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CHAP. IV - Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain 
An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, edited and with an Introduction by F.A. Hayek (London: George Allen and Unwin, 1939).
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This works appears online with the permission of the Estate of F.A. Hayek. A further annotated version of Hayek’s introduction appears as a chapter in volume 3 of the Collected Works of F.A. Hayek (University of Chicago Press, 1991).
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Observation of Dr. Smith respecting the Bank of England—of the Nature of that Institution.—Reasons for never greatly diminishing its Notes—its Liability to be exhausted of Guineas—the Suspension of its Cash Payments not owing to too great Issue of Paper—nor to too great Loans.—Propriety of parliamentary Interference.
Dr Adam Smith, after laying down the principle which has been lately animadverted on, “that the quantity of paper which can easily circulate in a country never can exceed the gold and silver which would circulate if there were no paper,” proceeds to observe, that the Bank of England, “by issuing too great a quantity of paper, of which the excess was continually returning, in order to be exchanged for gold and silver, was for many years together, obliged to coin gold to the extent of between eight hundred thousand pounds and a million a year. For this great coinage the bank was frequently obliged to purchase gold bullion at 4l. an ounce, which it soon after issued in coin at 3l. 17s. 10½d. an ounce, losing two and a half and three per cent. on the coinage.” Dr. Smith probably could not be acquainted with the secret of the actual quantity of those bank notes, of the number of which he complains; he must, therefore, have taken it for granted, that they were what he terms excessive, on the ground of the price of gold being high, and the coinage great. He does not proceed, in any respect, to guard or to limit the observation in question; an observation which, when thus unqualified, may lead the reader to suppose, that whenever the bank finds itself subjected to any great demand for gold in consequence of a high price of bullion, the cause of this evil is an excess of circulating paper, and the remedy a reduction of bank notes. There is also danger, lest it should be conceived, that if the remedy should appear to fail, it can fail only because the reduction is not sufficiently great.
The point of which we are speaking is of great importance, and will be the subject of much future discussion. One object of the present and succeeding Chapter will be to shew, that, however just may be the principle of Dr. Smith when properly limited and explained, the reduction of the quantity of Bank of England paper is by no means a measure which ought to be resorted to on the occasion of every demand upon the bank for guineas arising from the high price of bullion, and that such reduction may even aggravate that sort of rise which is caused by an alarm in the country.
It will be proper, first, to describe the nature of the institution of the Bank of England, and the relation in which it stands to the public; in this detail, the event of the late stoppage of its cash payments will be particularly noticed.
Bills are drawn on London from every quarter of the kingdom, and remittances are sent to the metropolis to provide for them, while London draws no bills, or next to none, upon the country. London is, in this respect, to the whole island, in some degree, what the centre of a city is to the suburbs. The traders may dwell in the suburbs, and lodge many goods there, and they may carry on at home a variety of smaller payments, while their chief cash account is with the banker, who fixes his residence among the other bankers, in the heart of the city. London also is become, especially of late, the trading metropolis of Europe, and, indeed, of the whole world; the foreign drafts, on account of merchants living in our out-ports and other trading towns, and carrying on business there, being made, with scarcely any exceptions, payable in London. The metropolis, moreover, through the extent of its own commerce, and the greatness of its wealth and population, has immense receipts and payments on its own account; and the circumstance of its being the seat of government, and the place where the public dividends are paid, serves to encrease its pecuniary transactions: The practice, indeed, of transferring the payments of the country to London being once begun, was likely to extend itself. For, in proportion as the amount and number of payments and receipts is augmented in any one particular place, the business of paying and receiving is more easily and cheaply transacted, the necessary guineas becoming fewer in proportion to the sums to be received and paid, and the bank notes wanted, though encreasing on the whole, becoming fewer in proportion also. On the punctuality with which the accustomed payments of London are effected, depends, therefore, most essentially the whole commercial credit of Great Britain. The larger London payments are effected exclusively through the paper of the Bank of England; for the superiority of its credit is such, that, by common agreement among the bankers, whose practice, in this respect, almost invariably guides that of other persons, no note of a private house will pass in payment as a paper circulation in London.
The bank has a capital of near twelve millions, to which it has added near four millions of undivided profits or savings: all this capital and savings must be lost before the creditors can sustain any loss.
The Bank of England is quite independent of the executive government. It has an interest, undoubtedly (of the same kind with that of many private individuals), in the maintenance of our financial as well as commercial credit. It is also in the habit of lending out a large portion of its ample funds on government securities of various kinds, a comparatively small part only, though a sum not small in itself, being lent to the merchants in the way of discount. The ground on which the bank lends so much to government is clearly that of mutual convenience, as well as long habit. It is the only lender in the country on a large scale; the government is the only borrower on a scale equally extended; and the two parties, like two wholesale traders in a town, the one the only great buyer, and the other the only great seller of the same article, naturally deal much with each other, and have comparatively small transactions with those who carry on only a more contracted business. The bank, moreover, in time of peace, is much benefited by lending to government. It naturally, therefore, continues those loans, during war, which it had been used to grant at all antecedent periods. It occasionally furnishes a considerable sum to the East India company. If, indeed, it lent more to the merchants during war, and less to the government, the difference would not be so great as might, perhaps, at first view be supposed. If, for instance, it furnished a smaller sum on the security of exchequer bills, that article might then be supposed to fall in price, or, in other words, to yield a higher and more tempting interest; and the bankers, in that case, would buy more exchequer bills, and would grant less aid to the merchants; they would, at least, in some degree, take up whichever trade the Bank of England should relinquish. The preference given by the bank to the government securities, is, therefore, no symptom of a want of independence in its directors: they are subject, in a much greater degree, to their own proprietors than to any administration. The strong manner in which the directors of the bank* at the time antecedent to the suspension of their cash payments, insisted on having four millions and a half paid up to them by the government—a payment which, though demanded at a very inconvenient time, was accordingly made—may be mentioned as one sufficiently striking mark of the independence of that company. There is, however, another much more important circumstance to be noticed, which is conclusive on this subject. The government of Great Britain is under little or no temptation either to dictate to the Bank of England, or to lean upon it in any way which is inconvenient or dangerous to the bank itself. The minister has been able to raise annually, without the smallest difficulty, by means of our funding system, the sum of no less than between twenty and thirty millions. The government, therefore, is always able to lessen, by a loan from the public, if it should be deemed necessary, the amount of its debt running with the bank. To suppose that bank notes are issued to excess, with a view to furnish means of lending money to the minister, is, in a high degree, unreasonable. The utmost sum which he could hope to gain in the way of loan from the bank, by means of an extraordinary issue of bank notes, could hardly be more than four or five millions; and it is not easy to believe, that a government which can raise at once twenty or thirty millions, will be likely, for the sake of only four or five millions (for the loan of which it must pay nearly the same interest as for a loan from the public), to derange the system, distress the credit, or endanger the safety of the Bank of England* . This banking company differs in this most important point from every one of those national banks, which issue paper, on the continent. I understand that the banks of Petersburgh, Copenhagen, Stockholm, Vienna, Madrid, and Lisbon, each of which issues circulating notes, which pass as current payment, are all in the most direct and strict sense government banks† . It is also well known, that the governments residing in these several places have not those easy means of