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PLAN FOR THE ESTABLISHMENT OF A NATIONAL BANK - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823 
The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005). Vol. 4 Pamphlets and Papers 1815-1823.
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First published by Cambridge University Press in 1951. Copyright 1951, 1952, 1955, 1973 by the Royal Economic Society. This edition of The Works and Correspondence of David Ricardo is published by Liberty Fund, Inc., under license from the Royal Economic Society.
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NOTE ON ‘PLAN FOR A NATIONAL BANK’
Ricardo started writing it at Gatcomb, where he had gone in the middle of July 1823, and it was completed by the beginning of August.
The Plan for a National Bank was republished in 1838 as an appendix to a pamphlet by another brother, Samson Ricardo, entitled A National Bank, the Remedy for the Evils Attendant upon our Present System of Paper Currency (London, Pelham Richardson).
There are among Ricardo’s Papers three MSS in his own handwriting connected with the Plan for a National Bank:
(1) A fragment of a draft, covering three quarto pages. This is printed in full below, pp. 298–300.
(2) A sketch of the Regulations for the establishment of a National Bank, covering two quarto pages. This also is printed in full below, p. 300.
The MS from which the edition of 1824 was printed (and which, as the Preface states, was committed to the press ‘in the state precisely in which it was found’) is not extant.
A conjecture made in footnote 4 on p. 286 below is confirmed by this MS: a regulation numbered 6, substantially the same as is given in that footnote, is deleted by Ricardo, whilst an equivalent sentence is inserted at the end of regulation 4; but by an oversight the subsequent regulations are not renumbered.
It has not been thought necessary to recast the footnotes attached to the text below; and consequently the ‘MS’ referred to there is the complete draft described above as (3), and not the final copy used by the printer.
It was the intention of Mr. Ricardo, on retiring into the country, after the last Session of Parliament, to employ part of his leisure in committing to paper, with a view to publication, a scheme by which, in his opinion, the profit derived from the supply of Paper Currency might be afforded to the public without any diminution of security against the inconveniences to which such a Currency is liable. It was known, previous to his last illness, that he had carried his design into execution; and the following pages were found among his papers after his decease. It is not known that Mr. Ricardo thought any alteration or addition necessary, unless it be in one point. Having communicated his MS. to a member of his own family,1 who was near him at the time of its completion; and it being suggested to him that difficulty might be experienced in the country, as the notes of one district were not to be payable in another, in obtaining currency for the purposes of travelling; he admitted that something to obviate this inconvenience might be required, but thought that some very simple arrangement would answer the end. It does not appear that he had committed to writing any expedient which might have occurred to him for that purpose; and his friends have deemed it most proper to commit his manuscript to the press, with this explanation, in the state precisely in which it was found.
The Bank of England performs two operations of banking, which are quite distinct, and have no necessary connection with each other: it issues a paper currency as a substitute for a metallic one; and it advances money in the way of loan, to merchants and others.
That these two operations of banking have no necessary connection, will appear obvious from this,—that they might be carried on by two separate bodies, without the slightest loss of advantage, either to the country, or to the merchants who receive accommodation from such loans.1
Suppose the privilege of issuing paper money were taken away from the Bank, and were in future to be exercised by the State only, subject to the same regulation to which the Bank is now liable, of paying its notes, on demand, in specie; in what way would the national wealth be in the least impaired? We should then, as now, carry on all the traffic and commerce of the country, with the cheap medium, paper money, instead of the dear medium, metallic money; and all the advantages which now flow from making this part of the national capital productive, in the form of raw material, food, clothing, machinery, and implements, instead of retaining it useless, in the form of metallic money, would be equally secured.2
The public, or the Government on behalf of the public, is indebted to the Bank in a sum of money larger than the whole amount of bank notes in circulation; for the Government not only owes the Bank fifteen millions, its original capital, which is lent at three per cent. interest, but also many more millions, which are advanced on Exchequer bills, on half-pay and pension annuities, and on other securities. It is evident, therefore, that if the Government itself were to be the sole issuer of paper money, instead of borrowing it of the Bank,1 the only difference would be with respect to the interest;—the Bank would no longer receive interest, and the Government would no longer pay it: but all other classes in the community would be exactly in the same position in which they now stand. It is evident too, that there would be just as much money in circulation; for it could make no difference, in that respect, whether the sixteen millions of paper money now circulating in London, were issued by Government, or by a banking corporation. The merchants could suffer no inconvenience from any want of facility in getting the usual advances made to them, in the way of discount, or in any other manner; for, first, the amount of those advances must essentially depend upon the amount of money in circulation, and that would be just the same as before: and, secondly, of the amount in circulation, the Bank would have precisely the same proportion, neither less nor more,2 to lend to the merchants.3
If it be true, as I think I have clearly proved, that the advances made by the Bank to the Government, exceed the whole amount of the notes of the Bank in circulation, it is evident that part of its advances to Government, as well as the whole of its loans to other persons, must be made from other funds, possessed , or at the disposal of the Bank;1 and which it would continue to possess after Government had discharged its debt to it, and after all its notes were withdrawn from circulation.2 Let it not then be said that the Bank Charter, as far as regards the issuing of paper money,3 ought to be renewed, for this reason— that if it be not, the merchants will suffer inconvenience, from being deprived of the usual facilities of borrowing; as I trust I have shown that their means of borrowing would be just as ample as before.4
It may however be said, that, if the Bank were deprived of that part of its business which consists in issuing paper money, it would have no motive to continue a joint stock company, and would agree on a dissolution of its partnership. I believe no such thing; it would still have profitable means of employing its own funds: but suppose I am wrong, and that the company were dissolved, what inconvenience would commerce sustain from it?5 If the joint stock of the company be managed by a few directors, chosen by the general body of proprietors; or if it be divided amongst the proprietors themselves, and each share be managed by the individual to whom it belongs, will that make any difference in its real amount, or in the efficacy with which it may be employed for commercial purposes? It is probable that6 in no case would it be managed by the individual proprietors, but that it would be collected in a mass or masses, and7 managed with much more economy and skill than it is now managed by the Bank. A great deal too much stress has always been laid on the benefits which commerce derives from the accommodation afforded to merchants by the Bank. I believe it to be quite insignificant compared with that which is afforded by the private funds of individuals. We know that at the present moment the advances by the Bank to merchants, on discount, are of a very trifling amount; and we have abundant evidence to prove, that at no time have they been great. The whole fund at the disposal of the Bank, for the last thirty years, is well known.1 It2 consisted of its own capital and savings—3 of the amount of deposits left with it by Government and by individuals, who employed it as a banker. From this aggregate fund must be deducted the amount of cash and bullion in the coffers of the Bank; the amount of advances to the holders of receipts, for4 the loans contracted for during each year; and the amount of advances to Government in every way. After making these deductions, the remainder only could have been devoted to commercial objects; and if it were ascertained, would, I am sure, be comparatively of a small amount.
