Front Page Titles (by Subject) SECTION IV.: STATE OF THE IRISH CURRENCY. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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SECTION IV.: STATE OF THE IRISH CURRENCY. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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STATE OF THE IRISH CURRENCY.
An Era of Theory—Bad State of the Irish Currency—Lord King’s Law of Currency—A Parliamentary Committee on the State of the Currency of Ireland—Testimony Before the Committee—Strange Incongruities of Evidence—Recommendations of the Committee.
WE have now to enter upon a new era, as it were, in banking. During the eighteenth century, the bank had not been managed on theories, but by rule of thumb; and though there had been several commercial crises, there had never been any general monetary panics till 1793. But since 1800, the bank had been managed on a succession of theories, each of which was considered as the acme of human wisdom by its own generation, and was condemned as the ne plus ultra of human folly by the next.
A few years after the suspension of cash payments in 1797, bank notes suffered a serious depreciation, which gave rise to several important pamphlets on paper money; among others to Lord King’s Law of Paper Money. This however passed away. The bank note recovered its value to a considerable extent, and discussion died out. In 1804, the Irish currency was in a dreadful state. The Bank of Ireland having been directed to suspend payments in cash at the same time as the Bank of England, issued notes with extravagant profusion. The foreign exchanges fell and the price of guineas rose. This led to the appointment of a committee of the House of Commons to inquire into the state of the Irish currency, of which we must give some account. In the space of six years after the suspension, the directors had increased their issues to nearly five times the amount they were before the restriction. For, while on the 1st of January, 1797, they were £627,917, by November, 1803, they were £2,911,628. The exchange between London and Dublin fell very rapidly in proportion to these increased issues.
At this time, the Irish shilling was 13d., and as both the Irish and English pounds were 240d., £100 sterling was equal to £108 6s. 8d. Irish currency. The par of exchange between Ireland and England was called 8 1-3. Hence, when the exchange was favorable to Ireland, it was below 8 1-3; when it was above 8 1-3, it was adverse. During the first year of the restriction, the exchange between London and Dublin was 7, and therefore favorable to Ireland. But immediately after that it began to fall; at the end of 1798 it was 9 1-4; at the close of 1799 it had fallen to 14 1-4. After some fluctuations, in November, 1803, it stood at 19, and was therefore highly unfavorable to Ireland. At this time, the note issues of the Bank of Ireland were £2,911,-628. This extraordinary derangement of the exchanges was productive of the utmost mischief and confusion to all commerce; and, Lord King states, was repeatedly brought before Parliament in the debates as the Irish Bank Restriction Bill. It also forcibly attracted the notice of economists. In 1803 and 1804, Lord King and Mr. Parnell, afterwards Lord Congleton, published most able pamphlets supporting the doctrine that the depression of the exchange below the cost of transmitting bullion from one place to the other was the proof and the measure of the depreciation of the paper currency. Both these pamphlets deserve the most attentive study, because they most clearly and unanswerably establish the great fundamental law of paper money, which many persons most unjustly attribute to Ricardo, in 1809.
