Front Page Titles (by Subject) PLAN FOR THE ESTABLISHMENT OF A NATIONAL BANK. - The Works of David Ricardo (McCulloch ed.)
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PLAN FOR THE ESTABLISHMENT OF A NATIONAL BANK. - 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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PLAN FOR THE ESTABLISHMENT OF A NATIONAL BANK.
It was the intention of Mr Ricardo, on retiring into the country after the last session of Parliament, to employ part of his leisure in committing to paper, with a view to publication, a scheme by which, in his opinion, the profit derived from the supply of Paper Currency might be afforded to the public without any diminution of security against the inconveniences to which such a currency is liable. It was known, previous to his last illness, that he had carried his design into execution; and the following pages were found among his papers after his decease. It is not known that Mr Ricardo thought any alteration or addition necessary, unless it be in one point. Having communicated his MS. to a member of his own family, who was near him at the time of its completion; and it being suggested to him that difficulty might be experienced in the country, as the notes of one district were not to be payable in another, in obtaining currency for the purposes of travelling; he admitted that something to obviate this inconvenience might be required, but thought that some very simple arrangement would answer the end. It does not appear that he had committed to writing any expedient which might have occurred to him for that purpose; and his friends have deemed it most proper to commit his manuscript to the press, with this explanation, in the state precisely in which it was found.
PLAN FOR THE ESTABLISHMENT OF A NATIONAL BANK.
The Bank of England performs two operations of banking, which are quite distinct, and have no necessary connexion with each other: it issues a paper currency as a substitute for a metallic one; and it advances money in the way of loan, to merchants and others.
That these two operations of banking have no necessary connexion, will appear obvious from this,—that they might be carried on by two separate bodies, without the slightest loss of advantage, either to the country, or to the merchants who receive accommodation from such loans.
Suppose the privilege of issuing paper money were taken away from the Bank, and were in future to be exercised by the State only, subject to the same regulation to which the Bank is now liable, of paying its notes, on demand, in specie; in what way would the national wealth be in the least impaired? We should then, as now, carry on all the traffic and commerce of the country, with the cheap medium, paper money, instead of the dear medium, metallic money; and all the advantages which now flow from making this part of the national capital productive, in the form of raw material, food, clothing, machinery, and implements, instead of retaining it useless, in the form of metallic money, would be equally secured.
The public, or the Government on behalf of the public, is indebted to the Bank in a sum of money larger than the whole amount of bank notes in circulation; for the Government not only owes the Bank 15 millions, its original capital, which is lent at 3 per cent. interest, but also many more millions, which are advanced on exchequer bills, on half-pay and pension annuities, and on other securities. It is evident, therefore, that if the Government itself were to be the sole issuer of paper money, instead of borrowing it of the Bank, the only difference would be with respect to the interest:—the Bank would no longer receive interest, and the Government would no longer pay it: but all other classes in the community would be exactly in the same position in which they now stand. It is evident, too, that there would be just as much money in circulation; for it could make no difference, in that respect, whether the 16 millions of paper money now circulating in London, were issued by Government, or by a banking corporation. The merchants could suffer no inconvenience from any want of facility in getting the usual advances made to them in the way of discount or in any other manner; for, first, the amount of those advances must essentially depend upon the amount of money in circulation, and that would be just the same as before: and, secondly, of the amount in circulation, the Bank would have precisely the same proportion, neither less nor more, to lend to the merchants.
If it be true, as I think I have clearly proved, that the advances made by the Bank to the Government exceed the whole amount of the notes of the Bank in circulation, it is evident that part of its advances to Government, as well as the whole of its loans to other persons, must be made from other funds, possessed, or at the disposal of the Bank, and which it would continue to possess after Government had discharged its debt to it, and after all its notes were withdrawn from circulation. Let it not then be said that the Bank charter, as far as regards the issuing of paper money, ought to be renewed, for this reason, that if it be not, the merchants will suffer inconvenience, from being deprived of the usual facilities of borrowing; as I trust I have shown that their means of borrowing would be just as ample as before.
It may, however, be said that, if the Bank were deprived of that part of its business which consists in issuing paper money, it would have no motive to continue a joint stock company, and would agree on a dissolution of its partnership. I believe no such thing; it would still have profitable means of employing its own funds; but suppose I am wrong, and that the company were dissolved, what inconvenience would commerce sustain from it? If the joint stock of the company be managed by a few directors, chosen by the general body of proprietors, or, if it be divided amongst the proprietors themselves, and each share be managed by the individual to whom it belongs, will that make any difference in its real amount, or in the efficacy with which it may be employed for commercial purposes? It is probable that in no case would it be managed by the individual proprietors, but that it would be collected in a mass or masses, and managed with much more economy and skill than it is now managed by the Bank. A great deal too much stress has always been laid on the benefits which commerce derives from the accommodation afforded to merchants by the Bank. I believe it to be quite insignificant compared with that which is afforded by the private funds of individuals. We know that at the present moment the advances by the Bank to merchants, on discount, are of a very trifling amount; and we have abundant evidence to prove that at no time have they been great. The whole fund at the disposal of the Bank for the last thirty years is well known. It consisted of its own capital and savings—of the amount of deposits left with it by Government and by individuals, who employed it as a banker. From this aggregate fund must be deducted the amount of cash and bullion in the coffers of the Bank, the amount of advances to the holders of receipts for the loans contracted for during each year, and the amount of advances to Government in every way. After making these deductions, the remainder only could have been devoted to commercial objects, and if it were ascertained, would, I am sure, be comparatively of a small amount.
From papers laid before Parliament in 1797, in which the Bank gave a number as unit, and a scale of its discounts for different years, it was calculated by some ingenious individual, after comparing this scale with other documents also laid before Parliament, that the amount of money advanced in the way of discount to the merchants, for a period of three years and a half previous to 1797, varied from 2 millions to 3,700,000l.. These are trifling amounts in such a country as this, and must bear a small proportion to the sum lent by individuals for similar purposes. In 1797, the advances to Government alone by the Bank, exclusive of its capital, which was also lent to Government, were more than three times the amount of the advances to the whole body of merchants.
A Committee of the House of Commons was appointed last session of Parliament to inquire into the law of pledges, and into the relation of consignors of goods from abroad to consignees. This committee called before it Mr Richardson, of the house of Richardson, Overend and Co., eminent discount brokers in the city. This gentleman was asked—
“Q. Are you not in the habit occasionally of discounting to a large extent bills of brokers and other persons, given upon the security of goods deposited in their hands?
A. Very large.
Q. Have you not carried on the business of a bill broker and money agent to a very large extent, much beyond that of any other individual in this town?
A. I should think very much beyond.
Q. To the extent of some millions annually?
A. A great many; about 20 millions annually,—sometimes more.”
The evidence of Mr Richardson satisfactorily proves, I think, the extent of transactions of this kind, in which the Bank has no kind of concern. Can any one doubt that, if the Bank were to break up its establishment, and divide its funds among the individual proprietors, the business of Mr Richardson, and of others who are in the same line, would considerably increase? On the one hand, they would have more applications made to them for money on discount on the other, many who would have money to dispose of would apply to them to obtain employment for it. The same amount of money, and no more, would be employed in this branch of business; and if not employed by the Bank, or by the individual proprietors, if they had the management of their own funds, it would inevitably find its way, either by a direct or circuitous channel, to Mr Richardson, or to some other money agent, to be employed by him in promoting the commerce and upholding the trade of the country; for in no other way could these funds be made so productive to the parties to whom they would belong.
If the view which I have taken of this subject be a correct one, it appears that the commerce of the country would not be in the least impeded by depriving the Bank of England of the power of issuing paper money, provided an amount of such money, equal to the Bank circulation, was issued by Government; and that the sole effect of depriving the Bank of this privilege would be to transfer the profit which accrues from the interest of the money so issued from the Bank to Government.
