Front Page Titles (by Subject) APPENDIX I: 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 - An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
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APPENDIX I: 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 - 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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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.
[* ][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: