The Online Library of Liberty

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• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

SECTION V.

FAILURE OF CURRENCY REFORM—INFLATION AND REACTION.

IN 1807, speculation burst out with redoubled fury. Napoleon’s Berlin decree, placing the whole of Great Britain under a paper blockade, and interdicting all commerce between all nations under his influence with Great Britain, was met with equally insane counter decrees by Great Britain. These decrees caused violent changes in the value of a multitude of commodities; and, as a natural consequence, immense speculation in them. The deposition of the House of Braganza from the throne of Portugal was followed by their emigration to the Brazils. This opened out the whole of the South American markets to British commerce, which had hitherto been closed against it. The speculation of the merchants swelled in proportion to the vastness of the markets opened up to them. A complete frenzy of speculation seized upon the nation. It spread from commerce to joint stock companies. The infatuation in 1720 was reproduced. Joint stock companies of every conceivable sort started up like mushrooms. At the same time the Bank of England fanned the flame of speculation beyond all the bounds of ordinary rashness. Sir Francis Baring said in his evidence before the Bullion Committee, that since the restriction, he knew of many clerks not worth £100 who had turned merchants, and got discount accounts from £5000 to £10,000 from the bank, which could not be done if it were not for the restriction. The paper discounted by the bank, which had been £2,946,500 in 1795, rose to £15,475,700 in 1809, and to £20,070,600 in 1810.

Along with this extravagant speculation, partly caused by it, and partly fanning it, a multitude of country banks started up in all directions and inundated the country with their notes, exactly as had happened before 1793. In the year 1797 they had been reduced to 270; in 1808 they had increased to 600; and in 1810, when the Bullion Committee was appointed, they amounted to 721; and the quantity of paper they put into circulation was supposed to amount to £30,000,000. At the same time the Bank of England had increased its issue to £21,000,000, a quantity declared by some of the most eminent witnesses far to exceed the legitimate wants of the country.

Concurrently with these extravagant speculations and issues of notes, the price of gold bullion rose rapidly, and the foreign exchanges fell with great rapidity—exactly the same symptoms as had been manifested in Ireland in 1804. Mr. Baring said that guineas sold for 26s. A celebrated war of pamphlets broke out. When the value of bank notes in 1797 had differed from specie, it had been universally said that bank notes had fallen to a discount. But in 1809, when exactly the same phenomena took place, an ingenious and powerful party made the wonderful discovery that it was not bank notes which had fallen, but gold that had risen! A host of writers, among whom one of the most distinguished was Ricardo, who now first appeared as a writer, maintained that bank notes were at a discount, which was caused by their excessive issues. The following figures, taken at intervals, are sufficient to show the rapid rise in the price of bullion and the fall in the foreign exchanges:

On the 1st of February, 1810, on the motion of Mr. Horner, the famous Bullion Committee was appointed.

The Bullion Report of 1810 has, from various circumstances, attracted so much public attention, as to have thrown completely into the shade the Report on Irish Currency in 1804. That report was soon so forgotten that the Directors of the Bank of England seem to have had no knowledge of it. The circumstances, however, of the derangement of the Irish currency in 1804 were precisely similar with those of the English currency in 1810. The same sets of opinions were delivered and adhered to stoutly by the professional witnesses in both cases, and the report of the committee in each case was precisely identical. In each case they condemned the doctrines and policy of the bank directors in the most emphatic manner. The report of the Bullion Committee of 1810 is written in a more methodical and scientific form, and is superior as a literary performance, but the principles adopted and enforced in it are absolutely identical with those of the report of 1804.

The witnesses examined before both committees consisted of the same varieties: bank directors, private bankers, general merchants and independent witnesses. The opinions given by the English bank directors and merchants were precisely similar to those of the Irish bank directors and merchants. The directors of both banks vehemently repudiated the idea that the bank paper was depreciated; they equally maintained that it was the price of specie which had risen; they both admitted that while they were liable to pay their notes in specie, they were obliged to regulate their issues by the foreign exchanges and the price of bullion; they both admitted that since the restriction they had paid no attention to their former rules, and they denied the necessity of so doing. They both denied that the issues of their notes had any effect on the exchanges, or were in any way the cause of the high adverse exchange, and they both denied that a limitation of their issues would have the slightest effect in reducing the exchanges to par. They both maintained that there could be no over-issue of their notes so long as they were confined to the discount of paper of undoubted solidity, founded upon real transactions. Nothing can be more remarkable than the perfect identity in sentiment in every point of opinion and policy between these two sets of directors; but we must remark what will detract considerably from the weight of their opinion, that they were all interested witnesses. In the first place, since the restriction on cash payments, and so being relieved of fulfilling their obligations, they had extended their discounts enormously, and as their profits upon their extended issues had been proportionate, the dividends of the proprietors had greatly increased. Secondly, they were in the position of semi-defendants; their policy was certainly impugned. The committee was a court of inquiry into their conduct; and it certainly was not likely that they would admit that the principles they were acting upon could be wrong, when they were so very lucrative to the proprietors of the bank. The same objection of interested testimony equally applies to that of the merchants; for they were interested in obtaining as large an amount of accommodation from the bank as possible; and a restriction on its issues would have curtailed their operations, speculative or otherwise; consequently, their interests were better served by the doctrines and policy of the bank directors. Both committees, however, examined witnesses of an independent position, who had no interest one way or the other; and in each case they totally disagreed from the opinions and the doctrines of the bank directors, and condemned their policy. And in both cases the committee, having examined all these witnesses of different shades and of opposite opinions, presented reports strongly condemning the opinions and practice of the directors of each bank, and called upon them to alter their policy; the report in the Irish case in language of great severity; that in the English case equally strong in fact, though milder in expression.