raising money, by a loan from the people, which the minister of Great Britain so remarkably possesses. Those governments, therefore, have, in times even of moderate difficulty, no other resource than that of extending the issue of the paper of their own banks; which extension of issue naturally produces a nearly correspondent depreciation of the value of the notes, and a fall in the exchange with other countries, if computed at the paper price. The notes, moreover, being once thus depreciated, the government, even supposing its embarrassments to cease, is seldom disposed to bring them back to their former limits, to do which implies some sacrifice on their part at the time of effecting the reduction; but it contents itself, perhaps, with either a little lessening, or with not further adding to, the evil. The expectation of the people on the continent, therefore, generally is, that the paper, which is falling in value, will, in better times only cease to fall, or, if it rises, will experience only an immaterial rise, and this expectation serves of course to accelerate its fall. Hence it has happened, that in all the places of Europe, of which mention has been made, there exists a great and established, and generally, an increasing discount or agio between the current coin and the paper money of the kingdom. Nor, indeed, is this all: several of the governments of Europe have not only extended their paper in the manner which has been described, but have, besides this, depreciated, from time to time, their very coin; and thus there has been a two-fold cause for a rise in the nominal price of their commodities when exchanged with the current paper. There is, therefore, a fundamental difference between the nature of the paper of the Bank of England, and that of all the national or government banks on the continent. No one supposes that the English guinea contains less and less gold than heretofore, through frauds practised by government in the coinage; and as little is it to be suspected that the Bank of England paper is about to be depreciated by an excessive issue either ordered or needed by the government. There is, moreover, at present, this further ground for assuming that the issue of Bank of England notes is not likely to be excessive,—that it has lately become a practice to make the number of them public. Their quantity, as it now appears, has never, in any short time, varied very greatly; has seldom, in late years, been below ten or eleven millions, even when no one pound and two pound notes were issued; and has at no moment exceeded the sum of about fifteen millions and a half, including two millions and a half of one pound and two pound notes. It is not impossible that the discredit into which the paper of the government banks of the continent of Europe has fallen, into which also the paper of the American banks sunk at the time of the American war, through the same extension of its issues by the successive French revolutionary governments, may have, in some degree, contributed, though most unjustly, to that fall in the exchange which Great Britain has experienced. Foreigners not adverting to that independence of the Bank of England, the grounds of which have been stated, and misled possibly by the abundant misrepresentations which have taken place in this country, may have thought that it was the government which, by its loans, involved the bank in difficulties (a point which shall be discussed presently), and that the bank is merely an instrument in the hands of the government; an instrument which may be turned, as the government banks on the continent have been, to the purpose of issuing notes to an extravagant extent. If such should, in any degree, be their sentiment, it would be just in them to infer from thence, that the Bank of England notes are not unlikely to fall in their value in the same manner as the notes of the continental banks, An unwillingness to leave in this country whatever sums they may have a right to draw from us (sums probably small in the whole) may have been the consequence of this fear, and a great unwillingness to trust with us even a small quantity of property, may happen to cause, under certain circumstances, a considerable fall in the exchange.
It may be mentioned as an additional ground of confidence in the Bank of England, and as a circumstance of importance in many respects, that the numerous proprietors who chuse the directors, and have the power of controlling them (a power of which they have prudently forborne to make any frequent use), are men whose general stake in the country far exceeds that particular one which they have in the stock of the company. They are men, therefore, who feel themselves to be most deeply interested not merely in the increase of the dividends or in the maintenance of the credit of the Bank of England, but in the support of commercial as well as of public credit in general. There is, indeed, both among them and among the whole commercial world, who make so large a portion of this country, a remarkable determination to sustain credit, and especially the credit of the bank; and this general agreement to support the bank is one of the pillars of its strength, and one pledge of its safety. The proprietors of it themselves are not likely to approve of any dangerous extension even of their own paper; both they and the directors know the importance of confining the bank paper, generally speaking, within its accustomed limits, and must necessarily be supposed to prefer its credit, and the paper credit of the nation, to the comparatively trifling consideration of a small increase in their own dividends; an increase which would prove delusory, if it should arise from that extravagant issue of bank notes which would have the effect of depreciating all the circulating medium of the country, since it would thus raise upon the proprietors of bank stock, as well as on others, the price of all the articles of life* . While the proprietors and directors of the bank have thus an interest, on the one hand, in limiting the quantity of paper issued, they are also naturally anxious, on the other, in common with the whole commercial world, to give the utmost possible credit to it; and although an opinion should prevail, even to some extent, among persons out of business, that the appearance of gold is the only test of wealth, and that the absence of it, however temporary, implies great danger to the country, the mercantile interest, and in particular the bank proprietors, the bankers, and the traders of London, by whose transactions the value of the London paper is upheld, may be considered as combined in the support of a juster sentiment. The bank itself is known to have experienced, at former times (as appears from the evidence of the directors given to parliament), very great fluctuations in its cash; and, in one period of returning peace and prosperity, a reduction of it below that which took place at the time of the late suspension of its cash payments: the amount of gold in the bank, at any one particular æra, is, perhaps, therefore, on the ground of this experience, not now considered by the commercial world as having all that importance which was given to it when the bank affairs were involved in greater mystery. It is perfectly well understood among all commercial men, that gold coin is not an article in which all payments (though it is so promised) are at any time intended really to be made; that no fund ever was or can be provided by the bank which shall be sufficient for such a purpose; and that gold coin is to be viewed chiefly as a standard by which all bills and paper money should have their value regulated as exactly as possible; and that the main, and, indeed, the only, point is to take all reasonable care that money shall in fact serve as that standard.
This is the great maxim to be laid down on the subject of paper credit. Let it, then, be next considered what is necessary, in order sufficiently to secure that, whatever the circulating paper may be, gold shall be the standard to which the value of that paper shall conform itself. It is no doubt important, that there should be usually in the country a certain degree of interchange of gold for paper, for this is one of the means which will serve to fix the value of the latter. Whether the interchange wanted to produce this effect must be more or less large and frequent, depends much on the habits and dispositions of the country, and, in particular, on the degree of knowledge of the nature of paper credit generally prevailing, and on the degree of confidence in it.
In order to secure that this interchange shall at all times take place, it is important that, generally speaking, a considerable fund of gold should be kept in the country, and there is in this kingdom no other depository for it but the Bank of England. This fund should be a provision not only against the common and more trifling fluctuations in the demand for coin, but also against the two following contingencies. First, it should serve to counteract the effects of an unfavourable balance of trade, for this infallibly will sometimes occur, and it is what one or more bad harvests cannot fail to cause. It is also desirable, secondly, that the reserve of gold should be sufficient to meet any extraordinary demand at home, though a demand in this quarter, if it should arise from great and sudden fright, may undoubtedly be so unreasonable and indefinite as to defy all calculation. If, moreover, alarm should ever happen at a period in which the stock of gold should have been reduced by the other great cause of its reduction, namely, that of a call having been recently made for gold to discharge an unfavourable balance of trade, the powers of any bank, however ample its general provision should have been, may easily be supposed to prove insufficient for this double purpose.
To revert, then, to the Bank of England. A short time before the suspension of its cash payments, the gold in its coffers had been reduced materially through an unfavourable balance of trade. The exchange with Europe had, however, so far improved for some time preceding the suspension, as to have caused gold to begin again to flow into the country. When it was thus only beginning to return, the fear of an invasion took place, and it led to the sudden failure of some country banks in the north of England. Other parts felt the influence of the alarm, those in Scotland, in a great measure, excepted, where, through long use, the confidence of the people, even in paper money of a guinea value, is so great (a circumstance to which the peculiar respectability of the Scotch banks has contributed), that the distress for gold was little felt in that part of the island. A great demand on the Bank of England for guineas was thus created; a demand which every one who can possess himself of a bank note is entitled to make by the very terms in which the note is expressed. In London, it is observable that much distress was beginning to arise, which was in its nature somewhat different from that in the country. In London, confidence in the Bank of England being high, and its notes maintaining their accustomed credit, its guineas were little called for with a view to the mere object of London payments. The guineas applied for by persons in London, was, generally speaking, on the account of people in the country. The distress arising in London, like that which took place in 1793, was a distress for notes of the Bank of England. So great was the demand for notes, that the interest of money, for a few days before the suspension of the payments of the bank, may be estimated (by calculating the price of exchequer bills, the best test that can be referred to, as well as by comparing the money price of stocks with their time price) to have been about sixteen or seventeen per cent. per ann. The bank, on this occasion, pursued, though only in a small degree, the path which a reader of Dr. Smith would consider him to prescribe, as in all cases the proper and effectual means of detaining or bringing back guineas. They lessened the number of their notes, which, having been for some years before near eleven millions, and having been reduced, for some time, to between nine and ten millions, were at this particular moment brought down to between eight and nine millions.
It has been shewn already, that, in order to effect the vast and accustomed payments daily made in London, payments which are most of them promised beforehand, a circulating sum in bank notes, nearly equal to whatever may have been its customary amount is necessary. But a much more clear idea of this subject will be gained by entering into some detail.
There are in London between sixty and seventy bankers, and it is almost entirely through them that the larger payments of London are effected. It may be estimated (though the conjecture is necessarily a loose one) that the sums paid daily by the bankers of London may not be less than four or five millions. The notes in their hands form, probably, a very large proportion of the whole circulating notes in the metropolis. It is certain, at least, that only a very small proportion of Bank of England notes circulate far from London, and that it is to the metropolis itself that all the larger ones are confined. The amount of the bank notes in the hands of each banker, of course, fluctuates considerably; but the amount in the hands of all probably varies very little; and this amount cannot be much diminished consistently with their ideas of what is necessary to the punctuality of their payments, and to the complete security of their houses. Thus there is little room for reduction as to the whole of that larger part of the notes of the Bank of England which is in the hands of the London bankers: the notes which may chance to circulate among other persons, especially among persons carrying on any commerce, if we suppose the usual punctuality of payments to be maintained, and the ordinary system of effecting them to proceed, can admit also of little diminution. A deficiency of notes in London is a very different thing from a deficiency either of country bank notes or of coin in the country. A large proportion of the London payments are payments of bills accepted by considerable houses, and a failure in the punctuality of any one such payment is deemed an act of insolvency in the party. The London payments are, moreover, carried on by a comparatively small quantity of notes; and they, perhaps, cannot easily be effected, with due regularity, by a much smaller number, so complete has been the system of economy in the use of them which time and experience have introduced among the bankers. There is, moreover, no substitute for them. They have an exclusive, though limited, circulation. They serve, at the same time, both to sustain and regulate the whole paper credit of the country. It is plain, from the circumstances which have just been stated, that any very great and sudden diminution of Bank of England notes would be attended with the most serious effects both on the metropolis and on the whole kingdom. A reduction of them which may seem moderate to men who have not reflected on this subject—a diminution, for instance, of one-third or two-fifths, might, perhaps, be sufficient to produce a very general insolvency in London, of which the effect would be the suspension of confidence, the derangement of commerce, and the stagnation of manufactures throughout the country. Gold, in such case, would unquestionably be hoarded through the great consternation which would be excited; and it would, probably, not again appear until confidence should be restored by the previous introduction of some additional or some new paper circulation.
The case which has been put is, however, merely hypothetical; for there is too strong and evident an interest in every quarter to maintain, in some way or other, the regular course of London payments, to make it probable that this scene of confusion should occur; or, even if it should arise, that it should continue. Whether there might chance to be much or little gold in the country, steps would be taken to induce the bank to issue its usual quantity of paper, or measures would be resorted to for providing, by some other means, a substitute for it. The credit, however, of even the best substitute, would be far inferior to that of the old and known Bank of England notes; for the new paper would be guaranteed by a capital probably far less ample than that of the Bank of England: it would also be just as impossible for the issuers of it to procure, at the time in question, a supply of guineas to be given in payment of it, as it would for the Bank of England to provide a supply of guineas for payment of their notes. The new paper, then, though it should be the same in its general nature, would be inferior to that of the bank. It would yield, indeed, a profit to the issuers, a profit which the bank would lose the opportunity of gaining; and the desire of this profit might co-operate in producing a disposition in new bodies of men to proceed to the creation of it. If we suppose it to be created, and to form one part of the current circulating medium of the metropolis; and if we suppose, also, as we necessarily must, a reduced quantity of Bank of England notes to continue current at the same time, the new paper would then be easily exchangeable for the Bank of England paper; and every holder of the new paper would, therefore, be able, by first exchanging it for the bank paper, to draw gold out of the bank. The directors of the bank, therefore, by proceeding to such a reduction of their notes, as should create a necessity for the bankers and merchants to create a new paper among themselves, would only increase the general paper circulation in London. They have now, by their exclusive power of furnishing a circulating medium to the metropolis, the means of, in some degree, limiting and regulating its quantity; a power of which they would be totally divested, if, by exercising it too severely, they should once cause other paper to become current in the same manner as their own. Projects for the introduction of a new circulating medium into the metropolis have, at different times, been formed; all such schemes, however, must necessarily fail, as long as there continues to be an unwillingness among the bankers to unite in giving currency to the new paper. This unwillingness would, of course, diminish in proportion as the pressure should become general and severe.
The idea which some persons have entertained of its being at all times a paramount duty of the Bank of England to diminish its notes, in some sort of regular proportion to that diminution which it experiences in its gold, is, then, an idea which is merely theoretic. It must be admitted, however, to be very natural.
It has been supposed by some, that the pressure on the mercantile world which a great diminution of notes must cause, would, especially if it were a severe one, induce the merchants to send for gold from abroad, in order to supply their own want of money. The supposition, when thus put, is stated in much too vague a manner to be susceptible of that close examination which I wish to give to it. There can be no doubt that we shall find it altogether false, when pushed to the extent of assuming that the extreme severity of the pressure is to be the remedy. Let us consider this point in as practical a way as possible.
It was supposed that the difficulty of obtaining bank notes would cause the merchants to send abroad for gold, in order to effect their payments. But what merchants? Certainly not those merchants whose goods are unfit for a foreign market, and are in no demand there. They must first exchange these unsuitable goods for goods which are suitable, that is, they must sell them, in the first instance, for money, or what passes as money, and answers, in their view, all the same purposes. Thus they get possession of the very thing, to supply their want of which they are supposed to send abroad. The trader acts, in this respect, like any one who is not a trader. If distressed for the means of effecting what is called a cash payment, he no more turns his thoughts to a foreign country for a supply of gold, than the farmer or landed gentleman who is equally pressed. He considers only what part of his property he can turn into bank notes. These he sees to be at hand; of the gold which is in foreign countries he knows nothing.
