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CHAPTER XI - 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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Of the Influence of Paper Credit on the Price of Commodities.—Observations on some Passages of Montesquieu and Hume.—Conclusion.
This subject has been in so great a degree anticipated by the discussions which have taken place; that it will scarcely be necessary to do more than to remind the reader of the principles which have been laid down, and to point out the manner in which they bear upon the present question.
It was observed in a former Chapter, that a very considerable advance in the price of the commodities bought and sold in one quarter of this kingdom, while there was no such rise in any other, was not supposable; because the holders of the circulating medium current in the spot in which goods were imagined to have been rendered dear, would exchange it for the circulating medium of the part in which they were assumed to be cheap, and would then buy the commodities of the latter place, and transport them to the former, for the sake of the profit on the transaction.
The exchangeableness of our country paper for our London paper was represented as always in this manner preventing the quantity of paper circulating in one place from being very disproportionate to the quantity circulating in another; and as also precluding any great local rise in the price of commodities within our own island.
We may justly extend our views, and conceive of Europe, and even of the world, as forming one great kingdom, over the whole of which goods pass and repass, as suits the interest of the merchant, nearly in the same manner in which they spread themselves through this single country.
In one particular, indeed, the resemblance between the two cases fails. Country bank paper, as compared with Bank of England notes, cannot be, to a material degree, excessive in any part of England; because, by the custom of our country banks, it is convertible, without any discount, into the London paper. But British paper is not exchangeable for the circulating medium of the continent, unless a discount, or difference be allowed. Of this fluctuating discount, or difference, the variations in the course of exchange are the measure.
It is true that the continental circulating medium, like our own, varies in value. Both, however, commonly vibrate only within certain limits; and both may be considered as fluctuating exactly so far as their value differs from that of bullion. To say that bullion varies in its price, is to say that there is an alteration in the general exchangeable value of that article, which constitutes the standard of the world.
We are led, by these observations, to divide our subject into two branches of enquiry: first, into the question how far our paper credit may have raised the price of goods in Great Britain, by causing their current price here (that is to say, their price in British paper, as well as in British coin) to be higher than their bullion price; and, secondly, how far also the bullion price of our commodities here (that is to say, their value in exchange for the article of bullion) may be suspected of having been enhanced by means of the paper credit of Great Britain.
As to the first question; the highest influence which a too extended paper credit can have had in raising the current price of commodities in Great Britain above their bullion price, must be measured by the difference which has subsisted between the market price and mint price of gold; or, which is nearly the same thing, by the fluctuation in the state of our general exchanges. This difference or fluctuation has at no period been more than about ten or twelve per cent. Even this variation, however, has not been fairly referable to a too great issue of paper, but rather to the peculiar circumstances of the country; and, in particular, to our two bad harvests, which sufficiently account for the unfavourable state of our exchanges.
The second question is, how far the bullion price of our commodities may be suspected of having been raised through the influence of the paper credit of Great Britain.
It was formerly stated, that the bullion price of articles may be considered to be their general price: because bullion necessarily bears that value, or nearly that value, in each country, in exchange for goods, which it bears in all, allowance being made for the expence of their transmission, inclusive of export and import duties, ordinary profit of the merchant, freight, insurance, and other customary charges. The expence of the transportation of commodities from the several places of their growth or manufacture, an expence which is great in some cases, and small in others, is the measure of the difference subsisting between the bullion prices of the same articles, at the same time, in different parts of the world. Each addition to this difference implies an extra profit on the transportation either of bullion or of goods; and must be supposed soon to cause the one or the other to be carried over in such quantity as to restore their due relative price. Every rise, therefore, of the bullion price in Great Britain of those commodities which she is accustomed to export, if we suppose the usual exportation to continue, implies an equal, or nearly equal, enhancement of the bullion price of all articles of the same class in every foreign part in which our commodities are sold.
Great Britain so remarkably takes the lead in manufactures and commerce, that she may not unjustly be deemed to have the power, especially in a time of general war, of prescribing to foreign countries the rate at which they shall buy her commodities.
That monopoly of the supply, however, which I am here supposing Great Britain to possess, is, probably, but temporary, and, in every respect, imperfect. In most of her sales abroad she meets with strong competition; for, though other countries may not rival her in the quality of her goods, they can, generally, furnish a substitute, which, if British prices are much lifted up, will gain, by comparative cheapness, the preference. Every great enhancement of the cost of our articles must lessen the foreign demand for them. It must reduce our exported and augment our imported goods. By thus turning the balance of trade against us, and rendering our exchanges unfavourable, it must cause the rise at home to be a rise not in the bullion price of our articles, the subject which we are now considering, but in the paper or current price, the point which was noticed before. If the advance is in the paper or current price, the bank is compelled to restrict its issues; and the reduction of the quantity of bank notes has a tendency to limit the cost not only of those particular commodities which are the subjects of exportation, but of every commodity in the kingdom.
That the bullion price of some British articles has lately been much encreased, and that the bullion price of all, or of almost all, has in some degree risen, are facts which cannot be doubted. But that this enhancmenet is to be charged to an increase of paper, is not equally to be admitted; for it is plain that other causes have powerfully operated, namely, a state of war, new taxes, and two bad harvests, which, by raising the price of bread, have in some degree lifted up that of labour, and of all commodities. Our prices may have also been partly augmented by the enhancement of the cost of raw materials brought from other countries.
Although it should be granted, as it must, either that the amount of our paper has been enlarged in proportion to the extension of pecuniary transactions; or that an encreased œconomy in the use of it has rendered an equal quantity sufficient for more payments (and it seems of little moment which of these two suppositions is adopted): still, it might be questioned whether the extended issue of paper ought to be deemed the cause of the high prices; or whether the high prices ought not to be deemed the cause, and the encrease of paper the effect.
It was before remarked, that it seems in general more fair to consider the latter to be the case, when the extension of paper is not such as to be the means of reducing its value below that of bullion. To prove the reasonableness of this observation, let us imagine the paper credit of this country to be abolished, and our payments to be conducted by a circulating medium consisting wholly of gold; and let us assume that we still find ourselves able to procure for our commodities sent abroad a higher bullion price than before. In this case the bullion price of articles at home will also experience a rise; for the high bullion prices abroad will have the effect of enlarging our exported and diminishing our imported goods; of rendering our balance of trade favourable, and of bringing gold into the kingdom; which encrease of gold will have precisely the same effect as an augmentation of paper, namely, that of raising British prices. The bullion will continue to flow in until it shall have brought the bullion price of goods in England to a level with the bullion price of the same articles in foreign parts, allowing for charges of transportation. On the ability, therefore, of Great Britain to maintain a high bullion price for her goods abroad, would depend the bullion price of her commodities at home, in the event of her employing gold as her only circulating medium.
If we suppose paper to constitute the circulating medium of Great Britain, and an encreased bullion price for her commodities abroad to be in like manner obtainable, the case will in the main be similar, though in one particular it will differ. The case will be similar, inasmuch as Great Britain will experience, exactly as if she made use only of gold, an encrease in the price of her commodities at home, as well as an enlargement of the quantity of her circulating medium; such an enlargement, I mean, as is necessary for effecting her more extended payments. The case will differ, inasmuch as, instead of importing the additional circulating medium which is wanted, she will create it. The production, therefore, of a rather less quantity of exportable articles will be necessary on the one supposition than on the other; and the state of the exchange itself will be in some degree affected by this variation in the circumstances of the two cases.
It may, perhaps, be thought, that I have considered the bullion price of goods in Great Britain as exclusively depending on the bullion price of the same kind of commodities abroad; and that I ought to have stated the converse to be also in some measure the fact, namely, the bullion price of articles abroad to depend in part on the bullion prices of Great Britain. I have intended thus to represent the case. My position has been this,—that the bullion price of articles in Great Britain conforms itself to the bullion price abroad; but that, in the formation of this bullion price abroad, the British price has some share of influence: and this influence I have considered to be proportioned to the degree of our monopoly of the supply of the foreign markets.
There is an additional mode of considering the influence of paper credit on the bullion price of articles.
The encreased use of paper in each individual country must contribute to lower the price of bullion, by lessening the general demand for it in the world. On every advance in the cost of commodities, it may be suspected that the means of effecting the encreased payments are supplied not by bringing more gold into use but rather by the enlargement of that part of the circulating medium which consists in paper. No inconsiderable portion of British gold coin is employed in effecting the fractional parts of payments; and the total amount of these does not encrease in the same proportion in which the sum total of payments is augmented* . Moreover, the art of œconomizing gold is continually advancing. The very vicissitudes of commerce, probably, tend to improve it. A time of distress, such as was felt in 1793, compels many to resort to new expedients, tending to spare the use both of Bank of England notes and of coin. The measures adopted, at first, through necessity, are afterwards persisted in because they are œconomical. To put the case which we have more recently experienced. An unfavourable balance of trade, arising out of the disadvantageous circumstances of the country, causes our guineas to go abroad. Paper is necessary to supply their place. Experience of the loss incurred by hoarding money, and of the practicability of sustaining both private and public credit during the absence of gold, strengthens the general confidence in a paper currency, and encourages a permanently encreased use of it. If we could suppose as large a substitution of paper in the place of coin to take place in other countries as we have lately experienced in our own; the diminution of the demand for bullion might be such as very materially to affect its general value, and to enhance the money price of articles over the world.
There is, however, a limit to this evil. The annual supply of the precious metals is obtained from mines, of which some afford to the proprietors a higher and others a lower revenue, and some probably no revenue at all. If we suppose the encreased use of paper to lower, in any degree, the value of the precious metals; we must assume those mines which have not yielded any rent, to be no longer worked; and the supply of gold and silver to be, in consequence, somewhat reduced. If we imagine the reduction of the price of the precious metals to be progressive, we must conceive a period to arrive when all mines will be unable to defray the charge of extracting the ore, except those which now yield the very highest rent. At this point the fall will necessarily stop. In other words, gold and silver must continue to bear that price, or nearly that price, at which they are now exchangeable for commodities, a deduction being made of the total present rent derived from the richest mines; a deduction which, if Dr. A. Smith’s observations on this subject are just, cannot be very considerable.
Mr. de Montesquieu has represented, in the following manner, the principle which regulates the price of the precious metals. He “compares the mass of gold and silver in the whole world with the quantity of merchandize therein contained,” and “every commodity with a certain portion of the entire mass of gold and silver:” and then observes, that, “Since the property of mankind is not all at once in trade, and as the metals or money also are not all in trade at the same time; the price is fixed in the compound ratio of the total of things with the total of signs, and that of the total of things in trade with the total of signs in trade also.” This theory, though not altogether to be rejected, is laid down in a manner which is very loose and fallacious* .
Not to mention the misconception of the subject which may arise from the silence of Mr. de Montesquieu respecting the state of the mines, it may be observed, first, that he alludes, in a manner so imperfect as to be scarcely intelligible, to those effects of the different degrees of rapidity in the circulation both of money and goods, which it has been one object of this work to explain. It is on the degree of the rapidity of the circulation of each, combined with the consideration of quantity, and not on the quantity alone, that the value of the circulating medium of any country depends.
Mr. de Montesquieu also leaves out of his consideration the custom of transacting payments by means of entries in books, and of other expedients. In proportion as contrivances of this sort prevail, and they must abound more and more as commercial knowledge advances in the world; the demand for bullion will be diminished.
He also does not advert to that reserve of gold and silver in the coffers of the banks of various countries which merely forms a provision against contingencies. The amount of this reserve will depend on the opinion which the banks entertain respecting the extent of the sum likely to be suddenly drawn from them, in consequence either of fluctuations in the national balances of trade, or of temporary interruptions of credit among individuals. In proportion, therefore, as the variations in the national balances of trade, as well as in the state of commercial confidence, are greater or smaller, the fund of gold which is kept out of circulation will be more or less considerable. On the amount of this fund depends, in no inconsiderable degree, the price of bullion in the world.
Mr. de Montesquieu likewise omits to take into his account that now immense and perpetually encreasing influence in sparing the precious metals which arises from the use of paper credit. The false impression which he gives of this subject, may chiefly be referred to his not having contemplated the effects of the introduction of the banking system.
Mr. Hume has spoken strongly of the influence of paper credit in sparing the use of the precious metals, and in proportionably lowering their value, and raising that of labour and of commodities, He inveighs against bank paper on this account, as well as on some others; but, in so doing, he appears to assume, that paper credit causes a merely local rise in the price of articles; a rise, I mean, which extends itself only over the whole of the single independent country in which the paper is issued. That bank is considered by him as most advantageous to a state, which locks up all the gold received in return for its notes [he admits that it will have no profit on its dealings], and thus causes the total quantity of circulating medium to remain the same. The price of labour, he says, will, in this manner, be kept down. The Bank of Amsterdam is approved by him, on account of its being an establishment of this nature* . In thus representing the subject, he appears to forget, that, when the total circulating medium of a country, whether consisting of gold, or of paper, or of both, is rendered excessive; when it has thus lifted up the gold price of articles above the point at which they stand in adjacent countries, the gold is obliged, by the operation of the exchange, to transport itself to these other parts; and that paper credit, therefore, enhances the prices not of that single spot in which it passes, but of the adjoining places, and of the world. The state which issues paper only in such quantity as to maintain its general exchanges, may be considered as substituting paper in the place of gold, and as gaining additional stock in return for whatever coin it may cause to be exported. It derives, therefore, from its own issue, the whole advantage of this augmentation of capital. It participates with other countries in that inconvenience of a generally encreased price of commodities which its paper has contributed to produce.
That the popular opinion which was lately entertained of the great influence of paper credit in raising the price not only of commodities in general, but of provisions in particular, had no just foundation, is a position which admits of easy proof.
First that opinion has proceeded on the assumption of the fact of a vast encrease of the total circulating medium of the kingdom, within the last two or three years, the period during which the high prices have subsisted. But I have shewn both that the amount of the notes of the Bank of England has lately not been such as to imply a material augmentation of the circulating medium of the metropolis, and, also, that the quantity of circulating medium in the country necessarily conforms itself to that of London, for which it is exchangeable. It has obviously been the use of country bank notes, and especially of the smaller ones, in the place of gold, not in addition to it, which has been the chief occasion of the prevailing suspicion: for the common complaint has been not only that paper has been multiplied, but, also, that guineas have been hardly to be seen: and it has not been considered, that by this double invective some sort of acknowledgment is made that the one article is only that substitute for the other, by which none of the supposed effect on the price of commodities can be produced.
It is sometimes said, that the additional loans which the paper of the country banks has enabled them to furnish, have encouraged mercantile speculation; and that we may ascribe to the spirit thus excited much of the late rise in the price of articles in general, and of corn in particular.
There is an error in the public sentiment on this subject, which it is important to correct.
It has been already shewn, that it is by the amount not of the loans of the Bank of England, but of its paper; or if of its loans, of these merely as indicating the quantity of its paper, that we are to estimate the influence on the cost of commodities. The same remark may be applied to the subject of the loans and paper of country banks. For the sake of more fully illustrating this point, let us examine into the several ways in which a country banker may be supposed to extend his loans, without augmenting the quantity of circulating medium in the kingdom.
He may be enabled to do this, first, through the enlargement of the deposits lodged with him. In this case some of his customers may be considered as leaving with him, or as lending to him, a sum which is lent by him to other customers. This is the same thing as if some individuals were to lend to others, without the intervention of the banker. Loans of this nature will be admitted not to have the supposed influence on prices.
A country banker may also encrease his loans, without augmenting the quantity of the circulating medium of the country, in the following manner. He may extend the issue of his own paper, and then that paper may circulate in the place of gold either hoarded or exported. If the gold is hoarded; if a quantity of coin locked up by one man equals the amount of the new paper issued by another it is plain that there will not be the supposed influence on prices. If the gold is exported, we must consider it in the same light with any other commodity sent abroad. It is true that the paper, according to this supposition, may be said to give existence to an additional exportable article: but so also does every encreased exertion of the national industry, as well as every favourable harvest. An augmentation of prices is no more to be inferred from the creation of a new exportable commodity in the one case than in the others.
The following facts furnish a convincing proof that the late high prices of corn have not been owing to the enlargement of Bank of England paper.
By the account which the bank rendered to Parliament, it appears, that the amount of Bank of England notes was, on the 25th of February, 1795, 13,539,160l. In the three months immediately following the 25th of February, 1795, the average price of wheat, in the London corn-market, was about 57s. per quarter.
By the same bank account, it appears, that the amount of Bank of England notes was, on the 25th of February 1796, 11,030, 116l. In the three months immediately following the 25th of February, 1796 the average price of wheat, in the London corn-market, was about 94s. per quarter.
Thus wheat bore a comparatively low price when the amount of bank notes in circulation was greater; and a comparatively high price when their amount was smaller. It bore the moderate price of 57s. per quarter, at a time when the amount of Bank of England notes was full as considerable (allowing for about two millions of 1l. and 2l. notes) as it is known to have been at any period.
Paper credit may be considered as tending, in some respects, to reduce the price of commodities. It was compared, in a former chapter, to a cheap species of machinery, which is substituted in the place of a dear one; and it is obvious, that, in proportion as any instrument of manufactures or commerce is less expensive, the articles which it contributes to produce may be afforded at a lower rate.
Paper credit, also, promotes general cheapness, by sparing much expence and trouble in weighing, counting, and transporting, money; and by thus facilitating more particularly the larger transactions of the merchant. Mr. Hume appears to suppose, that, when a great encrease of it takes place, the augmentation is artificially produced. But it has been shewn, that mercantile persons naturally resort more and more to the use of paper, in proportion as wealth accumulates, confidence improves, and commerce advances. The consumers of commodities may be considered as having an interest in permitting the merchants to follow their own plans of œconomy, in this respect, in the same manner as in all others.
But whatever may be the amount of that influence on the price of commodities which ought to be ascribed to paper credit, one point is clear, namely, that, during the period in which our paper has extended itself, our trade has prospered, the state of our agriculture has advanced, and both the capital and the income of the country have been augmented.
The chief mischiefs which, according to Mr. Hume, are to be apprehended from any considerable addition to our paper currency, may be stated to be the following: first, the great enhancement of the price of British labour and commodities, an evil with which we ought unquestionably to connect that of the diminution of the sale of our manufactures in foreign markets; secondly, the inconvenience to which we may be exposed in time of war through the want of sufficient means of making remittances in bullion to other countries; and, thirdly, the confusion which the failure of paper credit may produce at home in the event of any great disorder in the nation.
That the first consequence (the great enhancement of the price of British labour and commodities) cannot follow from the enlargement of our paper currency in the degree which Mr. Hume supposes, has been proved from the circumstance of our paper causing guineas to go abroad, and tending, therefore, to raise the prices of the world rather than those of our own single island. That our prices, however high, have not been such as to lessen the vent abroad of our home-made articles, and have, therefore, not been raised above the prices of other countries, is proved by those documents from our custom-house which state the continually encreasing quantity of manufactures exported by Great Britain* .
That the second evil (that of our being reduced to difficulty in making remittances abroad in time of war through the want of bullion) is one which there is less reason to dread than Mr. Hume has imagined, may likewise be inferred from recent experience. We have been able to maintain the credit of our funds, and to carry on all our financial operations, during the whole of the late expensive and protracted contest, although in the commencement of it our stock of circulating gold was probably less than in many former periods; and although, also, in the last years of the struggle, a period in which we lent considerable sums to Ireland, and had to purchase immense quantities of foreign grain, we were in a great measure deprived of current coin, and the cash payments of the Bank of England remained suspended.
Mr. Hume himself has remarked: “That want of money can never injure any state within itself; for that men and commodities are the real strength of any community.” He might have added, that Want of money can never injure any state in its transactions with foreign countries, provided it sufficiently abounds with commodities which are in demand abroad, and which it can afford to sell at a bullion price lower than that for which foreign articles of a similar kind can be afforded. The power of manufacturing at a cheap rate is far more valuable than any stock of bullion. Even the greatest quantity of gold which we can be supposed at any time to possess, bears but a small proportion to our extraordinary expenditure in time of war, and affords a security which is extremely slender in comparison of that which we derive from the commercial capital, the manufacturing skill, and the other resources of the country.
That the third evil (the confusion which the failure of paper credit may produce in the event of any disorder at home) is less a subject for apprehension than Mr. Hume and other British writers have conceived, is a point which a great part of the preceding work will have contributed to establish.
During the late scenes of trouble and consternation on the continent, the possession of a stock of the precious metals probably added little to the security of any nation. When the French armies approached, or when an insurrection was projected, a stock of gold and silver possessed by a government bank might contribute to invite attack; or if the fund should at such a juncture be expended in the public service, it would not long continue to perform the office of a circulating medium. It might even disappear after effecting a single payment.