As this division of opinion on these financial questions exercised the most momentous consequences on the welfare of the country, it will be of advantage to state shortly and precisely the points upon which the respective parties were at issue.

The facts were, of course, easily ascertained and agreed upon. They were as follows:

Upon this acknowledged state of facts the opposite issues maintained by the two parties were as follows:

The one party maintained—

In opposition to these principles the other party maintained:

With respect to the first point at issue between the two parties, after the previous full exposition of the principles involved in it, we need say very little about it here, as according to what has already been said, it is quite clear that it was a very fantastic opinion indeed to suppose that gold could rise in comparison to a “promise to pay” gold. There was one circumstance, however, different in the cases of England and Ireland. In the latter country, the bank notes were openly at a discount; there were two prices in every transaction—a money price and a paper price; and there were specie shops where guineas were openly sold for bank notes and several shillings over. In England, this was not the case, partly because Bank of England notes were received at their full nominal value in payment of taxes; but chiefly because it was held to be an indictable offence to sell guineas for more than 21s. Shortly before the Bullion Committee was appointed, a man named De Yonge was tried and convicted for the crime of selling guineas for more than 21s. This law only applied to heavy guineas. Light guineas, below 5 dwts. 8 grns. might be sold, and usually brought a bank note of £1, and 6s. or 7s. over. But though it was supposed to be an offence to sell heavy guineas openly for more than 21s., there was abundant evidence to show that when persons were dealing privately they made a difference between payment in gold and payment in notes. However, De Yonge’s conviction was afterwards quashed. As Mr. Huskisson said, the doctrine of those persons who held that bank notes were not depreciated was, that bank paper was the real and fixed measure of all commodities, and that gold was only one of the commodities of which the value, like that of all others, was to be determined and ascertained by reference to this invariable standard and universal equivalent, bank notes. These views pervaded the whole of the mercantile evidence adduced, the reply to which is so obvious. A bank note was the promise to pay a certain specified weight of gold of standard fineness; it did not promise to be of the value of any amount of indigo, broadcloth, corn, or anything else. A £1 bank note professed to be of the value, and to be exchangeable for 5 dwts. 3 grns. of standard gold, and nothing else; and if it would only purchase 4 dwts. 8 grns., those who maintained that it was not depreciated, must also have maintained that 4 dwts. 8 grns. were equal to 5 dwts. 3 grns. There is no escape from this conclusion. Those who maintained that a £1 bank note, which was a promise to pay 5 dwts. 4 grns. was still a “Pound” when it would only purchase 4 dwts. 8 grns., ought also to have maintained that if the fifth part were to leak out of a pint bottle of wine, it was still a “pint of wine” because it was contained in a pint bottle. In each case the “promise to pay” and the “pint bottle” were only the outward sign of what the contents ought to be; in either case, it was the quantity of the substance, either of gold or of wine, they actually did contain, which was their true value. There was, however, one argument to show that there was no difference between specie and paper in transactions; for specie had totally disappeared from circulation; it had no existence. Bank notes and tokens were the sole circulating medium of the country. When people found that they could get no more for their good golden guineas than for the depreciated bank notes, they hoarded them; they either retained them locked up, or melted them down for exportation—the temptation to perjury being exactly 12s. per ounce. The explanation of this phenomenon is very simple. When bank notes are convertible into gold at the will of the holder they cannot fall to a discount; and if bankers issue too great a quantity of them the holders demand gold. But when bank notes are inconvertible, they take rank as a new independent, substantive currency, exactly like silver. Now the relative value of gold and silver purely depends upon the law of supply and demand; and when their relative values are fixed by law, if the legal, or artificial value does not agree with the market, or natural value, it invariably happens that the metal which is undervalued disappears from circulation. So, also, when heavy and light coins of the same metal circulated together, the heavy coins invariably disappeared from circulation, because the heavy coins were undervalued; and nobody would give six ounces of silver for what they could purchase with five ounces.

It was exactly the same with inconvertible bank notes. They could only preserve their relative value with gold by preserving certain relative proportions in their quantity. As soon as this relative quantity was exceeded their relative value fell; and as their relative value for gold was fixed by law, a change in their market value was followed by exactly the same consequences as a difference between the market and the legal value of gold and silver. The guineas which were undervalued were driven out of circulation, as has always been done under similar circumstances, and as always will be done to the end of time. Thus this iniquitous and ignorant law to force down the value of guineas brought its own punishment with it. It destroyed their existence as a circulating medium. But then it became literally true that there was no difference between specie and paper; the power of making an invidious distinction between specie and paper was effectually cured. Solitudinem faciunt, pacem appellant. When the inhabitants were massacred, the Russians proclaimed: L’ordre regne à Varsovie.