From papers laid before Parliament in 1797, in which the Bank gave a number, as unit, and a scale of its discounts for different years, it was calculated, by some ingenious individual,5 after comparing this scale with other documents,6 also laid before Parliament, that the amount of money advanced in the way of discount to the merchants, for a period of three years and a half previous to 1797, varied from two millions to 3,700,000l.
These are trifling amounts in such a country as this, and must bear a small proportion to the sum lent by individuals for similar purposes. In 1797, the advances to Government alone, by the Bank, exclusive of its capital, which was also lent to Government, were more than three times the amount of the advances to the whole body of merchants.1
A committee of the House of Commons was appointed last session of Parliament, to inquire into the law of pledges, and into the relation of consignors of goods from abroad, to consignees. This committee called before it Mr. Richardson, of the house of Richardson, Overend, and Co., eminent discount brokers in the city. This gentleman was asked—2
“Q. Are you not in the habit occasionally of discounting to a large extent bills of brokers and other persons, given upon the security of goods deposited in their hands?
“A. Very large.
“Q. Have you not carried on the business of a bill broker and money agent to a very large extent, much beyond that of any other individual in this town?
“A. I should think very much beyond.
“Q. To the extent of some millions annually?
“A. A great many; about twenty millions annually;—sometimes more.”3
The evidence of Mr. Richardson satisfactorily proves, I think, the extent of transactions of this kind, in which the Bank has no kind of concern. Can any one doubt, that, if the Bank were to break up its establishment, and divide its funds among the individual proprietors, the business of Mr. Richardson, and of others who are in the same line, would considerably increase? On the one hand, they would have more applications made to them for money on discount: on the other, many who would have money to dispose of, would apply to them to obtain employment for it.1 The same amount of money, and no more, would be employed in this branch of business; and if not employed by the Bank, or by the individual proprietors, if they had the management of their own funds, it would inevitably find its way, either by a direct or circuitous channel, to Mr. Richardson, or to some other money agent, to be employed by him in promoting the commerce, and upholding the trade of the country; for in no other way could these funds be made so productive to the parties to whom they would belong.
If the view which I have taken of this subject be a correct one, it appears that the commerce of the country would not be in the least impeded by depriving the Bank of England of the power of issuing paper money, provided an amount of such money, equal to the Bank circulation, was issued by Government: and that the sole effect of depriving the Bank of this privilege, would be to transfer the profit which accrues from the interest of the money so issued from the Bank, to Government.
There remains, however, one other objection, to which the reader’s attention is requested.1
It is said that Government could not be safely entrusted with the power of issuing paper money; that it would most certainly2 abuse it; and that, on any occasion when it was pressed for money to carry on a war, it would cease to pay coin, on demand, for its notes; and from that moment the currency would become a forced government paper. There would, I confess, be great danger3 of this, if Government—that is to say, the ministers—4 were themselves to be entrusted with the power of issuing paper money. But I propose to place this trust in the hands of Commissioners, not removable from their official situation but by a vote of one or both Houses of Parliament.5 I propose also to prevent all intercourse between these Commissioners and ministers, by forbidding every species of money transaction between them. The Commissioners should never, on any pretence, lend money to Government, nor be in the slightest degree under its controul or influence. Over Commissioners so entirely independent of them, the ministers would have much less power than they now possess over the Bank Directors. Experience shows how little this latter body have been able to withstand the cajolings of ministers; and how frequently they have been induced to increase their advances on Exchequer bills and Treasury bills, at the very moment they were themselves declaring that it would be attended with the greatest risk to the stability of their establishment, and to the public interest.6 From a perusal of the correspondence between Government and the Bank, previous to the stoppage of Bank payments, in 1797,1 it will be seen, that the Bank attributes the necessity of that measure (erroneously in this instance, I think),2 to the frequent and urgent demands for an increase of advances on the part of Government. I ask then, whether the country would not possess a greater security against all such influence, over the minds of the issuers of paper, as would induce them to swerve from the strict line of their duty, if the paper money of the country were issued by Commissioners, on the plan I have proposed, rather than by the Bank of England, as at present constituted?3 If Government wanted money, it should be obliged to raise it in the legitimate way; by taxing the people;4 by the issue and sale of exchequer bills, by funded loans,5 or by borrowing from any of the numerous banks which might exist in the country6 ; but in no case should it be allowed to borrow from those, who have the power of creating money.
