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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 VI.

THE COMMITTEE ON BANKING OF 1840.

PURPORT OF THE REPORT.

ELSEWHERE we have fully explained the meaning of the terms circulating medium and currency, which are always used as identical. We have shown that the term circulating medium, by its very meaning, necessarily includes money and credit in all its forms, both written and unwritten. We have shown that, in mercantile law, the term currency means anything whatever of which the property passes by delivery and innocent acquisition, and that, in its strict legal sense, it can only be applied to written securities for money; because, it is only such rights recorded on paper, which can be mislaid, lost, and stolen, and passed away by manual delivery; but that, if it is to be used as an economic term, denoting a certain class of economic quantities, it must include money and credit in all its forms, written and unwritten, as it was universally understood to do in all the debates in Parliament up to a certain time.

But the present monetary system of the country, as established by the Bank Charter Act of 1844, is founded upon a totally different definition of currency. And as that act is founded upon a peculiar definition of currency, and is expressly intended to carry into effect a peculiar theory of currency, we must critically examine this peculiar definition of currency, in order to see if it can be accepted, instead of the one as settled by the courts of law. We must also explain the particular theory of currency which the Bank Charter Act of 1844 is designed to carry out.

The disputes as to the meaning of currency were begun by Mr. Boyd, an eminent financial agent, who said, in a letter to Mr. Pitt: “By the terms circulating medium and currency, which are used as almost synonymous terms in this letter, I always understand ready money, whether consisting of bank notes or specie, in contradistinction to bills of exchange, navy bills, exchequer bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood them. The latter is the circulator, the former are merely objects of circulation.” But he says iu the preface: “But, from the mere returns of bank notes (without that of the balances on the books for which the bank is also liable, and of the specie in its coffers) no accurate estimate can be formed of the positive difference between the present and the former circulation.” Mr. Boyd, therefore, expressly includes banking credits, or deposits, under the term currency; and as his notion of currency was ready money, it is quite evident that cheques are also currency in his opinion, because mercantile law holds that bank notes, cheques, and deposits are all equally ready money. Now it is seen that Mr. Boyd had not well considered the meaning of the term circulating medium; because the circulating medium is the medium which circulates commodities. And bills of exchange are expressly created to circulate commodities; and it has been shown that bills of exchange possess the attribute of currency in all respects in the same degree as bank notes.

Mr. Thornton, an eminent banker, and one of the authors of the Bullion Report, immediately combatted Mr. Boyd’s doctrine that bills of exchange form no part of the circulating medium. He says:* “A multitude of bills pass between receiver and lender in the country in the manner that has been described; and they evidently form in the strictest sense a part of the circulating medium of the country.” In a note to this passage he says: “Mr. Boyd, in his publication addressed to Mr. Pitt on the subject of the Bank of England, propagates the same error into which many others had fallen, of considering bills as no part of the circulating medium of the country.”

It will be seen in the progress of this work that it was necessary to clear away much confusion which had arisen from the want of a sufficiently full acquaintance with the several kinds of paper credit; and, in particular, to remove by a considerable detail, the prevailing errors respecting the nature of bills, before it could be possible to reason properly upon the effects of paper credit.

Those differences of opinion as to what the term currency includes appeared very strongly before the committee on the Bank Charter Act of 1832, but as they produced no practical result, we need not further advert to them. The question, “What the term currency includes?” was vehemently discussed before the committee on banking in 1840; and by this time a strong and influential party had adopted a certain definition which prevailed with Sir Robert Peel. The leaders of this party were Mr. Samuel Jones Loyd, afterwards Lord Overstone; Mr. George Warde Norman, and Colonel Torrens, and it will be best to let them explain their own views.

The question, “What does the term currency include?” was much discussed before the committee of 1840, but it is only necessary to state here the doctrines held by those witnesses whose opinions prevailed with Sir Robert Peel.

Mr. George Warde Norman, a director of the Bank of England, was asked:

Mr. Samuel Jones Loyd, afterwards Lord Overstone, was asked:

Lord Overstone was asked:

Mr. Hume had a long fencing match with Lord Overstone as to the distinction between bank notes and deposits. Lord Overstone admitted that a debt might be discharged either by the transfer of a bank note or by the transfer of a credit in the books of a bank; but he strongly contended that bank notes are money, and that bank credits, or deposits, are not.

Lord Overstone also said (3132): “Will any man in his common senses pretend to say that the total amount of transactions adjusted at the Clearing House are part of the money or circulating medium of the country?” Now this paragraph shows great looseness of idea. No one, of course, says that a transaction is money, but the operations of the Clearing House consist exclusively of the transfers of bank credits from one bank to another, and most undoubtedly these bank credits are part of the circulating medium of the country, and, as we shall shortly show, are included in law under the term “ready money.” Lord Overstone further said (3082): “When I give a definition of ‘currency,’ of course it is currency in the abstract; it is that which currency ought to be; that definition properly laid down and properly applied, will include paper notes payable on demand, and it will exclude bills of exchange.” Here again, Lord Overstone is absolutely in error. The term currency is, as we have shown, purely a legal term, and means anything of which the property passes by delivery and honest acquisition. Now bank notes and bills of exchange have each this property in common. Consequently they each are currency.

Lastly, we may quote Colonel Torrens, because he was not only one of the most influential of the sect, but it has been alleged that he was in reality the author of the scheme for dividing the bank into two departments, which Sir Robert Peel adopted in his Bank Act of 1844. He says:*

Again, he says, in reply to some perfectly just observations of Mr. Fullarton:

THE ECONOMICS OF THE REPORT.

We have given these long extracts in order that the reader may fully understand the doctrines and principles of the influential sect whose views were embodied in the Bank Charter Act of 1844. He will at once see that they are based on an arbitrary definition of the term currency, which is in diametrical contradiction to the decisions of the courts of law, which we have cited in Chap. I., and the unanimous doctrines of economists and statesmen in all the Parliamentary debates on the subject; and we have now to examine the necessary logical consequences to which these doctrines lead.

Mr. Norman said that money or currency should possess fixed value, and be a perfect numerator. Now the value of money is the various commodities and services, or securities, it can purchase; and as the quantity of all these things which money can purchase constantly varies from time to time, from day to day and from hour to hour, how can money have “fixed value?” We have already shown in Chap. II. that neither money nor anything else can have “fixed value” unless everything has “fixed value.” He said that he meant by a numerator that which measured the value of other things with the greatest facility; but does a cheque for £50, or a bill of exchange for £50, not measure the value of things with as great facility as a £50 bank note or fifty sovereigns?

It is not a little amusing to find the celebrated phrase of the Roman Catholic Church, Quod semper, quod ubique, quod ab omnibus, starting up and meeting us in a discussion on currency. In Lord Overstone’s opinion, money and currency are identical, and include the coined metallic money, and the paper notes promising to pay the bearer coin on demand; and he says that the characteristic of their being money is, that they are received equally at “all times, between all persons and in all places.” For the sake of shortness, let us designate this phrase by 3A—from the three Alls in it. Lord Overstone excludes bills of exchange from the designation of currency, because “they do not possess that power of universal exchangeability which belongs to the money of the country.” This definition is fatal to Lord Overstone’s own view. In fact, if it be true, there is no such thing as money or currency at all. In the first place, it at once excludes the whole of bank notes. The notes of a bank in the remote district of Cumberland would not be current in Cornwall; therefore, they are not 3A; therefore, they are not currency. Again, the notes of a small country bank in Cornwall would not be received in Cumberland; therefore, they are not 3A; therefore, they are not currency. Similarly, there are no country bank notes which would be generally received throughout England; therefore, no country bank notes are 3A; therefore, no country bank notes are currency. Till within the last sixty years or so, Bank of England notes had scarcely any currency beyond London and Lancashire; in country districts a preference was universally given to local notes; therefore, Bank of England notes were not 3A; they had not the power of “universal exchangeability”; therefore, they were not currency. Bank of England notes would even now not pass through the greater part of country districts in Scotland. If, therefore, the test of 3A and “universal exchangeability” be applied, the claims of all bank notes to be considered as currency are annihilated at once.

