exercise of a proper degree of foresight and caution can prevent its recurrence. No gold can now be obtained from the issue department except in exchange for notes; nor can the latter be obtained from it except in exchange for gold. Hence it is no longer, as formerly, in the power of the Bank to create paper money at pleasure to supply the place of cash in any emergency in which she may be involved; and instead of less she requires to act with more circumspection under the new system than under the old.
But though the check on the over-issue of Bank notes be thus nearly effectual, it appears rather singular that no check should be established on the issue of bank postbills, which amounted to 1,018,5031. on the 4th November, 1848, and which are and may be substituted for notes. No doubt, however, were the Bank (which is hardly to be imagined) to abuse the privilege of issuing post-bills, by making advances in them which she could not have made in notes, measures would be taken to prevent the abuse; and perhaps, on the whole, it was as well to postpone devising means for the prevention of what seems so unlikely to occur.
Weekly returns are now published of the issues of the Bank, and of the securities, bullion, &c., in her possession. The sum to be deducted by the Bank from the charge on account of the management of the national debt is in future to be 180,000l. instead of 120,0001. a year, as fixed by the act 3 & 4 Will. 4. c. 98. The charter is to be continued till twelve months' notice after the 1st of August, 1855.
The provisions made in this act for restraining the country circulation were, perhaps, still more important. The maximum future issue of the joint-stock and other banks in England and Wales was limited to the average amount of the circulation of each during the twelve months preceding the 27th of April, 1844. It was farther enacted that no new bank shall be established for the issue of notes, and that the names of the partners in joint-stock and other banks shall be periodically published.
The regulations in the statutes relating to banking in Scotland and Ireland are nearly similar. The maximum amount of notes to be issued by the banks of both countries is, in time to come, not to exceed the average amount which each bank had in circulation during the twelve months ending the 1st of May, 1845. Certain returns, including amongst others the amount of gold and silver coin held by the banks, the names of the partners, &c., are to be periodically published. The small-note currency of Scotland has not been affected by the measure.
It is impossible to doubt that these regulations interpose a formidable obstacle to over-issue; and that, consequently, they discourage overtrading, and tend to reduce both the number and the violence of those commercial revulsions and changes in the value of money, that liave always been, and must necessarily continue to be, productive of the greatest mischief. No one ever pretended to say that these or any other measures which could be adopted with respect to the currency would wholly prevent unsafe speculation and overtrading. These may originate in an endless variety of circumstances; but in times past the tendency to speculation and gambling, when once set on foot, was, in most cases, powerfully stimulated by the facility which banks then possessed of issuing additional quantities of paper; and of that facility they are now all but deprived. It is, perhaps, true, that the fair and legitimate influence of the acts now referred to may be in some degree countervailed by the circulation to a greater extent than formerly of bills and other sorts of paper not payable on demand but at short dates; and it is not inprobable that sooner or later the question may arise, whether any regulations should be adopted in regard to the issue of such paper. In so far, however, as respects the issue of paper money, or notes payable on demand, the regulations in the act of 1844 appear to bave left little to be desired. No doubt, also, numbers of the private and other banks that now issue notes will from time to time wind up their affairs; and as no new banks of issue can be established in their stead, the vacuum caused by the with. drawal of their notes will be supplied by those of the Bank of England; so that a gradual progress will be made towards the desirable consummation of having only one bank of issue.
It is sometimes contended, by those opposed to the policy of limiting the issues, that they never can be in excess so long as they are payable on demand. Such, however, is not the case : notes payable, and really paid, on demand cannot, it is true, fall below the value of specie in the country in which they are issued; but the check of payment in specie does not, in fact, begin to operate till their over-issue has depreciated the value of the whole currency, gold as well as paper, in such country, below its level in the surrounding countries, and till, consequently, the exchange becomes unfavourable, and it is of advantage to export gold. Then, of course, the over-issue is stopped, but such stoppage is almost always accompanied by a great deal of public distress and incon. venience; while it by no means necessarily follows that any considerable portion of the loss thence arising will fall on those banks by whose misconduct or over-issue the fall in the exchange and the demand for bullion may have been occasioned,
The measures adopted in 1844, though they deeply affected many powerful private interests, were, as already stated, passed with little difficulty, and were very generally approved of. In this respect, however, the public opinion has, to some extent, changed; and the act of 1844 has been charged with having aggravated the pressure experienced by the mercantile world in 1847. But we are satisfied that there is no real room or ground for any such imputation. The crisis of 1847 was a consequence, partly of the railway mania of the previous year, and partly of the failure of the potato crops of 1845 and 1846. The failure in the latter year deprived fully two-thirds of the people of Ireland, and a considerable portion, also, of those of Great Britain, of their accustomed supplies of food. In consequence of this deficiency, and of Government having come forward to provide the means for its relief, there was an unprecedented importation of all sorts of corn; and the demand for bullion for exportation to meet this importation, occurring simultaneously with a vast railway expenditure, pecuniary accommodations were obtained with the greatest difficulty, and the rate of interest rose to an extraordinary height. Instead, however, of being increased by the act of 1844, it is abundantly certain that the operation of the latter contributed to alleviate the severity of the crisis. The restraints it imposed on the issues of the country banks had hindered them from embarking to any great extent in railway adventures, so that they were better able to assist their customers; and it also prevented the Bank of England from attempting to meet the exigencies of the case, otherwise than by raising the rate of interest, and restricting her issues. And besides being the natural and proper, these were, in fact, the only means by which the value of bullion could be raised in this country, its demand for foreign remittance checked, and the exchange turned in our favour. A great many mercantile houses that had been trading upon very insufficient capitals, or which had previously been virtually insolvent, were, of course, swept off during the crisis; and the alarm that was thereby occasioned, though for the most part without any good foundation, gave rise to a species of panic. During the prevalence of the latter, Government consented (25th October, 1847) to a temporary suspension of the act of 1844; but there is now, we believe, little doubt that this was an unwise proceeding. When it took place the violence of the crisis had abated. The drain for gold for exportation had not only ceased, but had begun to set in our favour; and the probability is, that in a very few days all alarm would have passed off, without the dangerous precedent which was set by the interference of ministers. Hence, in our view of the matter, the experience afforded by the crisis of 1847 tells strongly in favour of the act of 1844. But for its influence, it is most probable that the Bank would have attempted to meet the demand for bullion without raising the rate of interest, at least to the extent to which she did raise it; and if so, we should have been exposed to the imminent risk of a suspension of cash payments. If, therefore, the act of 1844 should be subjected to any modifications, it is to be hoped that they may be such as may tend to carry out and strengthen the principles on which it is founded.
ABSTRACT OF THE ACT 7 & 8 Vict. c. 39. POR REGULATING THE ISSUE OF BANK NOTES, AND FOR GIVING
To the BANK OF ENGLAND CERTAIN PRIVILEGES FOR A LIMITED PERIOD. 19 JULY, 1844.
Bank to establish a separate Department for the Issue of Notes. Whereas it is expedient to regulate the issue of bills or notes payable on demand: and whereas the act 3 & 4 Will. 4. c. 98. gave to the corporation of the governor and company of the Bank of England certain privileges for a limited period, under certain conditions ; and it is expedient that the privileges of exclusive banking therein mentioned should be continued to the said governor and company of the bank of England, with such alterations as are herein contained, upon certain conditions : be it therefore enacted, that from and after the 31st day of August, 1844, the issue of promissory notes of the governor and company of the bank of England, payable on demand, shall be separated and thenceforth kept wholly distinct from the general banking business of the said governor and company; and the business of and relating to such issue shall be thenceforth conducted and carried on by the said governor and company in a separate department, to be called “The Issue Department of the Bauk of England,” subject to the rules and regulations hereinafter contained ; and it shall be lawful for the court of directors of the said governor and company, if they shall think fit, to appoint a committee or committees of directors for the conduct and management of such issue department of the bank of England, and from time to time to remove the members, and define, alter, and regulate the constitution and powers of such committee, as they shall think fit, subject to any bye-laws, rules, or regulations which may be made for that purpose: provided nevertheless, that the said issue department shall always be kept separate and distinct from the banking department of the said governor and company.-$1.