If the funds of the Commissioners became so ample as to leave them a surplus which might be advantageously disposed of, let them go into the market and purchase publicly government securities with it. If on the contrary it should become necessary for them to contract their issues, without diminishing their stock of gold, let them sell their securities, in the same way, in the open market. By this regulation a trifling1 sacrifice would be made, amounting to the turn of the market, which may be supposed to be gained by those whose business it is to employ their capital and skill in dealing in these securities; but in a question of this importance such a sacrifice is not worth considering. It must be recollected that, from the great competition in this particular business, the turn of the market is reduced to a very small fraction, and that the amount of such transactions could never be great, as the circulation would be kept at its just level, by allowing for a small contraction or extension of the treasure in coin and bullion, in the coffers of the commissioners. It would be only when, from the increasing wealth and prosperity of the country, the country required a permanently increased amount of circulation, that it would be expedient to invest money in the purchase of securities paying interest, and only in a contrary case, that a part of such securities would be required to be sold. Thus, then, we see that2 the most complete security could be obtained against the influence, which, on a first and superficial1 view, it might be supposed Government would have over the issues of a National Bank; and that, by organizing such an establishment, all the interest, which is now annually paid by Government to the Bank, would become a part of the national resources.
I would propose, then, some such plan as the following, for the establishment of a National Bank.
Five Commissioners shall be appointed, in whom the full power of issuing all the paper money of the country shall be exclusively vested.2 .
On the expiration of the charter of the Bank of England, in 1833, the Commissioners shall issue fifteen millions of paper money, the amount of the capital of the Bank, lent to government, with which that debt shall be discharged. From that time the annual interest of 3 per cent. shall cease and determine.3
On the same day, ten millions of paper money shall be employed by the Commissioners in the following manner. With such parts of that sum as they may think expedient, they shall purchase gold bullion of the Bank, or of other persons; and with the remainder, within six months from the day above mentioned, they shall redeem a part of the government debt to the Bank, on exchequer bills. The exchequer bills, so redeemed, shall thereafter remain at the disposal of the Commissioners.1 .
The Bank shall be obliged,2 with as little delay as convenient after3 the expiration of its charter, to redeem all its notes in circulation, by the payment of them in the new notes issued by government.4 It shall not pay them in gold, but shall be obliged to keep always a reserve of the new notes, equal in amount to its own notes which may remain in circulation.
The notes of the Bank of England shall be current for six months after the expiration of the Bank charter, after which they shall no longer be received by government in payment of the revenue.
Within six2 months after the expiration of the Bank charter, the notes of the country banks shall cease to circulate, and the different banks, which shall have issued them, shall be under the same obligation as the Bank of England3 to pay them in government notes. They shall have the privilege of paying their notes in gold coin, if they prefer so to do.
For the greater security of the holders of government notes, residing in the country, there shall be agents in the different4 towns,5 who shall be obliged, on demand, to verify the genuineness of the notes, by affixing their signatures to them, after which, such notes shall be exchangeable only in the district where they are so signed.
Notes issued in one district,1 or bearing the signature of an agent in one district, shall not be payable in any other; but on the deposit of any number of notes, in the office of the district where they were originally issued, or where they were signed, agreeably to the last regulation, a bill may be obtained, on any other district, payable in the notes of that district.
Notes issued in the country shall not be payable in coin in the country; but for such notes a bill may be obtained on London, which will be paid in coin, or in London notes, at the option of the party presenting the bill in London.
Any one depositing coin, or London notes, in the London office, may obtain a bill payable in the notes of any other district, to be named at the time of obtaining the bill. And any one depositing3 coin in the London office may obtain London notes to an equal amount.4
The Commissioners in London shall be obliged to buy any quantity of gold of standard fineness, and exceeding one hundred ounces in weight, that may be offered them,6 at a price not less than £3: 17s. 6d. per oz.
From the moment of the establishment of the National Bank, the Commissioners shall be obliged to pay their notes and bills, on demand, in gold coin.1
Notes of one pound shall be issued at the first establishment of the National Bank, and shall be given to any one requiring them in exchange for notes of a larger amount, if the person presenting them prefer such notes to coin. This regulation to continue in force only for one year, as far as regards London, but to be a permanent one in all the country districts.2
It must be well understood, that in country districts the agents will neither be liable to give notes for coin, nor coin for notes.
The Commissioners shall act as the general banker to all the public departments, in the same manner as the Bank of England now acts; but they shall be precluded from fulfilling the same office, either to any corporation, or to any individual whatever.5
On the subject of the first regulation I have already spoken. The Commissioners should be, I think, five1 in number—they should have an adequate salary for the business which they would have to perform and superintend—they should be appointed by government, but not removable by government.2
The second regulation refers to the mode in which the new paper circulation should be substituted for the old. By the provision here made, twenty-five millions of paper money will be issued; that sum will not be too large for the circulation of the whole country, but if it should be, the excess may be exchanged for gold coin,3 or the Commissioners may sell a portion of their exchequer bills, and thus diminish the amount of the paper circulation. There are other modes by which the substitution of the new notes for the old might be made, if the Bank of England co-operated with the Commissioners:4 but the one here proposed would be effectual. It might be desirable that Government5 should purchase from the Bank, at a fair valuation, the whole of its buildings, if the Bank were willing to part with them;6 and also take all its clerks and servants into pay. It would be but just to the clerks and servants of the Bank to provide employment and support for them, and would be useful to the public to have the services of so many tried and experienced officers to conduct their affairs. It is a part of my plan, too, that the payment to the Bank for the management of the national debt should wholly cease at the expiration of the Bank charter; and that this department of the public business should be put under the superintendence and controul of the Commissioners.
The third regulation provides for a proper deposit of gold coin and bullion, without which the new establishment could not act. In fact, there would be fourteen millions instead of ten, at the disposal of the Commissioners. It has been seen, by one of the subsequent regulations, that the Commissioners would act as Banker to the public departments; and as it is found by experience, that, on the average, these departments have four millions in their Banker’s hands, the Commissioners would have these four millions in addition to the ten millions. If five millions were devoted to the purchase of coin and bullion, nine millions would be invested in floating securities. If eight millions were invested in gold, six millions would remain for the purchase of exchequer bills. Whatever debt remained due to the Bank, after this second payment made by the Commissioners, must be provided for by loan, or made the subject of a special agreement between the Government and the Bank of England.1
The fourth and fifth regulations provide for the substitution of the new paper money for the old;1 and protect the Bank from the payment in specie of the notes which it may have outstanding. This cannot be attended with any inconvenience to the holders of those notes, because the Bank is bound to give them Government notes, which are exchangeable, on demand, for gold coin.
The seventh regulation provides for the substitution of the new notes for the old Country Bank notes. The country Banks could have no difficulty in providing themselves with the new notes for that purpose. All their transactions finally settle in London, and their circulation is raised upon securities deposited there. By disposing of these securities, they would furnish themselves with the requisite quantity of money to provide for the payment of their notes, consequently the country would at no time be in want of an adequate circulation. The circulation of the country Banks is estimated at about ten millions.2
The eighth regulation provides against fraud and forgery. In the first instance, paper money cannot be issued from each district, but must all be sent from London. It is just, therefore, that some public agent, should, in as many places as convenient, be prepared to verify the genuineness of the notes. After a time, the circulation of each district would be carried on by notes issued in that district, in forms sent for that purpose from London.1
The ninth regulation provides every possible facility for making remittances and payments to any district in the country. If a man at York wishes to make a payment of £1000 to a person at Canterbury2 , by the payment of £1000 in notes, issued at York, to the agent in that town, he may receive a bill for £1000, payable at Canterbury, in the notes of that district.3
The tenth regulation provides for the payment of the notes of every district, in coin, in London. If a man in York wants £1000 in coin, government should not be at the expense of sending it to him: he ought to be at that expense himself.4 This is a sacrifice that must be made for the use5 of paper money; and if the inhabitants of the country are not contented to submit to it, they may use gold instead of paper; they must, nevertheless, be at the expense of procuring it.
The eleventh regulation, as well as the ninth, provides for making remittances and payments to all parts of the country.6
The twelfth regulation provides against the amount of the paper currency being too much limited in quantity, by obliging the Commissioners to issue it at all times in exchange for gold, at the price of 3l. 17s. 6d. per oz. Regulating their issues by the price of gold, the commissioners could never err. It might be expedient to oblige them to sell gold bullion at 3l. 17s. 9d.; in which case the coin would probably never be exported, because that can never be obtained under 3l. 17s. 10½d. per oz. Under such a system, the only variations that could take place in the price of gold, would be between the prices of 3l. 17s. 6d. and 3l. 17s. 9d.; and by watching the market price, and increasing their issues of paper, when the price inclined to 3l. 17s. 6d., or under; and limiting them, or withdrawing a small portion, when the price inclined to 3l. 17s. 9d., or more; there would not probably be a dozen transactions in the year by the Commissioners in the purchase and sale of gold; and if there were, they would always be advantageous, and leave a small profit to the establishment.1 As it is, however, desirable to be on the safe side, in managing the important business of a paper money in a great country, it would be proper to make a liberal provision of gold, as suggested in a former regulation, in case it should be thought expedient occasionally to correct the exchanges with foreign countries, by the exportation of gold, as well as by the reduction of the amount of paper.
The thirteenth regulation obliges the Commissioners to pay their notes, on demand, in gold coin.2
The fourteenth regulation provides for a supply of one-pound notes for the country circulation. On the first establishment of the National Bank, but not afterwards, these are to be issued in London, to be subsequently counter-signed in the country.1 As a check on the country agents, every description of note2 might be sent to them from London, numbered and signed. After receiving them, the agent should countersign them before they were issued to the public; and he should be held strictly responsible for the whole amount sent to him, in the same manner as the distributors of stamps are responsible for the whole amount of stamps sent to them. It is hardly necessary to observe that the country agents ought to be in constant correspondence with the London district, for the purpose of giving information of all their proceedings. Suppose a country agent has given one hundred notes of one pound, for a note of one hundred pounds, he must give information of that fact, sending at the same time the larger note for which he has given them. His account in London would be credited and debited accordingly. If he receive one hundred pounds in notes, and give a bill on another district, he must give advice, both to the London district and to the district on which the bill is given, sending up the note, as in the former instance. His account will be credited for this one hundred pounds, and the agent of the other district will be charged with it. It is not requisite to go any further into details; I may already have said too much; but my object has been to show that the security for the detection of fraud is nearly perfect, as vouchers for every transaction would all be originally issued in London, and must be returned to London, or be in the possession of the country agent.
The fifteenth regulation is only explanatory of some of the former regulations.
The sixteenth regulation directs that the Commissioners shall act as banker to the public departments, and to the public departments only.1
If the plan now proposed should be adopted, the country would, probably, on the most moderate computation, save 750,000l. per annum. Suppose the circulation of paper money to amount to twenty-five millions, and the Government deposits to four millions; these together make twenty-nine millions. On all this sum interest would be saved, with the exception of six millions, perhaps, which it might be thought necessary to retain as deposits, in gold coin and bullion; and which would consequently be unproductive. Reckoning interest then at three per cent. only, on twenty-three millions, the public would be gainers of 690,000l. To this must be added 248,000l. which is now paid for the management of the public debt,—making together 938,000l. Now, supposing the expenses to amount to 188,000l., there would remain for the public an annual saving or gain of 750,000l.
It will be remarked that the plan provides against any party but the Commissioners in London, making an original issue of notes. Agents in other districts in the country, connected with the Commissioners, may give one description of notes for another; they may give bills for notes, or notes for bills drawn on them; but, in the first instance, every one of these notes must be issued by the Commissioners in London, and consequently the whole is strictly under their cognizance. If, from any circumstances, the circulation in any particular district should become redundant, provision is made for the transfer of such redundancy to London; and if it should be deficient, a fresh supply is obtained from London. If the circulation of London should be redundant, it will show itself by the increased price of bullion, and the fall in the foreign exchanges, precisely as a redundancy is now shown; and the remedy is also the same as that now in operation; viz. a reduction of circulation, which is brought about by a reduction of the paper circulation. That reduction may take place two ways; either by the sale of Exchequer bills in the market, and the cancelling of the paper money which is obtained for them,—or by giving gold in exchange for the paper, cancelling the paper as before, and exporting the gold. The exporting the gold will not be done by the Commissioners; that will be effected by the commercial operation of the merchants, who never fail to find gold the most profitable remittance when the paper money is redundant and excessive. If, on the contrary, the circulation of London were too low, there would be two ways of increasing it—by the purchase of Government securities in the market, and the creation of new paper money for the purpose; or by the importation, and purchase, by the Commissioners, of gold bullion; for the purchase of which new paper money would be created. The importation would take place through commercial operations, as gold never fails to be a profitable article of import, when the amount of currency is deficient.1
[Fragment of a draft of A Plan for the Establishment of a National Bank.]
The Bank of England, as well as every other Bank in this country is only of use as it substitutes a cheap currency for a dear one, a paper currency for a metallic one.
The advantages of a paper money provided security be taken to fix its value on a basis as permanent as the metals themselves have been so often and so satisfactorily, stated that it will not be necessary to dwell upon them here;—it will be sufficient simply and briefly to advert to them. The establishment of a paper money enables you to dispense with the use of a great quantity of a very valuable metal which as money produces nothing, but which being exchanged for raw material, machinery, food &ca. is made a productive capital and adds annually to the revenue of the country. The whole of such revenue is clear gain. Another advantage attending the use of paper money is the extreme facility with which payments are made by its means;—it is easily counted, it can be moved from one place to another without trouble or expences and is not subject to the loss to which metallic money is exposed from wear and friction. Let us only imagine that we had nothing but metallic money in the United Kingdom and were all obliged to receive our rents and our dividends and to carry on all our commercial transactions in such money and we shall have some idea of the immense benefits from the use of paper money. These then are the advantages which we derive from the establishment of Banks which issue paper money, but the public are apt to suppose that they confer other advantages and that our commerce is greatly benefited by the discounting of merchants bills which is a separate trade and would be equally carried on if the two businesses of issuing paper money and discounting bills were entirely separated.
Let me suppose that Government should take into its own hands one part of this joint business and should be the sole issuer of paper money in the kingdom, liable to the same obligation of paying their notes on demand in specie. It is known that the permanent Capital of the Bank is nearly 15 millions, which is all lent to Government at an interest of 3 pct. pr. Annm..—It is known also that the Bank have made advances to Government on Excheqr.-bills, and on1 an annuity which is to terminate at the end of 45 years. Let us suppose these advances to amount to 10 millions, and the whole debt of Government to the Bank to be 25 millions. Now then let us further suppose that at the expiration of the Charter Govt. pays in notes of its own these 25 millions to the Bank and at the same [time]2 compels the Bank of Engd. and all other Banks to call in their paper. It is evident that there would only be a substitution of one kind of paper for another there would neither be an increase or a diminution of quantity, and consequently there would be no diminution in the quantity devoted to mercantile discounts. On the contrary the Bank might greatly increase the amount of the particular fund which they now devote to such purposes. They would be in3 possession of 154 millions of capital after paying all their debts and might employ the whole of this amount in discounting commercial bills. The probability is that no such amount would be lent for that particular purpose, and that the Bank would actually be obliged to invest a large portion of this capital in the public funds of the country. That however which I am desirous of proving is that there would be no want of power in the Bank to afford precisely the same accomodation to trade as they now do and therefore that it is no argument against the Govt. issuing the paper money to urge that the trade of the country would be in want of its usual facilities. To make this more manifest let me suppose the following to be a statement of the affairs of the Bank
After the paym. t from Government of 15 millions and the withdrawing of 15 millions of Bank notes the acct. would stand as follows
[Sketch of the Regulations for A Plan for the Establishment of a National Bank.]
Let there be a National Bank established in London and oblige all other Banks, the Bank of England included to call in all their notes in certain proportions at fixed periods during 3 years after which there shall be no paper money in circulation excepting that which is to be issued by Government.—
Let the Government paper be a legal tender.