But the universality of Lord Overstone’s assertion is fatal to his argument in other ways. On the Continent, silver is a legal tender as money. In England, silver, like copper, is merely coined into small tokens, called shillings, etc., which are made to pass current above their natural value, and are only legal tender to a very trifling amount: hence, silver in England cannot be used in the adjustment of all transactions; therefore, it is not 3A; therefore, it is not currency. There are other countries, such as India, where gold is not a legal tender; therefore, it fails to satisfy Lord Overstone’s test; therefore, it is not currency. If, then, the test proposed by Lord Overstone is to be accepted, it is easy to see that there is no substance or material whatever which does not fail under it; and, therefore, there is no such thing as currency.

The fact is, that the only difference between a bank note and a bill of exchange is, that the note is the right to payment on demand, and a bill is the right to payment at a future time. For these reasons, a bank note possesses a greater degree of circulating power than a bill. In the Midland counties it used to be quite common for the banks to issue the bills they had discounted with their own indorsement on them, which made them bank notes, until the practice was declared to be illegal, and such instruments were declared to be bank notes. Moreover, there is not the same inducement to put a bill into circulation as a note; because the former increases in value every day until it is paid, while the latter does not. But it is to the last degree unphilosophical to maintain that these two obligations are of different natures because they are adapted to circulate in different degrees.

Colonel Torrens has adduced several legal and practical reasons in support of the views of his sect. The poet says:

• “Ah me! what perils do environ
• The man who meddles with cold iron.”

So are the perils which environ the lay dreamer who meddles with mercantile law and practical business. All Colonel Torrens’ reasons are absolutely fallacious both in law and practice. He includes bank notes in, and excludes cheques from, the title of currency; because, he says, by law and custom the acceptance of the notes of a solvent bank liquidates debts and closes transactions; whereas, the acceptance of bank credits and cheques does not liquidate debts and close transactions. In this Colonel Torrens is absolutely wrong, as any tyro in mercantile law could tell him. Bank notes, cheques and bank credits stand on exactly the same footing as to liquidating debts and closing transactions. No debtor can compel his creditor to accept an ordinary bank note, cheque or bank credit in payment of a debt; but if he chooses to do so voluntarily, they all equally liquidate debts and close transactions. Tender of a cheque is equally good tender of payment as the tender of an ordinary bank note. And when the bank has transferred the credit from the debtor’s account to that of the creditor, it liquidates the debt and closes the transaction in all respects as if it had been a payment in money. If a creditor accepts payment by cheque and keeps the cheque an undue time, without presenting it for payment, and the bank fails, having sufficient credit on the debtor’s account to meet his cheque, the debt between the creditor and debtor is liquidated and the transaction closed. And if the credit has once been transferred from the account of the debtor to that of the creditor, the debt as between the parties is liquidated, and the transaction closed, even though the bank should fail immediately afterwards.