Management of the Issue by Bank of England.-- Upon the 31st August, 1844, there shall be transferred, appropriated, and set apart by the said governor and company to the issue department of the bank of England securities to the value of 14,000,0001., whereof the debt due by the public to the said governor and company shall be and be deemed a part ; and there shall also at the same time be transferred, appropriated and set apart by the said governor and company to the said issue department so much of the gold coin and gold and silver bullion then held by the bank of England as shall not be required by the banking department thereof; and thereupon there sball be delivered out of the said issue depart. ment into the said banking department of the bank of England such an amount of bank of England notes as, together with the bank of England notes then in circulation), shall be equal to the aggregate amount of the securities, coin, and bullion so transferred to the said issue department of the bank of England: and the whole amount of bank of England notes then in circulation, including those delivered to the banking department of the bank of England as aforesaid, shall be deemed to be issued on the credit of such securities, coin, and bullion so appropriated and set apart to the said issue department; and from thenceforth it shall not be lawful for the said governor and company to increase the amount of securities
for the time being in the said issue department, save as herein-aster is mentioned, but it shall be lawful for the said governor and company to diminish the amount of such securities, and again to increase the same to any sum not exceeding in the whole the sum of 14,000,0002., and so from time to time as they shall see occasion; and from and after such transfer and appropriation to the said issue department as aforesaid it shall not be lawful for the said governor and company to issue bank of England notes, elther into the banking department of the bank of England or to any persons or person whatsoever, save in exchange for other bank of England notes, or for gold coin or for gold or silver bullion received or purchased for the said issue department under the provisions of this act, or in exchange for securities acquired and taken in the said issue department under the provisions herein contained : provided always, that it shall be lawful for the said governor and company in their banking department to issue all such bank of England notes as they shall at any time receive from the said issue department or otherwise, in the same manner in all respects as such issue would be lawful to any other person or persons. - $ 2.
Proportion of Silver Bullion to be retained in the Issue Department. - Whereas it is necessary to limit the amount of silver bullion on which it shall be lawful for the issue department of the bank of England to issue bank of England notes ; be it therefore enacted, that it shall not be lawful for the bank of England to retain in the issue department of the said bank at any one time an amount of silver bullion exceeding 1.4th part of the gold coin and bullion at such time held by the bank of England in the issue departo ment. - $ 3.
AU Persons may demand of the Issue Department Noles for Gold Bullion. - From and after the 31st dag of August, 1814, all persons shall be entitled to demand from the issue department of the bank of England balik of England notes in exchange for gold bullion, at the rate of 31. 178. 9d. per ounce of standard gold: provided always, that the said governor and company shall in all cases be entitled to require such gold bullion to be melted and assayed by persons approved by the said governor and coinpany at the expence of the parties tendering such gold bullion. - $ 4.
Percet 10 increase Securities in the Issue Department, and issue additional Notes. -- If any banker who on the 6th day of May, 1844, was issuing his own bank notes shall cease to issue his own bank notes, it wall be lawful for H. M. ia council at any time after the cessation of such issue, upon the application of the said governor and company, to authorize and empower the said governor and company to increase the amount of securities in the said issue department beyond the total sum or value of 14,000,0001., and thereupon to issue additional bank of England notes to an amount not exceeding such increased amount of securities specited in such order in council, and so from time to time : provided always, that such increased amount of securities specified in such order in council shall in no case exceed the proportion of 2-3rds the arount of bank notes which the banker so ceasing to issue may have been authorized to issue under the provisions of this act; and every such order in council shall be published in the next succeed. in, London Gazette. -- 95.