Our own island has been preserved, through the favour of Providence, from those violent convulsions which have been felt on the continent. We have, however, been exposed to many smaller evils, and, in particular, to the interruption of our mercantile credit. It was probable that the enemy, knowing how much our political strength depended on our commercial prosperity, and our commercial prosperity on the due maintenance of mercantile confidence among us, would direct his endeavours to the very object of exciting alarms over the kingdom, with the view of thus disturbing the course of our trade and manufactures. It therefore became us to protect ourselves by the best means in our power against this species of injury; and the continuance of the law for suspending the cash payments of the Bank of England has been one of the steps which parliament has deemed necessary.
There can be no doubt, that, in the situation in which we have thus found ourselves placed, we have been greatly benefited by the circumstance of our having been previously accustomed to the free use of a paper credit. In a commercial country, subjected to that moderate degree of occasional alarm and danger which we have experienced, gold is by no means that kind of circulating medium which is the most desirable. It is apt to circulate with very different degrees of rapidity, and also to be suddenly withdrawn, in consequence of its being an article intrinsically valuable, and capable of being easily concealed. If, during the war, it had been our only medium of payment, we might sometimes have been almost totally deprived of the means of carrying on our pecuniary transactions; and much confusion in the affairs of our merchants, great interruption of manufacturing labour, and very serious evils to the state, might have been the consequences.
Paper credit has, on this account, been highly important to us. Our former familiarity with it prepared us for the more extended use of it. And our experience of its power of supplying the want of gold in times of difficulty and peril, is a circumstance which, though it ought not to encourage a general disuse of coin, may justly add to the future confidence of the nation.
THE EVIDENCE GIVEN BY HENRY THORNTON BEFORE THE Committees of Secrecy of the two Houses of Parliament on the Bank of England March and April 1797
EVIDENCE GIVEN BEFORE THE COMMITTEE OF SECRECY OF THE HOUSE OF COMMONS APPOINTED TO ENQUIRE INTO THE OUTSTANDING DEMANDS OF THE BANK OF ENGLAND*
Veneris, 24° die Martii 1797
Henry Thornton, Esquire, a Member of the House, and a Banker of London; called in, and Examined.
Q. Is your House connected with any Country Banks?
A. It is; with several.
Q. Can you specify the places where those Banks are situated?
A. Edinburgh, Glasgow, Liverpool, Bristol, Exeter, Scarborough, Litchfield, Stamford, Tiverton, Totness, Carlisle. Stockton, Winchester, and a few others, which I do not at present recollect.
Q. So far as you know, or have reason to believe, have the Notes of these Country Banks in circulation during six months preceding the 26th of February last, been more or fewer than previous to the commercial difficulties in 1793?
A. I should judge, from occasional conversation which I have had with Country Bankers who have come up to town, that they have been much fewer; but I have not at present correct information from any number of persons on this point. I also incline to think they have been fewer: because, on the occasion of the late alarm, the demand for Guineas from Country Bankers who issue Notes on demand, was much less than on the occasion of the alarm in 1793. I am further confirmed in this opinion, by the circumstance of our having ceased to be connected with some Country Banks which did business with us before the year 1793, on account of our being liable to sudden demands through the circulation of their Notes. Some of these Banks then left off their business.
Q. Have you, or are you likely soon to have, the means of informing the Committee of the amount or proportion of the Notes issued by the respective Banks you have mentioned, previous to the year 1793, since the year 1793, and since the 26th of February last?
A. I yesterday wrote several letters, which I think will bring me information on that subject within three or four days.
Q. Do you apprehend that, for some time previous to the 26th of February last, the quantity of circulating medium had been greater than the convenience of trade required?
A. I am clearly of opinion, that, in the metropolis, it was much less.
Q. Supposing, during any part of the year, preceding the 26th of February, the quantity of circulating medium had been considerably diminished, is it, or is not your opinion, that such considerable diminution would have been highly injurious to public credit?
A. I am clearly of opinion, that, if the circulating medium had been much further reduced, many failures would have been the consequence. I know the distresses of many Merchants, and also of some Bankers, to have been considerable; and have had conversations with some of them on the subject of substituting a new circulating medium, with a view of relieving the existing distress.
Q. Supposing that, during any part of the six months preceding the 26th of February last, Government had wished to repay the whole, or a large proportion of the Bank advances, could Government have done this any otherwise than by a loan from the Public?
A. I conceive it to be self-evident that they could not, except by a loan, or something in the nature of it.
Q. From what source must that loan have been supplied, and in what shape must the advances to repay which the loan was to be made, have been repaid to the Bank?
A. I conceive that the same description of parties who usually furnish loans to Government, would furnish the supposed loan, and in the same manner. The custom now is, for those who are the most opulent, and the most desirous of embarking in a loan, to associate for the purpose of bidding for it; if they succeed in obtaining it, they draw on their Bankers, on the first day of payment, for the amount of that payment; it is usual for the Bankers, a few days antecedent to the first instalment, to request of those friends who have the opportunity of discounting at the Bank, to send Bills there at that period to be discounted, in order to increase the Cash of the Bankers; and I take for granted, that the same means of preparing for the payment of the supposed loan would have been taken, as has been usual in other cases. If the Bank should have been unwilling to furnish discounts on the days antecedent to the first payment on the supposed loan, there would be of course a difficulty in effecting the payment; and the circulating medium which I have already spoken of as too little for the accommodation of the Public, would be rendered, in that case, considerably less. The payments on the loan have usually been made in Bank Notes: in the case of the last loan, however, Exchequer Bills, payable three months after they were issued, have been received in payment of the loan; and these Exchequer Bills, though bearing about 5¼ per cent. interest, bore, for a few days antecedent to the 26th of February, a discount of 3 to 3½ per cent., which is equivalent to about 18 per cent. per ann. interest for Money. I understand that Government ceased to issue these Exchequer Bills in consequence of the high discount. Government obtained, by means of these Exchequer Bills, an anticipation of the payments on the loan, for which, however, if they had continued to obtain the same anticipation, they must have paid of course 18 per cent.; and I attribute this high interest to the extreme scarcity of the circulating medium at that time existing.
Q. Supposing a large proportion of the Bank advances to Government had been repaid during any part of the six months preceding the 26th of February last, must not that repayment have diminished the circulating medium, except so far as the Bank had re-issued Notes to the full amount of what should have been paid in?
A. Undoubtedly. I apprehend, moreover, that in order to prevent great commercial distress, it would have been necessary for the Bank to furnish some additional Paper circulation to the Public, antedecent to the first payment on the loan, by which they themselves were to be paid.
Q. If such commercial distress had taken place, is it, in your opinion, probable that the Bank of England Notes, not taken out of circulation by the loan, or any measure in the nature of a loan, would have remained in circulation; or that, on the other hand, by reason of such commercial distress, they must also have been carried to the Bank to be changed for Cash?
A. I apprehend, that, if the distress had become great, and the alarm through the country had risen to any considerable height in consequence, a suspicion of the insecurities of any thing but Guineas, would, in many minds have taken place; and that those persons who were under great alarm, and were possessed of property which they could dispose of, would, in many cases, sell that property, though, at a considerable loss, for Bank Notes, for the sake of exchanging those Bank Notes for Guineas; and that, in that manner, an increased run upon the Bank for Guineas might have taken place, in consequence of a distressing reduction of the circulating Paper of the Bank.
Q. Assuming, that the Paper of the Bank is usually ten millions, if Bank of England Notes to the amount of five millions had, in the course of the last twelve months, been taken out of circulation in the payment of a loan, without any new circulating medium having, previously to such payment, been provided, or without immediate restoration to public circulation of an equal issue of Bank Notes or Specie, is it, or is it not, your opinion, that the commercial distress of the country must in all probability have been very great and general?
A. I cannot conceive that the mercantile world would suffer such a diminution to take place, without substituting a circulating medium of their own; and I happen to know, as I before hinted, that some projects of this sort were on foot, and had been in the minds of several Bankers, whom I understood to have agreed in the general principle, though not actually associated for this purpose. Assuming the circulation of Bank Notes to have been reduced to the extent supposed, and no other circulating medium to have been substituted, I apprehend, especially if the diminution was made suddenly, and was not distinctly known by the Public to have been made, that great, and probably almost universal failures must have been the consequence. In the case supposed, every Banker, on the average, would only have one half of his accustomed Bank Notes in his drawer, which would certainly, in some cases, prove insufficient for the current payments. It is clear also, that in the case supposed, those Bankers who had the most property, whether in Bills or Stock, or other articles convertible into Bank Notes, would eagerly convert them into Notes, at whatever loss, for the sake of securing themselves from the risk of stopping payment. And if some Bankers should thus provide themselves with more than half their usual Paper circulation, other Bankers must be left with less; in which case, nothing is more clear to me, than that the failure of some of those Bankers would have taken place. The failure of even an individual Banker, in such a state of things, would produce the failure of others. It would create a disposition in the customers of other Bankers to take their Bank Notes, for security sake, to their own houses, although possibly some might lodge them in the Bank; in which case, however, it is material to remark, that they would have the right of drawing on the Bank for Guineas just as much as if the Notes were kept at their own houses, and that the balances at the Bank are to be considered therefore very much in the same light with the Paper circulation. I have hitherto spoken only of that part of the Paper circulation of the Bank which is in the hands of Bankers, and which may amount, as I should imagine, to about four or five millions. In case the supposed reduction of Bank Notes should take place, I rather conceive that the Bankers would be obliged to bear more than their share in it, as the private individuals, who have Bank Notes in their possession, would, many of them, be full as earnest, and more able, to retain the same quantity of Notes as heretofore, the sum in the hand of each individual person being small.
Q. In that state of commercial distress, which you represent, in your answer to the former question, to be probably consequent upon the state of facts, therein assumed, if an alarm of invasion had taken place, would it, in your opinion, have been probable, that as great or a greater run upon the Bank of England for Cash would have taken place, as was occasioned by the alarm of invasion, when such an assumed state of facts did not exist, and such a consequent commercial distress did not exist?
A. I think, that the state of facts which has been assumed, is such as might have produced of itself a very great run upon the Bank, in consequence of the commercial failures which would have followed, and of course that it would have exceedingly aggravated any run upon the Bank in consequence of the dread of invasion. These two causes of alarm existing together, would probably have operated with more than double the effects which each would have had separately.
Q. Is it your opinion, that, in the assumed state of facts, the consequent distress could have been avoided by a subsequent restoration, to public circulation, of a quantity of Bank Notes, or Specie, equal to the quantity which had been called in to the Bank in consequence of the proposed loan; or would it not be necessary, in your opinion, in order to avoid that distress, that some new circulating medium should have been provided previously to the Bank Notes having been called in, in the manner supposed?
A. I apprehend, that if the distress, which has been supposed, had taken place, it would take a considerable time, and a large temporary emission of whatever Paper might be received with the greatest confidence, before the natural state of things could be restored.
Sabbati, 1odie Aprilis 1797
Henry Thornton, Esquire, a Member of the House; called in, and further Examined
Q. Have you received any information, in answer to the enquiry which you stated you had set on foot, into the comparative amount of the quantity of Country Bank Notes in circulation before and since the commercial difficulties in 1793?
A. I have received a considerable number of letters on that subject; and the following is the substance of the intelligence contained in them:
First, I will state, by itself, the account which I received of the whole circulation of “Notes payable on demand to bearer” at Bristol. The relative quantity circulated at the several periods named, was furnished by the six Bristol Bankers themselves, and I believe it therefore to be very accurate.
I have obtained information on nearly the same points from other Banks in a variety of parts; viz. Ashburton, Carlisle, Exeter, Hinckley, Litchfield, Scarborough, Sleaford, Stamford, Stockton, Tiverton, and Woodbridge. Each of these issue ordinarily “Notes to bearer on demand”; though the quantity issued by several of them is never considerable.
I am informed, that at Manchester no “Notes to bearer on demand,” are issued by the Banks; but some small Bank of England Notes begin now to circulate there; and there having been a considerable quantity of Guineas in the Manchester Banks before the stoppage of the Cash payments of the Bank, these Guineas have been paid away whenever they have been demanded since that time. At Carlisle, I am informed that there is usually a premium given by the Bank of that place for Guineas, of ¼ to ½ part, which has lately advanced to 1½ per cent. This increase is accounted for by the disposition which there prevails to obtain Guineas, in order to send them over to Ireland. The Bank of Carlisle continues to keep a regular supply of Cash for all the calls upon it.
I am informed, that in Scotland, where the Paper circulation is usually in high credit, and where Guinea Notes are current, it may be calculated, that the additional Guineas lately thrown into circulation, or hoarded by individuals, may amount to about 60,000. This appears to be exclusive of any additional quantity with which the Banks may have supplied themselves, and may have still in their possession. Silver had disappeared from the circulation in Scotland quite as much as Guineas.
Q. Do any observations occur to you, from your late communications from the country, of which you think it will be useful to the Committee to be possessed?
A. It appears to me, that some inferences are obviously to be drawn from the information I have just given; the principal of which I think is, that that part of the Paper circulation of the country, for which, when it is withdrawn, Money becomes naturally the substitute, has been diminished since 1793, and is particularly diminished now; and that, consequently, there is a considerable degree of presumption, that the quantity of Guineas in circulation (not to speak of those which may happen to be hoarded) may have been for some time past, and may now in particular be considerable. I do not conceive, that the very great diminution of Notes, which there is at this time, is likely to have been fully supplied by Guineas; for it is always possible, that for a limited time a very great scarcity of every species of circulating medium, out of London at least, may subsist, and that some suspension of payment, as well as stagnation of trade, may for such interval continue. I should think, however, that the reduction of “Notes to bearer on demand,” which I have described as existing for a considerable time, is likely to have been supplied principally by Cash, though partly perhaps by the means of payment made by Bills of Exchange, of which it is not easy to calculate either the diminution or the increase.
Q. Is it understood, that, according to the established principles of banking, a Banker, in order to provide for his own safety, ought to maintain a certain fixed proportion between his Specie and the Notes which may be out against him?
A. I conceive, certainly not; and that his Specie should be proportioned to whatever may be thought, by him, considering all circumstances, to be likely to be the demand for Specie antecedently to the time within which he can provide himself with an additional quantity of it.
Q. According to the best of your judgment and experience, are the principles on which a private Banker acts, in the management of his business, applicable to the Bank of England?
A. I conceive, in many respects, the cases are similar; in others they are different, and even opposite. In forming any comparison between the case of a private Banker and the Bank of England, it will be necessary to take the case of a Country Banker, and not of a London Banker, as the latter does not issue Notes.
Q. What, in your opinion, are the principal differences between the two situations, and the principles which belong to them respectively?
A. I conceive that the cases are different in respect to the issuing of Notes: a Country Banker issues perhaps a small quantity of “Notes to bearer on demand,” and a larger quantity of Notes at interest, payable after certain notice; and he likewise has deposited with him very considerable sums, for which he is liable to be suddenly called upon by his customers residing very near to his Bank. In the time of expected distress and danger to the mercantile world, many of the prudent Country Bankers (if circumstanced as I have described) are disposed either to lessen or to suppress the circulation of their “Notes payable to bearer on demand,” because these circulate in the hands of strangers at a distance from him, and are confounded with the Notes of other Bankers; so that if any neighbouring Bank should happen to stop payment, he is particularly liable to a sudden demand for Guineas, in consequence of the country people, through the general alarm, bringing in for payment these Notes; he is also liable to expence and to danger, by its being possible for rival Banks, who have not Guineas enough for their own necessities, to possess themselves of these Notes, and to send them in for payment, with a view of thus supplying their own want of Guineas: the Country Banker therefore may act a prudent part, in relinquishing that source of his profits, which is furnished by the circulation of Notes to bearer, in times of expected difficulty, for the sake of securing himself in other respects. For, if through the pouring in of his Notes, his Cash should be inadequate, the whole body of his creditors would be likely to come for payment of their debts. The Bank of England is not at all circumstanced like the Country Banker in this respect; their Notes are in perfect credit in London, and its neighbourhood, where alone they generally circulate; and I believe it is universally agreed, it is not through any distrust of Bank of England Notes, that the demand upon the Bank for Guineas has taken place. The Bank of England are undoubtedly liable to be called upon for Guineas by Bankers in the country, in the same manner as a great Bank in the country is liable to be called upon for them by a rival Bank: but it is not possible for the Bank of England, unless it is supposed that they suppress their Notes altogether, to exempt themselves from this inconvenience: they are universally considered as the repository for Cash, on which every individual in the country, who is in want of Guineas, has a right to draw, and any person who has property he can sell for what is called ready Money, that is, for Bank Notes, may at any time sell it, and thus possess himself of Guineas drawn from the Bank. Moreover, the Bank of England, by their custom of daily discounting, afford to every individual an opportunity of obtaining Guineas from them; nor is it considered as being at all improper, by the friend of a Country Banker, to discount Bills with a view of thus furnishing Guineas for the relief of a Country Bank: whereas, in the case of two rival Country Banks, the idea of discounting at one Bank for the sake of furnishing Guineas thereby to the other, would not be entertained. I conceive, therefore, that in this respect the Bank of England has no such inducement to suppress or limit its Paper circulation, as a Country Banker has, since it cannot, by such suppression or limitation, secure itself from the inconvenience I have last-mentioned, in the same manner as a Country Banker can. I think, moreover, there is an important difference between the case of a Country Banker and the Bank of England, in this others respect: if a Country Banker thinks fit to lessen his Paper circulation, or even to reduce or relinquish his whole trade in a period of expected difficulty, he can do so, without bringing down any great evils on himself: he may possibly contribute to the general distress, by abandoning his profession, or even possibly by diminishing certain parts of his transactions; but he may consider himself as being more than recompensed for his particular share of the general distress which he occasions, by the personal ease and tranquillity, or security, which he obtains. The Bank of England, on the contrary, are engaged in such large transactions, that they cannot relinquish any considerable part of their accustomed business, without giving a general shock to credit, of which they themselves must, as I conceive, be some of the first victims. If they reduce materially their notes in a time of difficulty and distress, there are no other Notes which are ready to supply the deficiency in the circulation; and if it is to be supplied by Guineas, those Guineas must come from the Bank: they are always the possessors of a very large quantity of Bills, which they have discounted, and which are growing due from day to day. It is notorious, that the acceptors of these Bills have not provided themselves with Guineas for the payment of them, but that they depend upon the means of payment on the accustomed liberality of the Bank: in short, the Bank depend, as I conceive, in respect to every part of their receipts, on the maintenance of general credit; whether we consider the taxes, on the receipt of which they rely for the repayment of the loans made to Government, or for the punctual payment of Bills of Exchange, which I have just mentioned, or for any other source of supply which they may be expecting: I conceive, therefore, that the Bank of England can find no safety for themselves, except by seeking it in the safety of the commercial world, in the general support of Government credit, and of the general prosperity of the Nation. It follows, therefore, that if any great suppression of their Notes is injurious to general credit, it must be injurious also to the Bank of England itself; and that the Bank of England, in respect to the issuing of Notes, does not stand on the same footing as an individual Country Banker.
Q. What, according to the best of your judgment and information, is the proportion of Bank of England Notes circulating in the country, to that which circulates in London?
A. I should think that very few circulate more than 20 or 30 miles from London; for there are Country Banks which issue Notes at something more than that distance from London, which supply, as I conceive, the circulation of the surrounding part. The House with which I am connected is in the habit of receiving large remittances from the country, among which they seldom find any thing more than a trifling quantity of Bank Notes.
Q. Assuming, that, in consequence of the Bank having extinguished a very considerable proportion of its Notes in circulation, a new circulating medium should have been created, in order to make up for that deficiency; must not the Bank, supposing it to act on the principle of providing for its own safety, by maintaining a fixed proportion between Cash and Notes, be compelled to make that proportion bear relation, not to its own Notes only which should remain in circulation, but also to the amount of that new circulating medium which should have been so created?
A. In case a new circulating medium in London should take place, I take for granted, that it would pass current every where in payments, exactly like the Bank of England Notes, and that it would be easily exchangeable for them; which Bank of England Notes would then be exchangeable for Guineas. The Bank of England therefore, assuming them to return into circulation a quantity of Bank Notes equal to those which had been brought in through such exchange as I have described, for which I suppose Guineas to have been paid, would again be liable, by the interchange of the new circulating medium for some of these fresh Notes, to have fresh Guineas demanded of them. This observation, however, applies, not merely to any new circulating medium which might be introduced in London, but also to any circulating medium now existing in the country, which is exchangeable for Bank of England Notes, or to any species of Paper, or other article which is convertible into Bank of England Notes. I infer from hence, that the observation I have before made, is indisputable; namely, that the Guineas necessary in order to provide safety for any Bank, should be proportioned, not to the quantity of Notes, but to the probable demand for Guineas, for which, under all the circumstances of the case, the Bank is likely to be called upon antecedently to the time when fresh Guineas can be obtained.