There remains, however, one other objection to which the reader's attention is requested.
It is said that Government could not be safely entrusted with the power of issuing paper money; that it would most certainly abuse it; and that, on any occasion when it was pressed for money to carry on a war, it would cease to pay coin, on demand, for its notes; and from that moment the currency would become a forced Government paper. There would, I confess, be great danger of this, if Government—that is to say, the Ministers—were themselves to be entrusted with the power of issuing paper money. But I propose to place this trust in the hands of Commissioners, not removable from their official situation but by a vote of one or both Houses of Parliament. I propose also to prevent all intercourse between these Commissioners and Ministers, by forbidding every species of money transaction between them. The Commissioners should never, on any pretence, lend money to Government, nor be in the slightest degree under its control or influence. Over Commissioners so entirely independent of them, the Ministers would have much less power than they now possess over the Bank Directors. Experience shows how little this latter body have been able to withstand the cajolings of Ministers; and how frequently they have been induced to increase their advances on exchequer bills and treasury bills, at the very moment they were themselves declaring that it would be attended with the greatest risk to the stability of their establishment, and to the public interest. From a perusal of the correspondence between Government and the Bank, previous to the stoppage of Bank payments, in 1797, it will be seen, that the Bank attributes the necessity of that measure (erroneously in this instance, I think), to the frequent and urgent demands for an increase of advances on the part of Government. I ask, then, whether the country would not possess a greater security against all such influence, over the minds of the issuers of paper, as would induce them to swerve from the strict line of their duty, if the paper money of the country were issued by Commissioners, on the plan I have proposed, rather than by the Bank of England, as at present constituted? If Government wanted money, it should be obliged to raise it in the legitimate way; by taxing the people; by the issue and sale of exchequer bills, by funded loans, or by borrowing from any of the numerous banks which might exist in the country; but in no case should it be allowed to borrow from those who have the power of creating money.
If the funds of the Commissioners became so ample as to leave them a surplus which might be advantageously disposed of, let them go into the market and purchase publicly Government securities with it. If on the contrary it should become necessary for them to contract their issues, without diminishing their stock of gold, let them sell their securities, in the same way, in the open market. By this regulation a trifling sacrifice would be made, amounting to the turn of the market, which may be supposed to be gained by those whose business it is to employ their capital and skill in dealing in these securities; but in a question of this importance such a sacrifice is not worth considering. It must be recollected that, from the great competition in this particular business, the turn of the market is reduced to a very small fraction, and that the amount of such transactions could never be great, as the circulation would be kept at its just level, by allowing for a small contraction or extension of the treasure in coin and bullion, in the coffers of the Commissioners. It would be only when, from the increasing wealth and prosperity of the country, the country required a permanently increased amount of circulation, that it would be expedient to invest money in the purchase of securities paying interest, and only in a contrary case, that a part of such securities would be required to be sold. Thus, then, we see that the most complete security could be obtained against the influence, which, on a first and superficial view, it might be supposed Government would have over the issues of a National Bank; and that, by organising such an establishment, all the interest, which is now annually paid by Government to the Bank, would become a part of the national resources.
I would propose, then, some such plan as the following, for the establishment of a National Bank:—
On the subject of the first regulation I have already spoken. The Commissioners should be, I think, five in number—they should have an adequate salary for the business which they would have to perform and superintend—they should be appointed by Government, but not removable by Government.