With respect to the second issue joined between the parties, the principal places with which London had established exchanges were Amsterdam, Hamburg and Paris. The witnesses examined by the committee proved that the whole expenses of freight, insurance, war risk, and every other charge, varied from about four to five and a-half per cent.; but beyond these there was a depression of twelve to fourteen per cent., totally unaccountable for by any of these causes. If it were true that this difference arose from a demand for gold on the Continent, it is quite evident that gold should equally have risen in the Continental markets. But those who alleged this cause should have been prepared with a proof of their assertions, which, however, they were totally unable to produce. On the contrary, it was proved that there was no alteration in the Mint price of gold in foreign places, and that the market price had experienced no rise at all in proportion to the rise in England.

Of all the witnesses examined by the committee, one foreign merchant alone maintained in opposition to the English witnesses, that the rate of exchange was in no way due to the balance of payments due by England, but that it was solely due to the depreciation of the bank notes in which payments were made.

With respect to the third issue joined between the parties, nothing can be clearer than that a diminution in the quantity of paper in circulation must have enhanced its value relatively to all other commodities, gold included. And as the market price of gold was determined solely with reference to the price paid for it in bank paper, and not in guineas, it is evident that a reduction in the quantity of paper must have reduced the price of gold when expressed in paper, and brought the real value of the bank note nearer its nominal value. And thus, by raising the value of the whole currency, if the diminution had been carried far enough, it must necessarily have raised the foreign exchanges to par, and so would have brought gold back again into circulation.

The fourth issue between the parties contains a perfectly new theory of the paper currency, which had been previously maintained by the directors of the Bank of Ireland. As this is a very important, but very delusive, theory of paper currency, we shall defer the discussion to a future chapter. The Bullion Report especially condemned it. Upon all this conflicting evidence the committee produced a most masterly report, probably the most able ever drawn up by a Parliamentary committee. It was the joint work of Mr. Horner, Mr. Huskisson and Mr. Henry Thornton—each a master in his own department. It is one of the great landmarks in economics, as containing the infallible principles upon which a paper currency must be regulated.

Nothing can be a more amusing example of reasoning in a vicious circle than the unanimous doctrines of the English merchants. They laid down as a dogma that an adverse state of the exchanges and an export of bullion could only be caused by a balance of payments being due by England; and because the exchanges were adverse, and an export of bullion had taken place, they maintained that it must be owing simply to a balance of payments being due by England, without the least investigation into the facts. But an inquiry into the facts entirely disproved this assertion; because it was decisively proved that when the exchanges were reduced to their true value in specie, that the real exchange was in favor of England, which we know must necessarily have been the case, from the enormous exports of English commodities to all quarters of the globe.

The committee decisively proved that an excessive quantity of inconvertible paper necessarily causes the exchanges to be apparently adverse, whatever the real exchange may be, and an export of gold. They thus showed that instead of there being only one cause of an adverse state of the exchanges and an export of gold, there were two. The committee then laid down the rule that the issues of paper must be governed and regulated by the state of the foreign exchanges and the market price of gold bullion. Unfortunately, however, they laid down no rule for carrying these principles into practical effect; and consequently their theory, correct as far as it went, was incomplete, and was never properly worked.

In 1856, we showed that besides the two causes of an adverse state of the exchanges, and an export of bullion, there is a third, which up till then had never attracted sufficient attention. By stating this new cause and devising a rule founded upon it, showing how the theory of the Bullion Report is to be carried into practical effect, we completed the theory of the Bullion Report; and by this rule the Bank of England and every bank in the world is now managed. Some proposals were made for remedying the evil by imposing a limit on the issues of the bank; but the committee entirely condemned the plan of imposing a cast-iron limit on the issues of the bank; because doing so would prevent the bank from rendering that assistance to commerce in times of trouble which repeated experience had proved to be necessary, and might very much aggravate the inconveniences of a temporary pressure. The only true and proper remedy for all these evils was, therefore, a resumption of cash payments. That, however, was an operation of the greatest delicacy, and it must be left to the discretion and prudence of the bank to carry it into effect. Parliament should merely fix the time, and leave it to them to carry it into effect. Under all the circumstances a period of two years seemed to be not longer than necessary, and at the same time sufficient to enable them to prepare for it.

This report contains the eternal and immutable principles which must regulate every paper currency which makes any attempt to conform to the value of gold; and if any legislation on paper currency be considered necessary, it must endeavor to enforce the practical application of the principles of this report; and just in so far as it deviates from or contravenes them, so it will be found to thwart and contravene the eternal principles of economics. All legislation, then, on the currency should have as its object merely to provide the best machinery for ensuring the practical application of the principles. The general principles laid down in this report are as complete a matter of demonstration as any in Euclid. The method of treating the subject is as scientific as any of the great discoveries in natural philosophy, which have excited the admiration of the world; nor could it fail to carry conviction to any one of ordinary intelligence who was capable of understanding the force of the arguments. No sooner was it published, than it was assailed by a whole multitude of pamphleteers, whose obscure memory it is not worth while now to revive. The interests affected by the report were too deep and extensive for it not to be attacked by every species of ridicule and acrimonious controversy.