Q. Do you, or do you not conceive, in point of fact, that any considerable reduction of the Paper circulation of the Bank, below its ordinary amount, as often as it has taken place, has commonly produced an increase of discount on Navy and Exchequer Bills and India Bonds, and a fall in the price of Stocks?
A. I am not informed of every diminution in the total amount of Bank Notes, which may at different times have taken place; nor do I conceive that the effect spoken of in this question, is likely so much to follow from a diminution of any given quantity of Notes, as from a reduction of them below that quantity, whatever it may be, at which the circumstances of the time would naturally require that they should stand. It may happen, particularly in times of alarm, that through the depreciation of other Paper, the want of which Bank of England Notes may be wanted to supply, and also through the less œconomical use of Bank Notes, which may result from a disposition in many persons to keep their Bank Notes at home, instead of placing them at their Bankers, as well as from their disposition to provide some time before hand for an unexpected payment, that a very increased quantity of Bank Notes may be as necessary as a smaller quantity might have been at another time. I conceive, therefore, that, if in such a period the Bank of England should refuse even to increase their circulation, the effect may be the same, or even greater than their actual reduction of them at another period. I conceive, undoubtedly, that the refusal of the Bank to discount, with a view of reducing their Paper circulation, or of preventing its increase at periods when pressing applications for discounts were made to them, have often been manifestly followed by a great increase in the discounts upon Navy and Exchequer Bills, and upon India Bonds, and even by a fall in the price of Stocks. I apprehend, however, that the effect of such refusal in the Bank, is not so easy to be discerned, in respect to any fluctuation in the Stocks, because many other causes may co-operate in influencing their price.
Q. Have you, in point of fact, remarked, that when the Bank has reduced or limited its discounts within the amount which the convenience of trade required, a rise in the discounts of Government securities, and a fall in the price of Stocks has taken place?
A. I have a general recollection that, early in the last autumn, there was a considerable demand for discounts at the Bank, only a small proportion of which was complied with, and that there was also a great rise on some species of public securities, and I believe also a fall in the price of Stocks. I more particularly know, that at a period ending some weeks previous to the Order of Council, Exchequer Bills payable in three months, and bearing about 5¼ per cent. interest, were sold on Government account to the extent of above a million sterling; the interest which was made by the holder being thus about 6¼ per cent. I also know, from perfect recollection, that for two days antecedent to the Order of Council, the applications to the Bank for discounts were unusually great, and that a very small proportion of them was complied with, and also that the discounts on Exchequer Bills rose, on the two days preceding the Order of Council, to about 3 and 3½ per cent. per ann. yielding to the holder about 17 to 19 per cent. per ann. interest and that the Stocks fell at the same time; the difference between the price of Stock sold for Money, and the price of the same stock sold for a period distant by a few weeks, was such, as to make the interest paid by the sale and re-purchase of the Stock amount to nearly the same rate. On the Monday succeeding the Order of Council, a very large discount was made by the Bank, with a view of relieving the Bankers from any run upon them, which the alarm arising from the event of the preceding day might occasion; I believe, however, that no such run took place. The price of Exchequer Bills continued on that day nominally as before, but I believe that few or none of them were sold. On the next day, when some degree of liberality in discounting again took place on the part of the Bank, they fell to 2½ per cent. and the Stocks rose perceptibly. The difference between the ready Money Stock and the price of a future day was such as to afford, if I recollect right, an interest of 8 or 10 per cent. I believe there has been, since that time, some degree of fluctuation in respect to the supply of discounts from the Bank, and a somewhat corresponding fluctuation in the price of the public securities I have already named. It appears to me, that the high rate of discount on Exchequer Bills, which I mentioned to have taken place on Friday and Saturday preceding the Order in Council, was the consequence of the disappointments of the persons applying for discounts on the preceding Thursday, which is the chief discounting day at the Bank; and also, that the fall in the discount of the Exchequer Bills on the Tuesday, was the consequence of the enlarged discount on the Monday; and therefore that the diminution in the value of securities, and the high rate of interest upon them, may be considered rather as being the effect of the conduct of the Bank, than as the cause of the applications being made to them for discounts.
Q. Did the news of the Order in Council, produce any considerable shock on public credit in the metropolis?
A. I conceive the distress, for some time preceding it, and especially for two days before, to have been so great, that the relief given by the unusual discounts on the Monday, more than compensated, in the minds of most of the mercantile world, for any alarm occasioned by the stoppage of the Cash payments of the Bank. It was the want of Bank Notes, and not of Guineas, that had been felt; and no anxiety seemed to be entertained in the city, if Bank Notes were brought into circulation, respecting the manner of contriving to effect the smaller payments.
Q. Must not the reduction of Bank Notes considerably below the amount which the convenience of trade requires, have a tendency to cause manufacturers throughout the whole of Great Britain, to limit their manufactures and turn off their workmen?
A. I should think undoubtedly.
Q. Have any facts fallen within your knowledge, in actual confirmation of that opinion?
A. I recollect to have heard a mercantile person remark, that he had plenty of goods for sale; that he had also a sufficient demand for them abroad, but that a great many of the labouring manufacturers who made those goods had been turned off for some time past, and an increased number just before the Order of Council, on account of his not being able to afford the usual credit, since he could not obtain his usual discounts.
Q. Has not the profit to be made from Cash in the metropolis, for the last year or two, been such, as to afford a strong inducement to all persons having demands on foreign countries, to get in their debts as soon as possible?
A. I conceive the interest on public securities has been so high, and the want of Money so great, as to have been likely to have induced people to urge their correspondents abroad to make them more than ordinary remittances.
Q. Do you recollect the resolution of the Bank of the 31st of December 1795, respecting discounts?
Q. Was there, at that time, any extraordinary application to the Bank for discounts, arising from any difficulty in procuring private discounts?
A. I believe that private discounts had at that time nearly ceased, if not entirely so; I do not mean by private discounts, the discounts of Bankers, who in general discount for their customers in all periods; I mean, by private discounters, individual merchants, or monied men, who lend out Money upon Bills, for the sake of the interest which they obtain by those Bills.
Q. Were such private discounts, to any considerable amount, previous to December 1795?
A. I believe at some periods, since the war, they were; but I cannot recollect the periods exactly.
Q. Do not private discounts ordinarily diminish in time of war, when considerable profit may be made by floating Government securities?
Q. Must not the Bank therefore, in such times, ordinarily supply the defect of private discounts, in order to prevent inconvenience to the Public?
A. Unless it is supposed that a considerable diminution of mercantile transactions takes place in time of war, it appears to me necessary that the Bank should increase their discounts.
Q. Had the resolution of the Bank in December 1795, any effect to create any difficulty or alarm?
A. I do not recollect that any very particular alarm was excited: the Bank, antecedent to that resolution, had, in several ways, narrowed their discount; and I believe it was chiefly considered as an intimation, that they were about to limit them still more by this new regulation.
Q. Is any inconvenience likely to arise from the uncertainty and fluctuation in the conduct of the Bank, respecting their discounts?
A. Undoubtedly it must tend to create an occasion for an increased number of Bank Notes: for those who fear disappointment on the day on which they asked for discounts, will be likely to provide some time before for their expected payments; and Bankers, in proportion as they are in a state of uncertainty, are inclined to furnish themselves with a larger quantity of Bank Notes. I do not conceive that the resolution above-mentioned implied any fluctuation in the system of the conduct of the Bank, but rather the contrary; it nevertheless occasioned some uncertainty to each individual merchant, as to his means of supply; and I rather think it operated as an intimation to the commercial world at large; I mean, both in the metropolis and in the country, that there was danger of increasing distress.
Q. Supposing Government had, in January last, repaid to the Bank three millions sterling, do you imagine it would have put the Bank in a state of perfect security?
A. I should conceive that it would clearly have made no difference as to the quantity of their Cash. I do not understand whether it is meant, in this question, to assume, that if three millions of Government debt had been paid, the Bank were to suppress in consequence three millions of Notes. If they had taken occasion, at the time of this repayment, to make such a suppression, I conceive, as I have before explained, that they would prejudice essentially all commercial credit, and create a distress as well as an alarm, which would be likely to increase the run upon them for Guineas; but if, on the other hand, they should grant to the commercial world an equal quantity of discounts, that the Bank would then be in much the same circumstances in which they stood antecedent to such repayment.
Jovis, 6odie Aprilis 1797
Henry Thornton, Esquire, a Member of the House; called in, and further Examined.
Q. Since your last examination, have you received any further information respecting the quantity of Notes, or of Cash, circulated in the country?
A. I have, from Scotland. I am assured that the Notes now in circulation there, are very much the same as they have been for six months past, and that the amount of the Gold in the possession of the Banks may be computed to be much the same also; consequently, it is presumed, that about £60,000, of Gold which has been lately drawn from the Banks there, and which is about the same sum which the Banks have drawn from London, is not now in circulation there, but is hoarded through fear. The amount of the Paper circulation in Scotland, is computed to be from about £1,200,000 to £1,500,000, and the quantity of Guineas usually circulated, is computed to be not more than £50,000. Seven eights of the Notes is said to be twenty and twenty-one shilling Notes: five shilling Notes have also been lately issued, which are in very great demand, and it is said to be hoped, that the time of their legal circulation may be extended.
Q. In your former examination, you stated some differences between the situation of the Bank of England, and the Country Banker; are there any others, which suggest themselves to your mind; and also, are there any differences between the situations of the Bank of England, and of a Banker in the metropolis or elsewhere, who does not issue “Notes payable on demand”?
A. There is one very obvious and important difference between the case of a Country Banker and that of the Bank of England, to which the existence of the Bank of England itself gives rise. When a Country Banker is in want of Guineas, provided he has no supply of Guineas in the neighbourhood, which in times of alarm will often be the case, he is sure of a resource in the Bank of England: he has only to write to the Banking-house in London with whom he does his business, and to desire that they will send him such quantities of Guineas as he wants by the return of the mail coach: the Country Banker, therefore, has only to provide himself, either with a credit with his London correspondent, or with effects in his hands, or with some kind of property, such as Stocks, Exchequer Bills, or discountable Bills, quickly convertible into Bank Notes, and he may then consider himself as secure of having as many Guineas as his occasions may require. I here assume, that the Bank of England makes payments of Cash as usual. In case the Bank of England should fail in its Cash payments, I would here also remark, that a Country Bank, by suspending its Cash payments, suffers little or no discredit; and, as it appears from the circumstances of the present times, is in no respect very particularly distressed: on the contrary, when the Guineas of the Bank of England are nearly exhausted, it has no repository of Cash, as the Country Banks have, to which it can resort. I apprehend, that there is no quarter to which it can apply, nor any means which it can use, so as to obtain a considerable supply of Guineas, and that its best, and perhaps its only chance of again attracting Guineas to itself, is by strengthening general credit. It may, no doubt, contribute to a favourable balance of trade, and remotely therefore to an accumulation of Guineas in its own coffers, by lending a general aid to commerce; and it may also, more directly and immediately, promote the return of Guineas into its coffers in a time of alarm, by endeavouring to diminish that alarm; which I conceive it may do to a certain degree, and in certain cases, by a considerable increase, rather than by a diminution, of its Bank Notes: I apprehend this is a very important point, in which the Bank of England differ both from a Country Bank, and from every private Bank.
EVIDENCE GIVEN BEFORE THE LORDS’ COMMITTEE OF SECRECY APPOINTED TO ENQUIRE INTO THE CAUSES WHICH PRODUCED THE ORDER OF COUNCIL OF THE 26th OF FEBRUARY 1797*
Die Jovis, 30° Martii, 1797
Henry Thornton, Esquire, a Banker of London, being attending, he was called in, and examined
Q. Have you Reason to think there has been a great Increase in the whole Scale of Publick Income and Expenditure?
Q. Has not a similar Increase taken Place in the Scale of Private Expenditure?
A. If you include several Years past, it certainly has.
Q. Has there not been of late Years a Rise in the Price of Provisions and of Labour?
Q. Has there not been a great Extension in the Manufactures and Commerce of the Kingdom?
Q. Have not the Circumstances, stated in the preceding Questions and Answers, occasioned a Demand for additional Means of Circulation?
A. Before I reply to that Question, it may be proper to express distinctly what I shall understand by Means of Circulation. I conceive it to mean, First, Coin of every Sort; Secondly, Notes to Bearer payable on Demand, whether issued by the Bank of England or by Country Bankers, which I consider as exchangeable at all Times for Cash; and Thirdly, Bills of Exchange. In calling Bills of Exchange a Means of Circulation, I do not consider them equally so with the other Two Articles I have mentioned, since they ostensibly serve the Purpose of ascertaining Debts between Buyer and Seller, and of pledging the Acceptor to a punctual Payment, and are often created chiefly with that View, and are used but sparingly and occasionally as a Mean of Circulation. I conceive that the Number of Bills of Exchange which may happen at any Time to exist, bears no necessary Proportion to the Magnitude of the existing Trade, although, I conceive, that the Use of them in Payment does bear a pretty regular Proportion to the Quantity of Commerce For instance, at Liverpool and Manchester all Payments are made either in Coin or in Bills of Exchange. The Holders of these Bills (since they themselves profit by the Detention of them, the Bills growing more valuable in Proportion as they become nearer due) keep them in their Possession in larger Quantities than they would Notes to Bearer on Demand, the Profit of the Detention of which last goes to the Bank which issues them, and not to the Person who has them in his Possession.
I would now reply to the Question put to me, by answering, that I conceive the increased Trade of the Country has undoubtedly caused a Necessity for an increased Use, either of Bills or Notes to Bearer in Payment; and also that the increased Scale of Expenditure of the Country must have caused, as I conceive, an increased Use chiefly of Notes to Bearer upon Demand, though partly also of Bills of Exhange, and likewise, in some Degree, perhaps of Cash, especially in those Times when Notes to Bearer on Demand come into Discredit. In general, I consider Guineas as furnishing the Means of paying small or broken Sums; and as bearing much the same Relation to Notes which Shillings do to Guineas, and that the Occasion for the Increase of their Quantity does not necessarily keep Pace with the other increased Means of Circulation.
Q. How far have the additional Means of Circulation, stated in the last Answer to have become necessary, been furnished in the Metropolis, either by an increased Proportion of Bank Notes in Circulation, or by any other Means, so as to keep pace with the enlarged Scale of Expenditure, and with the increased Employment of acting Capital?
A. No Notes pass currently in Payment in the Metropolis except those of the Bank of England; nor is it usual there to make use of Bills of Exchange in Payment, as is done often in the Country. Of the Quantity of Bank of England Notes which may have been issued now and at former Periods, I can have no authentic Information; it is commonly understood, however, to have lately decreased; and I should conceive that the high Rate of Interest for Money amounting from Eight to Ten, and even Eighteen per Cent. which has been evident in the Price of Exchequer Bills, India Bonds, and other such Securities, soon convertible into Bank Notes, has arisen in a great Measure from the Scarcity of Bank Notes, the Price paid (if I may so express it) for the Purchase of Bank Notes naturally increasing in Proportion as those Notes are few in Number and in great Demand. In consequence of the assumed Scarcity of Bank Notes, it has been in the Contemplation of several Persons, and particularly of Bankers, to endeavour to provide some additional Means of Circulation for the Metropolis; which it has been thought, that if the Bankers would agree to take, they might become generally current in the Metropolis; but some Doubts have been entertained whether a Project of this Sort would answer, unless the Bankers should guarantee the Notes of each other; in which Case it is a Question, whether it might not be an Infraction or Evasion of the Bank Charter. I consider these Circumstances as Proofs that the Bank Notes in Circulation have not borne a due Proportion to the Wants of the Public.
Q. If, instead of a Decrease of Bank Notes in Circulation, assumed by the last Answer to have taken Place, the Quantity of those Notes had remained as they were, without material Increase or Decrease, would not the Inconveniences resulting from the forced Sale, and consequent Depreciation of other Securities, have then also prevailed, though in a less Degree?
A. I conceive they would; and that the increased. Transactions of Commerce in the Metropolis must have required an Increase of the Bank Notes issued. These being the only Means of Circulation in the Metropolis; excepting Guineas which cannot be used in any considerable Dealings.
Q. What Effect would any considerable Augmentation in the Quantity of circulating Bank Notes in the Metropolis have produced?
A. I conceive that the Increase of their Quantity ought to depend not only on the increased Quantity of Trade in the Metropolis, but also on the Occasion for them which might arise from other Causes.
If, for Instance, general Credit should be impaired while Bank Notes sustain their Credit, it follows that there would be a Disposition in many People to hold Possession of Bank Notes, although at some Loss to themselves, who at other Times might be satisfied with the Possession only of Bills of Exchange; for, the Convertibility of Bills of Exchange into Bank Notes being more doubtful, prudent Persons would provide themselves if possible with Bank Notes for their expected Payments, at a Time perhaps much antecedent to the Time of Payment. I conceive, therefore, the Quantity of Notes which it may be proper at any time to issue, to depend much on the State of the Public Mind, that is, on the Dispositions of Persons to detain them. If indeed, a much larger Quantity were issued than would remain in Circulation, I should imagine that the Effect of such excessive Emissions might be to draw Guineas out of the Bank of England.
Q. How far are you of Opinion, that an Increase in the Quantity of circulating Bank Notes, adequately proportioned to the increased Wants and Demands above described, would, or would not, have tended to an increased and inconvenient Call upon the Bank for the Issue of Cash?
A. I think that an increased Quantity of Notes, proportioned to the increased Occasion for them, must tend to prevent a Demand for Guineas rather than to promote it; and if the Quantity of Notes issued should be very considerably less than the Occasion of the Mercantile World requires, I should think a Run upon the Bank for Guineas would be the Consequence; for when Trade is much distressed and Failures are expected, a general Distrust is apt to be excited; and as the Cause of such expected Failures is not distinctly known to be the Diminution of the Bank of England’s circulating Notes, there are likely to be at least some Persons in the Country who may wish not only to be possessed of Bank Notes for their Security, but even of Guineas. I further think, that a Scarcity of the circulating Medium of the Metropolis tends to induce some of the Country Bankers, who are the most opulent and respectable, to forbear from issuing their Bank Notes, through the Apprehension of Mercantile Distress: And their Forbearance to issue Country Bank Notes is naturally followed by a considerable Increase in the Use of Guineas, all which are drawn out of the Bank of England.
Q. Is it not for the Interest of the Bank of England, as well as of every private Banker, to issue as many Notes as they possibly can, consistently with due Attention to their Credit and Stability?
A. I conceive that to be self-evident.
Q. Will you proceed to state how far any additional Means of Circulation have been furnished by the Country Banks to keep Pace with the increased Demand described in the preceding Questions and Answers?
A. I have no distinct Information as to the Quantity of Bills of Exchange used in the Country, and which, as I have before stated, in many Cases, answer the Purpose of Notes to Bearer on Demand, and in some Degree also may spare the Use of Guineas. I conceive, however, that the Use of Notes and Bills of Exchange depending in a great Measure on the Custom of each particular Place, which does not often vary, the Circulation of Notes and Guineas when combined must, generally speaking, supply the Means of Circulation in those Parts where Notes and not Bills of Exchange have been ordinarily current, as a Means of Circulation. I am well assured, that in many Parts the Notes of Country Bankers have, since the Year 1793, diminished rather than increased, and that they are in particular much decreased at this Time. I infer, therefore, that the Means of Circulation have been supplied, to a considerable Extent, by Guineas.
Q. Will you assign the Reason why you state the Year 1793 as the Time at which the Diminution of Country Bank Notes began to take Place?
A. That was the Period of very considerable Failures in this Country, and especially of the Country Bankers. Having been desired to enquire into the State of Paper Circulation in the Country, I some Days ago wrote to about Fifteen or Sixteen Country Bankers in different Places, with whom I was either acquainted or connected, and I desired them to state to me the comparative Amount of their Notes payable to Bearer on Demand, naming particularly to them the Period preceding the Failures in 1793, and also the Period subsequent to it as well as the present Time.
Q. Will you state the Result?
[The answer to this question repeats verbatim the first answer given to the House of Commons Committee on April 1st, from the paragraph beginning “First, I will state . . .” to the end of that answer (pp. 284-5 above), only adding at the end the following paragraph.]
The Paper Circulation of Scotland continues much the same as it was before the Failure of the Cash Payments of the Bank of England.
Q. When the Country Banks are in general in a high state of Credit, has it not been the Practice of the Country Bankers to discourage the Circulation of Bank of England Notes in the Country, in order to increase their own Circulation?