Let the Governt. Bank pay the Bank of England the debt due to them of £14,686,000 in Govt. notes. Let them further buy with their notes the whole stock of gold bullion of which the Bank is possessed at £3. 17. 6 pr. oz—if the Bank is willing to sell it.—
Let any other debt due by Govt. to the Bank be paid in Govt. Bank notes.—
Let a calculation be made by a return of the Stamp duties on Promissory notes of the amount of Country Bankers notes in circulation.
Let this amount be added to the amount of Bank of England notes in circulation.—
If the aggregate amount of the Gov. t notes to be issued in payment to the Bank for debt and bullion, be less than the aggregate amount of Bank of England and Country Bank notes let the Govt. issue a further amount of notes either in the purchase of bullion or of funded or unfunded debt as may be thought most expedient by those to whom the management of this important concern be confided.—
Let the Government Bank ever after regulate its issues by the price of gold bullion and the foreign exchanges.
The Govt. Bank shall be obliged to pay its notes in coin or bullion.—
It shall be obliged to give its notes at all times in exchange for gold coin of lawful weight, and shall also be obliged to buy whatever gold standard bullion may be offered to them at £3. 17. 6 per oz.—
[1 ]Probably his brother Moses Ricardo.
[1 ]In MS the end of the paragraph reads ‘without the slightest loss of advantage to the country that is to say without any diminution of the aggregate of profits.’
[2 ]Cp. the more extensive discussion of the advantages of paper money in the fragment, below, p. 298.
[1 ]MS ‘instead of allowing the Bank to issue it and borrowing it of them at interest’.
[2 ]In the fragment Ricardo says ‘the Bank might greatly increase the amount of the particular fund which they now devote to such purposes.’ See below, p. 299.
[3 ]MS, in place of the last six lines beginning ‘for, first’, reads ‘because there would be just the same quantity of money in the country, and of that quantity the Bank would have precisely the same proportion as before to lend to them.’
[1 ]MS ‘it is evident that all their loans to other parties must be made from other funds possessed by the Bank’.
[2 ]MS does not contain the last nine words.
[3 ]MS does not contain the last nine words.
[4 ]MS does not contain the last clause, beginning ‘as I trust’.
[5 ]MS, in place of the passage beginning ‘I believe’, reads simply ‘But suppose this to take place, what inconvenience would commerce sustain by it?’
[6 ]MS ‘The fact however is that’.
[7 ]In MS ‘probably’ is ins. here.
[1 ]In MS the last three lines read ‘, and we have the best evidence to prove that they never could have been very great. It is not a difficult matter to ascertain what the whole fund at the disposal of the Bank has been during the last 30 years.’
[2 ]MS has in addition ‘necessarily’.
[3 ]MS, in place of the dash, has ‘, of the amount of their notes, and’. This was no doubt omitted in the printed version by an oversight.
[4 ]MS has not ‘receipts, for’.
[5 ]William Morgan; see Appendix to this volume.
[6 ]MS, in place of the last two lines has ‘for different years without mentioning the actual amount it was calculated on data furnished by other documents’.
[1 ]MS, in place of the last two sentences, reads ‘In such a country as this 3 or 4 millions is a trifling amount and bears a small proportion to what is lent on discount by bankers and individuals. The advances to Govt. in 1797 were more than 3 times greater than the advances to merchants.’
[2 ]In MS this paragraph reads ‘Mr. Richardson an eminent discount broker was lately examined before a committee of the House of Commons on occasion of an enquiry into the state of the law as it regarded consignors and consignees of goods, and he was asked’; blank spaces are left for questions and answers.
[3 ]‘Report from the Select Committee on the Law Relating to Goods, Wares, Merchandize, intrusted to Merchants, Agents, or Factors and the Effects of the Law upon the Interests of Commerce’, 13 June 1823, ‘Minutes of Evidence’, p. 79; in Parliamentary Papers, 1823, vol. iv. Ricardo was a member of this Committee.
[1 ]MS, in place of the last two sentences, reads ‘Can it be doubted that the number of individuals applying to Mr. Richardson and to others who carry on the same business as he does for money on their bills, would be increased if the Bank were to break up their establishment and divide their funds amongst the individual proprietors, and can it be less doubted that those same individual proprietors then having their funds consigned to their own care would apply to Mr. Richardson for the means of employing them.’
[1 ]MS ‘one other objection to notice which will not require much time to answer.’
[2 ]MS ‘would be sure to’.
[3 ]MS ‘some danger’.
[4 ]MS ‘if [‘Gover’ is del. here] Ministers’.
[5 ]MS ‘by a vote of Parliament.’
[6 ]MS, in place of the last four sentences, reads: ‘I propose also that these Commissioners should have no transactions whatever with ministers, excepting that of laying from time to time a statement of their accounts before them, that they should never lend money to them nor be in the slightest degree bound by their instructions. I should think Ministers would under these circumstances have much less controul over the issues of Commissioners so independent of them than they now possess over those of the Bank of England. The Bank of England as is well known have been in the habit of making advances to Government on Treasury bills and on Exchequer bills, and have frequently been called upon to increase the amount of such advances at times when it was extremely inconvenient to the Bank and highly dangerous to the public interest that they should do so.’
[1 ]‘Report of the Lords’ Committee of Secrecy. Order of Council 26th February 1797; Relating to the Bank’; Appendix ‘Papers and Accounts’, No. 5, pp. 81–94; reprinted in Parliamentary Papers, 1810, vol. iii.
[2 ]MS does not contain the words in brackets.