In May, 1811, a debate of four nights took place on the report. Mr. Horner embodied the conclusions of the report in a series of sixteen resolutions. The first was negatived by a majority of 151 to 75. The next fourteen were negatived without a division; and the last was rejected by a majority of 180 to 45. Among the names of the majority was that of Robert Peel. Mr. Vansittart, the Chancellor of the Exchequer, in a speech of enormous length moved counter-resolutions to Mr. Horner. The purport of these was that there was no legal weight of bullion in the coins beyond what the caprice of each sovereign might dictate; that the bank notes were merely promises to pay these coins, and that they always had been, and at that moment were, held equivalent in public estimation to the legal coin of the realm, and were generally accepted as such in all pecuniary transactions to which such coin was lawfully applicable; and that the price of bullion and the state of the foreign exchanges were in no way owing to excessive issues of bank paper. Mr. Canning in vain attempted to persuade the Ministers to rest satisfied with the defeat of the Bullion Report; and, for the sake of the reputation of the House, not to make them pass a vote which no one outside of it could speak of without laughter. His amendment was rejected by a majority of eighty-two to forty-two, and Mr. Vansittart’s resolutions were carried.

After the House had indulged in this wild freak,—the very saturnalia of unreason,—and given the bank so great an encouragement to pursue its wild career, it became evident to everyone who understood the subject, that the value of every man’s property depended on the will of the bank. This was fraught with the most alarming consequences to every one with a fixed income; as, while the price of every article of necessity kept pace with the depreciation of the currency, anyone like a landlord, having a fixed rent to receive, was paid in a depreciated paper, while his tenants received the increased nominal prices of their commodities.

As matters were continually getting worse,—gold having risen to £4 16s. in March,—Lord King, who had distinguished himself some years before regarding paper money, issued a circular to his tenants, reminding them that their contract was to pay a certain quantity of the legal coin of the country, and that the present paper currency was considerably depreciated. He said that in future, he should require his rents to be paid in the legal gold coin of the realm; but that, as his object was merely to secure the payment of the real intrinsic value of the sum agreed to be paid, he should be willing to receive the amount in Portugal gold coin of an equal weight with that of the stipulated number of guineas, or in an amount of bank notes sufficient to purchase the weight of standard gold requisite to discharge the rent.

That such a demand was legal no one pretended to deny. But when, this practical sarcasm was passed upon the resolution of the House of Commons, it drove that party wild. The most unmeasured abuse was heaped upon Lord King for incivism. Not only was the measure in every way legal, but nothing could have been more equitable. His tenants were receiving increased market prices for their produce, and only paid him in the same number of depreciated notes. It is quite clear that, if his tenants got an increase in the price of their products, owing to the depreciation, he ought to have received a proportionate increase in his rents. Lord Stanhope brought in a bill which, after being considerably modified, was ultimately passed, making it a misdemeanor to make any difference between specie and paper in payments. He mentioned several instances which he had been informed of in which 27s. were demanded for a guinea. Lord Holland also said that a £1 note and seven shillings were currently given for guineas. Admirable commentary upon the resolutions so triumphantly carried only two months before in the House of Commons, and then standing in their journals, that in public estimation guineas and bank notes were equal! This act was originally limited to the 24th March, 1812, but it was subsequently prolonged during the continuance of the Restriction Act.

The harvest of 1811 was extremely deficient, and that was the period when the power of Napoleon was at its height, and the Continental sources of supply were cut off. In August, 1812, corn reached its highest price during the war. The average price of wheat in England and Wales was then 155s.; some Dantzic wheat brought 180s.; and in some instances oats were at 84s. The advocates of the rival theories attributed this great rise in the price of cereals to different causes—one party almost entirely to the depreciation of paper, the other to the scarcity. Mr. Tooke was a distinguished advocate of the latter view, and in support of it urged forcible arguments from the corresponding rise which took place in France during the same period, where the currency was almost purely metallic. Mr. Tooke’s powerful arguments derive additional force from his being a contemporary of the circumstances he describes. But we think he can hardly be correct in so entirely neglecting the effect of the depreciation of the paper currency as he does. We have abundant evidence that, before the gold coin and the bank note bill, there were very generally two prices in the country—a gold price and a paper price. After that act, gold totally disappeared from circulation, and there was nothing but a paper price. But, if any price had been paid in gold, would there not have been exactly the same difference in the price as before the act? If then such would have been the case, it is evident that when paid in paper, the paper was depreciated by exactly the difference that would have been between gold and paper. There does not appear to be the least reason to suppose that the scarcity was greater in 1812 than in 1800; in fact, the evidence seems to be all the other way; yet while corn only rose to 133s. in 1800, it rose to 155s. in 1812. Whence this difference? It was evidently due to the depreciation of the paper. In August, 1812, the price of gold was £4 18s. per ounce, at which the real value of the note was 15s. 11d. How is it to be supposed that the enhancement of prices when paid in paper, which was quite notorious before Lord Stanhope’s Act, was actually annihilated by that act?

The principles of the Bullion Report having been decisively rejected by Parliament, and pronounced to be fallacious by the resolutions which declared twenty-one to be equal to twenty-seven, the bank took no measures to bring their notes to a nearer conformity to their nominal value; and the market or paper price continued to rise, till November, 1813, it stood at £5 10s.; the greatest height it ever reached. The long continuance of high prices, caused partly by a series of deficient harvests and partly by the depreciated paper in which prices were paid, gave rise to the belief that they would continue permanent. Immense speculations began in land jobbing; vast tracts of waste and fen land were reclaimed. It was at this time that the immense agricultural improvements in Lincolnshire were effected. Rents in most cases rose to treble what they were in 1792; all the new agricultural contracts entered into at this period were formed on the basis of these extravagant prices. Landlords and tenants increased their expenditure in a like proportion; family settlements were made on a commensurate scale. As a natural consequence, country banks multiplied greatly. In 1811 they were 728; in 1813 they had risen to 940; and the amount of their issues was supposed on the most moderate estimate to be about £25,000,000.