A. I rather think it has; I am well convinced that very few Bank of England Notes have in ordinary Times circulated far from London, because if they had so, the Banking House with which I am connected, receiving, as they do, large remittances of Paper of various Sorts from the Country, would have received sometimes Bank Notes among them, and would also probably have been desired sometimes to send Bank of England Notes into the Country, neither of which has been the Case in any considerable Degree except indeed that since the Stoppage of the Cash Payments of the Bank, we have sent, I think, between 40 and £50,000 in Bank Notes, some Part of which have been 5l. Notes, the rest chiefly 20s. or 2l. Notes.
Q. Did not the First Alarm, on the late Occasion, with respect to the State of general Credit, take its Rise from some of the Country Banks?
A. A considerable Alarm was created about Three Weeks before the Stoppage of the Cash Payements of the Bank, through the Suspension of the Payments of the Newcastle Banks. But a considerable Distress in the Mercantile World prevailed antecedently to that Time.
Q. When this Alarm first prevailed in the Country, did the Country Bankers apply to their Correspondents in London for a Remittance of Cash or Bank Notes?
A. It did not happen to the House with which I am connected, to have any very considerable Demands for Cash made to them in consequence of the Stoppage of the Newcastle Banks, and still less for Bank Notes; the Application for Guineas to us, was from only One or Two Banks in the Neighbourhood of the Newcastle Banks, and also from Scotland, which Demands we had partly anticipated; the Demand for Guineas subsequent to the Stoppage of the Newcastle Banks was but small and gradual, so far as respected the House with which I am connected, the Effect of those Stoppages seemed not to be felt in some Parts on the Western side of England, till some Days after the Issue of the Order in Council.
Q. Did the late Alarm of Invasion occasion a great Demand of Guineas from the Country Banks?
A. I have always understood that it did so at Newcastle, and I presume it to have been probable that it did so, more or less, at other Places.
Q. Are you of Opinion, that the Check given to the Credit of some of the Country Banks in 1793, the subsequent Diminution of Country Bank Notes payable on Demand, the Effect of the late Alarm of Invasion, and the other Circumstances mentioned by you, have, altogether, occasioned the carrying of a considerable Quantity of Guineas from the Metropolis into the Country, beyond the Proportion which had been before employed in the Country?
A. I am not well informed as to the Transmission of Guineas at any particular Time from London into the Country, but I am well persuaded, that, in Point of Fact, a very considerable Quantity of Guineas are in various Parts of the Country at present. I have received Information in the Course of Business, from four or five Bankers in the Country, of their having either a Sufficiency or a Surplus of Guineas, and I have heard no Complaint lately of the Want of them. As the Notes of the Country Bankers to Bearer on Demand, now in Circulation, appear by the foregoing Statement to be at this Time particularly small, and as I have learnt from many Places that Guineas are abundant, I think it fair to infer, that the Quantity of Guineas now in the Country is, on the whole, likely to be considerable.
Q. Do you think, that the Distress in the Mercantile World, which you say preceded the Alarm from Newcastle in February last, did occasion an increased Demand for Cash on the Bank?
A. I conceive that it may have done so in the Manner which I before partly stated. The respectable Country Bankers knowing the Distress in London, and, anticipating future Mischief, restraining (as I well know in some Places) their Paper Circulation. The general Apprehensions of the Public being also aggravated by the Distress of the Commercial World, might also tend to produce in some Persons a Disposition to hoard Guineas; and it is obvious, that if only a few Persons of timid Minds choose to invest a large Portion of their Property in Guineas, instead of using them merely as that Means of Circulation for which they are intended to serve, that the Effect will be considerable.
Q. Did not the great Increase of Commerce in this Country for the last three Years, require a proportional Increase of Capital in the Commercial World, and was not that Want of Capital one of the Causes of the Distress amongst Commercial Men?
A. I conceive that it may have been so.
Q. Does not any given Quantity of Commerce in Time of War, require a greater Capital to carry it on, arising from the increased Expense of Freight, Insurance, and Mercantile Charges, than the same Quantity of Commerce in Time of Peace?
A. Undoubtedly it does.
Q. If any considerable Proportion of the Bank Advances to Government had been rapid in the Course of the last two Years (suppose to the Extent of 4 or 5 Millions), are you of Opinion, that a Reduction in the Quantity of Bank Notes to that Extent could have been made without occasioning great Public Distress? and give your Reasons?
A. I am clearly of Opinion that a Reduction of Bank Notes to the Extent of £5,000,000 less than their hitherto existing Amount, which I understand may have been about 9 or 10 Millions, would either produce the Substitution of other Paper nearly to the same or perhaps to a still greater Amount, or, assuming no such Substitution to take place, that it would produce very general, if not universal Failures in the Metropolis. In the Case supposed, one Half of the Bank Notes now in Circulation are to answer the Purpose that is now answered by the Whole; I apprehend that the Bankers of London may on a rough Estimate be supposed to have 4 or 5 Millions of Bank Notes, and possibly rather more, in their Possession, and that is the Sum which they deem it prudent if not necessary to keep for their current Payments; in whatever Degree they can reduce that Sum, they save in ordinary Times 8, 10, and occasionally 18 per Cent per Annum, on the Sum reduced, so that it is obvious that they do not keep more than is necessary. If the supposed Diminution of Bank Notes were to take place, I may consider the General Body of Bankers to be provided only with about One-Half of their accustomed Quantity of Bank Notes; some of these, however, would in that Case be able to possess themselves of more than Half, and others of less; the certain Failure therefore of those whose Resources are the least, would be the Consequence, and the Failure of one Banker in such a State of Things would be quickly followed by that of others.
I have as yet said nothing of that Part of the Bank Notes in Circulation which would be in private Hands I conceive, however, that Bankers would suffer at least as great a Diminution of the Sum possessed by them as private Persons, for as the Occasion for Bank Notes, and also the Alarm would in such a Case be as great or nearly so in the Minds of many private Individuals as in the Minds of Bankers, and as private Individuals would be more able each of them to possess themselves of a small Quantity of Bank Notes, by selling at whatever Loss any Property that was marketable, I think the private Persons would retain more than their accustomed Half of the Notes in Circulation. The Circumstance of Government paying off their Debt to the Bank, which has been supposed in the Question put to me, would evidently, as I apprehend, make no Difference in any Part of the Case which I have described. The Debt which Government would pay to the Bank would be paid by a Loan from the publick, and would be raised immediately from the Banking or mercantile World. I apprehend that the very Negociation of a Loan in Times of great Difficulty and Distress, since it occasions the Payment of large Instalments on particular Days, would be the Cause of peculiar Apprehensions antecedently to those Days, and of very eager Endeavours in some Bankers to provide Bank Notes for the Payment of whatever might be their expected Share of the Instalments, which Share they would not know distinctly before Hand, since they are not informed of the Proportion of the Loan which each Customer may have Some Bankers might be therefore led through their Fears, or through unavoidable Mistakes in their Calculations, to provide more Bank Notes for their expected Payments than might prove necessary, while others might provide less, and might be in peculiar Danger of failing in their Payments in consequence. I consider that there is always an Occasion for some Increase in the Emission of Bank Notes at the Period antecedent to each Instalment, on a Government Loan, on Account of this Uncertainty which the Bankers feel in respect to the Drafts which will be drawn upon them. I consider also that if a Loan were made by Government, with a View to pay the Bank, and if the Bank, in consequence, were to lend the same Sum to the Merchants, it would merely be like a Transfer of their Debt from one Person to another, and that the Bank would not be relieved by it. On the other Hand, if we suppose the Bank not to lend out the same Sum to Merchants, but to take that Opportunity of reducing their Paper Circulation, then the probable Mischief of such Reduction would, as I think, be what I have already stated.
Die Veneris, 31° Martii 1797
Henry Thornton, Esquire, being attending, he was called in, and examined.
Q. You having stated, that in Time of general Mercantile Difficulty and Apprehension of Failures, it is the Custom of the respectable and prudent Country Bankers to lessen or suppress the Quantity of their Notes payable on Demand, what is the Reason that, on the same Principle, the Bank of England ought not to lessen their circulating Notes at the same Time?
A. I take the Case of a Country Banker and of the Bank of England to be in several Respects extremely different, and that the Explanation of the Differences I allude to in their Circumstances, will best furnish an Answer to that Question.
First, I would observe, That a Country Banker who issues Notes to Bearer on Demand has, in many Cases, also several other Branches of Business which he follows, and which are very important to him. He has perhaps large Deposits in his Hands from his own immediate Customers, amounting in some Cases possibly to many Times the Sum in Notes which he has in Circulation; and he is liable to be called upon at any Time for immediate Payment of the whole Amount of these Deposits His Customers, however, having Confidence in him, and being personally known to him, are not very likely to take Alarm, unless some special Cause of Alarm should be given them; his Notes on the contrary circulate through the Hands of Strangers, and, consisting in small Sums, they are often in the Hands of the lowest Class of People. These Notes, moreover, are often confounded in the Minds of the Holders of them, with the Notes of other Bankers of less Credit; insomuch, that in the Event of the Failure of any neighbouring Bank, it is probable that the most respectable Banker in the Country would suffer some Run upon him from the Holders of his Notes. In order, therefore, to prevent his Credit from being wounded in that Part where it is most vulnerable, a prudent Country Banker, in Times of apprehended Danger, is apt to lessen or suppress his Notes to Bearer on Demand, for the Sake of better securing his Credit in other Respects. This is one Circumstance in which a Country Banker differs from the Bank of England. The Bank of England Notes possess undoubted Credit in the Metropolis and its Neighbourhood, where alone they chiefly circulate, and are not confounded with the Paper of other Banks. It is obviously not through any Distrust of the Bank of England Notes that any considerable Quantity of Guineas has been demanded for them, and that there is no Occasion, therefore, in Times of Danger to suppress them, for the Reason operating in the Minds of the Country Bankers which I have just stated. I would remark that, in the next Place, the Country Banker withdraws his Notes in a Time of Danger, partly because they expose him to a sudden Demand for Guineas in the following Manner: Rival Banks, when in want of Guineas, have only to possess themselves of his Notes, in order to obtain a Supply of Cash for themselves, which, when his Notes are every where in Circulation, are easy to be obtained, and he is thus exposed both to the Expence and the Risk of supplying Guineas to other Banks who have not sufficiently supplied themselves. If he withdraws his Notes, the rival Banks cannot so easily obtain Guineas from him by the Means of Guineas paid for the Deposits of his Customers; for his Customers will not assist them in any such Attempt. In this respect, the Case of the Bank of England is widely different. I here assume indeed, that the Bank of England will in no Case totally suppress their Paper Circulation; and, if they do not, it is obvious that any one who has Property which he can sell for what is called ready Money, (that is Bank of England Notes,) may possess himself of Guineas; and thus the Bank of England, as long as they issue Notes at all, are liable to be drained of their Cash just as much as any Country Bank that is the most exposed by his Paper Circulation. Moreover, the Bank of England are liable to have Cash demanded of them for the Amount of whatever may be their Deposits, and for all the Sums which they discount also, assuming that they continue to discount at the Rate, for Instance, of £100,000 a Day, they are liable to a daily Demand for Guineas to that Amount; and this Demand may be made upon them by Persons immediately connected with Country Banks who want those Guineas, without the Bank being able to prevent it; for, from the Extent of their Transactions, and from the Effect of the general Rules which they lay down, from the little private Attachment which can be supposed to be between them and their Customers, and, above all, from their being considered as the chief Repository of Cash on which every Individual in the Country supposes himself to have a Right to draw, they are, through the Necessity of their Situation, obliged to furnish Guineas to all the Persons who may be in Want of them. As no Reduction of their Notes can remove from them this Hardship, they have in this Particular no such Inducement to lessen their Paper Circulation, as the Country Banker has.
In the next and last Place I would remark, that when a Country Banker lessens or suppresses his Notes payable to Bearer on Demand, either some other Kinds of Paper or Guineas naturally supply their Place, and no general Distress results from such Conduct of one individual Banker: He may contribute possibly, by too great a Reduction of his Business, to produce general Commercial Difficulty, but the Advantage in the Way of Ease and Security, and, perhaps, of Profit also, which he individually derives from the Suppression of his own particular Notes, may be greater than his Share of the Disadvantage which results from his own particular Conduct. In this respect, the Case of the Bank of England is totally different. When the Bank of England materially lessens or suppresses its Notes, there are no other Notes, as I said before, which can supply their Place. Their Place, indeed, may be supplied partly by Guineas; but these Guineas must be furnished by the Bank of England itself; the Distress which the Suppression of Bank of England Notes, to any considerable Degree, causes in the Metropolis, produces Distress through the whole Kingdom: It is the Means, as I before explained, of producing the Suppression of much of the Paper of the Country, and a consequent Demand for Guineas from the Bank; in short, the Suppression of the Bank of England’s Paper, to any considerable Extent, must, unless some other Paper is substituted, in my Opinion, pull down the Price of Exchequer Bills, of India Bonds, and other Government Securities, which will be sold by those who possess them, in order to secure a sufficient Quantity of Bank Notes to carry on their Payments, and which a Variety of Bankers will be selling at the same Time, each endeavouring, though in vain, to possess himself of the notes held by the others. It must produce, therefore, Discredit to the Government, a consequent Distrust in the Minds of the Public, who will not understand the Cause of this Depreciation of the Stocks; it must produce, at the same Time, Commercial Failures, and an Appearance of Bankruptcy, even in Times when the Individuals in the Nation, and the Nation itself, might be rich and prosperous; and in the general Alarm and Difficulty which must ensue, the Demand for Guineas must of course rise, and perhaps to a considerable Height: In this Manner I think that the Bank of England, by its powerful influence on the Affairs of the Country, must, by the Suppression of its Notes, both prejudice the Country, and materially involve itself.
I conceive that the Principle of lessening the Paper Circulation of the Bank, in Proportion as Difficulties threatened it, and as Guineas were drawn out, may possibly at its first Origin have been a prudent Principle, for the same Reason that it is now a prudent Principle in the Country Bankers; but that since the Bank of England have obtained the Monopoly of supplying the Metropolis with its whole Means of Circulation, and have, by their superior Credit, excluded entirely all other Paper, and have also bound themselves, as far as long Custom can bind them, to a Number of General Rules, such as that of discounting daily for the Public; and since they have also become so considerable, that their individual Conduct operates upon the Credit of the whole Nation; it is no longer prudent in them to attempt to pursue their own individual Interest, by any Means which are contrary to the general Interests.
Q. Do Country Bankers, notwithstanding the peculiar Difficulties which you have stated they are exposed to, usually proportion the Number of their Notes to the Demand which they know is likely to be made for them in Payment of Rent and other large Remittances?
A. In ordinary Times, I conceive they do.
Q. In One of your Answers, you suppose £10,000,000 of Bank Notes to be in Circulation; will you explain how far that Amount is equal in its Operation as a Means of Circulation when compared to the same Quantity Five or Ten Years ago? and also how far you think it is equal to the increased Demands of the Kingdom described in the preceding Questions and Answers?
A. I should think that the increased Expenditure of the Country, and the very large Transactions on Government Account, which a State of War occasions, may (exclusively of the Distrust of other Paper, resulting from the War) occasion an increased Want of Bank of England Notes. I apprehend that in the Transactions of Government many Bank Notes are used, which, strictly speaking, are not in Circulation; and I have before stated, that during the Time of a Loan, a larger Quantity of Notes than usual appears to me to be wanted by the Public. I think, however, that the chief Cause of the Want of an increased Number of Bank Notes arises from the Distrust of other Paper, and in particular I conceive, that, at the present Time, a considerable Increase of Bank Notes is wanted for the Supply of the Country, and also as a Substitute for Guineas in many Places, for I do not find that Country Bankers are much disposed to become the Issuers of 20s. Notes on Account of the heavy Penalties to which the late Act for permitting their Issue is supposed to subject them, and, moreover, they refrain from issuing £5 Notes, because there is now no general Repository from which they can obtain Guineas in case the Notes should come in upon them. For all these various Reasons, I conceive there is an urgent Occasion for an Increase in the Issue of Bank of England Notes beyond the Amount to which they stood Five or Ten Years ago.
I cannot, however, calculate what that Increase ought to be, but I conceive it ought to be considerable.
Q. Supposing the Bank of England, for the Purpose of diminishing the Quantity of Bank Notes in Circulation, or from any other Motive, to reduce their Discounts considerably below the Demand for Discounts, what would be the Effect as well in the Metropolis, as with respect to the Country Banks, and the Commercial and Manufacturing Towns?
A. I should think there would be no great Difficulty in answering that Question, if the unnaturally low Interest of Money resulting from the Usury Laws which confine the Rate of discounting at the Bank to 5l. per Cent. did not perplex the Question. I am afraid that in the present Times, and supposing also the Stocks to continue at nearly the present Price, there might be a much greater Disposition to borrow of the Bank at 5l. per Cent. than it might become the Bank to comply with. I apprehend, however, that, generally speaking, the too great Limitation of the Bank Discounts, by producing too great a Limitation of the Bank Notes in Circulation, would draw after it the evils which I have already pretty fully described. I think the Country has a common Interest with the Metropolis in this respect; I conceive it is not the Limitation of Discounts or Loans, but that it is the Limitation of Bank Notes or of the Means of Circulation that produces the Mischiefs I have spoken of, and that, whether the Bank lend more to Government, and less to Individuals, or less to Government and more to Individuals, the Quantity of the Bank Paper which comes into Circulation, and therefore the Effect upon the Public also, will be much the same. Indeed, I consider the Government in the light of one great discounting Customer, to whom the Bank lends Money just as it does to Individuals, but with this Difference, that it lends to Government Sums which are to be repaid at the Distance of Twelve Months, and perhaps a longer Period, while the Sums which it lends to Merchants are, according to the present ordinary Rules of the Bank, repaid in Two Months. I here take for granted, that the Notes which the Bank pays to Government do not remain locked up in the Hands of Government to any considerable Extent, and if they do not, it is perfectly clear to me that they very soon find their Way into the Hands of the Bankers, who are of course the Bankers to those who receive the Payments made by Government. For Instance, I will suppose a particular Banking House to be Bankers to an Army Agent who owes to that Banking House £10,000, it clearly matters not whether that Agent relieves the Banking House of the Load of that Debt, by paying in £10,000, which the Agent himself procures from the Bank of England by discounting, or whether the Agent obtains Payment of £10,000 of Arrears due from Government which the Government by a Loan of the same Nature, though in another Form, obtains from the Bank of England. The Relief granted to the Bankers in general, and to the Commercial World and to the Publick at large, is much the same, in my Opinion, whether the Bank of England’s Paper (which I say is necessary as the Means of Circulation) comes to the Bankers and the Publick through the Medium of Government from the Bank of England, or whether it comes from the same Bank of England through the Medium of Individual Discounters. I think however that the Merchants, from a superficial View of this Subject, may very naturally be led to suppose that a large Extension of discounts to them must of course operate materially to their own Relief I am clear, however, that if it is duly considered, that in order to effect this Increase of Discount, a Quantity of Bank Notes, equal in its Amount, must first be paid into the Bank by the same Bankers who are in the Habit of accommodating these Merchants with Discounts, and who must reduce their Accommodations to the Merchant in Proportion, that this Misconception must cease. I do not here mean to imply any Opinion on the Subject of the Propriety on other Grounds of paying off Part of the Government Debt to the Bank, and of distributing the Amount of it by the Means of Discount to the Merchants; but I mean distinctly to say, that I conceive such a Measure would not produce any particular and direct Relief to the Merchants I think, however, it might perhaps indirectly produce Benefit to them by improving general Confidence. I have thought it necessary thus fully to explain for what Reasons I conceive, that even an Increase of Discounts, if it is no greater than the Sum paid to the Bank by Government, will, in Fact, be no Increase of Accommodation to the Publick. I apprehend, on the other Hand, that some Diminution of Discounts would not hurt the Merchants, if a Loan were afforded to Government by the Bank to a still greater Extent; for Bank Notes to the Amount of that Loan would come into the Hands of the Bankers, and be lent by the Bankers to the Merchants, instead of being lent to the Merchants by the Bank of England.
Q. Is the Committee to understand, that you conceive the Opinion you have given to the preceding Answer to be consonant to the general Sentiments entertained by the Mercantile Body?
A. I conceive that many Persons of the Mercantile Body having heard that the Bank are likely, in the Event of a Loan made with a View of paying off the Bank, to increase their Discounts, have satisfied themselves to a certain Degree with that Information, not adverting to the Suppression of Bank Notes to as great, or possibly a still greater Amount, which the Bank of England might take Occasion to make at the Time of the Loan. Many of the Mercantile Body seem to me not at all to have considered the Whole of the Subject: Those Individuals of them, with whom I have conversed at large upon this Topic, have been very much of my Opinion.