The second regulation refers to the mode in which the new paper circulation should be substituted for the old. By the provision here made, 25 millions of paper money will be issued; that sum will not be too large for the circulation of the whole country, but if it should be, the excess may be exchanged for gold coin, or the Commissioners may sell a portion of their exchequer bills, and thus diminish the amount of the paper circulation. There are other modes by which the substitution of the new notes for the old might be made, if the Bank of England co-operated with the Commissioners: but the one here proposed would be effectual. It might be desirable that Government should purchase from the Bank, at a fair valuation, the whole of its buildings, if the Bank were willing to part with them; and also take all its clerks and servants into pay. It would be but just to the clerks and servants of the Bank to provide employment and support for them, and would be useful to the public to have the services of so many tried and experienced officers to conduct their affairs. It is a part of my plan, too, that the payment to the Bank for the management of the national debt should wholly cease at the expiration of the Bank charter; and that this department of the public business should be put under the superintendence and control of the Commissioners.
The third regulation provides for a proper deposit of gold coin and bullion, without which the new establishment could not act. In fact, there would be 14 millions instead of 10, at the disposal of the Commissioners. It has been seen, by one of the subsequent regulations, that the Commissioners would act as banker to the public departments; and as it is found by experience, that, on the average, these departments have 4 millions in their banker's hands, the Commissioners would have these 4 millions in addition to the 10 millions. If 5 millions were devoted to the purchase of coin and bullion, 9 millions would be invested in floating securities. If 8 millions were invested in gold, 6 millions would remain for the purchase of exchequer bills. Whatever debt remained due to the Bank, after this second payment made by the Commissioners, must be provided for by loan, or made the subject of a special agreement between the Government and the Bank of England.
The fourth and fifth regulations provide for the substitution of the new paper money for the old, and protect the Bank from the payment in specie of the notes which it may have outstanding. This cannot be attended with any inconvenience to the holders of those notes, because the Bank is bound to give them Government notes, which are exchangeable on demand for gold coin.
The seventh regulation provides for the substitution of the new notes for the old country bank notes. The country banks could have no difficulty in providing themselves with the new notes for that purpose. All their transactions finally settle in London, and their circulation is raised upon securities deposited there. By disposing of these securities, they would furnish themselves with the requisite quantity of money to provide for the payment of their notes; consequently the country would at no time be in want of an adequate circulation. The circulation of the country banks is estimated at about 10 millions.
The eighth regulation provides against fraud and forgery. In the first instance, paper money cannot be issued from each district, but must all be sent from London. It is just, therefore, that some public agent should, in as many places as convenient, be prepared to verify the genuineness of the notes. After a time, the circulation of each district would be carried on by notes issued in that district, in forms sent for that purpose from London.
The ninth regulation provides every possible facility for making remittances and payments to any district in the country. If a man at York wishes to make a payment of 1000l. to a person at Canterbury, by the payment of 1000l. in notes issued at York to the agent in that town, he may receive a bill for 1000l., payable at Canterbury in the notes of that district.
The tenth regulation provides for the payment of the notes of every district in coin in London. If a man in York wants 1000l. in coin, Government should not be at the expense of sending it to him: he ought to be at that expense himself. This is a sacrifice that must be made for the use of paper money; and if the inhabitants of the country are not contented to submit to it, they may use gold instead of paper; they must, nevertheless, be at the expense of procuring it.
The eleventh regulation, as well as the ninth, provides for making remittances and payments to all parts of the country.
The twelfth regulation provides against the amount of the paper currency being too much limited in quantity, by obliging the Commissioners to issue it at all times in exchange for gold at the price of 3l. 17s. 6d. per ounce. Regulating their issues by the price of gold, the Commissioners could never err. It might be expedient to oblige them to sell gold bullion at 3l. 17s. 9d., in which case the coin would probably never be exported, because that can never be obtained under 3l. 17s. 10½d. per ounce. Under such a system, the only variations that could take place in the price of gold, would be between the prices of 3l. 17s. 6d. and 3l. 17s. 9d.; and by watching the market price, and increasing their issues of paper when the price inclined to 3l. 17s. 6d. or under, and limiting them, or withdrawing a small portion, when the price inclined to 3l. 17s. 9d. or more, there would not probably be a dozen transactions in the year by the Commissioners in the purchase and sale of gold; and if there were, they would always be advantageous, and leave a small profit to the establishment. As it is, however, desirable to be on the safe side in managing the important business of a paper money in a great country, it would be proper to make a liberal provision of gold, as suggested in a former regulation, in case it should be thought expedient occasionally to correct the exchanges with foreign countries, by the exportation of gold as well as by the reduction of the amount of paper.