After the disaster of the French in the Russian campaign of 1812, and the battle of Leipzic in 1813, the ports of Russia and Northern Germany were thrown open to British commerce. This naturally gave rise to enormous speculative exports and overtrading. The harvest of 1813 was prodigiously abundant, so that the price of wheat, which in August, 1812, had been 155s. gradually fell till in July, 1814, it was only 68s. The exporting speculations were at their height in the spring of 1814, and the prices of all such commodities rose to, in many cases, double and treble what they had been before. Every branch of industry was affected by the preceding causes, and the natural and inevitable consequences soon followed. A violent revulsion and general depression of the price of all sorts of property, which entailed such general and universal losses among the agricultural, commercial, manufacturing, mining, shipping and building interests, as had never before been paralleled. As is always the case, the consequences of the wild speculations and engagements persons had entered into during the continuance of the fever, continued to be felt for many years afterwards. The disasters commenced in the autumn of 1814, continued with increasing severity during 1815, and reached their height in 1816-17. During these years, eighty-nine country bankers became actually bankrupt; probably four or five times that number ceased business, and the reduction of their issues of country paper was such, that in 1816 its amount was little more than half what it had been in 1814.

This discredit of country bank paper, similar to what had previously occurred in 1793 and 1797, caused a demand for additional issues from the Bank of England, to help to maintain public credit. This caused an extension of the bank paper by upwards of three millions; but so great was the abstraction of country bank paper, to certainly four times the amount of the increased issues of the bank, that the value of the whole currency gradually rose, so that while in May, 1815, the market or paper price of gold was £5 6s., the exchange on Hamburg 28·2, and the exchange on Paris 19·00, in October, 1816, the paper price of gold was £3 18s. 6d., the exchange with Hamburg was 38·00, and that on Paris was 26·10, and they remained at these prices with little variation till July, 1817. Hence at length was manifested the most complete triumph of the principles of the Bullion Report. The great plethora of this worthless quantity of paper currency being removed, the value of the whole currency was raised almost to par; so near, in fact, that the smallest care and attention would have brought it quite to par; and if means could have been taken to prevent the growth of the rank luxuriance of country bank notes, cash payments would have been resumed at this period with the utmost possible facility, and, as a matter of course, without exciting the least comment.

On several previous occasions, the bank had intimated to the Government their perfect ability and readiness to resume payments in cash, but had always been prevented from doing so for political reasons. In 1815, when peace was finally restored, they prepared in good faith to be ready to do so as soon as they should be required; and during that year and 1816, they accumulated so much treasure that, in November, 1816, they gave notice of their intention to pay all their notes dated previously to the 1st January, 1812; and in April, 1817, all their notes dated before the first of January, 1816. When this was done, there was found to be scarcely any demand upon them for gold. The nation had got so accustomed to a paper currency, that they were most unwilling to receive gold for it. Mr. Stuckey, one of the largest bankers in the west of England, said that during this partial resumption of cash payments, it cost him nearly £100 to remit the surplus coin which accumulated upon him to London, as he could not get rid of it in the country, his customers all preferring his notes. Many persons who had hoarded guineas requested as a favor to have notes in exchange.

In March, 1814, the restriction was prolonged till July, 1816. Just after that, took place the Hundred Days. The expenses of the campaign made the Ministers dread a monetary crisis, and the restriction was prolonged till July, 1818. The partial resumption of cash payments was attended with perfect success; it caused no very great demand for gold; which continued to accumulate in the bank till October, 1817, when it reached its maximum, being £11,914,000. The bank gave notice that it would pay off in cash all the notes dated before the 1st of January, 1817, or renew them at the option of the holders. In the course of 1817, a very large amount of foreign loans was contracted for. Prussia, Austria, and other lesser states were endeavoring to replace their depreciated paper money by specie; and as money was abundant in England, a very large portion of these loans were taken up here. The effect of this began to manifest itself in April, 1817, when the exchanges with Hamburg and Paris began to give way and the market price of gold to rise. These phenomena gradually increased throughout 1818, until in January, 1819, the market price of gold was £4 3s., the exchange on Hamburg 33·8, and that on Paris 23·50. In July, 1817, the new gold coinage began to be issued from the Mint in large quantities. The consequence was, that a steady demand for gold set in upon the bank, and, in pursuance of its notices, the sum of £6,756,000 was drawn out of it in gold. Just at this time the British Government reduced the rate of interest upon exchequer bills. The very much higher rate of interest offered by Continental governments caused a great demand for gold for export; and in the beginning of 1818, a very decided drain set in. The bank directors, however, determined to set all the principles of the Bullion Report ostentatiously at defiance. While this great drain was going on, they increased their advances to the Government from £20,000,000 to £28,000,000; and though they knew perfectly well that the demand for gold was for export, they took no measures whatever to reduce their issues for the purpose of checking the export. At the same time, the issues of the country banks had increased by two-thirds since 1816. This demand for gold became more intense during 1818 and January, 1819; and it became evident that the bank would soon be exhausted if legislative interference did not take place. Accordingly, on the 3d of February, 1819, both Houses appointed committees to inquire into the state of the bank; and on the 5th of April they reported that it was expedient to pass an act immediately to restrain the bank from paying cash in terms of its notices of 1816-17. An act for that purpose was passed in two days. The report of the Commons stated that in the first six months of 1818, 125 millions of francs had been coined at the French Mint, three-fourths of which had been derived from the gold coin of this country. The act forbade the bank to make any payments in gold whatever, either for fractional sums under £5 or any of their notes, during that session of Parliament. The bank was, therefore, totally closed for cash payments. This was the second notable triumph of the principles of the Bullion Report. The first had proved the truth of its doctrine that a reduction of the paper currency would reduce the price of gold, and bring the exchanges to par. The second showed that an ostentatious defiance and contravention of its doctrines brought on a total suspension of cash payments.

The chief points of interest in these reports of the committees are the opinions of the witnesses respecting the great doctrines of the Bullion Report. The reports of neither House entered into any question of the theory of the currency; they were confined to recommending a certain course of action; but they examined a number of witnesses of the first eminence on the subject, and the result of their evidence is most extraordinary. In 1804 and 1810 the immense preponderance of commercial testimony scouted the doctrine that the issues of paper currency had any effect on the exchanges or the price of bullion, or should be regulated by them. Nevertheless, the reports of both committees were certainly in the teeth of the mercantile evidence. The Bullion Report had now been before the country for nearly nine years; and had caused more public discussion than almost any subject whatever, both in Parliament and in the press. It is perfectly manifest that if its principles were erroneous, the commercial world would only have been further strengthened against them. But what was the result now? The overwhelming mass of commercial evidence was entirely in their favor. The current of mercantile opinion was now just as strong in their favor as it had been formerly against them. A few old, antiquated fossils still stuck to the exploded fallacies to the last. What could be more triumphant than this? What could be more splendid testimony to their soundness and accuracy than the fact that they had converted the immense hostile majority of the commercial world? Notwithstanding that the Governor and the Deputy Governor of the bank had given strong evidence in favor of the doctrines of the Bullion Report, they were not able to carry the majority of the court with them, who persisted in the old opinions. On the occasion of some questions being sent to them for their consideration, the court took the opportunity of recording publicly their disapproval of the doctrines which were now in the ascendant. On the 25th of March they resolved:

“That this court cannot refrain from adverting to an opinion strongly insisted upon by some, that the bank had only to reduce its issues to obtain a favorable turn in the exchanges, and a consequent influx of the precious metals; the court conceives it to be its duty to declare that it is unable to discover any solid foundation for such a sentiment.”

In pursuance of the reports of both Houses, the celebrated Act of 1819 was passed, commonly called Peel’s Act, because he was Chairman of the Committee of the Commons, and the Ministry entrusted the bringing in of it to him.

The chief provisions of this Act, Statute 1819, c. 49, were:

The fantastic plan of paying in bars or ingots of gold bullion, instead of in gold coin, was a scheme of Ricardo’s, who had by this time acquired great celebrity on account of the prominent part he took, in 1810, in proving that the bank note was depreciated, and the admirable evidence he gave before the committees of both Houses in 1819. But it proved a dead letter—it never took effect at all. Although the bank was permitted to pay its notes in bars of gold bullion at the rate of £4 1s. per ounce, they were actually at par. In August, 1819, the market price of gold fell to £3 17s. 10 1-2d., and continued at that rate till June, 1822, when it fell to £3 17s. 6d. The accumulation of treasure became so rapid in the vaults of the bank in 1820, that early in 1821 the directors felt themselves in a position to resume complete payments in cash. An act was passed to enable them to do so on the first of May, 1821, instead of in 1823. By this time the Government had repaid £10,000,000 of the debt it owed to the bank, which all the witnesses agreed was a necessary preliminary to enable the directors to contract their own issues.

The Act, Statute 1819, c. 49, commonly called Peel’s Act, has probably been the subject of more gross misapprehension and misrepresentation than any other act which was ever passed, even by grave historians who were culpably negligent in not accurately ascertaining the facts. The almost universal opinion is, that while bank notes were heavily depreciated, Peel’s Act of 1819 compelled the bank at once to resume payments in cash at their full nominal value, thereby causing a great contraction of the currency, which it is alleged produced the dreadful agricultural distress in 1821 and succeeding years. The preceding narrative shows that this is a complete misstatement of the facts. The great contraction of the currency was caused by the failure of somewhere about three hundred country banks in 1815-16, and the destruction of about £12,000,000 of their worthless paper. This brought the bank note to all but its par value; and the bank of its own accord commenced a partial resumption of cash payments in November, 1816, and a further resumption in April, 1817; and there can be no doubt it would have completely resumed payment in 1818, without exciting the least comment, if it had not been so grossly mismanaged in that year. The Act of 1819 produced absolutely no contraction of the currency whatever. The bank note was at par in October, 1819, although the act allowed the bank to redeem their notes at £4 1s.; and the bank did not ultimately resume cash payments in pursuance of the Act of 1819, but in pursuance of an act passed at the instance of the bank itself in 1821. Mr. Turner, a director of the bank, says in a pamphlet: “With regard to the effect of Mr. Peel’s bill on the Bank of England, I can state, from having been in the direction of the bank during the last two years, that it has been altogether a dead letter. It has neither accelerated nor retarded the return to cash payments.” London bankers, as we have said, of their own accord, discontinued issuing their own notes in 1793; and proved that in such a place as London banking can be carried on without issuing notes, but only allowing their customers to draw cheques.