But Colonel Torrens’ statement of facts is equally erroneous as his statement of law. He alleges that a transaction by a bill of exchange is not finally closed until the bill has been paid in coin or in bank notes. It is the idea of Colonel Torrens, Mill and other dreamers, who have not the slightest knowledge of the mechanism of modern banking, that all bills of exchange and cheques are ultimately paid in coin or bank notes, at which all bankers and persons conversant with the mechanism of modern banking would make themselves very merry. In modern banking, probably not one bill of exchange in 10,000, and only a small proportion of cheques, are paid in coin or bank notes. An investigation instituted by some bankers after the late Gold and Silver Commission showed that only ·0025 per cent. of banking transactions are settled in coin. No doubt, 250 years ago, before the institution of banking, all bills were paid in money; but as soon as banking attained any magnitude, persons who had bill transactions must have been customers of the same bank; and in all such cases bills were paid and discharged by means of bank credits, and not by money. Before the institution of the Clearing House in 1776, all banking charges were settled by coin and bank notes; but when the Clearing House was instituted, and bankers’ charges were settled by means of mutual exchanges of the securities, and it was only the inequality of these exchanges which was paid in bank notes, this, of course, enormously diminished the number of cheques and bills which were paid in money or bank notes; but in recent years almost all the banks, including the Bank of England, have entered the Clearing House, and even most of the banks which are not in the Clearing House themselves pass their cheques and bills through banks which are. And by a further improved system of clearing, no money or bank notes are used at all. In the year 1889, cheques and bills to an amount exceeding £7,000,000,000 were settled and discharged in the London Clearing House alone, without the use of a single coin or bank note; and besides that, there is a Country Clearing House and clearing houses in all the great towns. What becomes, then, of the foolish fancy of Torrens, Mill and so many others, that all cheques and bills are ultimately paid in coin and bank notes? They are all paid and discharged by bank credits. Thus, when Torrens and his sect maintain that the criterion of currency is that it liquidates debts, and closes transactions, and they maintain that bank credits, or deposits, are not currency, they are “hoist with their own petard.” Because, as a fact in modern banking, all banking transactions are liquidated and closed by bank credits or deposits. Bank credits, or deposits, are now for all practical purposes the money of the country.

BANK CREDITS, OR DEPOSITS, ARE READY MONEY.

We show elsewhere that the term circulating medium means the medium which circulates commodities; and hence, ex vi termini, it necessarily includes money and credit in all its forms, both written and unwritten; because, if a person buys goods on credit, or by issuing a right of action, that credit or right of action circulates the goods equally, whether it is recorded on paper or not. So we have shown that money, and all rights to money recorded on some material, which can be lost or stolen, and passed away by manual delivery, are included under the term currency. A superficial difficulty, however, arises when the term currency is used as synonymous with circulating medium; because there is a vast mass of credits which have circulated goods, and are therefore circulating medium, which are not recorded on any tangible and transferable material, and therefore are not currency in its strict legal sense, such as book debts in traders’ shops, and deposits or debts in bankers’ books. The slightest reflection, however, will show that there is no real difficulty in the case. A right of action, credit or debt is exactly the same in its nature, whether recorded on paper or not. And it can be bought and sold or exchanged with perfect facility in either form. In Roman law, in which written instruments were not used, if it was wanted to transfer a debt, the creditor, the debtor and the transferee met together; the creditor transferred the debt orally to the transferee, and the debtor agreed orally to pay the transferee, instead of his original creditor. This was a valid transfer of the debt. The same mode of proceeding is equally a valid transfer of the debt in English law. But in many cases this is a clumsy and inconvenient way of transferring a debt. It is infinitely more convenient to write it down on paper, and then it can be transferred by manual delivery, like money or any other chattel. But whether the transfer be effected orally or by written document can make no possible difference in the nature of the right. Recording a credit, debt or right of action, therefore, on paper does not create any new right; it merely records an already existing right on paper. Payment, therefore, by means of a bank note, or cheque, or bank credit, termed a deposit, is absolutely the same. Now bank notes and cheques are currency in strict legal phraseology; but bank credits or deposits are not strictly currency in legal phraseology, because they cannot be lost, mislaid, stolen and passed away in commerce by manual delivery. So also of a book debt in a tradesman’s books. If a trader buys goods from a merchant on credit, that credit has performed exactly the same function in circulating the goods as money; because we have shown that the word circulation means buying goods with money or credit, and the credit has been equally the medium of circulation or sale, whether it is recorded on paper or not; but it is not currency, because it cannot be dropped in the streets, stolen and transferred to some one else by manual delivery. Nevertheless, all these book credits in the books of bankers and traders are of exactly the same nature as if they were recorded on circulating paper, and they can always be recorded on paper at the will of the parties, when they become currency in the strictest legal sense of the term. If, then, we are compelled to adopt this barbarism, and employ the term currency to denote a certain class of economic quantities, synonymous with circulating medium, it must, by the laws of philosophy, be held to include bank credits or deposits, bank credits and verbal credits of all sorts.