Q. Is it not generally understood, that the Bank encreased their Discounts to a considerable Amount, subsequent to the Order of Council?
A. They accommodated both the Bankers and others with an unusually large Discount early on the Monday Morning, subsequent to the Order of Council. A Representation was made to them by some of the City Bankers, that they were doubtful whether to open on the Monday Morning, and to make their Payments as usual, unless some extraordinary Discounts were afforded with a View of providing against the Demand on them for Bank Notes, which the Consternation, arising from the Event of the Sunday, was thought, by some of the Bankers, not unlikely to produce. I believe that the Bank also continued their Liberality, though not on the same Scale, for some of the succeeding Days in that Week, but I conceive not through the Whole of it, and I rather think, that antecedently to the Day of the Order of Council, they had particularly contracted their Discounts.
I believe, that during the last Week or Ten Days, they have also enlarged their Discounts.
Q. Is it not generally understood, that if the Bank had not increased their Discounts at the Period mentioned in the preceding Question, considerable Failures would have ensued in the mercantile World?
A. I believe that such an Apprehension did prevail, though I rather think it prevailed more for some Days preceding the Order of Council, than it did for some Days after it.
Q. If the Bankers in London had, in consequence of an assumed Scarcity of Bank Notes, provided some additional Means of Circulation for the Metropolis, what Effect, in your Opinion, would such a Measure have had on the publick Credit?
A. I think the good or bad Effect which it would have had would have depended considerably on the good or bad success of the Plan. An Attempt to substitute in the Place of Bank Notes a new circulating Medium, if unsuccessful, would be likely to produce additional distrust. If, on the other Hand, it should be successful, and should be carried to any considerable Extent, whatever Evil had arisen from the too small Quantity of Bank of England Notes, would, of course, be cured; and if Payments were made with Facility in the Metropolis, and its Fears relieved, I should think that the Circumstance of the Creation of new Paper, through the acknowledged Deficiency in the Quantity of the Paper of the Bank of England, might not produce any considerable Prejudice to general Credit. I assume that the Plan I have alluded to would have been effected without much previous Agitation in the public Mind, and without the Suspence occasioned during the passing of an Act of Parliament.
Q. If, from an acknowledged Diminution in the Quantity of the Paper of the Bank of England, arising from the Pressure of the Times, such a Plan, as has been described in the preceding Question should be attempted, and should prove unsuccessful, would the Failure of such a Plan affect, in your Opinion, the future Interests of the Bank?
A. I am not aware that such Failure would particularly affect them.
Q. Would it not have the Effect of increasing their Credit?
A. I consider the Credit of the Bank of England already so high in the Minds of all those who have Transactions with them, or who are Possessors of their Notes, that it is hardly capable of Increase. I conceive that they have more Credit than they make use of, and that their Credit is material only in Proportion as in some Way or other it is expected to be used.
Q. Did the Pressure of the Times, in your Opinion, render it necessary to diminish the Number of Bank Notes in Circulation?
A. My own Opinion is, that for the Reasons which I have already given, the Pressure of the Times was likely rather to require an extension of their Number.
Q. Have not Merchants as well as Bankers occasionally engaged in the discounting Business, and has not that Business considerably diminished since the Bank have limited their Discounts?
A. There are a few Merchants who at some Periods have been great Discounters, but I believe they have for some Time almost entirely ceased to discount.
Q. Has not the low Price of the Funds and other Government Securities, by affording an higher Interest than Five per Cent., operated as an Hindrance to Mercantile Discounts?
A. It undoubtedly has operated in that Manner very effectually.
Q. Did there appear any Mercantile Distress previous to the Determination of the Bank to limit their Discounts by their Resolution in December 1795?
A. I apprehend there was, and that the large Demand for Discounts made to the Bank arising from that Distress, gave Occasion to the Resolution of the Bank.
Q. Explain what you think gave rise to that Resolution of the 31st of December 1795?
A. I conceive that formerly the Bank of England were accustomed to afford Discounts to as many Persons as brought in Bills which they considered as sufficiently secure, and that their Notes of course at that Time proportioned themselves to the Demands for them; but that the Directors, wishing not to continue the same Proportion between their Paper and the Demands for it which had antecedently existed, established the Rule that has been referred to, with a View of enabling themselves to limit their Discounts, and thus to limit their Paper without Prejudice to the Credit of any individual Discounter. Antecedently to that Time they had established some other Rules tending to facilitate the Limitation of their Paper.
MANUSCRIPT NOTES BY HENRY THORNTON To Lord King’s Thoughts on the Effects of the Bank Restriction (April 1804)
The copy of Lord King’s Thoughts on the Effects of the Bank Restriction. The Second Edition enlarged, including some remarks on the coinage. London, 1804 (viii + 178 pp.), from which the following manuscript notes are reproduced, is in the Goldsmiths’ Library of the University of London. It bears on the top of the title page the inscription “James A. Maconochie 1805” and beneath the title the statement, “The Manuscript Notes in this copy are by Henry Thornton Esq. M.P.” This is supplemented by the further statement in the same hand on the back of the title page, that “This Copy with his own MS Notes was sent to Mr. Scott Moncrieff by Mr. Thornton and given by him to me. J. A. M.” As it appears from Henry Thornton’s Diary that he was acquainted with a Mr. Scott Moncrieff, and as the marginal notes in the volume are at least in part in a hand which resembles that of Henry Thornton, there seems to be no reason to doubt the correctness of the ascription.
The notes are partly written on the margin of the book and partly on separate sheets pasted in. The latter may be in a different hand, but have probably been transcribed from rough notes on loose slips. A number of very short marginal notes, mostly consisting of single words expressing approval of, or doubt about, a particular passage have not been reproduced.
It should be noted that the page references given refer to the second edition of Lord King’s Thoughts, the pagination of which is different from the first edition of 1803.
F. A. v. H.
MANUSCRIPT NOTES BY HENRY THORNTON TO THOUGHTS ON THE EFFECTS OF THE BANK RESTRICTIONS BY LORD KING
THE SECOND EDITION ENLARGED, INCLUDING SOME REMARKS ON THE COINAGE LONDON 1804
TWO SPEECHES OF HENRY THORNTON, ESQ. ON THE BULLION REPORT MAY, 1811
The first of the two following Speeches was delivered soon after the opening of the debate in the House of Commons on the Report of the Bullion Committee; the question then under consideration being the first of the Resolutions moved by Mr Horner, the Chairman of that Committee. The general object of his Resolutions may be stated, briefly to have been, First, to declare what was the standard of the country; secondly, to affirm the depreciation of Bank paper; thirdly, to suggest the limitation of it, as the means of improving its value and preparing for a return to cash payments; and, lastly, also to recommend that the Bank should open in two years. It was chiefly to the third point, namely, the practical measure of limiting the Bank paper, that the first Speech was directed.
The second Speech was delivered after a debate of five days had taken place. The Resolutions of Mr. Horner had then been negatived, and the counter Resolutions, moved by Mr. Vansittart, were under consideration.
The imperfect manner in which the very extended debates on the Report of the Bullion Committee have been given to the public, and the importance of spreading sound opinions on the fundamental principles of the system of our paper credit, are the considerations which have led to the present publication.
It contains the substance of the facts and arguments adduced, as far as they could be recollected, though the order may have been in some degree changed; and a few passages, which appear to have been misunderstood, are rendered more clear.
The substance of these Speeches is submitted more especially to those numerous Constituents, to whose favour the individual who delivered them stands indebted for the opportunity which he has had of expressing his sentiments on this subject before the House;—a subject which has long engaged his careful attention, and on which he has been most anxious to form a sound and dispassionate, as well as disinterested, judgment.
TWO SPEECHES OF MR. HENRY THORNTON
May 7, 1811.
MR. H. THORNTON said, that however ably, as well as fully, the Learned Gentleman (Mr. Horner), who opened this discussion, had treated the subject, he conceived that there were some important points which required amplification; and he should prefer entering on these, to the examination of those numerous and smaller questions respecting the accuracy of the Report of the Bullion Committee, on which the Right Hon. Gentleman who preceded him (Mr. Rose) had principally dwelt. A time would come, when the respective merits of the several propositions intended to be submitted by different members would be brought into minute discussion, and an answer to the Right Hon Gentleman might then, perhaps, be more conveniently given. He trusted the House would agree with him in the propriety of his confining himself, for the present, to great and broad principles; he should apply himself to the spirit of some of the first resolutions now proposed, and to the main point at this moment in issue. That main point was, not whether the Bank should open at any particular time, or any change be made as to the law in this respect, which would be a second consideration; but whether with a view to facilitate such opening if it should be prescribed, or with a view to secure the due maintenance of our standard during the long continuance of the restriction of cash payments, if the continuance should be deemed advisable it was or was not expedient that the Bank should regulate the issues of its paper with a reference to the price of Bullion, and the state of the Exchanges. The Bank and the Bullion Committee were at variance on this leading and essential point. The Committee affirmed, that the quantity of paper had an influence on the price of Bullion, and the state of the Exchanges; all the Directors of the Bank who had been examined, affirmed that it had not. The Right Hon. Gentleman over the way (Mr. Rose) likewise insisted that it had not. “None whatever,” were his words. This was a great practical question. If the Bank had in their own hand the power of improving the Exchange, and lowering the price of Bullion, and did not use it, if they had the means of restoring, or contributing to restore, the standard of the country, and did not at all believe that they possessed it, then it became the House, who had exempted them from the necessity of making payments in cash, supposing it to agree with the Bullion Committee, to take care that the Bank should resort to the proper remedy of the present evil, by interposing some suggestion of their own on the subject.
He would now proceed to prove, that quantity of paper had an influence on the price of Bullion and the Exchanges. There were two steps in this argument First, he had to shew that quantity of paper influenced its value, or, in other words, the relative value of commodities exchanged for it Could it be doubted, on the first mention of the proposition, that the quantity of all articles affected their value? This was unquestionably true of the precious metals, for the augmented supply obtained from the mines of the new world, was acknowledged to have produced that general lowering of the value of money, which had been experienced in Europe for many years. And why was paper, the substitute for gold, to be exempted from this universal law? He had never yet found any man, who, when the simple question was put to him, whether an augmentation of paper had a tendency to reduce its value, or raise that of commodities, had been so singular as to refuse his assent to the proposition. One of the Bank Directors of Dublin, when examined before the Committee on the State of the Irish Exchange, though firmly persuaded that an extension of paper currency had no influence whatever on Exchanges, had been very ready to agree that it must have an effect on the price of commodities, and one of the Directors of the Bank of England had then, if he rightly recollected, made a similar admission.
This point had been conceded only the other day in the House; for in debating the question of granting Exchequer Bills to the distressed manufacturers, it was generally affirmed and understood that the supply of these bills, which would operate in some measure as circulating medium, and would facilitate their obtaining it, would enable them to maintain their prices at a point higher than that to which they otherwise would have fallen. He himself well remembered having in 1796 observed the influence upon prices, which the restriction of the Bank discounts at that period had produced. He recollected to have then heard a West-India merchant, who had failed to obtain from the Bank the whole of his usual and expected accommodation, declare his intention of proceeding in consequence to sell some of his sugar at a somewhat reduced rate; half an hour after which, he heard a sugar-baker express his indisposition to buy sugar in consequence of the same scarcity of money, which he also had experienced. Was it not obvious, that when these two men met in the sugar-market, some fall in the price of that commodity would be the result? When money was generally scarce, an influence of this kind would diffuse itself over all commodities: it was thus, in short, that general prices were regulated; and it was absolutely necessary to set out in such an investigation as the present, with the establishment of some great and fixed principles in the mind; for a thousand points would then become manifest and simple, which otherwise would be contradictory and perplexed. He did not mean to say, that equal quantities of paper would affect the value of equal quantities of goods in an exactly equal degree, under all the varying circumstances which might arise. Far from it. He insisted, however, that augmentation of paper always tended to the diminution of its value, and diminution to its increase. The principle was always operative: its tendency was uniform, though not always productive of an equal effect.
A great fall of prices had at one time been experienced in Dublin, in consequence of the suppression of a large part of the currency of the place, as one of the Irish Bank Directors had incidentally observed.
Mr. H. Thornton admitted that great pressure, and even calamity, might arise from any sudden and very violent diminution of the circulating medium: he had himself complained, of what he thought too great and rapid a reduction of the paper of the Bank of England, in the year 1797, when called upon to give evidence before the Secret Committee of the Lords and Commons on that point. He was as earnest as any man to prevent severity of pressure in any quarter, and having already shewn this disposition in the Bullion Committee, he was anxious to express it also in the House. But he was not investigating principles: he was aiming to shew the tendencies of things; and such tendencies were often most clearly evinced by the palpable effects manifested in some strong and striking case.
Assuming, then, the tendency of every increase of paper to lower its own value, or, in other words, to augment that of commodities exchanged for it; a point, as he had just observed, admitted on all hands, and so plain as scarcely to demand proof; he had, in order to establish the second and concluding part of his argument, merely to prove something which was as undeniable as any mathematical proposition, as plain as any common question in arithmetic, and of which he felt just as confident as of his own existence.
This was, that supposing an increase of paper to take place, and to augment the general price of commodities in exchange for that paper, it must influence also the state of the Exchanges, and raise the price of Bullion For what, in the first place, do we mean by the rate of our Exchanges? We mean the rate at which the circulating medium of this kingdom passes in exchange for the circulating medium of other countries. Supposing, then, the circulating medium (the gold or silver coin for example) of other countries to remain as before, that is, to bear the same price as before in exchange for commodities, while the value of our currency, in exchange for commodities, has been altered, it follows that our currency must exchange for a new quantity of such foreign coin. It also follows equally, that it must exchange for a new quantity of Bullion; for foreign coin is itself made of Bullion, deviates from it in only a limited degree, and is almost identified with it. Bullion, indeed, is a commodity: it comes from America in the same manner as other commodities—is subject to those laws which govern their rise and fall—and consequently, when it is affirmed that an increase of circulating medium, raises the price of commodities, Bullion must be considered as included among their number. It could not be supposed that one article would be affected by an increase of the general currency, and not another;—the produce of manufacturing industry, for example, and not the produce also of the surface of the earth, and of the mines. All things, it is manifest, must ultimately partake in that increase of price which an augmentation of currency tends to produce, as well as in that depression of price which a reduction of it occasions.
Mr. H. Thornton next proceeded to observe on the doctrine which was maintained that the present high price of Bullion and state of the Exchanges resulted from the unfavourable circumstances of our commerce, and the present extraordinary state of the world. The evil was referred to what is called the unfavourable balance of trade or of payments, and was thought to have nothing to do with quantity of paper inasmuch as this balance of trade and payments was deemed a separate and independent cause. He was willing freely to admit the influence of the present circumstances of our trade and expenditure, on Exchanges and the price of Bullion; but he could not allow that these had a separate and independent operation.
He should best explain himself, on this difficult but important subject, of the influence of balance of trade, as it is called, or balance of payments, by putting three several cases; in each of which cases, he would suppose that we had to struggle with political and commercial difficulties exactly resembling the present.
First, he would assume that we had no laws forbidding the melting and exportation of our coin, or limiting the rate of interest, or protecting the Bank against cash payments, it being the simple policy of the country to let every thing take its own course. By thus adverting to what might be called a state of nature, we should be able to discover what was the natural limitation of the evil to which we were now subject; and what the kind of corrective which administered itself. He was not examining whether it was wise to commit ourselves to this state of nature; he was now only investigating principles, that we might thus obtain some light to guide us amidst those difficulties of our own artificial system, in which our understandings seemed to be lost.
His second case would be, the actual case of this country before the cash payments of the Bank were suspended; and his third, our case at present.
First, then, he would suppose, that we were paying in cash, and that we had no usury laws, and no law forbidding the melting or exportation of coin; the King merely affixing his stamp to those pieces of gold which were the current circulating medium, in order to certify their quantity and fineness. For the sake of simplifying the subject, he would also assume the same circulating medium to be employed in surrounding countries. If, while we were thus circumstanced, the same evils of which we now complain were to arise, what would be the consequence? Doubtless much of our gold coin would be taken from us; and, perhaps, a larger quantity of this than of other articles. The whole, however, would not leave us; a high rate of interest would arise, and this extra profit on the use of gold, which would increase as its quantity diminished, would contribute to detain it here—some foreigners, probably, transferring property which would take the shape of the precious metals, or continuing to afford to us the use of it for the sake of this high interest. Such portion of our coin would be transferred, as would cause the remaining quantity to bear the same value in exchange for our remaining commodities, which the same coin in foreign countries bore to commodities abroad. In other words, gold and commodities would be exported in that relative proportion in which the exportation answered; and since every diminution of the quantity of our gold would produce an augmentation of it abroad, the relative value of gold to goods, in this and in foreign countries, would soon find one general level; and thus would remain the standard of value among us all. This, indeed, was simply to suppose the same case to occur in respect to Europe, which usually exists in respect to the different provinces of the same kingdom. He repeated, that he was merely putting a case for the sake of illustration; and the great point which he meant to press was this, that according to what he had denominated the state of nature, there would be a reduction of the circulating medium of this country under the present circumstances of our trade—a reduction which would tend to bring down our prices to the level of the prices which similar commodities, allowing for all expenses of transportation, were found to bear in exchange for gold in the general market of the world.
He would now put the second case. He would suppose our laws to forbid both the melting and exportation of coin, and to limit the rate of interest to five per cent.; and the Bank to be paying in cash. In other words, he would assume that we were circumstanced as we were before 1797, and that exactly the same political and commercial difficulties which we now experience were to arise.
The effect of these difficulties upon the quantity of our currency, would resemble the effect assumed to be experienced in the former case, though it might not be exactly equal in degree. There would arise a similar demand for cash, with a view to exportation; and though the law would interpose some obstacle to its transmission, yet some of our gold would probably go abroad, and it would serve, as in the former case, both as a remittance which would contribute to pay our debts, and as the means of augmenting the circulating medium of foreign countries, as well as of diminishing our own. The Bank, in this event experiencing a drain, would, in some degree, contract its issues. It would not only not increase them, as it has in some degree done during the last two or three years of the very unfavourable state of our exchanges; it would diminish them; it would feel itself, in consequence of our new circumstances, under the painful necessity of straitening its accommodation either to merchants or government, or both; and some difficulty in effecting the limitation would arise out of the necessity under which the Bank would consider itself to be placed of still continuing to lend at only five per cent. It was only by limiting its paper that it could maintain its own cash payments. The reduction would undoubtedly be an evil, but it would be an evil to be balanced against another evil otherwise to be incurred, that of stopping payment, and ceasing to abide by the standard of value which the King and the law had prescribed.
He was aware that this view of the case was not the most gratifying, and might not be welcome to some gentlemen around him; but it was the truth, and it was only by the right knowledge of the nature of our situation, that we could expect to come to any just conclusion. Thus, in this second case, exactly as in the first, there would be a reduction of the total quantity of circulating medium, which would be carried so far as to equalize, or nearly equalize, the relative value of our currency and commodities with the relative value of currency and commodities in our countries. Doubtless a pressure might arise which possibly might be considerable: (A cry of Hear! Hear!) He wished to know whether his principles were admitted. Was it acknowledged, that if we were now paying in cash, as before 1797, the Bank would thus limit its issues, and by such limitation would lower the price of Bullion, and rectify the Exchange? He should be glad to have a distinct affirmative or negative to this question. What degree of pressure might result, was not the main point now under consideration. He did not care at this moment what gentlemen said as to that point. He was in search of a principle. Did they or did they not admit his fundamental position, namely, that when a very unfavourable exchange, resulting from what is called an unfavourable balance of payments, arises, the limitation of the currency of the country serves to limit the evil? He had shewn, first, that this was the corrective which applied itself in what he had called the state of nature; and, also, secondly, that this corrective applied itself under that partly artificial system, under which we lived before our cash payments were suspended.
He now advanced to his third, which was the present case. The Bank, since they became protected against the necessity of making cash payments, not unnaturally thought that they might use more liberality than they would have ventured to exercise under the same circumstances of our trade, if they had been subject to a drain for cash. They, perhaps, were not much to be blamed on this account. Indeed, they appear not to have believed that a reduction of their paper would mend the Exchange, for they had not examined very deeply or philosophically into the subject. They had continued, although the exchanges turned much against us, gradually a little to augment their notes, as they had done for a long time before, they appearing to themselves not to increase, but merely to maintain the existing prices; and they hoped that the evil of the unfavourable exchange would correct itself. Possibly some new latitude might fairly be allowed under the new political circumstances in which we were placed. It was, however, important not to mistake leading principles, and not to fancy that an exchange running against us with all countries for two or three years, and reaching the height of 25 and 30 per cent., accompanied with a corresponding high price of gold, ought at no time and in no degree to be checked by that limitation of the currency to which nature, as it were, as well as our own practice before 1797, taught us in such cases to resort. He was aware that before 1797, if our coin was sent abroad, it went illegally (A cry of Hear! Hear!) The illegality of the transaction, however censurable it might render the individuals engaged in it, was no reason for dismissing the consideration of this part of the subject. It was by this illegal melting and exportation of our coin that the drain on the Bank used heretofore to be produced; and it was by the operation of that drain on the mind and practice of Bank Directors, that the evil of a high price of gold, and an unfavourable exchange, was checked.