For a long time the consequences that might be deduced from this apparently unimportant change in the method of banking escaped notice. But about 1820 Mr. Joplin, a well-known writer on banking in his day, maintained that the monopoly of the bank was exclusively confined to issuing notes; and that there was nothing in its charter which prevented joint-stock banks being founded, and carrying on their business according to the then usual method of London bankers. He says:* “That public banks have not hitherto existed, more especially in London and Lancashire, seems to have arisen from the want of a proper knowledge of the principles of banking, rather than from the charter of the Bank of England, which I find does not prevent public banks for the deposit of capital from being established. * * * That banks ought to be the permanent depositories of the capital of the country is an idea which no writer has hitherto entertained, and the silent operations of the Scotch banks have eluded observation. It has, in fact, always been hitherto considered that the proper business of a bank was to issue notes and discount bills at short dates. It is quite evident that the framers of the above clause (the monopoly clause) considered the business pursued by the Bank of England the only proper banking. It appeared to them that preventing banks with more than six partners from issuing bills at short dates or notes payable on demand was altogether conferring on the bank the privilege of exclusive banking as a public company. This it did, no doubt, according to their definition of the term, but it still leaves the most important part of banking open to the public. There is at this moment no legal impediment to the establishment of joint stock companies for trading in real capital. Both the letter and the spirit of the charter has reference to the circulation of bills and notes alone. A bank which traded only in capital would not in the least trench upon the monopoly of the Bank of England, nor be any infringement of its charter.”

In this passage, Mr. Joplin shows that he had not well considered the nature of banking. He, as well as many others, consider that the private bankers and the joint stock banks of London trade only in real capital, i. e., money; but this is a pure delusion. All London bankers discount bills by creating rights of action, or credit; the only thing is that these credits are circulated by means of cheques only, and not by cheques and notes. However, Mr. Joplin has the merit of being the first, as far as we are aware, who perceived that the charter of the Bank of England did not prevent joint-stock banks being founded so long as they did not issue notes. But, like many good ideas, it remained a considerable time unfruitful, and it was not till ten years later that the first joint-stock bank was founded in London.

In 1823, the Government endeavored to persuade the Bank of England to give up the privileges of their charter, so far as to permit joint-stock banks to be formed in the country. But the bank refused. Nothing further took place till 1826, when the disasters of the preceding year being very generally attributed to the improper management of the country bankers, the Ministers were powerful enough to compel the bank to give up its unjustifiable monopoly, and at length agreed to permit joint-stock banks to be formed beyond sixty-five miles from the metropolis. An Act, Statute 1826, c. 46, was passed for this purpose. The provisions which touch our present subject are:

The formation of joint-stock banks under this act proceeded very slowly at first; not more than four or five being formed in as many years. In fact, such banks could only be formed by influential persons; and, of course, such persons had already their own banker, whom they would naturally be unwilling to injure by the formation of so powerful a rival. The first joint-stock bank was formed at Lancaster; the second at Bradford, and a third at Norwich, before any one was founded in the great manufacturing towns. It was not till the prosperous years of 1833-4-5-6 that any remarkable increase took place in their numbers. In these years, however, they multiplied rapidly, more especially in 1836, when upwards of forty were established in the spring.

The great crisis and panic of 1825 was attributed to the excessive issues of £1 notes by the country bankers. These were suppressed by the Act, Statute 1826, c. 6. By this act:

When the Government determined to suppress the issue of £1 notes in England, they said it was their intention to extend the measure to Scotland and Ireland. However Scotland may have suffered from commercial overtrading, as all commercial countries must occasionally do, no banking panic had ever occurred such as those which had so frequently desolated England. The Ministerial intentions raised a prodigious ferment in Scotland. Sir Walter Scott published three letters on the subject, under the name of “Malachi Malagrowther,” which greatly fanned the public enthusiasm; and such an opposition was organized, that the Ministry were obliged to consent to appoint committees of both Houses on the subject. These committees sat during the spring of 1826, and investigated the whole subject of Scotch banking, which had been very little understood in England before that time; and the result was so favorable to the system of Scotch banking, that the Ministry abandoned their intention of attempting to alter it.

Although the act of 1775 had forbidden notes under £5 to be issued in England, it did not prohibit the circulation of Scotch £1 notes in England, and they had always circulated in the districts adjacent to Scotland, and even as far south as York. When the English £1 notes were suppressed, it seemed naturally to follow that the circulation of similar Scotch notes in England should also be suppressed. But the districts in which they had always circulated were as unanimous as Scotland itself against the measure. In 1828 the Ministry brought in a bill to restrain the circulation of the small Scotch notes in England. Sir James Graham presented a petition from the borderers, deprecating in the most earnest terms the withdrawal of the Scotch notes, to which they had been so long accustomed. For seventy years they said they had possessed the advantage it was now sought to deprive them of—namely, the Scotch currency. Seven-eighths of the rents of estates were paid in the paper currency of Scotland, and no loss had been sustained in consequence of it. After a debate of two nights the motion was carried by 154 to 45. The Act, Statute 1828, c. 65, provided that after the fifth of April, 1829, no corporation or person whatsoever should publish, utter, negotiate or transfer, in any part of England, any promissory note, draft, engagement, or undertaking in writing, payable to bearer on demand, for less than £5, or upon which less than £5 remained unpaid, which should have been made or issued, or purport to have been made or issued, in Scotland or Ireland, or elsewhere out of England, under a penalty of not less than £5, or more than £20.