And this is exactly what mercantile law does. It treats any form of credit payable on demand by a banker, whether it be a bank note, a cheque, or a bank credit, as money or cash. They are all equally, in the eye of the law, payment; that is, none of them are legal money; that is, a debtor cannot compel his creditor to take payment in them of a debt; but if a creditor chooses to do so of his own accord without objection, they all stand on exactly the same footing as payment.

The importance and the practical bearing of these investigations and decisions are evident. All banking “advances” are made, in the first instance, by creating bank credits or deposits in favor of the customer. These deposits are simply rights of action, or simple contract debts. Now, these rights of action, credits or debts, are the “goods and chattels” or property of the customer, which are exactly of the same value as money, because they can always be exchanged for money instantly on demand. But the customer wishes to use these credits as money and transfer them to some one else. This may be done by writing them down on paper either as notes or cheques. But it is evident that the property, or “goods and chattels,” are identically the same, whether they are written down on paper or not. Now, many persons seeing a material bank note or cheque, are willing to admit that they are cash. But, from the want of a little reflection and ignorance of the mechanism of banking, they feel a difficulty with regard to what they see as deposits. They admit that a bank note or a cheque is an “issue” and “currency” and “circulation,” but they fail to see that a bank credit is in exactly the same sense equally an “issue,” “currency” and “circulation.” When unreflecting persons see so many figures in a book they are sometimes startled at hearing them called wealth; but in fact it is not these figures in the ledger that are the wealth; these figures are only the evidence and the acknowledgment of so many rights of action, credits or debts in the persons of the creditors of the banker; these rights of action are just as much “issued” and in “circulation” as if they were notes; they are equally rights of action to demand gold, and it makes not the slightest difference in their nature whether they are recorded on paper or not. The figures in the book are a mere reminder to the banker that he is bound to pay them in gold if demanded. Thus these bank credits or deposits are a mass of exchangeable property, like so much gold, or corn, or timber, or any other; and their value depends upon exactly the same thing as the value of any thing else, whether they can be paid in gold on demand. And for this reason they are termed Pecunia, Res, Bona, Merx, in Roman law: χρήματα, πράγματα, ἀγαθά, οὐϭία, in Greek law, and goods, goods and chattels, chattels, merchandise, vendible commodities and incorporeal wealth in English law. And in all the Parliamentary debates from 1797 till Sir Robert Peel’s speech on introducing his Act of 1844, it was invariably assumed that money and credits of all sorts—i. e., rights to demand money—whether written or unwritten, constitute the currency of the country. As Lord Tichfield expressed it: “When it was considered to how great an extent these contrivances (i. e., credits of various forms) had been practiced in the various modes of verbal, book and circulating credits, it was easy to see that the country had received a great addition to its currency. This addition to the currency would of course have the same effect as if gold had been increased from the mines.” This expression of Lord Tichfield’s represents the unanimous doctrine of statesmen and economists until the time of Lord Overstone and his sect, and is amply confirmed by the decisions of the courts of law which we have so copiously quoted.

CONSEQUENCES OF LORD OVERSTONE’S DEFINITION OF CURRENCY.

We have now to point out the consequences to which Lord Overstone’s definition of currency leads, which may somewhat surprise its advocates. Lord Overstone’s dogma asserts that the fundamental essence of money or currency is that it “closes a debt.” To this we reply, as was the fashion in the glorious old days of special pleading, (1) There is no debt to close; (2) It does not close the debt.

