Front Page Titles (by Subject) X. Responsibility for Excess Issue: the Credit Policy of the Bank of England - Studies in the Theory of International Trade
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X. Responsibility for Excess Issue: the Credit Policy of the Bank of England - Jacob Viner, Studies in the Theory of International Trade 
Studies in the Theory of International Trade (New York: Harper and Brothers, 1965).
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X. Responsibility for Excess Issue: the Credit Policy of the Bank of England
Silberling finds other statistical evidence of the high quality of the Bank of England's management of its affairs during the Restriction: “the Bank's loans to the State tended to expand when discounts were moderate, and vice versa. In other words, the Bank granted accommodation to the government during the war rather sparingly and according to the state of their mercantile accounts. They put the business interests foremost and assumed a primary responsibility for the maintenance of British trade and industry, which, in an essentially commercial war, was of vast consequence.” 1 But as can be seen from chart II and table III, all that the data show is that there was somewhat of an inverse correlation between the short-run changes in commercial discounts and advances to the government. As they stand, the data will equally well support the conclusion that commerce got only what was left after the government's demands had been satisfied. An even more plausible explanation of the inverse correlation between commercial discounts and advances to government, because it does not involve the attribution to the Bank of England of any consistent regulatory policy, is that advances to the government supplied commerce with funds as effectively as, though less directly than, commercial discounts. When the government borrowed freely from the Bank, the borrowed funds flowed into commerce and consequently lessened the demand of businessmen for discounts.2 But while Silberling here praises the Bank for giving commerce a preference over the government, and for treating the latter only as a residual claimant for credit, he later attacks the bullionists for their alleged failure to recognize the extent to which the Bank's expansion of its credit was due to the demands made upon it by the government.3
Angell, from the same data, derives a substantially different defense of the Bank's operations. Instead of finding that the Bank treated the government as a residual borrower, he claims,
probably justly,4 that the Bank was not a free agent in deciding the amount of credit it should grant to the government, and concludes, from his analysis of the data, that the Bank in its commercial discounts, “that part of the credit extensions over which it had independent control,” exercised “a moderating policy, of restraint in boom times and of assistance in stringency.... The Bank of England, in so far as its independent and uncontrolled loan-extensions were concerned, was largely blameless.” 5
What inverse correlation there was between the commercial discounts of the Bank and its advances to the government is consistent, in the absence of additional information, with a wide variety of interpretations of the credit policy of the Bank. All that can reasonably be inferred from the available data, statistical and non-statistical, with respect to the operations of the Bank is that during the Restriction period the Bank increased both its advances to the government and its commercial discounts substantially, that the increase in its commercial discounts was proportionately much greater than the increase in its advances to the government, that rising premiums on bullion, falling exchanges, and rising prices all failed to act as a check on the expansion by the Bank of its credit facilities of all types, and that the Bank directors told the truth when they insisted repeatedly that they followed no clearly-defined rule or principle in regulating their discounts except insistence that the commercial paper discounted should be “sound” and of short maturities. That the depreciation was, on modern, less exigent standards, only moderate, seems to have been due much more to the fact that the 5 per cent discount rate had become traditional and therefore was not lowered than to deliberate policy of the Bank. Even if it be granted that the Bank of England exercised a stabilizing influence, the evidence is lacking that it did so deliberately and as a matter of policy, and the record as to the premiums on bullion, the fall of the exchanges, and the rise of prices, demonstrates that it did not exercise it sufficiently, if these phenomena are regarded, as all the bullionists regarded them, as highly undesirable.
There is substantial ground for accepting Angell's plea in defense of the Bank's advances to the government that the Bank with respect to these was not a free agent. It nevertheless had much greater scope for regulating the currency through control of its commercial discounts than it made use of. Ample facilities for direct credit to private business had developed during this period outside the Bank of England both in London and in the provinces, and it is by no means clear that there was any longer any urgent need, as far as the nation's commerce and industry were concerned, for the Bank to grant any genuinely “commercial” discounts at all. Its “commercial discounts” increased, however, from 6.3 millions in 1800 to 15.3 millions in 1809 and 19.5 millions in 1810,6 amounts which were never again reached until after 1914! The proportion of the Bank's commercial discounts to its total advances increased, from an average of approximately 25 per cent during the years 1794 to 1796 inclusive, to 33 per cent for 1797 to 1800, 42 per cent from 1801 to 1805, 50 per cent from 1806 to 1810, and 36 per cent from 1811 to 1815;7 in 1820, after resumption, it fell to 19 per cent, a level which it appears barely to have maintained during the 1820's.8
Even these percentages apparently minimize the extent to which the Bank's expansion of its credit facilities provided funds for use by private industry rather than by government. The government during the Restriction kept a large proportion of the advances to it by the Bank, for the years 1807 to 1816 exceeding 50 per cent on the average,9 on deposit with the Bank, presumably as an emergency reserve. The commercial discounts, on the other hand, were in the main drawn out immediately in cash, and the private deposits at the Bank of England during the same period averaged under 12 per cent of the commercial discounts.10 It is likely, therefore, that the funds resulting from the commercial discounts had a greater velocity of circulation and consequently, pro rata, a greater influence on the level of prices, than the advances to the government.