It will be allowed, then, that it is not on our traders in general that the pressure will so operate as to induce them to send for gold from the continent. It will, perhaps, however, be said to operate on our foreign merchants: but we must now distinguish, also, between one foreign merchant and another. The export trade to foreign countries is, generally speaking, one trade; the trade of importing from foreign countries is a second; the trade of sending out and bringing home bullion, in order to pay or receive the difference between the exports and imports, may be considered as a third. This third trade is carried on upon the same principles with any other branch of commerce, that is, it is entered into just so far as it is lucrative to the speculator in bullion, and no farther. The point, therefore, to be enquired into is clearly this,—whether the pressure arising from a scarcity of bank notes tends to render the importation of bullion a more profitable speculation.
In solving this question, there is not, perhaps, all the difficulty which might be supposed; for it is obvious that, generally speaking, it will answer to import gold into a country just in proportion as the goods sent out of it, in the way of trade (that is, the goods which must be paid for), are greater in value than the goods which are, in the way of trade, brought into it. We may, therefore, now dismiss also the case of the mere dealer in bullion from our consideration. We have only to examine in what way the pressure arising from the suppression of bank notes will affect the quantity of goods which are in the way of trade either exported or imported.
That a certain degree of pressure will urge the British merchants in general who buy of the manufacturers, as well as the manufacturers themselves, to sell their goods in order to raise money; that it will thus have some influence in lowering prices at home; and that the low prices at home may tempt merchants to export their articles in the hope of a better price abroad, is by no means an unreasonable supposition. But, then, it is to be observed on the other hand, first, that this more than ordinary eagerness of all our traders to sell, which seems so desirable, is necessarily coupled with a general reluctance to buy, which is exactly proportionate to it: it must be obvious, that, when the general body of merchants, being urged by the pecuniary difficulties of the time, are selling their goods in order to raise money, they will naturally also delay making the accustomed purchases of the manufacturer. They require of him, at least, that he shall give them a more than usually extended credit; but the manufacturer, experiencing the same difficulty with the merchants, is quite unable to give this credit. The sales of the manufacturer are, therefore, suspended; but though these are stopped, his daily and weekly payments continue, provided his manufacture proceeds. In other words, his money is going out while no money is coming in; and this happens at an æra when the general state of credit is such, that he is not only not able to borrow, in order to supply his extraordinary need, but when he is also pressed for a prompter payment than before of all the raw materials of his manufacture. Thus the manufacturer, on account of the unusual scarcity of money, may even, though the selling price of his article should be profitable, be absolutely compelled by necessity to slacken, if not suspend, his operations. To inflict such a pressure on the mercantile world as necessarily causes an intermission of manufacturing labour, is obviously not the way to increase that exportable produce, by the excess of which, above the imported articles, gold is to be brought into the country.
But, secondly, that very diminution in the price of manufactures which is supposed to cause them to be exported, may also, if carried very far, produce a suspension of the labour of those who fabricate them. The masters naturally turn off their hands when they find their article selling exceedingly ill. It is true, that if we could suppose the diminution of bank paper to produce permanently a diminution in the value of all articles whatsoever, and a diminution, as it would then be fair that it should do, in the rate of wages also, the encouragement to future manufactures would be the same, though there would be a loss on the stock in hand. The tendency, however, of a very great and sudden reduction of the accustomed number of bank notes, is to create an unusual and temporary distress, and a fall of price arising from that distress. But a fall arising from temporary distress, will be attended probably with no correspondent fall in the rate of wages; for the fall of price, and the distress, will be understood to be temporary, and the rate of wages, we know, is not so variable as the price of goods. There is reason, therefore, to fear that the unnatural and extraordinary low price* arising from the sort of distress of which we now speak, would occasion much discouragement of the fabrication of manufactures.
Thirdly, a great diminution of notes prevents much of that industry of the country which had been exerted from being so productive as it would otherwise be. When a time either of multiplied failures, or even of much disappointment in the expected means of effecting payments arises, plans of commerce and manufacture, as well as of general improvement of every kind, which had been entered upon, are changed or suspended, and part of the labour which had been bestowed proves, therefore, to have been thrown away. If, for instance, expensive machinery had been erected, under an expectation of regular employment for it, a pressing want of the means of effecting payments may cause that machinery to stand idle. The goods which ought to form part of the assortment of the factor or the shopkeeper, and to be occupying their premises, are loading the warehouse of the manufacturer* , and, perhaps, are suffering damage by too long detention. On the other hand, some sales are forced; and thus the goods prepared for one market, and best suited to it, are sold at another. There cease, at such a time, to be that regularity and exactness in proportioning and adapting the supply to the consumption, and that dispatch in bringing every article from the hands of the fabricator into actual use, which are some of the great means of rendering industry productive, and of adding to the general substance of a country. Every great and sudden check given to paper credit not only operates as a check to industry, but leads also to much of this misapplication of it. Some diminution of the general property of the country must follow from this cause; and, of course, a deduction also from that part of it which forms the stock for exportation. It can hardly be necessary to repeat, that on the quantity of exported stock depends the quantity of gold imported from foreign countries.
It will be supposed, perhaps, that the limitation of bank notes, by lessening the means of payment of the importing merchant, may induce him to suspend his imports; and that, since it is the excess of exports above the imports which causes gold to enter the country, the limitation of paper may, with a view to the diminution of imports, be very desirable. There is, probably, some justice in this supposition. It should, however, be observed on this subject, that Great Britain, at that period of an unfavourable balance which we are now supposing, may be considered as importing chiefly either, first, corn, of which no one would wish to check the import by a limitation of paper; or, secondly, that class of articles which are brought from one country in order to be transported to another, articles which come chiefly from very distant parts, and of which the payment cannot be declined, it having been promised long before hand; articles, also, which soon serve to swell the exports in a somewhat greater degree than they had increased the imports; or, thirdly, that rude produce of other countries which forms the raw materials of our own manufacture, and serves, after a short time, to supply exportable articles to a very increased amount.
The limitation of credit at home will chiefly be of use by urging the exporting merchant to press the sale of the goods which he has abroad, and to direct them to be sold, if he can, at a short credit; and also by its urging, in like manner, the importing merchant to delay buying abroad, as long as he can, and to buy at a long credit. In other words, it may be of use in leading English merchants, in their dealings with foreigners, to anticipate their receipts, and to delay their payments; on the other hand, it is carefully to be remembered, that an anticipation of receipts, and a delay of payments, are only a temporary benefit; while a suspension of manufactures operates, as far as it goes, as so much permanent and entire loss to the country. It is, moreover, to be borne in mind, that a very severe pressure is sure to produce a suspension of manufactures, while it is not sure to cause British merchants to obtain an extension of credit from foreigners. And very extraordinary suppression of bank notes must produce distrust abroad through the failures at home, to which it is known abroad to give rise. It, therefore, indisposes foreign merchants to lend money to England, and it induces those foreigners, who have debts due to them from Englishmen, to urge the payment of those debts. England, during the prevalence of any great distrust, is obliged to send abroad manufacturers not for the payment of goods imported or for the puchase of gold, but for the extinction of debt.
Although, therefore, it may possibly admit of a doubt whether some moderate restriction of the paper of the bank may not be expedient with a view to mend for the time an unfavourable balance, it seems sufficiently clear that any very sudden and violent reduction of bank notes must tend, by the convulsion to which it will lead, to prevent gold from coming into the country rather than to invite it, and thus to increase the danger of the bank itself. The observation which was before made may, therefore, be repeated, that it is not the severity of the pressure which is to be the remedy. It is, indeed, in every respect plain that it must be important to maintain, and to maintain carefully, the credit of the country, at that time in particular, when its guineas are few, and are also leaving it; that is the time when our own funds are necessarily low, when the most regular industry should by every means be promoted, and when there is the most need of the aid both of our domestic and foreign credit; and it belongs to the Bank of England, in particular, to guard and to superintend the interests of the country in this respect. The very policy of the bank differs, in this particular, from that of the individual country banker, whose own share of the evil resulting to the country, from the sudden suppression of his own notes, is small; who may trust, moreover, that there will be a substitution either of guineas or of other paper in the place of his own paper which is suppressed; and who, it may be remarked, supplies himself with the means of discharging his own notes by obtaining guineas from the Bank of England.