This great law which we have designated Lord King’s Law of Paper Money, because he bore the most conspicuous part in establishing it, is this: “A rise of the market or paper price of gold above the Mint price, and a fall in the foreign exchanges beyond the cost of sending bullion from one place to another, is the proof and the measure of the depreciation of the paper money.” Lord King also showed most forcibly the fallacy of Adam Smith’s doctrine, that as long as the issues of bank notes are confined to the discount of mercantile bills, founded upon real transactions and of undoubted solidity, they could not exceed the amount which would necessarily circulate if the currency were purely metallic, and therefore could not be excessive. This doctrine was stoutly maintained by the directors of the Bank of Ireland before the committee of the House of Commons, and by the directors of the Bank of England before the Bullion Committee of 1810. The doctrine is very specious, but is wholly delusive, and Lord King has the merit of having first shown its fallacy. In 1804, the extravagant issues of the country bankers and others reached such an intolerable height, that all the monetary transactions between Dublin and London were destroyed; while those between Belfast (where nothing but specie was tolerated) and London were perfectly regular. Lord Archibald Hamilton called the attention of the House very strongly to the evils of the excessive issues of paper. In 1797, when the first Irish restriction bill was passed, the issues of the Bank of Ireland were £600,000; they were then £2,700,000. While the par of exchange between Ireland and London was 8 1-3, it was then 17, 18, 19 and even 20. Thus an Irish gentleman who came to attend to his duty in Parliament, after he had allotted £500 for his expenses, found at the end of his journey that he had only £400 to receive. On the 2d of March, 1804, Mr. Foster moved for a committee to inquire into this monetary derangement. He said that guineas were then at a premium of 2s. 4d. and 2s. 6d. in the current paper of the country; and, to whatever causes it might be attributed, the whole bank paper of Ireland was then at a discount of ten per cent. There was scarcely anything in the shape of money to be seen; but a miserable coinage of adulterated copper and of counterfeit shillings, so bad that for a £1 note, even at its depreciated state, 26 or 27 of such shillings would be given in exchange.
The circumstances which caused the appointment of this committee and its report are deserving of great attention, because it was the first investigation by a Parliamentary Committee into the theory of the paper currency; and they are the antitype of what occurred afterwards in England, and gave rise to the appointment of the Bullion Committee in 1810. The evidence of the state of the currency of Ireland given before the committee was most extraordinary. Mr. D’Olier, a director of the Bank of Ireland, had some of the base currency in circulation weighed. He found that it took 126s. to the pound weight; such as remained of the old Mint issues weighed 94s. 6d. to the pound—the Mint weight being 62s. to the pound. He estimated that the best of the base silver shillings were not worth 6d. and the worst about 3d. The makers of the base coinage sold it to persons who had an opportunity of circulating it at the rate of 28s. to 35s. the guinea.
Mr. Roach said that, in the south of Ireland, the silver currency had entirely disappeared from circulation, and its place was supplied by the issue of silver notes. These, together with the increasing issue of bankers’ notes of all descriptions, had enhanced the price of all articles of the export trade above their natural value, and had created a degree of false credit in the southern parts of Ireland, which increased the price of land and everything else. These issues of silver notes were constantly increasing, especially during the last twelve months. There was in reality a very good supply of real silver in the south of Ireland, which was hoarded and concealed, and which would again come into circulation, if these silver notes were suppressed. Traders almost universally issued notes for 3s. 9 1-2d. and 6s., payable to bearer at twenty-one days after date, to evade the law.
Mr. Colville, a director of the Bank of Ireland, said there might be some small proportion of Mint silver, greatly worn, in circulation in Dublin, but not more than two per cent. This had been gradually getting worse and worse for more than five years. Crowns and half-crowns, originally issued from the Mint, were not circulated, but kept as curiosities; and from the high state of the exchange, the best pieces were carefully picked out for exportation. There were at this time in Ireland seven bankers issuing notes; twenty-eight issuers of gold and silver notes; sixty-two issuers of silver notes; and 128 issuers of I. O. U.’s. In the Youghal district alone, there were seventy issuers of currency, of which sixty-two issued I. O. U.’s from 6s. down to 3 1-2d.
In the north of Ireland, where nothing but gold was current, the exchange at Belfast with London had always continued favorable to Belfast; and even while the exchange at Dublin was progressively sinking, the exchange at Belfast continued to rise. From 1794 to the end of 1798, the exchange had been invariably favorable to Dublin, being generally about 7 1-2, and sometimes even so high as 5; but at the end of 1798 it fell to 9; in December, 1799, it fell to 14; but it being expected that Bank of England notes would be substituted for those of the Bank of Ireland, it rose to 9. From this time, it gradually fell to 18 and 19 in January, 1804, when the matter was brought before the House.
