Front Page Titles (by Subject) CHAPTER VII. - The Works of David Ricardo (McCulloch ed.)
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CHAPTER VII. - David Ricardo, The Works of David Ricardo (McCulloch ed.) 
The Works of David Ricardo. With a Notice of the Life and Writings of the Author, by J.R. McCulloch (London: John Murray, 1888).
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MR BOSANQUET'S OBJECTIONS TO THE PROPOSITION, THAT THE CIRCULATION OF THE BANK OF ENGLAND REGULATES THAT OF THE COUNTRY BANKS, CONSIDERED.
The next proposition which Mr Bosanquet attempts to disprove is that in which the Committee give it as their opinion, “That the circulation of country bank notes depends upon, and is proportionate to, the issues from the Bank.”
There are many practical authorities for the truth of this principle also. It appears to be singularly unfortunate, that few of the principles of the Bullion Committee which Mr Bosanquet has selected have not the authority of practical men, to whose opinions on these subjects so much deference is paid. That the exchange can never vary for any length of time beyond the limits defined by the Committee has been, and is, the opinion of the ablest practical men.
That the price of bullion cannot long continue with a sound system of currency, above the Mint price, has received full confirmation from the same quarter, and the proposition now under discussion is not without the same sanction. Mr Huskisson has already availed himself of the authority of the Governor of the Bank for its truth, who declared in his evidence to the Committee, page 127, “The country banks, by not regulating their issues on the principle of the Bank of England, might send forth a super-abundance of their notes; but this excess, in my opinion, would no sooner exist in any material degree, than it would be corrected by its own operation, for the holders of such paper would immediately return it to the issuers, when they found that in consequence of the over issue its value was reduced, or likely to be reduced, below par; thus, though the balance might be slightly and transiently disturbed, no considerable or permanent over-issue could possibly take place, as from the nature of things the amount of bank notes in circulation must always find its level in the public wants.” Mr Gilchrist of the Bank of Scotland, stated to the Committee, that “If the Bank of England were to restrict their issues, of course the Scotch banks would find it necessary to diminish theirs.” “The issues of the Bank of England,” he observed, “operate upon the issues of the banks of Scotland in this manner. If the banks of Scotland issue more than they ought to do in proportion to the issues of the Bank of England, they would be called upon to draw bills upon London at a lower rate of exchange.” (Page 114, App.) Mr Thompson, a country banker, and a member of the Committee, was asked, “By what criterion do the country banks now regulate their issues of paper?”—Ans. “By the plenty or scarcity of bank notes.” “Then their issues bear a proportion to the issues of the Bank?”—Ans. “In my opinion they do.”
“The Committee,” Mr Bosanquet observes, “has not defined the sense in which they use the term excess of currency; I, therefore,” he continues, “suppose it to be used in the Report in the sense in which it is used by Dr Smith, as denoting a quantity greater than the circulation of the country can easily absorb or employ.” And in another place, “As the fact is not apparent, at least (I mean that there is more paper than the country can easily absorb and employ) the onus probandi seems to lie on the Committee.”
This is not the sense in which I consider the Committee to use the word excess. In that sense there can be no excess whilst the Bank does not pay in specie, because the commerce of the country can easily employ and absorb any sum which the Bank may send into circulation. It is from so understanding the word excess that Mr Bosanquet thinks the circulation cannot be excessive, because the commerce of the country could not easily employ it. In proportion as the pound sterling becomes depreciated will the want of the nominal amount of pounds increase, and no part of the larger sum will be excessive, more than the smaller sum was before. By excess, then, the Committee must mean the difference in amount of circulation between the sum actually employed, and that sum which would be employed if the pound sterling were to regain its bullion value. This is a distinction of more consequence than at first sight appears, and Mr Bosanquet was well aware that it was in this sense that it was used by me. He has been so obliging as to express my meaning in a passage where it appeared obscure; he has done it most ably, and completely understood the sense in which I used the words an excessive circulation. He observes upon the passage, page 86, “If this interpretation be adopted, it will be nearly useless to search for, and inquire after, excess of paper as a fact; we must be content to admit proof of its existence from its effects, and our attention must be directed to ascertain depreciation, or an increased price of commodities, solely arising out of, and occasioned by, the increased amount of the circulating medium.” I do most unequivocally admit, that whilst the high price of bullion and the low exchanges continue, and whilst our gold is undebased, it would to me be no proof of our currency not being depreciated if there were only 5 millions of bank notes in circulation. When we speak, therefore, of an excess of bank notes, we mean that portion of the amount of the issues of the Bank, which can now circulate, but could not, if the currency were of its bullion value. When we speak of an excess of country currency, we mean a portion of the amount of the country bank notes, which cannot be absorbed in the circulation, because they are exchangeable for, and are depreciated below, the value of bank notes.