It was affirmed in the resolutions to be proposed by his Right Hon. friend (Mr. Vansittart), that there was a want of correspondence between the amount of bank paper in circulation at a vareity of periods, and the state of the exchanges, the exchanges being often more favourable when the notes were higher, and less favourable when they were lower in amount. This might be the case in certain instances which might be selected; for a variety of undefinable circumstances would lead to little fluctuations, both in the exchange and the amount of notes. It, however, was remarkable, that three cases had occurred, and only three within the memory of persons now living, in which the experiment of a restriction of discounts had been made; and in each of these the effect had been comformable to the principles which he was affirming. He meant to say, that at three several times—namely, first in 1782 and 1783; secondly, in the end of 1795 and the beginning of 1796; and, thirdly, in February 1797; and only at these three times the Bank had experienced a material drain of their cash;—that in each of these cases they had been led by the drain, as they themselves professed, to restrain their supply of discounts;—and that not long after each of these three periods, the exchange and the price of bullion manifestly improved. Perhaps a question might arise, whether the improvement of the exchange through the year 1797, might not be referred to the restriction of paper in 1795 and 1796, rather than to that in the single month of February 1797: on which supposition the cases might be said to be two, instead of three; the effect of the limitations in the two latter periods being considered as combined.
That in the first period, namely, in 1782 and 1783, the experiment both was made and answered, was proved by the testimony of the late Mr. Bosanquet before the Secret Committee of 1797, who referred the improvement to this cause. The improvement of the exchange in 1796 and 1797 would be seen in the papers now before the House, and would also be found to be stated in the evidence of Mr. Pitt before the Secret Committee; by whose testimony it also would appear how earnestly the Bank had previously insisted on his repaying them some large advances, on the alleged ground of the existing drain; of which advances only a part was afterwards afforded in the way of accommodation to the merchants. A resolution of a new and very strict kind had been passed by the Directors, on 31st December 1795, with a view of limiting the total amount of mercantile discount, and served remarkably to show how much their liberality had been restrained, before the suspension of cash payments, by a drain of gold.
The limitation of paper in February 1797 was sudden and very great, and arose from a drain occasioned, not by an unfavourable exchange, but a totally distinct cause—an alarm produced through fear of an invasion. He had always thought, and still was of opinion, that the sudden limitation of paper at that period tended not to mitigate the alarm, but rather to increase it; but it unquestionably served to manifest the general habit of the Bank of reducing their issues when they found their gold taken from them. Since 1797, the Bank, having been subject to no drain, in consequence of their being under no obligation to pay in cash, the experiment of limitation of discounts had not been tried, and it had not been likely to be tried between 1783 and 1795, for that was an interval of peace, when exchanges are less subject to fluctuation, and when, moreover, the current rate of interest in the market being lower than in war, and as low perhaps as the rate charged by the Bank, there would be less disposition than in war to borrow of the Bank to an extent which should lead to an excessive issue of notes. It was in evidence before the Secret Committee of 1797, that the Bank had, at one period of the peace, deliberated, whether they should not lend at a less rate of interest than five per cent., so small was then the demand for discount.
This subject, of the rate of interest, was one to which he wished to call the attention of the House; it seemed to him to be a very great and turning point. If the principle adopted by the Bank was that which they professed, of lending to the extent, or nearly to the extent, of the demand made upon them by persons offering good mercantile paper, the danger of excess was aggravated in proportion to the lowness of the rate of interest at which discounts were afforded; and one cause, as he conceived, of the somewhat too great issues of the Bank, during the present war, had been the circumstance of their lending at five per cent., when rather more than five per cent. might in reality be considered as the more current rate paid by the merchants. Private bankers had generally found, during the war, that the growing demand of their customers on them, for discounts at five per cent. on very good bills, was apt to exceed the supply which any means of theirs could enable them to afford. If they gratified every wish, there would be no bounds to the gradual increase of applications. They therefore gave the preference to some applicants, and the persons who obtained the accommodation conceived themselves to be receiving a favour. The usury laws forbid the banker to charge more than five per cent.; but he who borrowed from a private banker, naturally, and of his own accord, bestowed the benefit of his running cash, which was often an important consideration; while, in the case of his discounting at the Bank, he kept a running cash which was extremely insignificant, and therefore borrowed at the rate of exactly five per cent. in that quarter. Again, if he borrowed in what is called the money market, he gave to a broker a small per centage on every bill; and thus paid not less than five and a half or six per cent. per annum, in the way of interest.
It was material to observe, that there had, since the beginning of the war, been a continual fall in the value of money: he meant, of money commonly so called, whether consisting of cash or paper. This had been estimated by some at 60 or 70 per cent., and certainly was not less than 40 and 50 per cent.; which was, on the average, 2 or 3 per cent per annum: it followed from hence, that if, for example, a man borrowed of the Bank 1000l. in 1800, and paid it back in 1810, having detained it by means of successive loans through that period, he paid back that which had become worth less by 20 or 30 per cent. than it was worth when he first received it. He would have paid an interest of 50l. per annum for the use of this money; but if from this interest were deducted the 20l. or 30l. per annum, which he had gained by the fall in the value of the money, he would find that he had borrowed at 2 or 3 per cent., and not at 5 per cent. as he appeared to do. By investing his money either in land or in successive commercial undertakings, in the year 1800, and then finally selling his land or his commodities in the year 1810, he would find the produce amount to 200l. or 300l. above the 1000l. which he had borrowed; which 2 or 300l. being deducted from the 500l. interest which he had paid, would make the neat sum paid by him to be only 200l. or 300l. It was true, that men did not generally perceive, that, during a fall in the price of money, they borrowed at this advantageous rate of interest; they felt, however, the advantage of being borrowers. The temptation to borrow operated on their minds, as he believed, in the following manner:—they balanced their books once a year, and, on estimating the value of those commodities in which they had invested their borrowed money, they found that value to be continually increasing, so that there was an apparent profit over and above the natural and ordinary profit on mercantile transactions. This apparent profit was nominal, as to persons who traded on their own capital, but not nominal as to those who traded with borrowed money; the borrower, therefore, derived every year from his trade, not only the common mercantile profit, which would itself somewhat exceed the 5 per cent., interest paid by him for the use of his money, but likewise that extra profit which he had spoken of. This extra profit was exactly so much additional advantage, derived from the circumstance of his being a trader upon a borrowed capital, and was so much additional temptation to borrow. Accordingly, in countries in which the currency was in a rapid course of depreciation, supposing that there were no usury laws, the current rate of interest was often, as he believed, proportionably augmented. Thus, for example, at Petersburgh, at this time, the current interest was 20 or 25 per cent., which he conceived to be partly compensation for an expected increase of depreciation of the currency.
The observations which he had made had been suggested to him by his attention to a variety of facts; and he would now trouble the House with the statement of some specific cases, which would contribute to establish the truth of the doctrine which he had asserted—namely, that an increase of the quantity of paper tended to diminish its value; and a reduction of its quantity, to improve it;—that when the quantity became too great, a drain of cash arose; that this drain was checked by a limitation of paper;—and that the excess, and consequent drain, were most likely to accrue when any circumstances rendered the rate of interest taken, less than the current and actual rate at the time in the common market.
The case of the Bank of Paris was remarkably in point, and it was full of instruction to the parliament and people of this country. That Bank stopped payment in 1805, the year when the war had again broken out. It was a Bank as independent as any such institution in France could be, of the French government. It had a good capital, and circulated notes around the metropolis of France; which it emitted only in the way of discounts, and, as far as he understood, only on the security of bills at short dates, and of a good character: it thus exceedingly resembled the Bank of England, though inferior in the extent of its transactions. The French government having occasion in 1805 for some advances on the security of what they call their anticipations, a species of security on which it was not consistent with the rules of the Bank of Paris to lend, borrowed the sum in question of some French merchants and capitalists, who then contrived to fabricate among themselves, and proceeded to discount at the Bank, as many securities as were sufficient to supply their occasions; so that the Bank was the true lender. The object of thus borrowing at the Bank, was to save something in the way of interest; for if these anticipations had been sold in the market, the price would have been very disadvantageous. The consequence of this transaction was, an augmentation of the paper of the Bank of Paris; a drain of their cash followed; the diligences were found to be carrying off silver into the departments, which the Bank, with a view to its own safety, had continually to bring back, with much expense and trouble. The circulating medium of the metropolis had now plainly become excessive. Greater facilities were afforded for borrowing in that quarter than in other places, and the country wished to partake in those opportunities of extending purchases which the metropolis enjoyed. But the paper of the Bank would not circulate in the departments: it was therefore necessary first to exchange it for coin; and the coin being then carried away from Paris, the plenty of of circulating medium would equalize itself through the French territory. In England we had country bank paper, which was interchanged for Bank of England paper, and proportioned itself to it; but no part of the English paper would circulate out of the country. What therefore the departments of France were to Paris, that Europe was to Great Britain. If large opportunities of borrowing were afforded in London, and over England, by a free emission of paper, there would arise a disposition to exchange that paper for gold, because the gold might then be sent abroad, and it would tend to diffuse over the continent that plenty of circulating medium which we had introduced into our own territory.—It might, perhaps, be thought that the cases were dissimilar, inasmuch as we had an unfavourable course or exchange, and a high price of gold, into which the evil which we suffered appeared to resolve itself. But it would be found that there arose also a premium on silver at Paris, and an unfavourable exchange between Paris and the departments of France; and this was proportionate to the expense and trouble of bringing back the silver from the departments. There was, therefore, a similarity in the two cases. The Bank of Paris at length stopped payment; the Government was consulted; the Bank was directed to reduce its paper; and in the course of three months, having pursued this principle, it opened without difficulty. The discount on its paper, or, in other words, the premium on coin, had varied from 1 to 10 or 12 per cent.; but after the reduction of paper it ceased. The exchanges of France with foreign countries had also turned about 10 per cent. against that country.
A special commission, of which M. Dupont de Nemours was the secretary, was subsequently appointed to inquire into the causes and effects of this stoppage of the Bank of Paris; and it was from the French Report published by this gentleman that he collected the facts which he had stated. The report proceeded to suggest the means of preventing the recurrence of a similar evil, and it advised three things; first, that the Government should never solicit any loans from the Bank, on the ground that such an application amounted to a demand, and might lead to issues inconsistent with the true nature of a banking establishment. It was unnecessary to observe, how unlike our circumstances, in this respect, were to those of France. Our Bank Directors had sufficiently shewn, in 1796, their complete independence of the Government; for they then peremptorily refused to afford to Mr. Pitt even the continuance of the existing advances. The second suggestion of the commission was, that the Bank of France should lend only on securities coming due within two months; and this, as well indeed as the other, was for the purpose of enforcing the third and principal admonition,—namely, that the Bank should always “draw in its discount as soon as it perceived the existence of a more than ordinary disposition to exchange bank paper for money.”* “For what,” added the Report, “mean these applications for money? They imply that there are more bank notes on the spot than the circumstances of the time demand. And how are you to provide against this evil? By diminishing their quantity, through a reduction which shall exceed the new emissions.”† It is then added, that if the Directors of the Bank will but be attentive to the first signs of superabundance, if they will moderate the evil in the first instance, they will almost always retain the mastery; and thus the horseman (it is said) will not be thrown out of his saddle.
Many of the principles urged by the Bullion Committee, would be found to be remarkably confirmed by this Report. It appeared by it, that the French over-issue arose from an attempt to turn certain securities into cash, at a rate of interest lower than that which was the natural one at the moment. The Report dwelt much on the error committed in this respect. The anticipations, it said, ought to have been sold, though at a losing and discreditable price, at whatever might have been the rate in the market.
Again, the Report stated that the limitation of the French bank paper did not produce an instantaneous, or exactly corresponding effect, but yet that after three months it issued in the expected consequences. All this was in exact conformity with the doctrines of the Bullion Committee. They had never said that every small fluctuation of Bank of England paper would be attended by either an immediate, or an exactly proportionate, influence on the exchanges, or on the price of gold. They had only affirmed that the unquestionable tendency of limitation was to improve exchanges; and had recommended that the Bank should feel its way. The discount of 10 per cent. on the French paper was not completely removed till the amount was reduced from 90 to 54 millions of livres; a scale of reduction unquestionably greater by far than would be found necessary here, under all the circumstances of our metropolis.
The Report affirmed another principle of the Bullion Committee, namely, that it was not merely the numerical quantity of bank paper which evinced either its deficiency or excess; the true test being the disposition of the public to demand payment for bank notes in cash. At one time the Report observed that one hundred millions of bank paper had circulated at Paris, and that there was not a note too much, because there occurred no extraordinary demands for cash; but that at the period of the failure, 90 millions evidently were excessive; that at the time of publishing the Report, 44 millions was the whole amount. Circumstances were described as occurring from time to time, which called for a diminution of currency, or an increase.
The Bank of Sweden supplied another example which it might be useful to consider. It was not, properly speaking, a government bank, being a bank only of the States: and it issued its notes in the way of loan, at a moderate interest, and their amount, as he had been informed, there was reason to think had been much extended. This bank had ceased, for some time, to pay in cash, and its paper had fallen to about 70 per cent. discount. Sweden, in one respect, was circumstanced somewhat like ourselves: it had experienced great obstacles to the exportation of many articles, with which it abounded; and, probably, the desire of keeping up the nominal price of those commodities, contributed to dispose both the government, the states, and the people to the existing system. The public in Sweden, according to what he had heard, were not fully persuaded of the depreciation of their paper; for many of their commodities, their iron in particular, had not risen in any proportion to the fall of their currency. Indeed, nations in general were usually insensible at first to the declension of the value of their circulating medium. They were accustomed to experience fluctuations of exchange, and they naturally referred, at first, even a serious depreciation of their paper, to the same commercial causes which they were in the habit of contemplating. He well remembered to have been himself, twenty or thirty years ago, employed in a Russian counting-house, where he had often heard conversations on the Russian Exchange. It used at that time generally, and on the whole, to decline; but as it occasionally rose, and evidently fluctuated a little, with each political or commercial event, the general tendency to depression, as far as he remembered, was never ascribed to an increase of the quantity of Russian paper; but it was now plain, that quantity had had a leading and permanent influence upon it. The ruble, originally, was worth 48 pence sterling; at the time when he was in the Russian counting-house, it passed for 35 or 40 pence: it was now worth only 12 or 14 pence. Was it possible, that merely what is called balance of trade, or political events, could in thirty years have reduced the ruble from 48d. to 12d.? It was not perfectly well known, that the late Empress, as well as the succeeding emperors of Russia, had, from time to time, greatly augmented the quantity of paper money; and hence, in truth, arose the depression. Many of those who narrowly watched the exchange, were the most misled on the subject. Thus, if a man watched the falling tide, he might be deceived by seeing a few occasional waves rise higher than the preceding ones, and might infer that the tide was rising when it was falling.
It was reasonable to suppose, that men should generally mistake in this respect. We naturally imagine that the spot on which we ourselves stand is fixed, and that the things around us move. The man who is in a boat seems to see the shore departing from him, and it was the doctrine of the first philosophers that the sun moved round the earth, and not the earth round the sun. In consequence of a similar prejudice, we assume that the currency which is in all our hands, and with which we ourselves are, as it were, identified, is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion, the larger article serving for the commerce of the world, which is the more fixed.
It was remarkable, that when the American banks, about the year 1720, issued their excessive paper, the merchants of America ascribed the consequent fall of the exchange to something in the state of trade; a circumstance which is noticed, in the recent history of General Washington, by Mr. Marshall.
All the banks which he had mentioned, except that of Russia—namely, the Bank of France, the Bank of Sweden, and the Banks of America, were establishments more or less independent of the government; they all emitted their paper in the way of loan, furnished at a moderate or low interest; and they had all issued it to excess. The adversaries of the Bullion Committee had grounded a great part of their argument on the following distinction between the Bank of England and all those Banks of which the paper had been depreciated:—The Bank of England, they said, issues nothing, except in return for something valuable: they receive a bill, representing real property, for every note which they emit; and therefore they cannot issue to excess Now the French Bank, the American Banks of which he had spoken, and he believed also the Swedish Bank, issued paper only in the way of loan; they received something valuable in return for every note which they put out—in this respect resembling the Bank of England. It was true, that the Austrian and the Russian Banks issued paper simply in discharge of the expenditure of the government: they were, strictly speaking, government banks; and the excess in their case was more likely to be great. But it was of the utmost consequence to understand, that, even when a supposed equivalent is received in return for the paper issued, excess might arise; and the excess, as he had already said, was likely to be great in proportion as the rate of interest was low.
The Bank even of Mr. Law, in France, issued its paper only in the way of loan. This bank had been adverted to by the Learned Gentleman who opened the debate; and the Right Honourable Gentleman who spoke next to him had complained of the comparison between the establishment of that projector and the Bank of England. Undoubtedly the name of Mr. Law, and that of the present Directors of the Bank, ought not to be mentioned on the same day, if the general nature of the two establishments, or the comparative character of the persons presiding over them, were the only subject for consideration. It was, however, not improper to point out what was the main error of Mr. Law. It very clearly exposed itself in a small Essay on Money and Credit, published by him in Scotland, containing a plain, submitted to the Scotch Parliament, which was apparently not unlike to that which he had more successfully recommended in France. Mr. Law considered security as every thing, and quantity as nothing. He proposed that paper money should be supplied (he did not specify in his book at what rate of interest) to as many borrowers as should think fit to apply, and should offer the security of land, estimated at two thirds of its value. This paper, though not convertible into the precious metals, could not, as Mr. Law assumed, be depreciated. It would represent, as he said, real property, and would be worth even more than the precious metals, because land was not subject to the same fall in value as gold and silver. He forgot that there might be no bounds to the demand for paper; that the increasing quantity would contribute to the rise of commodities: and the rise of commodities require, and seem to justify, a still further increase. Prices in France rose to four times their antecedent amount; great seeming prosperity was experienced for a time; but in the end, the fall of exchanges, and the exportation of money, served to detect the error of the system; and successive alterations of the standard of the coin were among the means of recovery to which the government resorted. The Bank of Mr. Law preceded the French Mississippi scheme, and was formed, in some measure, after the example of the Bank of England; but its notes, after a short time, were made a legal tender, and they were lent at the low rate of 3 per cent. interest. In the progress of the scheme, the Bank became confounded with the Mississippi Company, for whose actions the bank notes were interchangeable; so that it was not easy to trace causes and effects through the whole progress of those extraordinary speculations.
The present state of the currencies in Surinam and Demerara afforded another proof of the tendency of an increase of paper to influence exchanges. In one of these places, the circulating medium consisted of paper; in the other, of coin; and before these colonies came into our possession, the coin of Demerara had even been of less value than the paper of Surinam, that paper having been carefully limited. Through the facility of the government of Surinam, the paper, as he had heard, had been exceedingly augmented, and it was now of only about one-third its former value, and one-third the present value of the coin of the neighbouring settlement. In Austria there had been a manifest excess of paper, and a corresponding fall in its value, indicated by the exchange. The case was somewhat the same at Lisbon. Indeed, in all parts of Europe, Hamburgh, Amsterdam, and Paris excepted, the principle of a standard seemed to have been lost; a suspension of cash payments had every where taken place; and paper had been issued to excess, and had also been depreciated. It belonged, therefore, to Great Britain to take care that she did not follow the course of so many nations on the Continent; and it would be most presumptuous in her to assume that her Bank, on account of some undefined difference in its constitution, could act on their principles, and yet not share in their fate.