[3 ]MS, in place of the last four lines, beginning ‘as would induce’, reads ‘to make them swerve from their duty if so powerful a body as the Government were precluded from having any transaction or holding any correspondence [the last four words are ins.] with them.’
[4 ]MS does not contain the last eight words.
[5 ]MS ‘public loans’.
[6 ]MS, in place of the remainder of this paragraph and the first two sentences of the next, reads ‘. It should be a part of the constitution of the board which I propose to establish that they should at no time and under no circumstances lend money to Governt., but that if their funds were so ample as to permit them to dispose of money they should purchase governt. securities in open market, and if on the contrary they had occasion to reduce their [‘circulation’ is del. here] floating securities they should in like manner sell them in open market.’
[1 ]MS ‘a very trifling’.
[2 ]MS, in place of the last two sentences and the opening of this sentence, reads: ‘It must be recollected that these transactions would be few in amount, as the circulation would be kept at its just level by being exchanged for coin and bullion when it exceeded its proper proportion, and by the sale of gold bullion or of coin to the commissioners when the amount of paper money was below that proportion. It would only be in the case of the stock of coin and bullion in the coffers of the Commissioners being too low that they would be under the necessity of selling some of their securities in the market in order to purchase with the paper money which they obtained by such sale the gold which they might deem necessary. On the other hand if the gold came into their coffers too fast, and accumulated in too great a degree, by the issue of more of their paper in the purchase of these securities such a tendency would be checked. By a very trifling sacrifice then’.
[1 ]MS does not contain ‘and super-ficial’.
[2 ]In MS the first regulation is ins. and reads: ‘Let Commissioners be appointed for the management of the paper circulation of the country.’ Later in the same MS the number of Commissioners is fixed at three; see below, p. 290, n. 1.
[3 ]In MS this regulation reads: ‘On the 1833, the day on which the Bank charter expires, let the Commissioners issue 15 [first written ‘20’, corrected to ‘15’, then restored to ‘20’, and finally written ‘15’] millions of paper money and pay it to the Bank of England, supposing that sum or more to be due from the Government to the company in discharge of its debt for the Bank Capital for which it is now paying 3 pct. interest.’
[1 ]In MS this regulation was first written: ‘Let the Government [replaced by ‘Commissioners’] with 5 [‘or 10’ is ins. here] millions more of paper money purchase gold and silver bullion to that amount.’ The last three words were then del. and the following was added: ‘and pay the Bank for as many Exchequer bills as they may think proper to take. If the debt of Govt. to the Bank exceed the 15 millions and the money paid for Exchr. bills provision must be made for it if the Bank require it by the issue of Exchr. bills or by loan’. A later version, which is much nearer to the printed one, was written at the back of another sheet.
[2 ]In MS ‘to use its best effort’ is ins. here.
[3 ]MS reads ‘within 6 months of’ in place of ‘with as little delay as convenient after’.
[4 ]In MS regulation 4 ends here. To the remainder of the printed regulation 4 there corresponds in MS a separate regulation 6 which reads: ‘The Bank shall not be exempted from the obligation of paying their notes in specie till 6 months after the expiration of their charter after which they shall be bound to pay them only in Government notes and shall be obliged to keep by them a sum of Governt. notes equal in amount to the notes which they may have in circulation.’ Since there is no regulation 6 in the printed version, it is possible that, in the copy sent to the printer, what was originally a separate regulation 6 was embodied in regulation 4, whilst the numbering was left unadjusted by an oversight.
[1 ]On the absence of a regulation 6, see above, p. 286, n. 4.
[2 ]In MS first written ‘6’, altered to ‘12’, finally revised to ‘8’.
[3 ]MS, from here to the end of this regulation, reads ‘to replace their notes by Govert. notes or Gold coin.’
[4 ]MS has in addition ‘large’.
[5 ]In MS the remainder of this regulation was first written: ‘who shall be obliged on demand to pay the notes presented to them in coin, to verify their being genuine by their signature, or by the issue of a local note, at the option of the party presenting them.’ Three main alterations were then made: (1) ‘for the first twelve months’ was ins. after ‘obliged’; (2) ‘to pay the notes presented to them in coin’ was del.;(3) ‘at the option of the party presenting them’ was replaced by ‘as may hereafter be judged most expedient’.
[1 ]The ‘issue of a local note’ had been previously mentioned in the MS (cp. the preceding footnote) but not in the printed version.
[2 ]In MS regulation 11 originally concluded the Plan; what corresponds to the subsequent regulations was ins.
[3 ]In MS ‘gold’ is ins. here.
[4 ]In MS this sentence is ins. and forms a separate regulation numbered 12.
[5 ]Numbered 13 in MS.
[6 ]In MS the remainder of this regulation reads ‘at £3. 17. 6—they shall be at liberty to give a price as high as £3. 17. 10½ if they think proper to do so.’
[1 ]In MS the corresponding regulation reads ‘The Commissioners shall be obliged to give gold coin of the standard weight on demand for any notes issued in London or for any bill drawn from the country.’
[2 ]MS does not contain this sentence.
[3 ]MS does not contain this regulation.
[4 ]A corresponding regulation is ins. in MS after regulation 6 (on which see above, p. 286, n. 4) and it reads ‘The commisss. should act as the Banker of the public, in the same way that the Bk. of England now does.’ A later draft of this regulation, corresponding more closely to the printed one, was written at the back of another sheet.