Angell makes some attempt to determine the responsibility of price inflation in England for the fall in the exchanges and the premium on bullion by a comparison of their fluctuations with the fluctuations in the English price level, as shown by Silberling's index number of English prices for the period, but with admittedly inconclusive results.11 Such a comparison is by its nature without significance. Even a comparison of the fluctuations in the exchange rates with the relative fluctuations of English to foreign price levels would not yield conclusive results unless there was very marked agreement or disagreement in the fluctuations.12
That resort to price inflation is necessary if a great war is to be financed seems to Silberling so axiomatic that without argument he makes their failure to acknowledge this one of the most heavily stressed counts in his indictment of the bullionists.13 There is no need to debate this issue here, but several considerations of which the bullionists were aware call for notice. Contemporary writers pointed out that England had financed successfully the Seven Years' War and the American War, both of which involved fairly comparable financial strain, without resort to price inflation involving serious depreciation of the currency in terms of bullion. Napoleon financed his side of the war on a strictly metallic currency basis. There was, moreover, a substantial rise in English prices even in terms of gold and silver, and England could, therefore, have had a substantial inflation even if she had remained on the gold standard.
THE BULLIONIST CONTROVERSIES: II. THE DEFLATION PHASE
The guinea was made for man, and not man for the guinea.
—Thomas Attwood, A letter on the creation of money, 1817, p. 95.
Silberling, “Financial and monetary policy,” loc. cit., p. 420, note.
Officers of the Bank testified before the Commons Committee of 1819 that when the advances to the government were large, the demand for commercial discounts was generally small. (Reports from the Secret Committee on the expediency of the Bank resuming cash payments, 1819, pp. 27, 143.)
“Financial and monetary policy,” loc. cit., pp. 425–27.
Cf. Chancellor of the Exchequer Vansittart, Hansard, Parliamentary debates, 1st series, XXIV (Dec. 8, 1812), 230: “the enormous profits of the Bank had also been dwelt upon: to this he would bear testimony, that the Bank was an unwilling party to those measures whence the profits accrued, and which were forced upon it by the government of the country.”
Theory of international prices, p. 486.
Some of the increase in “commercial discounts” may have been in rediscounts for London bankers, and some of it consisted undoubtedly of advances to subscribers to new issues of government stock, rather than of commercial discounts proper.
Cf. Angell, Theory of international prices, p. 498, col. 15. Angell comments that “these percentages are on the whole surprisingly low” (Ibid., p. 502) but does not indicate what his criterion of “lowness” is.
Cf. the statistics of public and private securities held by the Bank, given in the Report on the Bank of England charter, 1832, appendix no. 5, pp. 13–25.
Cf. ibid., appendix no. 24, p. 35; appendix no. 5, pp. 13 ff.
Ibid., appendix no. 32, p. 41; appendix no. 5, pp. 13 ff.
Theory of international prices, p. 484. Angell says, in this connection, that “contrary to the opinion of most contemporary writers, neither the specie premium nor the rise in the foreign exchanges were correct measures of the depreciation, if this last be measured by commodity prices. Both were much too low.” Since the bullionists did not in fact measure depreciation by the trend of English commodity prices, and the anti-bullionists either denied its existence or claimed that the premium on bullion and the fall in the exchanges exaggerated the extent of the depreciation, this passage is not easy to understand.
Although Silberling's index number is a valuable contribution, it would not be satisfactory for this purpose even if a comparable Continental index number were available. Of the 35 commodities from whose prices the index is computed, only 11 are classed by Silberling as British commodities—including copper plates (or cakes or sheets) and tin blocks, essentially import commodities?—and none of these is a substantially fabricated commodity. (“British prices and business cycles,” loc. cit., p. 299.) For such comparisons, it is the relative trends of the prices of “domestic commodities” which are most significant. See infra, p. 385.
Silberling's emphasis on the desirability of inflation under the then existing circumstances makes it hard to explain his anxiety to free the Bank of England from the charge that it was mainly responsible for bringing it about.