The Directors of the Bank of England, as he had already shewn, before the suspension of their cash payments, had been used to lessen their paper when they experienced a drain of their cash. The quantity of currency, indeed, when gold was in circulation, in the event of a very unfavourable exchange, lessened itself, for a part of it was transported to other countries. No such natural corrective now existed; and it therefore was important that the general and permanent state of the exchange should be regarded as the index of an excess of paper, and that the Bank Directors should not continue to act on the principle that a limitation of paper had no influence whatever on the exchange. This was the point on which they were at issue with the Bullion Committee. That Committee, as he conceived, would have rendered an essential service, even though guilty of all the errors with which the Right Honourable Gentleman had charged them—errors, however, which he was by no means ready to admit—if they had merely called the attention of Parliament to this important subject. The Parliament had now to decide on this point of difference between the Committee and the Bank. He would not affirm it to be totally impossible that the exchange should improve, or even recover itself, without any change of system; but his fears predominated. The circumstance that most encouraged hope, was the fact of our exchanges having been restored, after a great depression, in 1800 and 1801, and apparently without any effort to improve them made by the Bank. There were, however, three points of difference between that case and the present. First, the exchanges did not fall, in the years of scarcity of 1800 and 1801, more than about 8 or 10 per cent below par—they had now fallen 25 or 30, and even more than 30 per cent., and had continued much depressed for nearly three years. Secondly, we had in 1800 and 1801 a great quantity of gold in circulation, the clandestine transmission of which undoubtedly contributed to improve the exchange, by constituting a remittance; perhaps also to diminish the sum total of the currency remaining in this kingdom; and it should be remembered, that it is the amount of currency in general, and not of paper in particular, which regulates the value. Thirdly, we had, after the fall of exchange in 1801 and 1802, the benefit of an interval of peace. If the Right Honourable Chancellor of the Exchequer would assure the House of the approach of peace, he would contribute much to dissipate the present fear.
The Right Honourable Gentleman over the way (Mr. Rose) had spoken of the balance of payments as having lately been peculiarly unfavourable to this country. A short time before the appointment of the Bullion Committee, the same Right Honourable Gentleman had stated in his place, from documents to which he only had then access, how uncommonly favourable the balance of trade appeared to be up to that time. He was right in his statement; for, upon an inspection of the annual Custom-house accounts of the year 1809, afterwards presented to the House, it appeared that the balance of that year was no less than about sixteen millions in our favour, if reckoned according to the official value—a balance greater by several millions than it had been in any preceding year. The balance, computed according to the real value, proved to be nearly as considerable, and equally exceeded the balance in real value of any preceding year. He admitted that the Committee had fallen into inaccuracy in stating some parts of this topic; but it was a subject on which he defied any man to arrive at any thing like precision, and he had chiefly to lament that they had attempted too much specification. They had been betrayed into this course by too great a wish to follow their adversaries into a detail of discussion of this sort, which he was happy to find that the resolutions of his Right Honourable Friend did not much countenance. He was convinced that it was impossible to form any estimate of the amount of precious metals which went out of the country, or of what was called the balance of trade, by instituting calculations of the value of exports and imports, and by then combining with these the amounts of drafts drawn on Government account, and all the other items which remained to be added to the two sides of the statement. The errors committed by those who had gone the furthest in such attempts were a warning on this subject. The Right Honourable Gentleman had remarked, that the sum paid for foreign freights had been erroneously stated by the Committee, as being to be deducted from the favourable balance; and he was right to a certain extent, in this observation. It, however, only followed from hence, that the Committee had represented the balance somewhat less favourably than they should have stated it. The year which had passed subsequently to their Report, was certainly much more adverse than that to which they adverted, the large importations of corn in 1810 having materially augmented our imports. Neither this circumstance, nor the burning decrees of the enemy, on which much stress had been laid, were known at the time when the Committee made their Report.
He must advert, before he concluded, to the important subject of the standard of our currency. There was great danger of our finally departing from it, if we suffered the present depreciation of our paper to continue. The first resolution of his Right Honourable Friend appeared to him to be liable to the construction of laying in some claim to depart from it, if such a measure should hereafter be deemed expedient; for it asserted the King’s right to alter the standard: and the very mention of such a right, at a period when the temptation to exercise it was occurring, might naturally excite apprehension among the public. Indeed the argument in favour of a deterioration of our coin (or of a change of its denomination, which was the same thing), would, while the present state of things continued, grow stronger every day. To change the standard when the paper has been long depreciated, is only to establish and perpetuate a currency of that value, to which we already are accustomed, and may also be made the means of precluding farther depression. The very argument of justice, after a certain time, passes over to the side of deterioration. If we have been used to a depreciated paper for only two or three years, justice is on the side of returning to the antecedent standard; but if eight, ten, or even fifteen or twenty years, have passed since the paper fell, then it may be deemed unfair to restore the ancient value of the circulating medium; for bargains will have been made, and loans supplied, under an expectation of the continuance of the existing depreciation. If, therefore, we were in earnest in our professions of attachment to the standard, we ought not to place ourselves in a situation of irresistible temptation. By the present decision of the House, the question of adherence to the standard might be determined. It had been said, that, by our present contest in Portugal, we were in truth defending England, since we were preventing a conflict which might otherwise take place on English ground. We might, by the parliamentary contest of this day, prevent a struggle for the maintenance of the standard of our coin. We were now, perhaps, fighting that battle, and at a time the most favourable for it. If the limitation of paper had been urged when the exchanges were only six or eight per cent. against us, it might have been said, that the evil was not sufficiently considerable to deserve attention. If we waited till they were fifty or sixty per cent. against us, it might have been insisted, that the time for administering such a remedy was past, and that the mischief was become too formidable for us to deal with. Was it not at least prudent to take the side of limitation? He had no idea, that all that embarrassment would result from a moderate reduction of Bank paper, which some gentlemen might suppose. Let the whole subject be fairly understood, for much depended on the general prevalence of sound opinions on this question;—let the contending parties yield a little to each other;—let it be known that the Bank proposes to do nothing sudden or violent; that they are determined to guard carefully against extensive failures; and to afford to the mercantile world reasonable facility for fulfilling the pecuniary engagements into which they might have already entered;—let it be seen through the country, that there was no party spirit, or heat, in our discussions:—he should, in that case, have little fear of disastrous consequences. If, on the other hand, the question was to be carried with a high hand, and there was to be a triumph of the Bank over the Bullion Committee; if the Bank were to be encouraged in the extension of their issues for the sake of the temporary ease which these might afford to the merchants and to the government; and we were resolved to shut our eyes to the remoter consequences; the light might possibly, at length, break in upon us, as Mr. Burke, on another occasion, had observed, not through the ordinary apertures, but through flaws and breaches; and we might then lament, too late, that we had not made timely efforts to restore the value of our currency Gentlemen, he feared, had not sufficiently considered the present state of the law on this subject A question was suspended, the decision of which was expected every day, and might lead to the establishment of two prices. We were, moreover, at the mercy of events Many persons seemed to think that there was no particular evil to be apprehended from perseverance in the present system; and were unwilling to resort to a limitation of paper, because it was safer not to change our course: but they ought to reflect, that, though a small depreciation of paper produces little or no evil, and even may, for a time, operate beneficially; and though a great depreciation may not bring on at once any striking mischief; yet the long continuance and the growth of it, might lead to the most serious dangers. To the consequences of excess of quantity distrust might add itself: new laws might become necessary to enforce the receipt of the depreciated currency; and in order that they might be effectual, their severity must increase as the depreciation extended itself. This had been the course in other countries. At the same time, there probably would not be wanting ill-affected persons, who would endeavour to aggravate the evil, and would be glad to connect with the temporary discredit arising from the excess of our circulating paper, the discredit of the whole mass of our stocks, which had nothing to do with it. Surely it became the Parliament to anticipate the possible occurrence of such a state of things, and not to wait the uncertain course of events, as if we had no power whatever to provide for our own safety, or contribute to the improvement of our condition.
On these grounds he now supported the first set of the Resolutions of the Learned Gentleman, which affirmed the doctrine of a standard, and which recommended, as the means of expediting and insuring our return to it, a cautious restriction of the paper of the Bank of England.
On the 14th of May, Mr. H. Thornton observed, that having, when he before addressed himself to the House, spoken antecedently to all those gentlemen to whom he was opposed, excepting only one Right Hon. Gentleman (Mr. Rose), who had chiefly dwelt on the details of the Report; and having now the advantage of distinctly knowing the grounds on which their argument rested; he was anxious to be permitted once more to offer himself to their notice.
The speech of his Right Honourable Friend (Mr. Vansittart), in support of the Resolutions now proposed by him to be substituted in the place of those of the Chairman of the Bullion Committee, had particularly urged him to rise. In the conclusion of that speech, his Right Honourable Friend had enumerated the various circumstances to which he looked as the means of producing an improvement of the exchange:—first, a continental peace; secondly, a better understanding, and, consequently, an open trade with America; thirdly, some extension of our commercial intercourse with Europe;—all of them, especially the first, events which he did not much encourage us to expect:—but it was remarkable that he totally omitted any mention of a limitation of paper, in this enumeration of the means of meliorating our exchanges. His Right Hon. Friend, in one part of his speech, as well as the Right Hon. Chancellor of the Exchequer, had admitted that a limitation of paper had a tendency to produce this effect; but it was plain, from the concluding part of it, that the principle was practically disregarded. Indeed, his resolutions were in the same spirit: they were silent on this point: they did not venture to deny the doctrine, that quantity of paper had an influence on its value; but they seemed to throw a doubt upon it; for they specified a variety of facts, with the evident view of discrediting the principle; and thus were calculated to lead men, less enlightened than the Mover, to suppose that the tenets of the Bullion Committee, in this respect, were completely visionary and erroneous.
He rejoiced that his Right Hon. Friend was the person who led the opposition to the Report of the Bullion Committee, because he was confident, that, with such an adversary, the discussion would be amicable, and free from party spirit, and because the House was sure of hearing so much ability employed on that side of the subject. He could not, however, help remarking, that his Right Hon. Friend himself had been a party in an administration which had twice extended the term of the continuance of the restriction act on a principle which, if Parliament would now give its attention to the subject, he could not help thinking that they would perceive to have been very objectionable.
Twice, under the administration of Lord Sidmouth, of whom he wished to speak most respectfully—namely, once in peace, and once after the recommencement of the war—the act for restricting the cash payment of the Bank was renewed, upon the professed ground of the unfavourableness of the exchanges. This was not the principle on which the first act had passed, and he much questioned whether the Parliament would have ever consented to institute such a measure merely on that plea. It was by means of an unfavourable exchange, and a high price of bullion, that an excess of bank paper was detected and restrained, as he trusted that he had already sufficiently shewn. The ground on which the restriction bill had passed was much more justifiable, namely, that of an alarm arising out of the idea of an immediate invasion, which caused a violent run upon the Bank, and threatened suddenly and unavoidably to exhaust its coffers. The State, for political reasons, on that occasion interfered. To extend the suspension because the exchange was unfavourable, was to adopt a new and dangerous course. He recollected to have himself, on one occasion, remarked on the insufficiency of this motive for the renewal; but the subject did not always particularly attract the attention of the House; it now, therefore, became them, and especially since they were resolved to continue the suspension, to look well to the general principles on which both they and the Bank proceeded, and not to consider themselves as debating merely on a temporary measure.
One great security to the Bank of England, heretofore, had been its independence of the Government: its paper had been properly restrained, because the Government had felt no interest and taken no part in the extended issue of it; and he submitted, whether, if the subserviency of large issues from the Bank to the purposes of the war, and the convenience of the State, were, during the suspension of cash payments, to be a principle recognised by Parliament, the State and the Bank might not become identified in point of interest, somewhat in the same manner as those government banks on the Continent, whose paper had become first excessive and then depreciated.
It might not be improper to take a slight survey of the whole period which had passed since the first Bank Restriction Bill in 1797. Probably, in consequence, as he had before shewn, of a limitation of paper which was antecedent to that area, and perhaps in consequence also of the caution which the Bank would naturally exercise for some time after it, the exchanges in 1797 and 1798 were peculiarly favourable, and a great tide of gold flowed into the country. In the years 1800 and 1801, when the scarcity of corn occurred—a commercial event more likely, perhaps, than any other to prejudice the exchange—the tide turned quite as much against us: the exchanges then fell below the point which they had ever reached while the Bank was open. The Bank did not at that time limit its issues, which it certainly would have done if it had been liable to make its payments in cash. The exchange, however, recovered itself in 1802, but it did not improve so much as to bring back gold into the country. After a few more years, the exchange turned much against us; and it had now, for the space of nearly three years, continued more unfavourable than it was ever known to be before the suspension. Thus the only influx of gold, of which we had had the benefit, since the suspension act of 1797, was, apparently, in consequence of a limitation of paper antecedent to that period. There would naturally be a tendency to excess during the suspension of cash payments; but the first consequences of such excess, as well as the peculiar pressure of 1801 and 1802, would undoubtedly be mitigated by the exportation of a large portion of that immense fund of gold, with which the providence of the time preceding the suspension had enriched us; and the recovery of the exchange in 1802 was thus facilitated. When the second great pressure, of 1808 and 1809, arose, it found us stripped of a great part of our coin; and this probably was the reason why it proved so serious. It soon carried off our little remaining gold; and we were therefore now arrived at a period when we were no longer protected against the most fearful fall of our exchanges. As long as the foreigner knew that the bill on England which he bought, could be turned into cash, which cash was of a given value, and subject, though contrary to law, to be transported, there was a limit to the depression of the price of the bill; and this limit would exist even during the suspension of the cash payments of the Bank, provided there was a moderate quantity of gold coin actually circulating; for, in that case, if the exchange fell below a certain point, some men would clandestinely collect our guineas, and thus furnish a remittance: but now a man must walk a mile before he can collect a guinea, he must incur great expense in gathering, as well as in purchasing, the very trifling quantity of coin which remained among us. The limit, therefore, to the fall of the bill, was no longer what it had been: we were ceasing to have any limit, and were therefore now arriving at a new state of danger; so that it was difficult to say, in case untoward circumstances should arise, what might be the extent to which the exchange possibly might run down. Such had been the effect of the long continuance of the Bank Restriction Bill, and of the system under which we had acted during the fourteen years of its existence. The House had now decided against the repeal of it, and seemed to intend that the bill should remain in force until the period already assigned to it, of six months after the ratification of a treaty of peace. He was not eager as to the question whether the Bank should now be required to open at any early period. He would willingly have agreed to suspend the determination of that point, if he could but have seen a disposition to act, in the mean time, in such a manner as to facilitate the opening. But the misfortune was, that the Directors of the Bank seemed to consider the suspension as exempting them from the necessity of pursuing the principles on which they would have acted if no suspending bill had passed, and on which also they could not fail now to act, if they were liable to pay in cash. To one of them the question was put, “Supposing the Bank to pay in cash, and a great drain to arise (and there could be no doubt that a great drain would now arise if the Bank were liable to pay in cash) should you advise some diminution of bank paper?” The answer was, “I must recommend it from necessity, though in my opinion it would not improve the exchange. I think it one of the advantages of the Restriction Bill, that we are not driven to that necessity.” The Parliament, if they voted the resolutions of his Right Hon. Friend, would fortify the Bank in these opinions. They had, indeed, already indicated their approbation of them, by negativing all the first resolutions of the Learned Gentleman; and in consequence of that vote, which he had considered to be a vote against any limitation of paper, he had reluctantly joined in the subsequent vote for opening the Bank in two years;—a vote which he should have been glad to have had an opportunity of qualifying, by specifying certain accompanying measures, by which he thought that the apparent severity of it might have been mitigated, and the opening much facilitated. He had, when in the Bullion Committee, expressed a wish to soften the terms used in that part of the Report which suggested that the restriction should cease in two years. He was clearly against a period so indefinite as that of six months after the ratification of a treaty of peace, considering all the experience we had had. He was for returning to the principle on which we had set out, that of allowing to the Bank only a short term; possibly renewing it, if necessary, but not as a matter of course, and on the mere ground that the exchanges were unfavourable. He was aware that the gentlemen opposed to him had gained a great advantage by turning the attention of the public to the opening of the Bank; as if that were the only thing recommended by the Bullion Committee. This was not the sole object of their Report. There had been many shades of opinion upon that part of it, among men agreed in all their fundamental principles. The Bullion Committee had been far more united on the other point on which he had dwelt—the propriety of limiting the bank issues with a view to the improvement of the exchange. The Parliament was now taking part with the Bank against their own Committee, in respect to this important principle, and the Right Hon. Chancellor of the Lxchequer, in exerting himself on the same side, appeared to him to be taking on himself a fearful responsibility.
It had appeared in the course of the present debates, that the chief circumstance which had led the Directors of the Bank to embrace the opinion that the quantity of their paper had no influence on the exchange, was the doctrine which they entertained respecting what is called the Balance of Trade. The state of the exchange was, according to them, the unavoidable consequence of an unfavourable balance he therefore requested leave to enter somewhat fully into this topic.
An inaccurate use of words had served to confuse many parts of the general subject under discussion, and the term balance of trade, in particular, had contributed to this perplexity. He would endeavour to expose the error involved in this expression, and in order to do this, it might be convenient to remark how it first obtained currency.
Our ancestors, eager for the acquisition of the precious metals, exploring, as is well known, new continents, chiefly with a view to this article; and accustomed to consider trade as profitable or otherwise, in proportion as it brought in or took out gold and silver, were naturally led to denominate that part of our exports or imports which consisted of these metals a balance. In truth, however, this was not a balance Bullion was an article of commerce, rising or falling in value according to the supply and the demand, exactly like any other, transporting itself in greater or less quantities according to the comparative state of the market for that and for other articles, and forming only an item on one side of the general account. Corn, or any other commodity, might just as properly be said to pay the balance as gold or silver; but it would evidently be inaccurate to affirm that corn discharged it, because it would imply that the amount of all the articles except corn was fixed; and that these having first adjusted themselves with relation only to each other, a given quantity of corn was then added to pay the difference. It was, for the same reason, inaccurate to affirm, that gold or silver paid the difference. He was aware that many of our older writers of great name had used expressions of this sort, and that a phraseology borrowed from such respectable authority ought not to be too much censured. They had written, however, at a time when paper currency scarcely had an existence; they had not contemplated the consequences of the introduction of so much paper credit: they had therefore not guarded or measured their expressions, as they probably would have done, if they had foreseen the use which was now made of them.
The Governor of the Bank (Mr. Manning) had in his speech quoted a passage in Mr. Locke, containing the term on which he had just animadverted, and had grounded himself on what he inferred from this expression to be the principles of that author. The words of Mr. Locke were these;—“The coming and going of our treasure depends wholly upon the balance of trade;”—a mode of speaking which certainly countenanced the doctrine of the Honourable Gentleman and other Bank Directors, namely, that there is no possibility of preventing the departure of our gold by any measures which the Bank can take, inasmuch as it is balance of trade, and balance of trade alone, which regulates both its coming and its going, over which balance the Bank has no controul. It would be found, however, that Mr. Locke could not be so completely claimed as an authority, on the side of the Governor of the Bank, as might at first view be supposed; for Mr. Locke in the part of his work immediately preceding that from which the quotation was taken, speaks of “two cases” in which profit may be made by melting down our money: “First, when the current prices of the same denomination are unequal and of different weights, some heavier, some lighter; the other that of a losing trade, or an overgreat consumption of foreign commodities;” and then goes on to say, that “the coming and going of our treasure depends wholly on the balance of trade.”
Mr. Locke, therefore, refers to either of two causes the disappearance of coin. Agreeing in this respect with Sir Isaac Newton and others, whom his Honourable Friend (Mr. Huskisson) had quoted, he affirms that two kinds of circulating medium, if of different value, cannot long continue to pass interchangeably, because the heavier and more valuable pieces will be melted down, with or without law, and the light ones only will remain. Did gentlemen allow the truth of what Sir Isaac Newton and other high authorities, not excepting Mr. Locke, had laid down as a fundamental maxim in this science? If they did, they ought to admit not only that silver currency would disappear, if of more value than gold; and gold currency, if of more value than silver; and heavy pieces, if light ones were allowed equally to pass; but also that gold currency would vanish if a paper currency of inferior value was circulating at the same time. Silver coin was not now a legal tender for more than a limited amount; gold coin and paper were therefore the only two currencies in use for the payment of large sums; Gold was now to paper what it had formerly been to silver, and what the heavier pieces of gold had been to the lighter pieces of the same metal. Thus, the present disappearance of our gold coin, might be ascribed to the first of the two causes mentioned by Mr. Locke, namely, the difference in value between the two kinds of currency in the country; and not to the second cause, the unfavourable balance of trade.