This distinction appears to me to be an answer to Mr Bosanquet's objection, where he says, “but does it follow that the country bank paper, if issued to excess, will not be checked, because there is already more bank paper in circulation than the country can absorb and employ? If it be admitted, and how can it be denied? that the price of commodities must everywhere rise or fall in proportion to the increase or diminution of the money which circulates them; must not an increase of London money increase the prices of commodities in London only, unless a part of that money can be employed in the country circulation? and, on the contrary, must not the same rise take place in the country prices only if the country currency be increased, and if it be not convertible into London currency; or cannot circulate in London? If the case put by Mr Bosanquet be supposed possible, that the London currency only should be increased, and that London bank notes were not current in the country, then we should have an exchange with the country in the same manner as we have with Hamburgh or France, and that exchange would show that London paper was, on a comparison with country paper, depreciated.
If each of the country banks were protected by a restriction act from paying their notes in any other medium than their own paper, and if these notes were each confined to the circulation of their particular districts, they would each be depreciated on a comparison with bullion, in proportion as their amount exceeded the amount of money of bullion value which would have circulated in those districts if they had not been protected by such an act. The notes of one bank might be depreciated 5 per cent., of another 10, another 20, and so on. The restriction bill being confined to the Bank of England alone, and all other notes being convertible into their notes, country notes can never be issued in a greater proportion than those of the London Bank. Mr Bosanquet thinks, “I was bound to show that some physical impossibility obstructs the increase of bank notes at the expense of country notes, and vice versa, before I assume that an increase of bank notes must produce an increase of country notes.”
From what I have already said, I think it will appear that, unless London notes are employed in the circulation of places where they were not before admitted, there is, if not a physical, at least an absolute impossibility, that an increase of Bank of England notes should not either be followed by an increase of country bank notes, or by a depreciation in the value of the London notes as compared with the country notes.
But how is this effected? How do the issues of the Bank produce an increase in the country circulation? Mr Gilchrist has informed us. Reverse the case which he has supposed, and it would stand thus:—If the Bank of England increase their issues, the country banks might increase theirs: the prices of commodities being raised in London, whilst those of the country continued as before, money would be wanted in the country to purchase in the cheaper market; bills would be demanded for that purpose upon the country, which would therefore sell at a premium, or, in other words, bank notes would be depreciated below the value of the country currency. Such demand would cease as soon as the country currency were either brought up to the level of the London currency, or the London currency reduced to the level of the country currency.
I should not have thought that a principle so clear could have been questioned: the value of our gold currency formerly regulated the value of a pound sterling all over England. If gold became abundant from the discovery of new mines, and more money were therefore employed in the circulation of London, a proportionate increase must necessarily have taken place in the country to preserve the equality of prices. Bank notes perform now the same office; and if they be increased, the country currency must either partake in the use of the additional quantity, or the country banks must make a proportional increase to their issues. It is not difficult, under such circumstances, to determine what will be the choice of the country banks.