The charter of the bank expired at the end of one year’s notice to be given after the first of August, 1832, and this time the bank had done no such services to the Government as to be in a position to demand from it a renewal of its monopoly several years before it expired. Moreover, as Lord Liverpool said in 1826, these exclusive privileges were out of fashion. Many great monopolies were on the eve of breaking up; and the public mind was more roused and enlightened on the subject of banking from the discussions caused by the great panic of 1825. Before taking any steps towards a renewal of the charter, the Government determined to have an inquiry before a committee of the House of Commons. This committee sat for some months, and reported the evidence given before them at the end of the session. It was not reappointed, as the Government had made up their mind on the subject.

On the 31st May, 1833, Lord Althorpe moved a series of resolutions for the renewal of the bank charter—one of which was that, so long as the bank continued to pay its notes in gold, bank notes should be declared legal tender, except by the bank itself. Several members wished for further delay to consider the resolutions, as the session was nearly at an end. But Sir Robert Peel was decidedly of opinion that the resolutions should be passed at once. He held it desirable to continue the privileges of the bank, and that there should be but one bank of issue in the metropolis, in order that it might exercise an undivided control over the issue of paper, and give facilities to commerce in times of difficulty and alarm, which it could not give with the same effect if it were subject to the rivalry of another establishment [why not?]. He resisted at great length the proposition for making bank notes legal tender, as a departure from the principle of the Act of 1819 and the true principles which should govern a paper currency. It was decided by a majority of 316 to 83 to proceed with the resolutions. The plan of making bank notes legal tender was strongly opposed, but was carried by 214 to 156.

We have already shown that the public had at various times attempted to form rival banking companies to the Bank of England; and in 1709 and 1742 the Bank Acts had been framed to stop up various loop-holes which had been successively discovered. In 1742, the phraseology used had been supposed to be quite effectual for the purpose. At that time, the custom of issuing notes payable to bearer on demand to their customers in exchange for money and bills, was considered so essentially the fundamental idea of “banking,” that to prohibit the issue of these notes was deemed an effectual bar upon the business of “banking.” But in process of time—in 1793—the London bankers of their own accord discontinued the practice of issuing their own notes to their customers. The Act of 1742 was considered to be so effectual a bar against banking companies in general that it escaped public observation that the way of doing business by way of cheques enabled banking companies to elude the wording of the Act of 1742.

In 1796, when in consequence of the restrictive measures of the Bank of England, much distress was felt in London from the want of a circulating medium, an association of merchants and bankers was formed for the purpose of providing a circulating medium which should not infringe the privileges of the bank. The question was considered by them in what the bank’s privilege of exclusive “banking” did consist, and they determined that, “The privilege of exclusive ‘banking’ enjoyed by the Governor and Company of the Bank of England, as defined by the acts of Parliament under which they enjoy it, seems to consist in the power of borrowing, owing, or taking up money on their bills or notes payable on demand.” About the year 1822, Mr. Joplin and other writers detected the flaw in the monopoly of the bank, and maintained that a joint-stock bank of deposit was no infringement of the charter, and that such banks might be formed and carry on a very successful business without issuing notes at all, but by merely following the practice of the London bankers by adopting cheques only. It is somewhat remarkable that this discovery should have been allowed to lie unfruitful so long. When the Government first entered into negotiations with the bank in 1833, concerning the terms of the renewal of the charter, they, as well as the general body of the mercantile community, were persuaded that the monopoly forbade any banks of any description whatever, with more than six partners, being formed. In the course of the negotiation this point was brought under the notice of the Government, who took the opinion of their law officers upon so important a point. The opinion of the Crown lawyers was that the clause did not prohibit joint-stock banks of deposit being formed. The flank of the monopoly of the bank being, as we may say, turned in this extraordinary and unexpected manner, created the greatest consternation and alarm in that body, and they requested the Government to have the omission rectified. But Lord Althorpe decidedly refused anything of the sort, and told them that the bargain was that their privileges should remain as they were, and that he would not consent to any extension of them.

In order to remove all doubts upon the subject, the Solicitor General brought up a clause by way of rider, declaring the right to form such banks. He said that the basis of the contract with the bank was, that they were to enjoy whatever monopoly they already possessed, but nothing beyond it. He had examined the case with the utmost care, and there was no pretence for saying that such banks were an encroachment on the monopoly of the bank. The bank as originally founded was a bank of issue, and the monopoly first granted in 1697 must be held to refer to banks ejusdem generis. Such had been the uniform language of all the subsequent acts. The clause upon which their monopoly was founded was strictly confined to the issue of paper money. Joint-stock banks of deposit were legal at common law, and it rested with those who said it was forbidden to point out the act which prohibited them.

The chief provisions of the Act, Statute 1833, c. 98, were as follows:

By this act, declaring the common-law right to found joint-stock banks which did not issue notes, the second great breach on the monopoly of the bank was effected, and the joint-stock banks of London were founded. As the next renewal of the charter in 1844 was for the first time founded on certain specific theories of currency and banking, we shall defer mentioning and examining them for the present.

[* ] Supplementary Observations to the Third Edition of an Essay on Banking, 1823, p. 84.