Still, however, the language of Mr. Locke was certainly inaccurate, when he said, that the “coming and going of our treasure depends wholly on the balance of our trade,” and served to countenance that dangerous doctrine which now prevailed. According to this doctrine, the fact of the disappearance of our guineas attended with the highest imaginable price of gold, was no indication of an excess of paper or of a depreciation of it, but was simply an evidence of an unfavourable balance of trade; and the only remedy was generally to promote national industry and œconomy. It might, indeed, be imagined by some, that according to this view of the subject, even additional issues of paper would operate as a remedy; for it might be said that an increased emission of it tended to encourage manufactures, an augmented quantity of manufactures supplied the means of enlarging our exports, and more extended exports improved the balance of trade; and thus an increased issue of paper might be assumed to be the means of rectifying the exchange, instead of prejudicing it. This was exactly the course of argument into which the Noble Lord over the way (Lord Castlereagh) appeared in one part of his speech to be running. It was an error to which he himself had once inclined, but he had stood corrected after a fuller consideration of the subject. There must obviously be a fallacy in this way of reasoning. It proved too much. It implied, that indefinitely to increase our paper, was the way indefinitely to improve its value in exchange for the circulating medium of other countries, as well as in exchange for bullion and for all commodities. The utmost admission which he was disposed to make was, that in proceeding to limit our paper with a view to the improvement of the exchange, we ought to avoid that severity of pressure by which manufacturing industry might be seriously interrupted.
According to the same erroneous doctrine, the export of our gold coin in each of those instances of which Sir Isaac Newton and others spoke, was referable to balance of trade, and not to the cause to which they ascribed it. When in the reign of King William, our gold coin went abroad, in consequence, if we were to credit Sir Isaac Newton, of its having become more valuable than our silver, through a change in the relative value of the two articles, it went to pay a balance of trade; for it was balance of trade, and balance of trade alone, according to the tenets in question, which caused the precious metals to transfer themselves to other countries. When in a subsequent year a similar difference between the two kinds of currency occurred, it was in order again to pay a balance of trade that the better coin quitted the kingdom. He would put another case. Suppose a fisherman on our southern coast, to collect a thousand guineas, and exchange them in the channel with some French fisherman for as much French brandy as should be deemed an equivalent, the gold, according to the doctrine in fashion, would have gone to pay the balance of trade. It would have been employed to discharge a previously existing national debt. It was always, according to these tennets, the brandy which forced out the gold, and not at all the gold which forced in the brandy. By the Frenchman’s putting the brandy into his boat, the Englishman was compelled to put the gold into his. The brandy always went before; the gold always followed after. It was one of the peculiar properties of gold that it always served to pay a balance.
The truth was, that our paper currency having become less valuable by nearly twenty per cent. than the gold contained in our coin, the coin could no longer circulate interchangeably for it, but went abroad, because there was a profit of nearly twenty per cent. on the transmission. This profit operated as effectually in withdrawing it from circulation, and causing that part of it which was not bought at a high price for manufacturing uses, to be exported, as if an actual bounty of twenty per cent. were given on the export of it; and as much prevented the importation of gold for the purpose of serving as currency—the only purpose for which large quantities of gold were usually imported—as if a tax of twenty per cent. were levied on the import of it. We deplored the loss of our gold coin; but by not limiting our bank notes, we were thus, in substance, laying a tax on its importation, and giving a bounty on its exportation: and then, referring its absence to balance of trade, we imagined that we had no power of recalling it.
He admitted that something was to be conceded on the ground of an unfavourable state of trade and a bad harvest, as well as on account of large drafts in discharge of the foreign expenditure of Government. Our manufactures, and other exportable commodities, might happen not to be in such demand abroad as to supply, on such occasions, the whole of the remittance advantageously. The precious metals were in more universal request than any other article; and the transmission of a certain quantity of these might prevent so low a selling price of our commodities, in the foreign market, as might otherwise be necessary. But our gold was now gone, and that disadvantage of which he was speaking, was therefore one against which we were beginning to be quite unprotected. Our coin had for the most part left us in 1801. The state of our trade and foreign expenditure seemed not likely to improve materially. The exchange could not be corrected, as heretofore, by the transmission of specie. The cautious limitation of our paper was, therefore, a principle to which every consideration of prudence should lead us to resort.
Several of the first Resolutions of his Right Hon. Friend (Mr. Vansittart) were intended to shew that there was no correspondence between the variations in the exchange for some time past, and the existing quantity of notes. He had in his former Speech remarked, in reply, that at three several periods—in 1783, 1795 and 1790, and 1797—the Bank had experienced a drain of gold, had consequently restrained their issues, and had experienced a subsequent improvement of the exchange. His Right Hon. Friend erroneously assumed that the Bullion Committee deemed the effect of a limitation of paper to be instantaneous; an error which was exposed by the amendments intended to be offered by the Chairman of the Bullion Committee. The influence both of a reduction and increase of paper, though sure, might be slow, and probably would be various, both as to the degree and time of its operation: it would affect, first, one kind of commodity, then another; probably operating more early on those articles of which the sale was for ready money, reaching slowly the land, and still more slowly the labour, of the country. When an over-issue of paper had produced a general alteration in the price of labour, and, through the price of labour, on that of commodities, the improvement of the exchanges became more difficult and hopeless; and this consideration ought to induce us not to delay the reduction of our bank notes till the wages of labour had become materially affected. In the case of an alteration in the value of the coin of a country, the operation on prices, though in like manner sure, was also in like manner slow and irregular. Mr. Hume, in speaking of the successive deteriorations of the French coin, in the reign of Louis XIV., had remarked, that they did not at once produce a proportionate rise of prices. He says, “Though the high price of commodities be a necessary consequence of the increase of gold and silver,” (as it surely must also be of the increase of paper currency), “yet it follows not immediately on that increase, but some time is required before the money circulates through the whole state. At first, no alteration is perceived: by degrees the price rises, first of one commodity, then of another; till the whole at last reaches a just proportion with the new quantity of specie in the kingdom. In my opinion,” he adds, “it is only in interval between the acquisition of money and rise of prices, that the increasing quantity of gold and silver is favourable to industry.”—Those gentlemen who are eager to maintain an extended paper circulation, with a view to serving commerce, would do well to bear in mind this very sound observation of Mr. Hume. They should remember, that it is only by the perpetual increase of paper that their object can be fully effected. They should also reflect, that, in proportion to this increase, the exchange will be prejudiced, and the standard of the country forsaken. Mr. Hume goes on to specify some facts in proof of his general position. “And that the specie,” says he, “may increase to a considerable pitch before it have this latter effect” (of raising prices), “appears, amongst other instances, from the frequent operations of the French King on the money; where it was always found, that the augmenting of the numerary value did not produce a proportional rise of prices, at least for some time. In the last year of Louis XIV., money was raised three sevenths, but prices augmented only one.”
The impression intended to be conveyed by his Right Hon. Friend (Mr. Vansittart) was this; that, inasmuch as there was no exact correspondence between the quantity of paper and the state of the exchanges, at the periods which were specified by him, the evidence of facts was against the doctrine of the Bullion Committee, that a diminution of paper tended to meliorate the exchange. His Right Hon. Friend, if reasoning at the time of Louis XIV., might have shown the evidence of facts to have been against the corresponding doctrine of Mr. Hume, that a debasement of the quality, and consequent enlargement of the quantity, of the coin of a kingdom, tended to raise prices. He would have only had to select some day almost immediately following the debasement, in order to shew that no perceivable consequence had followed. It then took a year to produce an effect amounting to 1-7th, when the whole ultimate effect ought plainly to be, and doubtless was, 3-7ths. The case of the Bank of France, in 1805, might, in like manner, have been turned by his Right Hon. Friend to the purpose of proving his own point. The restriction of its paper was not effectual at once; it was not operative in any kind of regular proportion to its degree. These two cases served, nevertheless, on the whole, to establish the doctrine of the Bullion Committee. They shewed both the general effect and the irregularity of it. Nothing, indeed, was more easy, than for one who, in a case like this, had the choice of the days on which he was to make his comparisons, to state facts which would seem to prove almost any thing, In one instance, his Right Honourable Friend, arguing from the amount of bank notes on a single day, had stated them three millions higher than a note supplied by a Bank Director (Mr. Raikes) had allowed them to be; of which error he had become so convinced, as to have altered his resolution. It was only by averages of the amount, and not by the amount on single days, and it was by looking to periods subsequent to the limitation of paper, that any sound inference could be made.
There was another species of unfairness in the Resolutions. They stated the fluctuations in the exchange and the price of bullion, for a long time preceding the suspension of cash payments; and then spoke of the variations since that period, as if these were somewhat similar in their degree. But was the House aware of the different extent of the fluctuations in the two periods? He would specify the fluctuations in the price of bullion. This was a surer test of depreciation than the exchanges. Many circumstances perplexed our inquiry into the true par of exchange; it was necessary to know, first, the exact standard in foreign countries;—secondly, the degree of wear of the current foreign coin; for it was with the coin actually circulating, and not with that which was fresh from the foreign mint, that the comparison with our own was to be made;—we ought likewise to be informed whether there was any, and what, foreign seignorage; and also, indeed, what obstacles to the exportation of the foreign currency. But, besides these sources of inaccuracy, many of which were continually varying, there was another most fruitful cause of error, namely, the circumstance of the standard of this country having now for some time been gold, while that of Hamburgh in particular, as well indeed as of Amsterdam, was silver. There had been a very varying disproportion between the prices of gold and silver in the world; and this variation, as he believed, would serve to account for much of that occasionally great depression of our apparent exchange with Hamburgh, in times preceding 1797, on which the opponents of the Bullion Committee had relied. The people of this country were not bound to examine into all the intricacies of the exchange, in order to know whether their standard was adhered to. The state of the exchanges merely afforded a confirmation of a depreciation of our currency: a generally high price of bullion of itself distinctly established it. What, then, was the price of bullion before 1797, and what was it now? It had never, before 1797, except in the South Sea year, and at the time when our coin was deteriorated, risen higher than 4l. 1s. 6d. per oz. and had scarcely ever reached that point; that is to say, it had never fluctuated more than from 3l. 17s. 10d. to 4l. 1s. 6d.—it was now 4l. 14s. It had not exceeded its proper mint price by more than 3s. 8d. or 2 to 3 per cent. in the one period—it exceeded it by 16s. 2d. or fitfeen to twenty per cent. in the other. Was it fair, then, to infer, or to imply, that because we had occasionally departed from the standard before 1797, to the extent, at the utmost, of two of three per cent.; we need not now regard a departure from it of fifteen or twenty per cent.? The Bullion Committee had never intended to say, that no deviation from the standard of our coin, however small, ought to be tolerated. They were not in this respect the theorists which they were sometimes represented to be. They, indeed, affirmed bullion to be the standard, and the more the subject was examined, the more did it appear that we had either this standard or none; but they allowed of a moderate departure from it. Nothing human was perfect. The very mint, though it professed to convert a pound of gold into forty-four and a half equal parts, or guineas, did not effect their object with mathematical precision, and to their deviation was given the technical name of a Remedy. Even the most minute departure of this kind below the standard might be called a depreciation. Through the wear of guineas there arose a further depreciation, which the Parliament had taken care to limit, by making them cease to be a legal tender when their weight fell below about one per cent. The strictness of this limit shewed the principle in the mind of Parliament; it proved that depreciation to a certain extent was contemplated, and that depreciation beyond that point was thought an evil to be carefully provided against. The operation of our laws, which prevented the melting and exportation of coin, had led to a further increase of the difference between the market price and mint price of gold, or, in other words, to a further depreciation. The effect produced by all these causes had never, before the suspension of cash payments in 1797, been such as to cause the actual currency of the country to differ from bullion more than to that extent of two or three per cent. which he had stated, except on the two occasions which he had spoken of. The people, therefore, up to that time, were secure of having the value of their currency thus far sustained. The liability of the Bank to pay in cash, guaranteed to them a paper incapable of departing below bullion further than in the degree which he had mentioned. At the present time this paper was fifteen or twenty per cent. below bullion, and they had no security against a further, and even indefinite, depression. It was said, that gold itself had risen; but even if it had, gold being the standard, we were bound to hold to it: we had held to it in its general fall, and we ought to abide by it in its general rise also. The argument that gold had risen would justify an adulteration of the gold coin, just as much as it would justify the present depreciation. On the whole, he thought, that to confound the little differences between the market price and mint price of bullion before 1797, with the great difference at present, was most unfair. The difference, it was true, might be said to be only in degree, but degree was every thing in this case; and it was remarkable, that the Resolution of his Right Hon. Friend studiously forbore to specify the amount of the difference between the market price and mint price of bullion at the two periods.
There remained only one other topic on which he had to remark.—The Resolutions of his Right Hon. Friend assumed that the notes of the Bank of England were not excessive, because the difference between their numerical amount now and in 1797, was not greater than the comparative trade and expenditure at the two periods would fairly justify.
The notes of 5l. and upwards, for the average of three years before 1797, were about ten millions seven hundred thousand pounds; and, for the average of the last three years, were about fourteen millions two hundred thousand pounds. He would fairly say, that if he had been asked to pronounce them excessive on the simple ground of their relative quantity at the two periods, he might have hesitated to do it. He should have inquired what was the state of the exchanges and the price of bullion, and should have formed his judgment chiefly by the answer to this question. He was, however, very far from admitting, on the other hand, that the due limitation of them could be presumed from what was called the small extent of their increase. There was much misconception on this subject, which those who, like himself, were acquainted with the money transactions of the metropolis, were best able to remove. A very increased degree of economy was practised in the use of notes. Gentlemen uninformed on this topic naturally assumed, that when our trade and revenue and public expenditure were extended, the amount of notes requisite for these enlarged payments must be nearly proportionate. But this was very far from being the case. In the infancy of paper credit, the circulation of such an establishment as the Bank of England might regularly and uniformly increase: a time, nevertheless, would come when it would begin to diminish; but exactly at what period, and in what degree, this change would take place, was not easily ascertained. When the Bank was instituted, and for some time afterwards, the fund which private bankers, who were then goldsmiths, kept in store as a provision against emergency, consisted chiefly of gold; but by slow degrees it became Bank of England notes. The papers before the House would accordingly shew how very trifling was the circulation of the Bank at an early period of their establishment, and how greatly it after a time advanced. But it was not regularly progressive in proportion as confidence increased. The banker suffered a loss of interest proportionate to the amount of Bank paper in his possession; for which, therefore, he would be disposed to substitute a paper from which no such disadvantage accrued. Exchequer bills furnished one provision of this sort. They yielded interest to the banker, and yet were convertible by a very short and sure process into bank notes. Bank paper, therefore, was by no means the perfection of the system; it was not his “last and best supply.” The last and best supply had been furnished from the Bank of the Right Hon. the Chancellor of the Exchequer, who well knew to what an extent his issues of this kind had been recently carried. Bills of exchange also, and other articles of a similar nature, served exceedingly to spare the use of notes; and a variety of devices was resorted to for the same purpose. As in many manufacturing concerns there had been a perpetual exercise of ingenuity, and a consequent abridgment of labour; so in the banking system there had been an exertion of the talents of individuals in producing the necessary quantity of notes. Evidence had been given before the Bullion Committee of the increasing number of money-brokers, who passed from one banking-house to another, and supplied the daily and hourly wants of one quarter, by carrying away the superfluity of another. If we could suppose the sixty or seventy bankers of the metropolis to be reduced to six or seven, it was obvious that a very diminished quantity of notes would suffice for the same business. The improvements in the banking system tended to unite, as it were, into one house, for the purpose of which he was speaking, even those bankers who held no direct communication with each other.
The quantity of notes kept by private families was also, as he believed, continually diminishing, through the increased habit of employing bankers, and of circulating drafts upon them, in and round the metropolis. The circulation of Bank of England notes in the country (he still spoke of those of 5l. and upwards), had probably also diminished, in consequence of the immense increase of country banks. The sum total of the stock of Bank of England notes kept in store by these banks might be augmented; but that stock consisted, in a great degree, of those 1l. and 2l. notes, which he had left out of his calculation.
Mr. H. Thornton concluded with observing, that he was conscious of having left almost untouched many important parts of this extensive subject. The material point, however, of the nature of the standard, over which so much obscurity was thrown by the present Resolutions, had been so very ably and satisfactorily treated by the Right Hon. Gentleman over the way (Mr. Canning), as well, indeed, as by the Honourable Gentleman near him (Mr. Huskisson), that he had felt little inclination to dwell upon it: but he could not sit down without adverting once more to the first of the Resolutions now proposed, in which the right of the Crown to vary the standard, both with and without the concurrence of Parliament, seemed to be asserted. It might be true, that to the King, generally speaking, was committed the regulation of the coin of a country; but the language which he should be disposed to use, would be that, not of his Right Hon. Friend, but rather of Sir Thomas Rowe, at the council table of Charles I.;—a language, indeed, in the first words of it a little resembling the Resolution on which he was animadverting, but far different in its conclusion. “The regulating of coin,” said Sir T. Rowe, “hath been left to the care of princes, who have ever been presumed to be the fathers of the commonwealth. Upon their honours they are debtors and warrantees of justice to the subject in that behalf.”
Dr. A. Smith had observed, that “in every country the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, has by degrees diminished the real quantity of metal in their coin.” This was an evil to which, in times of difficulty, like the present, all nations were prone. The Romans (observed the same author), in the later and worse times of their country, reduced their coin to one twenty-fourth. England had reduced her pound only to one third. Scotland enjoyed the honour, and had also had the advantage—for such the principles of the Right Honourable Baronet over the way (Sir John Sinclair) would probably lead him to consider it—of having reduced its coin to one thirty-sixth; France to one sixty-sixth. He had always deemed it highly creditable to England, that the deterioration of her standard had been comparatively so small; but we seemed to be now willing to expose ourselves to the danger of giving way to this temptation, while Hamburgh and Amsterdam, and our great adversary in France, were superior to it. Their several standards were sustained. That we might not yield in this respect to the pressure of our present circumstances, was the chief object for the sake of which he had spoken. A country seldom was sensible of the first steps taken in this downward course; and it therefore belonged to those who possessed an extensive knowledge of such subjects, and adverted to the history of other nations, to point out the approaching danger.
He feared that the members of the Administration, partly, perhaps, through their having taken in the first instance a too transient view of the question, in consequence of their multiplied employments, and of their having then committed themselves too hastily upon it; partly also through a wish to enjoy the present benefit of an extended issue of paper in their financial and political concerns, were not the safest guides on the present occasion. He had endeavoured, for his own part, to fulfil his duty, both as an individual of the Bullion Committee and as a member of Parliament; and though he had not dwelt in his speech on the difficulties by which we were encompassed, he had not formed his judgment without taking them fully into his consideration.
[* ]The bank notes in circulation commonly are notes for five, ten, fifteen, twenty, twenty-five, thirty, forty, fifty, and one hundred pounds and upwards. If we suppose the price of all articles to be doubled, then we may assume every payment of one guinea to be a payment of two guineas, and to employ a double quantity of gold; every payment of two guineas to be a payment of four guineas, and also to employ a double quantity of gold; but every payment of three guineas will be a payment of six, and it may employ a five pound note, the fractional part only being paid in money. This particular payment will, therefore, require less gold. A payment of four guineas will be a payment of eight, and will also require less gold. The payments of more than four guineas, when, in like manner, doubled, will some of them employ a greater and some a less quantity of gold than before. They will employ, taking them together, the same quantity. It is evident from this statement, that an encrease of the quantity of the circulating medium of a country employing paper in its larger payments, and coin only in the smaller, will consist chiefly of paper; a circumstance which may considerably tend to prevent an encreased demand for bullion on the occasion of an augmentation of prices, and which may, therefore, greatly facilitate a rise of the bullion price of articles in the world.
[* ]It is controverted at great length in the work of Sir James Stewart on Political Œconomy.
[* ]It has been already observed, that, when the French possessed themselves of Holland, it was discovered that the Bank of Amsterdam had been accustomed privately to lend its deposits of specie to the city of Amsterdam, and, also, to the old Dutch government. The specie thus lent, as soon as goods in exchange for it experienced even a very small rise in Holland, would naturally find its way to other countries. The following are the passages from Mr. Hume, referred to in the text.
[* ]The British manufactures exported in 1785 amounted to—
[* ][Apart from the original separate edition of 1797 the three Reports from the Committee of Secrecy on the Outstanding Demands on the Bank of England, dated March 3, March 7, and April 21, 1797, together with the Evidence and the Report from Committee on the Restriction of Payments in Cash by the Bank, dated November 17, 1797, have been reprinted by order of the House of Commons in Reports from Committees of the House of Commons, vol. xi, Miscellaneous Subjects, 1782, 1799, 1805, pp. 119-131, and again in 1826. The present reprint is from the edition of 1805, pp. 149-150 and 161-165.]
[* ][The report of this committee, ordered to be printed April 28, 1797, exists in three forms:
[* ]“Reserrer l’éscompte, aussitôt que l’on s’apperçoit qu’il se presente à la Caisse plus de billets à réaliser en argent que de coutume.”
[† ]“Qu’est-à-dire que ces demandes d’argent? Qu’il y a sur la place plus de billets que les affairs du moment n’en exigent. Et comment y pourvoir? En diminuant leur quantité par un retrait plus fort que l’émission nouvelle.”