The Committee having stated, that “If an excess of paper be issued in a country district, while the London circulation does not exceed its due proportion, there will be a local rise in prices in that country district, but prices in London will remain as before; that those who have the country paper will prefer buying in London, where things are cheaper, and will therefore return that country paper upon the banker who issued it, and will demand of him Bank of England notes, or bills upon London; and that thus the excess of country paper being returned upon the issuers for Bank of England paper, the quantity of the latter necessarily and effectually limits the quantity of the former.”
Mr Bosanquet asks, “Does this follow as a consequence? Admitting the accuracy of the reasoning, under the supposition that the country notes were actually paid in bank notes, does it apply under the admission that they are paid by bills on London, since, as we have already shown, the payment of these has very little reference to bank notes?” Most certainly it does. Suppose the excess of country paper to be 1000l., and in consequence 1000l. in Bank of England notes is demanded of the issuer, and sent up to London for the purchase of goods, will not 1000l. be added to the London circulation, whilst that of the country is diminished 1000l. Now, suppose that instead of a Bank of England note of 1000l. a bill on London is given to the holder of the country note, this will as sufficiently answer his purpose of making a purchase in London; but as a bill is only an order to A in London to pay to B in London, the London currency will remain as before, but the country currency will be reduced 1000l.
Now, the only difference in the two cases is this, that in the former 1000l. was added to the London circulation, in the latter it continued at the same amount. But will not the country banker, having by the payment of the 1000l. Bank of England note diminished that deposit, which he thinks it necessary for the safety of his establishment to have by him, give directions to his correspondent, either by the sale of an exchequer bill, or in any other way that might be agreed upon, to send him Bank of England notes to the amount of 1000l.?
“If things are cheaper in Liverpool than in London, I shall prefer buying there; and if I have too many bank notes, I shall send them to Liverpool in payment,”—provided they can circulate there. If they can, Liverpool will partake with London in the increase of circulation; but it is not improbable that a Liverpool banker will find an opportunity of persuading the people of Liver-pool that his note will answer their purposes as well as the Bank of England note;∗ he will, therefore, possess himself of it for one of his own, and will send it to London, thus will the circulation of Liverpool be increased by the issues of the Bank of England; and thus Mr Bosanquet is mistaken, when he observes that “they may restrict, but can never augment, one shilling in the circulation of the Liverpool banks.” The Committee having “assumed as an axiom, that country bank paper is a superstructure raised on the foundation of the paper of the Bank of England,” Mr Bosanquet asks where they have learned this? “They learned from Mr Stuckey,” he continues, “a considerable and experienced banker in Somersetshire, that his houses regulate their issues by the assets they have in London to pay them, consisting of stock, exchequer bills, and other convertible securities, without much reference to the quantity of Bank of England notes or specie which they have, although they always keep a quantity of both to pay occasional demands. What is there in this evidence to sanction the opinion, that bank notes either generate or limit country notes?”
It may, I think, be shown, that the increased issues of the Bank would induce Mr Stuckey, or any other country banker, to increase the amount of his issues, although he kept precisely the securities which he has enumerated. There would be such a demand for country notes, in consequence of the alteration of prices in London, that a country banker would be enabled to obtain bills upon London in return for his notes. With the produce of the bills he might possess himself of a larger sum of stock, exchequer bills, &c., the foundation being thus increased, the superstructure might be further raised.
The Committee could not have supposed that the Scotch Bank in the year 1763, when they reduced their circulation by giving bills at 40 days upon London, actually deposited bank notes, in the first instance, in the hands of their London correspondents. They might, if such were the case, have redeemed their notes at once with bank notes in Scotland. No; the Scotch Bank were situated as Mr Stuckey describes; they had securities of some sort in London, which they authorised their correspondents to turn into money in time to pay their bills. There was a transfer of money from A to B in London, and the Scotch note was withdrawn.
[∗]The Committee asked Mr Stuckey, “Is it not your interest as a banker to check the circulation of Bank of England notes; and with that view do you not remit to London such Bank of England notes as you may receive beyond the amount which you may think it prudent to keep as a deposit in your coffers?” Ans. Unquestionably.