[5 ]In MS an additional regulation is ins. which reads: ‘An account specifying the amount of notes in circulation, the prices of gold and silver for each month, the amount and description of Govt. securities which the commissrs. have bought and sold since the last return shall be laid quarterly before the Lords commissioners of the Treasury who shall transmit a copy of such accounts within one week to the House of Commons, if Parliamt. be sitting, and if they be not sitting within one week after the commencement of the Session.’
[1 ]MS ‘3’.
[2 ]MS reads ‘but should not be removable but in consequence of an address to his majesty by the House of Commons, or by both Houses of Parliament.’
[3 ]MS does not contain the remainder of the sentence.
[4 ]MS, from here to the end of the sentence reads ‘but which it will not be necessary here to state.’
[5 ]MS ‘the Commissioners’.
[6 ]MS does not contain the last nine words.
[1 ]In MS this paragraph reads: ‘The third regulation provides for a store of gold coin and bullion without which the new establishment could not act. If it were thought necessary to purchase 10 millions of gold in bullion and coin there would be nothing left for the purchase of Excheqr. bills.—In that case Govt. must make some other provision for the payment of the Bank Debt. If 5 mill. of gold should be thought enough 5 millions might be paid for Exchr. bills. It must be recollected that as by a subsequent regulation the Commisss. are to act as Bankers to all the public departments this alone would furnish them with four millions of coin and bullion besides that which they should purchase, four millions being the average amount of those deposits even now after the reduction which has taken place in consequence of the cessation of the war. Whatever debt remained due to the Bank after the paymt. of the commissioners must be provided for by loan or made the subject of a special agreement between the Govt. and the Bank[;] with this the Commissioners would have no concern.’ The last sentence is ins. and the latter part of it is written at the back of another sheet.
[1 ]In MS the comment on the 4th and 5th regulations ends here. It is followed by the comment on the 6th regulation of the MS (which corresponds to the last sentence of the 4th regulation of the printed version) reading: ‘The 6th. resolution preserves to the country the right to obtain gold coin for whatever notes may be in circulation. While any Bank notes are in circulation the Bank will be liable to pay them in specie and this cannot be injurious to the Bank even if they sold all their gold to Govt. because as they would have an amount of Govt. notes equal to their own in circulation, they would have the means of providing themselves with gold by demanding it from the Commisss. in exchange for their notes.’
[2 ]MS does not contain this sentence.
[1 ]MS does not contain the last eight words.
[2 ]MS ‘Brighton’.
[3 ]MS reads ‘he may receive £1000 from the agent at Brighton in notes of that district.’
[4 ]In MS ‘or must impose it upon his debtor’ is del. here.
[5 ]MS ‘for the conveniences’.
[6 ]MS (in which the last sentence of regulation 11 of the printed version stands as a separate regulation 12; cp. above, p. 288, n. 4) has in addition: ‘The 12 Regulation gives the option to every man in London to use paper money or the coin of the realm.’
[1 ]Up to this point the corresponding comment in MS reads: ‘The13.th Regulation provides for a due issue of paper money by obliging the Commisss. to issue more paper when its low value as compared with gold shews that it [replaces ‘when the low value of gold as compared with paper shews that the latter’; Ricardo neglected to replace ‘low’ with ‘high’] is not in sufficient quantity. This is the case when 3. 17. 10½ in paper will purchase more than an ounce of gold for by law an ounce of gold is coined into £3. 17. 10½ and therefore it is of less value than paper money if an ounce of it will not sell for £3. 17. 10½ in paper money. If the commissioners regulate their issues by the comparative value of gold and paper they cannot err and they might carry on the whole business of currency with a very small quantity of gold by merely increasing or diminishing the quantity of paper according as its value was high or low compared with gold.’
[2 ]MS does not contain this paragraph.
[1 ]MS has here in addition ‘and may ever after if it be thought right to banish that species of circulation from London be issued in the country only’. In MS two passages corresponding to the remainder of this paragraph are ins., the second on another page.
[2 ]MS ‘the one pound notes’.
[1 ]MS does not contain this or the preceding paragraph.
[1 ]MS, in place of the last paragraph of the printed version, reads: ‘It will be seen that the plan provides against any party but the Commisss. in London making an original issue of notes. In the first instance they are all issued in London and a part must find its way into the country and be substituted for the country circulation. If from any circumstances the circulation in any particular country district should become redundant it could only be reduced by the return of notes to the country agent and the demand of a bill on the London Bank or on some other district. If the circulation of London or any of the other districts could not bear an increase the redundant circulation of the particular district would be finally exchanged for gold coin in London which would be melted or exported. If on the contrary the circulation of any particular district were too low it could only be increased by a transfer from London or from some other district where the circulation might be redundant. In London the circulation can always be increased either by means of the sale of gold bullion to the commissioners for paper money to be issued on the demand of the seller of the bullion or by the issue of notes by the commissioners in payment of govt. securities which they are authorised to purchase in the market. [‘This is in fact the precise way in which the circulation of London and the country is now regulated—’ is del. here.] The only difference in the way proposed, and that by which the circulation is now regulated is this that if there be need of an increased quantity of circulation in the country now the country banker can increase the quantity of his notes and lend them at interest, or he can increase his gold deposits and increase his issues at the same time; in fact by buying gold coin with his notes. By the plan proposed he can do neither of these but the commissioners can; when they buy gold and procure the gold to be coined they in fact increase their issues and their deposits of gold coin at the same time, when they purchase govt. securities in the market they create an additional number of notes, and lend them at interest.’
[1 ]‘the half pay of the’ is del. here.
[2 ]Omitted in MS.
[3 ]‘immediate’ is del. here.
[4 ]Replaces ‘25’.