1. When money is exchanged for goods no debt arises, and if it be said that the money closes the debt which would have arisen on the sale of the goods, we reply that the goods equally close the debt which would have arisen on the sale of the money. It is simply an exchange; the money and the goods equally close the debt which would have arisen on either side. Therefore, if the essence of currency be to “close debt,” the goods are currency for precisely the same reason that money is.

2. It is quite common in the city to close a debt with stock; therefore, by this dogma, stock is currency.

3. In numerous cases debts are closed by a payment in goods. Traders may exchange goods. Now, by the exchange of goods, the debt is closed as effectually as by money. Hence, by this dogma, the goods exchanged on each side are currency.

4. Two merchants may issue acceptances for the same amount payable on the same day. These merchants may chance to get possession of each other’s acceptances. If so, each merchant may tender to the other his acceptance in payment of the debt due by himself. By this exchange, the debts are closed on each side. Consequently, each acceptance, according to Lord Overstone’s dogma, is currency. In the great Continental fairs merchants exchanged their acceptances by millions; the debts were closed; and therefore they were currency.

5. A merchant issues his acceptance, which gets into the hands of a banker. The banker issues notes, which get into the hands of the merchant. When the banker presents his acceptance to the merchant, the merchant pays the banker in his own notes. By this exchange the debt on each side is closed; hence, by Lord Overstone’s dogma, the acceptance is equally currency as the notes.

6. Or the merchant issues an acceptance which gets into the hands of his own banker; when the acceptance falls due, the banker simply writes off the amount from the merchant’s account. Both debts then are closed; and, according to Lord Overstone’s dogma, the acceptance and the deposit are equally currency.

7. If two persons, A and B, are customers of the same bank, and A owes B a debt; A gives B a cheque on his account; B pays in the cheque to his account; the banker transfers the credit from A’s account to B’s, and the debt is closed by novation. Hence, by Lord Overstone’s dogma, the deposit is currency. Thus Lord Overstone’s dogma is transfixed by shafts drawn from his own quiver.

The same doctrine may be extended to other cases:

8. A person buys a ticket from a railway company; the company then is in debt to him for a journey. But when they have carried him to his journey’s end, the debt is closed; therefore, according to Lord Overstone’s dogma, the railway journey is currency.

9. A person buys an opera ticket; the manager is then in debt to him for a performance; when the person has seen the performance, the debt is closed; hence, by Lord Overstone’s dogma, the performance of the opera is currency.

10. A person buys a postage stamp; the post office is then in debt to him for the carriage of a letter. When the letter is carried to its destination, the debt is closed. Hence, by Lord Overstone’s dogma, the carriage of a letter is currency.

And the same principle may be applied to many other cases which will readily suggest themselves to the intelligence of the reader.

In the next place, by the unanimous consent of economists, a payment in money does not close the debt.

Economists affirm that the transaction is not closed until a satisfaction has been obtained for the one originally given; they therefore held that, in exchange for money, the exchange is not consummated. A baker, say, wants shoes; he sells his bread for money. But can he wear the money as shoes? Certainly not; he must exchange away his money for shoes. Consequently, the economists held that the exchange was not consummated or completed, and the debt closed, until the baker has got the shoes in exchange for the bread. For this reason, all economists, from Aristotle to the present time, have perceived and declared that money itself is only a species of credit, a general bill of exchange, as we have shown by a whole catena of writers. Hence, money and bills of exchange are fundamentally analogous. They are merely the evidence of a debt due to their possessor. And the payment of a bill of exchange in money is only the exchange of a particular and precarious right for a general and permanent one.

But, as economists, we have nothing to do with satisfaction and enjoyment, but only with exchanges; the exchange of goods for a bill is one exchange; the exchange of a bill or note for money is another exchange, and the exchange of money for goods is another exchange. Hence, a person who has received money for goods or services has no more got a satisfaction, in the economic sense, than the person who has received a bill of exchange.

[* ] Essay on the Public Credit of Great Britain.

[* ] The Principles and Practical Operation of Sir Robert Peel’s Act of 1844 Explained and Defended, p. 79.