But the Bank of England has no bank to which it can resort for a supply of guineas proportioned to its wants in the same manner in which it is resorted to by the country banks; nor have the bankers and traders in London, to whom at present is transferred the business of effecting the great cash payments of the whole country, the same resource in case Bank of England notes are suppressed which traders in the country have, supposing country bank notes to be withdrawn. The country payments being not strictly promised before hand, may, many of them, bear to be postponed. Bills of exchange on London may also form some substitute for country bank notes, and may pass as such in the manner which was some time ago described; but if Bank of England notes are suppressed, and are suppressed, as we have been supposing them to be, in consequence of guineas being scarce, there then remain no means whatever of effecting the London payments. There can be no doubt that the extinction or very great diminution of bank notes would be a far greater evil, in the present circumstances of the metropolis, than the disappearing of guineas. If guineas disappear, notes may be substituted in their place; and through that general confidence which may be inspired by the agreement of bankers and other leading persons to take them, they will not fail, provided the issues are moderate, and the balance of trade is not very unfavourable to the country, to maintain exactly the gold price. The punctuality thus introduced into all the larger operations of commerce, will facilitate contrivances for effecting the smaller payments.
Differences of opinion, undoubtedly, may exist as to the exact degree in which the notes of the Bank of England ought, under any given circumstances, to be diminished. It may be hoped, however, that at least one point has now been fully and completely established, namely, that there may be an error on the side of too much diminishing bank notes, as well as on the side of too much increasing them. There is an excessive limitation of them, as every one must admit, which will produce failures; failures must cause consternation, and consternation must lead to a run upon the bank for guineas. There must, in short, then, be some point at which the bank must stop in respect to the reduction of its notes, however progressive may be the drain upon it for guineas.
But if its notes are not lessened, or if even they are lessened, but are not entirely extinguished, it is then in the power of any one who can possess himself of a bank note to possess himself also of guineas, as long as the bank pays in guineas; and it will be found to follow, moreover, that the bank is thus rendered liable to be totally exhausted of guineas. I mean, that it is liable to be totally exhausted of them, however great their number may have been, if it determines to maintain even the smallest number of notes. By maintaining, that is to say, five millions, or two millions, or even one million, of notes, the bank cannot avoid being exhausted (supposing the alarm to rise high enough to do it) of even five millions, or ten millions, or, if it had them, of twenty or fifty millions of guineas. It will depend, in such case, on the degree of alarm, and not on the maintenance of the greater or of the less quantity of notes, whether the guineas shall be more or less rapidly called for from the bank; or, in other words, the bank may be as much exhausted of guineas if it maintains five millions of notes as if it maintains ten millions, provided the alarm is only the same in the one case as in the other. If, therefore, the maintenance of the five millions of notes is sure to produce more alarm than the maintenance of ten, then the maintenance of the larger quantity of notes will serve to diminish the demand for guineas, and the maintenance of the smaller number to increase it.
The following is the manner in which that operation, which is finally to exhaust all the guineas of the bank, may be supposed to proceed. A, for instance, the holder of a note of 1000l. (and it is what any man may obtain by selling goods) carries it to the bank and demands 1000l. in gold. The bank gives the gold; which gold, let it be remarked, either goes abroad to pay for an unfavourable balance of trade, or, as we are now rather supposing, fills a void in the circulation of the country, occasioned by the withdrawing of country bank notes in consequence of alarm, or serves as an addition to the fund of country banks, or forms a hoard in the hands of individuals. The 1000l. in gold, thus furnished by the bank, does not supply, in any degree, the place of the 1000l. note for which it was given; for the 1000l. note had been employed in London in making the larger payments. It is hardly ever, in almost any degree, as a substitute for Bank of England notes, that the gold taken from the bank is wanted. The bank, therefore, having paid away this 1000l. in gold, and having received for it their own note for 1000l. must now re-issue this note, if they are resolved to maintain the amount of their paper circulation. How, then, is the bank to issue it? The only means which the bank, on its part, is able to take for the extension of its paper circulation, is to enlarge its loans. It must, therefore, re-issue the 1000l. note, in the shape of a loan, to some person who offers a bill to discount. It receives, therefore, a bill of 1000l. and gives a note of 1000l. in return for it. For the same note, thus re-issued, we may suppose 1000l. in money to be again demanded, and to be again paid. The paper circulation of the bank is now again diminished 1000l. and, therefore, there arises a necessity for issuing the same 1000l. note, or some other note or notes to like amount, a third time, in order to maintain the amount of notes in circulation. The like transaction, or rather a number of such transactions, may be supposed to be repeated either five, or fifty, or a hundred, or a thousand times. Even if we should suppose the bank to bring down its paper circulation to one hundred thousand pounds, and to maintain it at that sum, it is obvious that this same operation might be so reiterated, from day to day, as to extract at length from the bank even the greatest imaginable number of guineas. Thus, then, the bank is rendered liable to be exhausted of its guineas, by its determination to maintain the number of its notes, whether that number be greater or smaller; and here, also, let it be remarked by the way (a point on which more shall be said presently), that the bank, in consequence of its determination to maintain a given number of notes, is placed under an absolute necessity of increasing its loans to the very same extent to which it is deprived of its guineas. The bank, let it be remembered, was stated to lend an additional 1000l. on the occasion of each reiterated demand upon it for 1000l. in guineas. It thus clearly appears that the Bank of England is placed, by the very nature of its institution, in a situation in which it may not be possible to avoid a temporary failure in the regularity of its cash payments.
An idea has, indeed, prevailed, than which nothing can be more natural, that because an individual merchant is presumed to be blameable if he is not able to make good his payments, therefore also, a national bank, in case of failure, may be presumed to be censurable in like manner; and, on account of the greater importance of its transactions, to be censurable even in a still higher degree. But the total disparity in the circumstances of the two cases should be taken into consideration. Private houses may, in general, be fairly presumed to be in fault if they fail in the punctuality of their cash payments, supposing the Bank of England to pay in money, because, if they have made on their part a tolerably prudent provision, they may be in general considered as having in the bank a sure resource. Take away from them that resource and they will then be not only as liable as the Bank of England to the like accident, but they will be much more so; their means of supplying themselves with guineas becoming then exceedingly precarious. It may be apprehended, also, that, if instead one national bank two or more should be instituted, each having a small capital; each would then exercise a separate judgment; each would trust in some measure to the chance of getting a supply of guineas from the other, and each would allow itself to pursue its own particular interest, instead of taking upon itself the superintendance of general credit, and seeking its own safety through the medium of the safety of the public; unless, indeed, we should suppose such a good understanding to subsist between them as to make them act as if they were one body, and resemble, in many respects, one single institution.
The accident of a failure in the means of making the cash payments of a country, though it is one against which there can be no security which is complete, seems, therefore, to be best provided against by the establishment of one principal bank. It, however, becomes the public not to judge the bank, which is thus rendered its servant, and is completely subjected to its interests, by the same rules by which it judges of smaller banking and commercial establishments, but to advert to the peculiarity of its case.