The thirteenth regulation obliges the Commissioners to pay their notes on demand in gold coin.
The fourteenth regulation provides for a supply of one-pound notes for the country circulation. On the first establishment of the National Bank, but not afterwards, these are to be issued in London, to be subsequently countersigned in the country. As a check on the country agents, every description of note might be sent to them from London, numbered and signed. After receiving them, the agent should countersign them before they were issued to the public; and he should be held strictly responsible for the whole amount sent to him, in the same manner as the distributors of stamps are responsible for the whole amount of stamps sent to them. It is hardly necessary to observe, that the country agents ought to be in constant correspondence with the London district, for the purpose of giving information of all their proceedings. Suppose a country agent has given 100 notes of 1l. for a note of 100l., he must give information of that fact, sending at the same time the larger note for which he has given them. His account in London would be credited and debited accordingly. If he receive 100l. in notes, and give a bill on another district, he must give advice, both to the London district and to the district on which the bill is given, sending up the note as in the former instance. His account will be credited for this 100l., and the agent of the other district will be charged with it. It is not requisite to go any farther into details; I may already have said too much; but my object has been to show that the security for the detection of fraud is nearly perfect, as vouchers for every transaction would all be originally issued in London, and must be returned to London, or be in the possession of the country agent.
The fifteenth regulation is only explanatory of some of the former regulations.
The sixteenth regulation directs that the Commissioners shall act as banker to the public departments, and to the public departments only.
If the plan now proposed should be adopted, the country would probably, on the most moderate computation, save 750,000l. per annum. Suppose the circulation of paper money to amount to 25 millions, and the Government deposits to 4 millions, these together make 29 millions. On all this sum interest would be saved, with the exception of 6 millions, perhaps, which it might be thought necessary to retain as deposits, in gold coin and bullion, and which would consequently be unproductive. Reckoning interest, then, at 3 per cent. only on 23 millions, the public would be gainers of 690,000l. To this must be added 248,000l. which is now paid for the management of the public debt, making together 938,000l. Now, supposing the expenses to amount to 188,000l., there would remain for the public an annual saving or gain of 750,000l.
It will be remarked that the plan provides against any party but the Commissioners in London making an original issue of notes. Agents in other districts in the country, connected with the Commissioners, may give one description of notes for another; they may give bills for notes, or notes for bills drawn on them; but, in the first instance, every one of these notes must be issued by the Commissioners in London, and consequently the whole is strictly under their cognizance. If from any circumstances the circulation in any particular district should become redundant, provision is made for the transfer of such redundancy to London; and if it should be deficient, a fresh supply is obtained from London. If the circulation of London should be redundant, it will show itself by the increased price of bullion and the fall in the foreign exchanges, precisely as a redundancy is now shown; and the remedy is also the same as that now in operation, viz. a reduction of circulation, which is brought about by a reduction of the paper circulation. That reduction may take place two ways; either by the sale of exchequer bills in the market, and the cancelling of the paper money which is obtained for them,—or by giving gold in exchange for the paper, cancelling the paper as before, and exporting the gold. The exporting the gold will not be done by the Commissioners; that will be effected by the commercial operation of the merchants, who never fail to find gold the most profitable remittance when the paper money is redundant and excessive. If, on the contrary, the circulation of London were too low, there would be two ways of increasing it,—by the purchase of Government securities in the market, and the creation of new paper money for the purpose; or by the importation and purchase, by the Commissioners, of gold bullion, for the purchase of which new paper money would be created. The importation would take place through commercial operations, as gold never fails to be a profitable article of import when the amount of currency is deficient.