Account to be rendered by the Bank of England. --An account of the amount of bank of England notes issued by the issue departinent of the bank of England, and of gold coin and of gold and silver bullion respectively, and of securities in the said issue department, and also an account of the capital stock, and the deposits, and of the money and securities belonging to the said governor and company in the banking department of the bank of England, on some day in every week to be fixed by the commissioners of stamps and taxes, shall be transmitted by the said governor and company weekly to the said commissioners in the form prescribed in the schedule hereto annexed marked (Å), and shall be published by the said commissioners in the next succeeding London Gazette in which the same may be conveniently wserted. - $6.
Bank of England exempted from Stamp Duty upon their Notes. - From and after the said 31st day of August, 1844, the said governor and company of the bank of England shall be released and discharged from the payment of any stamp duty, or composition in respect of stamp duty, upon or in respect of their protnissory notes payable to bearer on demand ; and all such notes shall thenceforth be and continue free and wholly exempt from all liability to any stamp duty whatsoever.--87.
Bank to allow 140,000 per Annum. — From and after the said 31st day of August, 1844, the payment or deduction of the annual sum of 120,00Cl., made by the said governor and company under the provisions of the said act passed in the 4th year of the reign of his late Majesty King William IV., out of the sums payable to them for the charges of management of the public unredeemed debt, shall cease, and in lieu thereof the said governor and company, in consideration of the privileges of exclusive banking, and the exemption from stamp duties, given to them by this act, shall, during the continuance of such privileges and such exempeion respectively, but no longer, deduct and allow to the public, from the sums now payable by law to the suid governor and company for the charges of management of the public unredeemed debt, the annual sum of !*0,0001., any thing in any act or acts of parliament, or in any agreement, to the contrary notwithstanding: provided always, that such deduction shall in no respect prejudice or affect the rights of the said governor and company to be paid for the management of the public debt at the rate and according to the terms provided in the act 48 G. 3. c. 4., intituled " An Act to authorize the advancing for the Public Service, upon certain Conditions, a proportion of the Balance remaining in the Bank of England, for the Payment of Unclaimed Dividends, Annuities, and Lottery Prizes, and for regulating the Allowances to be made for the Management of the National Debt." --$8.
Bank to allow the Public the Profils of increased Circulation. --- In case, under the provisions hereinbefore contained, the securities held in the said issue department of the bank of England shall at any time be increased beyond the total amount of 14,000,0004., then and in each and every year in which the saree shall happen, and so long as such increase shall continue, the said governor and company shall, in addition to the said annual sum of 180,0001., make a further payment or allowance to the public, equal in amount to the net profit derived in the said issue department during the current year from such additional securities, after deducting the amount of the expences occasioned by the additional issue during the same period, which expences shall include the amount of any and every composition or payment to be made by the said governor and company to any banker in consideration of the discontinuance at any time hereaster of the issue of bank notes by such banker; and such further payment or allowance to the public by the said governor and company shall, in every year while the public shall be entitled to receive the same, be deducted from the amount by law payable to the said governor and company for the charges of management of the unredeemed public debt, in the same manner as the said annual sum of 180,00001. is hereby directed to be deducted therefroin. ---$9.
No ner Bank of Issue. - From and after the passing of this act no person other than a banker who on ite 6th day of May, 1841, was lawfully issuing his own bank notes shall make or issue bank notes in any part of the U.K. - $ 10.
Restriction against Issue of Bank Notes. - From and after the passing of this act it shall not be lawful for any banker to draw, accept, make, or issue, in England or Wales, any bill of exchange or promissory note or engageinent for the payment of money payable to bearer on demand, or to borrow, owe, or take up, in England or Wales, any sums or sum of money on the bills or notes of such banker payable to trarer on demand, save and except that it shall be lawful for any banker who was on the 6th day of May. 1844, carrying on the business of a banker in England or Wales, and was then lawfully issuing, in England or Wales, his own bank notes, under the authority of a licence to that effect, to continue to Isque such rotes to the extent and under the conditions herein-after mentioned, but not further or otherwiseand the right of any company or partnership to continue to issue such potes shall not be in any manner prejudiced or affected by any change which may hercaster take place in the personal composition