If there has been any fault in the conduct of the Bank of England, the fault, as I conceive, has rather been, as has just been stated, on the side of too much restricting its notes in the late seasons of alarm, than on that of too much enlarging them. In doing this, it has happened to act (though but in part) according to what seems likely to have been the advice of Dr. A. Smith in the case. It has also taken that course which is the natural one for smaller banks, and which might, perhaps, have been the proper one for the Bank of England itself, in the infancy of its establishment, when the country was less dependent upon it for the means of effecting its payments. It has, probably, pursued a principle which had been acted upon, by its own directors, in all former times. It has also followed what was, at the very period in question, the common opinion of the public on the subject. It has, moreover, only diminished those notes, perhaps, in too great a degree, which there might possibly be found to be some argument for restraining with a more gentle hand. I venture, however, with deference, to express a suspicion that the bank may have, in some measure, aggravated, perhaps, rather than lessened, the demand upon itself for guineas through the suppression of too many notes at the time preceding the suspension of its cash payments; and I will hazard an opinion, that it might also, with propriety, have somewhat extended the temporary issue of its paper in the year 1793, when that alarm, arising from the failure of country banks, which has been already spoken of, took place. It is clear, at least, that it did not, in the more recent instance, succeed by the diminution of its notes in curing the evil which it thus aimed to remedy.
A suspicion prevailed, at the time of which we have been chiefly speaking, that the loans afforded by the bank to the government had caused the distress of the bank. But the government, it should be remembered, has no supply of guineas with which it can discharge any debt. It is circumstanced, in this respect, like any other debtor of the bank. It must, if forced to pay its debt, pay it in bank notes, an article which the bank cannot refuse to take. And the government must collect these notes wherever they are to be obtained; that is, from the bankers and traders, and other persons in possession of them, to whom it must, in return, give new stock or exchequer bills, which it may, at all times, easily create; though, at a period of mercantile distress, this would be done at a somewhat unfavourable price. We learn, from the evidence given to parliament, that the government was urged by the bank to pay up four and a half millions of existing debt a short time before the period in question, and that it complied with the demand; that is, the government collected some of the bank notes which were in circulation, and paid them into the bank; and then a part, but only a part, of the notes so paid in were re-issued to the merchants. If the whole of the notes paid into the bank by the government had been immediately re-issued in loans to private traders, then the sum of notes in circulation would have been the same. The government is only one large borrower from the bank; the merchants are a number of similar, though smaller, borrowers. Whether, therefore, the bank lent more to individuals and less to government, or less to government and more to individuals, the effect as to the number of notes allowed to be in circulation, must have been equal. The Exchequer, after receiving notes from the bank, almost as quickly pays them away, and thus sends them into the common circulation as the merchant does; and it is the total quantity of circulating notes, and not the manner in which they come into circulation, that is the material point.
It may be thought, indeed, that commerce would be encouraged, and commercial credit, as well as general paper credit, would be supported in a much greater degree by the bank sending their notes into circulation, through the medium of a loan to the merchants, than through that of a loan to government. But the difference would not, as I apprehend, be so great as many commercial men themselves at that time imagined. Those merchants who obtained an increase of the accustomed advances from the bank, would, some of them, probably invest, in the new exchequer bills which were created, a part of that very sum with which the bank favoured them. The merchants in higher credit, of course, would have the preference at the bank; and they were certainly under a very strong temptation to borrow of the bank at five per cent. interest for the sake of investing the sum so borrowed in exchequer bills, yielding five and a half or six, or, for a time, even seven or eight per cent. or more. As far as this was the case, it is obvious that the bank, instead of lending to the government, would only lend to those who lent to the government, the government paying an additional interest, and the merchants receiving it. Where this did not take place, that might happen which would be exactly equivalent. The bankers finding that the merchants were, many of them, allowed to become larger borrowers at the bank than before, would think it less necessary to lend to them, and would, therefore, add to the sum which they themselves kept in exchequer bills, the great profit on that article tempting them, at the same time, to do this. The bank, on this supposition, would lend to the merchants, who would forbear to borrow of the banker (which is the same thing for the present purpose as lending to the banker), who would lend to the government. But let us put a third case. Let us imagine it to be a gentleman in the country who invested the property in the new exchequer bills. That property would probably, since we must suppose it easily applicable to such investment, have been lying in some private hand at interest. Let us imagine it to consist of 100l. which had been in the hands of a country banker; the country banker, in this case, would draw upon his London banker; the country banker’s account with the London banker would then be worse by 100l.; and the London banker having 100l. less deposits, would be able to lend 100l. less to the London merchants. In other words, the Bank of England, in this case, instead of lending to the government, would lend to the London merchant, who would forbear to borrow of the London banker, who would lend to, or, perhaps, forbear to borrow of the country banker, who would forbear to borrow of the country gentleman, who would lend to the government; which also seems to be much the same as if the Bank of England themselves lent to the government. This detailed case has been put partly for the sake of observing upon it, that the necessity which would be created for the transfer of this 100l., through so many hands, would produce a want of some degree of additional circulating medium in order to effect these several payments. It would, however, be chiefly by the means of a bill on London that the transaction just now supposed would be conducted; but the bill must finally be paid by a Bank of England note.—Let us imagine a fourth case. Let us suppose a sum to be invested in the new exchequer bills by a person obtaining money for the purpose of the investment, not by calling in a sum lying at interest, as was last assumed, but by selling goods, land, or any other article. We must, then, necessarily suppose a buyer of those goods, of that land, or of that other article to be created by such sale. We shall find, also, that it is necessary to suppose either that buyer to become a borrower, or to become the seller to one who would become a borrower; or, at least, we must come to a borrower at last. We are supposing one man to sell goods for 100l., and not to restore this 100l. to trade, but to lend it out. We must, then, necessarily suppose some other man to borrow 100l. and by thus borrowing to add that 100l. capital to trade which the other had taken from it; for since the trade goods in the country remain the same, the capital invested in trade must be the same also. The body of lenders, therefore, whoever they might be, who lent the four and a half millions to government, necessarily created a body of borrowers to exactly the same amount in what may be called the general money market of the country. Thus a pressure was, on the whole, created, which was just equal to that which was relieved: a pressure, in the first instance, falling in some degree (though by no means entirely, or even principally) in a different quarter than before; a pressure, however, very soon extending itself to the same persons; for there is a competition among the several classes both of borrowers and of lenders in the money market, which, notwithstanding some inequality occasioned by the usury laws, causes the increased distress brought upon any one class of the accustomed borrowers very soon to distribute itself among all. The bank, it is true, would, by lending the four and a half millions in bills at two months, possess more means of at any time diminishing its loans, and of thus lessening also its notes, than if the same sum had been invested in exchequer bills, since the latter are at a longer date; and it was natural for the bank to call in its loan to government for this reason. If, however, the calling in of the loan to government was only to furnish the means of limiting the notes, then that question returns which has already been discussed, namely, whether the diminution of the notes was not carried possibly somewhat farther than was desirable, even for the sake of the bank itself. During the existence of this loan to government, that reduction of notes, which has been supposed to have been too great, may have been, perhaps, to a certain degree obstructed, though by no means necessarily precluded since an opportunity of diminishing the discounts to the merchants, and of thus lessening the notes, at all times existed. On the whole, there appears to be no reason to infer, from the circumstance of the demand for the four and a half millions having been made upon government, that the government was either the more remote or the more immediate cause of the suspension of the cash payments of the bank, except, undoubtedly, so far as the war in general, or the particular circumstance of a remittance of a subsidy to the Emperor a short time before the event in question, might be considered as affecting the balance of trade, and thus contributing to draw gold out of the country.