The following figures exhibit the difference of the exchange on London between Dublin, where all the currency was paper, and Belfast, where it was all specie:
At Newry, which was a kind of debatable land between specie and paper, the exchange upon London, according as bills were purchased with specie or bank notes, was as follows:
In 1696, the extremely depreciated state of the silver coinage had turned the exchanges greatly against the country. But it was a principle perfectly well understood at that time, that the real exchange between any two places could never vary by more than the cost of sending bullion from one place to the other. The question, therefore, before the committee was, to what could the extraordinary state of the exchange at Dublin upon London be owing? What could be the reason of the difference of the rates between Dublin and Belfast? Some of the witnesses declared that it was owing to the over-issues of paper in Dublin. The directors of the Bank of Ireland indignantly denied that the bank’s notes were depreciated. Mr. Colville being asked what could be the motive for so large an increase of its issues, from £600,000 to £3,000,000 in so short a time, said, that the course of exchange about two years after the restriction having become very high, and greatly against Ireland, the money of the country was carried out of it, for the purpose of paying the balance of remittances against Ireland; that as the gold decreased, it became necessary to supply its place with paper. This amount he placed at £1,200,000. He contended that it was a great error to suppose that the increased issues caused the raising of the exchange, as was often done. In his opinion it was directly the reverse, inasmuch as the paper enabled the gold which before stood in its place to be exported; and as far as it went in weight and measure, so far was it a clear and decided cause of preventing the exchange getting higher than it was. It was evident, he said, that the more paper issued by the bank in extension of loans enabled a greater drain of specie to take place, and consequently to strengthen the cause which kept down the rate of exchange. Mr. Colville repeatedly said that the state of the exchange was exclusively due to the fact that Ireland owed a great deal more money than she was able to pay. Mr. Colville’s evidence was an amusing specimen of reasoning in a vicious circle. He decidedly held that the sole cause of the unfavorable state of the exchange was that Ireland owed a heavy balance of payments to Great Britain. And, being asked what was his criterion of such a heavy balance being due, he said it was the state of the exchange. That is, the reason why the exchange was unfavorable was that Ireland owed money; and the proof that Ireland owed money was that the exchange was unfavorable. Admirable logic! He admitted that the rate of exchange would be influenced if degraded and adulterated coin was the medium in which the balance of debt was paid; but he strenuously denied that such views in any way applied to Bank of Ireland paper.
The directors maintained that it was no proof that Bank of Ireland paper was depreciated because gold was bought at a premium. They maintained that buying gold at a premium was the effect and not the cause of the exchange, and, therefore, no proof of the depreciation of the paper. The theory of these gentlemen was that the exchange could only be depressed on account of money being remitted; and that it might be depressed to any extent in proportion to the money which had to be remitted. Now, if this theory was true, it happened, as may be seen from the above figures, that while the exchange was adverse to Dublin, it was highly favorable to Belfast. Therefore, while large remittances were being made from Dublin to London, there were at the same time large remittances being made from London to Belfast! The phenomena at Newry were more astounding still; for at that place, where payments were made both in specie and in paper, the exchange if paid in specie was favorable to Newry; but if paid in paper was favorable to London. Consequently, that reasoning would show that Newry was largely in debt to London, and London was largely in debt to Newry!
Mr. Colville fully admitted that, before the restriction, the bank was obliged to contract its issues during an unfavorable exchange and a drain of guineas; and also that the directors would have been very unfit for their business if they had not done so. The gist of the evidence of several of the witnesses was that, before the restriction, the directors had felt the necessity of contracting their issues during an adverse exchange, no matter how good the bills presented for discount were. But after the restriction, they adopted different principles. Then the doctrine of Adam Smith was brought forward, which we have noticed above as having been denounced by Lord King—viz., that the bank’s issues could not be excessive, so long as they were advanced on mercantile bills of undoubted solidity, and based on a real transaction. This was a very plausible theory, and was stoutly maintained afterwards by the directors of the Bank of England before the Bullion Committee. But the very admission of the directors that it was incapable of being acted upon, so long as cash payments were maintained, was sufficient to condemn it.
In 1696, during the re-coinage of the silver money, the Bank of England stopped payment, and a difference of twenty per cent. arose between specie and paper, and between tallies and specie of forty per cent.; and it was universally said that bank notes and tallies were at a discount of twenty and forty per cent. respectively. There is no trace of any other language being applied to them. In 1804, the Bank of Ireland had suspended cash payments; and Irish bank notes and specie exchanged at a difference of ten per cent.; so that it required a guinea note and 2s. 6d. in specie to buy a guinea in specie. The statesmen and merchants of 1696 would have expressed this state of things by saying that Irish bank notes had fallen to a discount of ten per cent. But at this period, a new mode of expressing it was discovered. It was stoutly maintained that it was not the paper which was depreciated; but the gold which had risen in value! or was appreciated, as the jargon was. When those directors maintained that a rise in the price of gold was no more a proof of the depreciation of the note than the rise in the price of any other commodity, they did not remember that a bank note is a “promise to pay” gold, and is not a promise to pay anything else. The same opinions were expressed by other witnesses, who seemed to think that there could be no possible cause which influenced the rate of exchange, but the remittances to be made to or from the country. They totally forgot, what was fully understood in 1696, that a bad state of the coinage influenced the rate of exchange, as well as the remittances to be made. When we consider the nature of an exchange, and the state of facts proved with regard to the Irish coinage at that time, we might almost smile at these ideas, and attribute them to the peculiar modes of thinking which are sometimes prevalent on the western side of St. George’s Channel. But when a precisely similar state of things took place in England with regard to the foreign exchanges, the very same doctrines were long and stoutly maintained by a very numerous party in this country.
One thing, however, made the investigation of the subject much simpler in Ireland than in England. In England, the use of bank paper extended throughout the whole country, and the exchanges were reckoned solely in bank notes. No part of the country used specie. But in Ireland, Dublin and the South used bank paper exclusively; Belfast and the North specie exclusively; and Newry used both specie and paper. The distinction between the two was therefore open and manifest. One very clear-headed witness, however, Mr. Marshall, Inspector-General of imports and exports of Ireland, controverted all these views. Upon considering the facts detailed above, he was clearly of opinion that Irish bank notes were depreciated from over-issue. Mr. Marshall also showed most clearly that the real exchange, arising from a balance of payments, was in favor of Ireland; and not adverse, as appeared by the nominal exchange. The exchange appeared to be against Dublin, because it was computed in bank notes, which, having ceased to represent the full quantity of specie for which they were issued, required an additional number of them to make up that quantity. This additional number swelled the exchange, and made it appear to be against Dublin, when it was in reality in its favor. The proof that the real exchange was in favor of Dublin was very simple. Bills of exchange purchased with specie in Dublin, or with Bank of Ireland notes equal in amount to specie at their market price, would then yield about £1 16s. 8d. more in London than they cost in Dublin. Whereas, if the exchange was unfavorable to Dublin, a merchant would always get more for his bill in Dublin than in London. This fact decisively proved that the real exchange was in favor of Dublin. Mr. Marshall then entered into a masterly analysis of the exchanges, showing that the depreciation of the note commenced when specie was flowing into Ireland; that it was always depreciated, whether specie was flowing in or flowing out, and had never been influenced by the balance of debt. He maintained that the high exchange which then existed arose like all other permanently high exchanges which ever existed, from the depreciated state of the currency in which bills of exchange were purchased.
The report of the committee condemned in the strongest terms the opinions of the Irish Bank directors and merchants, and adopted those of Mr. Marshall. It declared that the difference in the rates of exchange when paid in specie and in paper was due entirely to the depreciation of paper; that guineas were the true standard to which the value of the circulating paper was to be referred. It was not to be supposed that, by any circumstances, guineas could be ten per cent. higher in Ireland than in England, when the expense of conveying them from one country to the other was not so much as one per cent. From the official accounts it was certain that the balance of payments due to Ireland was about two and one-half millions; consequently the real exchange ought to be, and was, under par. The Irish Restriction Act was adopted purely for English considerations. There was no drain of specie; the exchange was highly favorable to Ireland; nor had the Bank of Ireland any reason to dread any alarming demand on it, as the Bank of England had. The committee attributed the unfavorable state of the exchange to the consequences of that restriction. It compelled the bank to refrain from sending gold, the only common medium between the two countries, into circulation. Paper was issued to supply the place of the gold so withdrawn; and at the same time the best and most effective check against the depreciation of paper—namely, convertibility into gold at the will of the holder—was removed. By being released from its engagements, the bank was encouraged to make excessive issues. The natural and constant effect of an adverse exchange, correcting itself by diminishing the issue of paper, was counteracted by this measure. When the exchange was so adverse as to draw gold out of the country, for every guinea drawn out of the bank an equal quantity of paper must be paid to buy the guineas. The directors would also be probably induced to lessen their discounts, so that the paper would be reduced in a greater degree than the gold withdrawn.
Mr. Colville admitted that, before the restriction, such was the practice of the Bank of Ireland and of every other bank. If prudence had not dictated such a course, necessity would have compelled a diminution of issues, by diminishing the stock of specie, which could only be replaced at a loss proportionate to the existing rise of exchange; and in fact, as well as in theory, the result of such practice always was, and must be, the redress of the unfavorable exchange. But the Restriction Act freed the directors from that necessity; and, so far from contracting their issues in consequence of the unfavorable exchange, they had increased them, which the state of the exchange would have prevented them from doing if they had not been relieved from the necessity of paying their notes in cash. The fact of the excessive issues of paper in 1753-4, and the adverse exchange which accompanied it, proved that excessive issues of paper produced a corresponding rise in the rate of exchange; and when the excess of paper was annihilated by the failure of the bankers, the exchange immediately became favorable. The reason was obvious: the nominal rates of exchange are influenced by the medium in which the payments are made, and the quantity of that medium necessary to effect a given payment must be increased as the value of the medium diminishes. This must equally take place, whether the payments are made in a degraded or adulterated coin or in a depreciated paper. The exchange between London and Holland in 1694 was a case in point. The currency of England was then degraded twenty-five per cent. below its proper value, and the exchange with Holland was twenty-five per cent. against England. As soon as the coin was reformed the exchange fell to par. If paper, therefore, by depreciation comes to represent a less quantity of money than it professes to do, it must make the exchange which it has to pay appear unfavorable, in the same manner as coin which contained less gold than it ought would do. And the removal of the degradation in the one case and of the depreciation in the other would have the same effect in bringing the exchange to its true state.
It was probable that this depreciation in Ireland arose almost entirely, if not solely, from excessive issues of paper. The rise in the exchange was concomitant with the extended issues of the bank. In March, 1797, the issues of the bank were under £700,000, and the exchange on Dublin was 5 1-2 to 6 3-4. In April, 1801, the paper was £2,266,000, and the exchange rose to 11 3-4 and 13. In January, 1804, the paper was £2,986,999, and the exchange rose to 17 and 18. How far these increased issues from the Bank of Ireland facilitated an increase from private bankers was not clearly proved, but it certainly did so to an immense extent; silver notes and I O U’s especially, were issued with the greatest profusion. In 1799, the number of bankers issuing notes was eleven; in 1800, there were twenty-three; in 1801, there were twenty-nine; in 1802, there were thirty; and in 1803, there were forty. In 1799, the issues of the private bankers were £450,721; in 1800, £458,085; in 1801, £1,233,502; in 1802, £1,096,207, and in 1803, £1,457,283. These immense issues, along with the profusion of silver notes and the base and counterfeit coin, kept up the prices of all necessaries and manufactures, drove out of circulation what little good silver was in it, and above all kept up a high and unexampled rate of exchange against the kingdom, unwarranted in its height and continuance by any other great or adequate cause than that depreciation, which such extravagant issues had assisted. The total number of houses that issued tokens and notes, according to the best accounts they could procure, was considerably above two hundred. Mr. Beresford, a Dublin banker, estimated that the country issues had increased four-fold since the restriction.
The repeal of the Restriction Act, from which all these evils flowed, would undoubtedly be the great and effectual remedy for the high and fluctuating rates of exchange. The common medium of payment being thereby restored, the rise of exchange above par would be limited to the expense of transporting specie; and paper being convertible into gold, its depreciation would be prevented. The inconveniences, however, to which the Bank of Ireland and other banks would be exposed, if such a measure were suddenly adopted at the present rate of exchange, was a strong argument against its being done then. But there was no commercial reason against its being done, as the real exchange was undoubtedly in favor of Ireland. Seeing, however, that the repeal of restriction could not be expected at that time, other measures might be adopted to cure the evil. One was that the Bank of Ireland might give bills of exchange on London for its paper. This would certainly have the effect of rectifying the exchange. The bank objected to the difficulty and expense of establishing a fund for that purpose. But the argument had no weight, because the expense of this would not be so great as the bank was subject to before the restriction, in order to maintain the convertibility of its notes, and which they must again incur when the restriction should be removed. Besides, the Scotch banks had done the very same thing with the greatest success. The Scotch currency had never varied from par since they had organized a measure of this sort, even during periods of great discredit, and no restriction had been imposed upon them, as it was on the banks of England and Ireland.
The undoubted success of this measure in the case of the Scotch banks was a strong argument that the Bank of Ireland should do the same thing. And there was a stronger argument still why the Bank of Ireland should do it. The Scotch banks, of their own good sense and patriotism, organized this measure without a precedent, and provided a fund at their own expense. But the Bank of Ireland had now an opportunity of doing it without any risk, difficulty or expense. The sums to be remitted during that year from England to Ireland amounted to £5,000,000 Irish. This sum, or a portion of it, might be appropriated for that purpose. It might be paid into the Bank of England to the credit of the Bank of Ireland, and though no doubt it would be an expense to that bank, it would furnish a fund to draw upon, by which it would effectually control the exchange, and the evil of the expense would be temporary: the good would be permanent to the bank and to the public. But all the benefits derived from these remedies would be of little avail and of very short duration if they did not at the same time cure the depreciation of Irish paper by diminishing its over-issue. This consequence must necessarily follow from Bank of Ireland notes being made convertible into Bank of England notes, almost as they would be into gold, if the restriction were to cease. For, if their fund in London were too rapidly drawn upon at any time, they must immediately limit their issues to lessen the demand; the notes would become of equal value with the English notes, and therefore with guineas, so long as the English notes were at par. The committee did, in express terms, declare their clear opinion that it was incumbent on the directors of the Bank of Ireland, and their indispensable duty, to limit their paper at all times of an unfavorable exchange during the continuance of the restriction, exactly on the same principle as they would, and must have done, in case the restriction did not exist; and that all the evils of a high and fluctuating exchange were to be imputed to them if they failed to do so. The effect which making Bank of England notes procurable in Ireland would have on the exchange was clearly shown by the great fall in it in March, April and May, 1797, when Government passed Bank of England notes in Dublin. They recommended that the Irish currency should be equalized with the English, by making the Irish shilling 12d. before any new coinage was struck, and that the English copper coinage should be as current in Ireland as the silver and gold coinage.
This admirable report is the first Parliamentary investigation into the theory of a paper currency; and is the first authoritative declaration that it ought to be governed by the foreign exchanges. In this it fully adopted the truths demonstrated by Mr. Boyd, Lord King and Mr. Parnell, and is in entire accordance with the more celebrated Bullion Report of 1810. These two reports are the most masterly papers which were ever drawn by Parliamentary committees. This report did not discuss the new theory propounded, that the paper currency should be regulated by the discount of mercantile bills. The Bullion Committee did, and entirely condemned it.