It is, on public grounds, so important to shew that the more than usual largeness of the bank loans to government (for it can hardly fail to be true that they were more than commonly extended) was not the cause of the suspension of the cash payments of the bank, that I shall dwell for some time longer on this subject. This was continually charged as the cause, and it was not unnatural to suppose it to be so. The paper circulation of the bank, however, it has been observed, was at this time not increased. It was, on the contrary, much reduced. It was by no means higher than was necessary for securing the regularity of the payments of the metropolis. Now, if it be allowed that there was this necessity for maintaining the existing quantity of notes, it then was not the notes which must be considered as issued for the purpose of making the loans, but the loans must be considered as made in consequence of the issue of notes. When the notes of the bank are increased, the loans must be increased also; when the notes are maintained, the loans must be maintained in as great proportion; when the notes are decreased, the loans can be decreased only in that proportion. There can, then, be no matter of blame on account of the magnitude of the loans, unless there be matter of blame on account of the magnitude of the notes. But the notes I have stated to have been probably rather too few than too many. If the reader has agreed with me in this, he must then agree with me that the loans were too scanty rather than too large. In other words, then, the bank, at the time of the failure of its cash payments, had lent too little rather than too much. If the bank would have somewhat diminished its danger by issuing more notes, the granting of more loans would have also diminished its danger. Thus the very converse to the common opinion on this subject seems to be the truth.
There is, however, another point of importance here to be remarked. The loans which the bank had made on the whole, that is, the loans to government and to individuals taken together, at the time of the suspension of its cash payments, were not only maintained in that proportion in which the notes were maintained, but they were increased beyond that proportion. This increase beyond that proportion was also a matter of necessity.
The loans of the bank do not simply keep pace with the notes. The loans necessarily increase or diminish through another cause; they diminish as gold flows into the bank, and increase as gold goes out, supposing, as we generally may, the article of deposits to remain the same; that is, they necessarily increase and diminish in a ratio directly contrary to that which a theorist would prescribe and which the public naturally would suppose.
To those who are but slightly acquainted with these subjects, this truth will probably be made much clearer by a statement of the whole disposeable effects of the Bank of England, and of the manner in which those effects are employed. The statement is important, because it will serve to prove, beyond the possibility of contradiction, that the extraordinary largeness of the loans of the bank, at the critical period in question, ought to be considered not as a consequence of any disposition in the bank to be great and adventurous lenders at a time when their guineas grew low, but as arising out of the necessity under which they were placed. I mean that they could not avoid lending to the whole extent to which they did, provided even that small number of notes which they kept in circulation was maintained.
The effects of the bank on the 25th February 1797, I mean those effects which were their own, as well as those placed in their hands belonging to other persons, may, in conformity to the account rendered by themselves to parliament, be stated, in round numbers, to have been as follows.
(It may be premised, that they had a capital of their own of about 11,626,000l. which shall be excluded from our present consideration, it being lent to government at three per cent. per annum interest.)
It will much illustrate what is about to be added, if the following observations respecting these three several heads of disposeable effects are here made.
First. Let it be remarked, that the first sum of 3,800,000l. does not fluctuate; it only increases gradually, and in a small degree.
Secondly. The second sum of 5,100,000l. fluctuates probably but little; and as far as it does so, it fluctuates not at the pleasure of the bank, but at the will of its customers.
Thirdly. The third, then, is the only one of the three component parts of the disposeable effects of the bank which it is in the power of the bank to increase or diminish at its own option. The bank exercised their power of diminishing this article, at the time in question, so far as to bring it down to about 8,600,000l. To reduce it thus far was, as has been repeatedly stated, to reduce it, perhaps, somewhat too much; but let us assume only, that the reduction was sufficient, or nearly sufficient. The bank, then, it must be admitted, had 17,500,000l. of disposeable effects, and it was not to be ascribed to them as a matter of blame that these effects then stood at about the sum at which they did.
Having, then, these effects, and being under a necessity of disposing of them in some way or other, let us state next how they did in fact employ them.
In proceeding to make this statement, it will be necessary, with a view to the object for which it is made, to name some specific sum (it matters not whether more or less than the real one) for the amount of that part of the effects of the bank which was, on the 25th February, 1797, invested in bullion. In the account rendered to parliament, the value of the bullion and of the bills discounted, &c. are put together, and are stated at nearly seven millions. Let it be supposed that the bullion was either one, two, or three millions; and that the bills discounted, &c. were, therefore, either four, five, or six millions. The mode of disposing of the 17,500,000l. will then be as follows.
It will now be obvious to the reader, that if the bullion, instead of three millions, is supposed to have been only two millions, then the total of the loans must be supposed to be increased one million; and that if the bullion, instead of three millions, is supposed to be only one million, then the loans must be supposed to be increased two millions.
In other words, the account of the investment may either be stated as has been just done, or it may be stated as follows:
It thus appears, that the loans necessarily must increase in proportion as the gold decreases, provided the disposeable effects remain the same.
It follows, on the principle which has just been explained, that if we suppose, as we necessarily must, the bullion to have been, twelve months before the time of the suspension of the cash payments of the bank, much higher than at the period of the suspension, the loans would, during the course of those twelve months, necessarily increase. Let us (for the sake of illustration) suppose the gold to have been a year before the suspension eight millions, and to have fallen on the 26th February, 1797, to the sum of two millions. In that case, if we were to suppose the disposeable effects of the bank to have been at both periods the same, there must necessarily have been, in the course of the year, an increase of the bank loans of no less than six millions. But the effects of the bank were not quite the same at the two periods. They probably were higher by about two millions at the former period; for the notes were higher by nearly that sum. The notes, then, fell in the year two millions, but the bullion fell six. The loans, therefore, would be decreased two millions, through the decrease of notes, but would be increased six millions through the decrease of bullion; that is, they would necessarily be increased, in the course of the year four millions. I have dwelt thus particularly on this circumstance, because the whole of the suspicion, that the magnitude of the bank loans were the cause of the failure of its cash, seems to me to rest upon it. The largeness of those loans was not the cause of the guineas going from them, as has been ordinarily supposed; it was the effect. Nothing could be more natural than for the public to call that the cause, in this instance, which was the effect, and that the effect which was the cause. In the case of private persons it is often very justly said, that a man fails in his payments because he has lent so largely; and it would seem very strange to reply that this was not the case, for that the man in question had found it necessary to lend largely, because his cash failed him; and that the failure of the cash was the cause, and the lending merely an effect. That, however, which could not be affirmed of an individual, is true in the case of the bank, and the circumstances which give occasion for this peculiarity in our reasonings respecting that institution, are these two; first, the difficulty in obtaining a supply of guineas which the bank experiences, a difficulty totally unknown to individuals who draw their guineas from the bank itself; and, secondly, the singular necessity under which the bank is placed of maintaining at all times its notes.
It was thought by some, that the interference on the part of the government and parliament was improper, inasmuch as the bank ought not to have been prevented from continuing to pay in cash as long as it had any remaining ability to do so. Every bank note, it was urged, is a contract to pay money entered into between the bank and the possessor of it, in consequence of what has been deemed a valuable consideration; and no authority of parliament ought, except in a case of the last necessity, to interpose itself to prevent the fulfilment of such a contract. To this it seems to be a fair answer to say, that the question is not whether any one holder of a note shall have his claim to receive money for it interfered with, but that it is a question respecting all the holders of notes, as well as all other persons having a right to demand any cash payments in any quarter whatever. Now, there are few or no creditors who are not also debtors; and a very large proportion of debtors owe as much to others, as others owe to them. Bankers and traders are greater debtors than other men; but they are also greater creditors. The bank itself is a great creditor, its credits, indeed, being far greater than its debts, and it is intitled to receive a part of its debts almost immediately. The case, then, is this: a comparatively very small portion of the persons having a right to demand cash, are led, by sudden alarm, to urge their claim for guineas to such an extent as to invest even a large portion of their capital in that article of which a quantity has been provided which is sufficient only for the purpose of the ordinary kind of payments. All the cash in the world would not satisfy claims of this sort, if all men, having a right to urge them, were disposed equally to do so. The very persons who press for these payments do not reflect, that they themselves, perhaps, have creditors who might, with equal justice, exact the immediate money payment of a still larger debt against them. The law authorizing the suspension of the cash payments of the bank, seems, therefore, to have only given effect to what must have been the general wish of the nation in the new and extraordinary circumstances in which it found itself. If every bill and engagement is a contract to pay money, the two parties to the contract may be understood as agreeing, for the sake of a common and almost universal interest, to relax as to the literal interpretation of it, and as consenting that “money should mean money’s worth,” and not the very pieces of metal: and the parliament may be considered as interposing in order to execute this common wish of the public.
By authorising the suspension of the cash payments of the bank, while a certain quantity of guineas still remained in its coffers, the parliament, moreover, much diminished the shock which this extraordinary event might naturally be expected to occasion; and also provided the means of furnishing the guineas actually necessary after that æra for some smaller current payments, as well as the means of securing the credit of bank notes, thus rendering them a more valuable medium of exchange for goods, and a fairer substitute for guineas than they might otherwise have been. The parliament, then, were led by the practical view which they took of the subject, to disregard theory, as well as some popular prejudice, for the sake of more effectually guarding the public safety, and promoting real justice.
The danger chiefly to be apprehended in London, was, that the common class of people, not receiving their pay in the usual article of coin, and not knowing at the first that one and two pound notes would purchase every thing in the same manner as gold, might be excited to some tumultuous proceedings. It was also feared that, through the discredit cast on small notes by the common people, this new paper might fall, at the first issue of it, to a discount. It was important, therefore, to continue for a time to pay the labouring people in money; and to circulate the new one and two pound notes, in the first instance, by the medium of the higher classes. Of the sum remaining in the bank, a small part was issued to each of the bankers, after the suspension took place, for the convenience of common workmen. It was obviously desirable, that a farther sum should be reserved in the bank as a provision for any subsequent and important uses.
Immediately after this event, the bank extended the quantity of its notes nearly to the amount of the sum usually in circulation: and not only was credit revived, but in no long time guineas became remarkably abundant. The bank, as is commonly supposed, was replenished with them. And there is this infallible proof, that gold flowed into the country; that the course of exchange became much in favour of it.
[* ]See the correspondence of the bank on this subject, in the Appendix to the Report of the House of Commons respecting the order of council for authorising the suspension of the cash payments of the bank.
[* ]The same remark has been made in a short pamphlet lately published by Sir Francis Baring.
[† ]The bank of Amsterdam did not issue circulating notes, but was a mere bank for deposits, the whole of which it was supposed by some to keep always in specie. It was discovered, however, when the French possessed themselves of Holland, that it had been used privately to lend a certain part of them to the city of Amsterdam, and a part to the old Dutch government. These loans ought certainly rather to have been furnished in that open manner in which those of our bank are made. Neither of the two debts, as I understand, have yet been discharged. The bank of Amsterdam had no capital of its own.
[* ]If the bank notes were increased even five millions, the additional profit which would accrue to the proprietors would not be more than two per cent. A proprietor qualified to vote in the bank court (that is, having 500l. stock) would, therefore, gain by this extravagant issue, supposing it to be maintained for a year, the sum of 10l. A large proportion of the bank proprietors do not hold more than 1,000l stock. The gain of each of these would not be more than 20l.; a sum perfectly insignificant, compared with the interest which they have in the maintenance of the general commercial credit of the country.
[* ]It may, perhaps, be supposed, that a diminution of the quantity of Bank of England notes, if permanent, would produce that permanent diminution of the price of articles which is so much desired, and the observation made above may be thought to give some countenance to this supposition. Such permanent reduction in the price of commodities could not, however, as I apprehend, be by any such means effected. The general and permanent value of bank notes must be the same as the general and permanent value of that gold for which they are exchangeable, and the value of gold in England is regulated by the general and permanent value of it all over the world; and, therefore, although it is admitted that a great and sudden reduction of bank notes may produce a great local and temporary fall in the price of articles (a fall, that is to say, even in their gold price, for we are here supposing gold and paper to be interchanged), the gold price must, in a short time, find its level with the gold price over the rest of the world. The continuance of the great limitation of the number of bank notes would, therefore, lead either, as has already been observed, to the creation of some new London paper, or possibly to some new modes of economy in the use of the existing notes: the effect of which economy on prices would be the same, in all respects, as that of the restoration of the usual quantity of bank notes. What seems most probable is, that the continuance of any great limitation of the number of bank notes would lead to the transfer of the present cash payments of London to some other place or places in which the means of effecting payments should not be obstructed through the too limited exercise of that exclusive power of furnishing a paper circulation with which the Bank of England has, by its charter, been invested. This subject of the influence of paper credit on prices will be more fully entered into in a future chapter.
[* ]When an interruption of the usual credit arises, it naturally happens that the individuals having the least property, and the fewest resources, are the most pressed; and it is sometimes assumed by the public, rather too readily, that those who suffer are justly punished for the too great extent of their speculations. It is true, undoubtedly, that those who prove to be the first to fail, have probably been men of too eager and adventurous a spirit. Let the spirit of adventure among traders, however, have been either more or less, the interruption of the usual credit cannot fail to cause distress; and that distress will fall upon those who have merely been, comparatively, the more adventurous part of the trading world. It is often also assumed by the public (and without the least foundation) that the want not of gold merely but of bonâ fide mercantile capital in the country is betrayed by a failure of paper credit. The error of this supposition is not only plain, from the general principles laid down in the first chapter of this work, but it is also distinctly proved by the circumstance stated above, that while the premises of the factor and of the shopkeeper are becoming empty of goods, the warehouse of the manufacturer is growing proportionably full. The time soon comes, indeed, when that suspension of labour (which, it should be remembered, is the consequence of the suspension of credit) causes the general stock of goods (or the mercantile capital of the country) to be diminished. The evil, therefore, consists not in the want of bonâ fide capital, but in the want of such a quantity of the circulating medium as shall be sufficient, at the time, to furnish the means of transferring the goods of the manufacturer from his own warehouse to that of the factor and the shopkeeper. The quantity wanted to be employed in the circulation, and especially the quantity of gold, becomes more, as was observed in the third chapter, when confidence is less, because the rapidity of the circulation is less. The substitution of gold for paper, and of better paper for that which is worse, and some temporary increase of the gold and good paper actually circulating, are obviously the remedy.