Front Page Titles (by Subject) SECTION VII.: ON THE BANK ACTS OF 1844 AND 1845. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
Return to Title Page for A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
The Online Library of Liberty
A project of Liberty Fund, Inc.
SECTION VII.: ON THE BANK ACTS OF 1844 AND 1845. - 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.
About Liberty Fund:
The text is in the public domain.
Fair use statement:
ON THE BANK ACTS OF 1844 AND 1845.
Conditions Preceding the Acts—Peel’s Vacillations—He Finally Embraces the “Currency Principle”—His Statement Before Parliament—Provisions of the Act of 1844—Scotch Bank Act of 1845—Irish Bank Act of 1845—Limited Liability Banks.
A FEW years after the Bank Restriction Act of 1797, the market price of gold in bank paper rose very considerably, and the foreign exchanges fell and produced great derangement in the foreign commerce of the country. The most sagacious observers of the day attributed the rise in the market price of gold and the fall in the foreign exchanges to the depreciation of the bank notes, caused by excessive issues. Many persons began to think how the bank was to be prevented from making these excessive issues of notes, which, being the only measure of value left in the country, caused the most violent changes in the value of all kinds of property. It was proposed by many that its issues should be limited by law. But Mr. Henry Thornton, M. P., one of the most eminent bankers in London, and one of the joint authors of the Bullion Report, says:* “It was the object of several former chapters to point out the evil of a too contracted issue of paper. The general tendency of the present, as well as the preceding one, has been to show the danger of a too extended emission. Two kinds of error on the subject of the affairs of the Bank of England have been prevalent. Some political persons have assumed as a principle that, in proportion as the gold of the bank lessens, its paper, or, as it is sometimes said, its loans (for the amount of the one has been confounded with that of the other), ought to be reduced. It has already been shown that a maxim of this sort, if strictly followed up, would lead to universal failure.” We shall see afterwards whether this prognostication was verified.
This disturbance, however, passed away, and for several years the value of the bank note did not differ very much from par, and consequently these discussions slumbered. In 1804, a committee was appointed on the Irish currency in consequence of the excessive rise in Irish bank notes and the severe fall of the Dublin exchange. The committee condemned in the strongest terms the excessive issues of Bank of Ireland and other paper; and laid down most emphatically the doctrine that the issues of bank paper should be governed by the foreign exchanges, exactly as they were before the restriction. The most extravagant over-trading in 1808 and 1809 in England, fostered by the most reckless over-issues by the Bank of England, produced exactly the same phenomena, and led to the appointment of the Bullion Committee in 1810. The directors of the Bank of England maintained exactly the same doctrines as the directors of the Bank of Ireland. The directors of both banks acknowledged that before the restriction they regulated their issues by the state of the foreign exchanges; contracting them when the exchanges were adverse, and expanding them when the exchanges were favorable. But the directors of both banks maintained that they were in no way bound to follow such a rule after the restriction; and they all agreed in scouting the notion that their issues could have any effect on the exchanges. The directors of both banks stated that they regulated their issues solely by the discount of mercantile bills. The Bullion Report laid down that the issues of the bank should be regulated by the price of gold and the foreign exchanges; but how this was to be done they did not say. As in 1802, it was strongly urged that the issues of the bank should be limited by law. But the Bullion Report emphatically condemned the idea of imposing a cast-iron limit on the issues of the bank.
The report gave some statistics regarding the quantity of notes in circulation at different periods since the restriction. However, they said that the actual numerical amount of notes in circulation at any given time was no criterion whatever as to whether it was excessive. Different states of trade and different extents of commercial operations would require different amounts of notes. When public credit was good a smaller amount would be required than when public alarm was felt, and people had recourse to hoarding. Moreover, the different methods of doing business and economizing the use of the currency much influenced the amount which might be necessary at any period. The improved methods of business, the policy of the bank, the increased issue of country bankers, had all tended to diminish the quantity of notes necessary for commerce. Consequently, the numerical amount alone was no criterion whatever. A surer test must be applied; and that sure criterion was only to be found in the state of the exchanges and the price of gold bullion.
The experience of the crisis of 1793 had proved that an enlarged accommodation was the true remedy for the failure of confidence in country districts, such as the system of paper credit was occasionally exposed to. That it was true that the bank had refused the enlarged accommodation in 1793. But the issue of exchequer bills was the same in principle, and the good effect that followed that issue proved the truth of the principle, that if the bank had had the courage to extend its accomodation in 1797, instead of contracting it as they did, the catastrophe which followed might probably have been avoided. Some persons thought so at the time, and many of the directors since the experience of 1797 were now quite satisfied that the course adopted by the bank in that year increased the public distress, in which opinion the committee fully concurred. A very important distinction, however, was to be observed between a demand for gold for domestic purposes, sometimes great and sudden, and caused by a temporary failure of confidence and a drain arising from the unfavorable state of the foreign exchanges. A judicious increase of accommodation was the proper remedy for the former phenomenon, but a diminution of issues the correct course to adopt in the latter.
Some proposals had been made of remedying the evil by a compulsory limitation of the amount of the bank’s advances or discounts, or of its profits or dividends. All these, however, were futile, because the necessary proportion could never be fixed; and even if it were so, might very much aggravate the inconveniences of a temporary pressure; and even if their efficiency could be made to appear, they would be most hurtful, and an improper interference with the rights of commercial property. Thus, the Bullion Report, the ablest commercial report ever presented to Parliament, absolutely condemned the plan of imposing a cast-iron limit on the issues of the bank.
Mr. Peel, who was chairman of the Committee of 1819, had become an entire convert to the doctrines of the Bullion Report, which he had voted against in 1811, contended in the debate on moving for the Act of 1819, that there was no test of the excess or the deficiency of bank notes, but a comparison with the price of gold. As the bank had repudiated the principles of the Bullion Report, they could not be expected to act upon them. It might, therefore, appear necessary to prescribe such a limitation of their issues as would secure the power of the bank over the exchanges. He himself thought this a very unwise plan, because it depended so much on circumstances whether or not there was an excess of circulation. There were occasions when what was called a run upon the bank might be arrested in its injurious consequences by an increase of its issues. There were other occasions when such a state of things demanded a curtailment. In the year 1797, when a run was made on the bank, but when the exchanges were favorable and the price of gold had not risen, it was proved that an extension of issues might, by restoring confidence, have rendered the original restriction unnecessary. On the other hand, if the run was the effect of unfavorable exchanges and the consequent rise in the price of gold, the alarm must be met by a reduction of the issues. It was, therefore, impossible to prescribe any specific limitation of issues to be brought into operation at any period, however remote. The quantity of circulation which was demanded in a time of confidence varied so materially from the amount which a period of despondency required, that it was an absolute impossibility to fix any circumscribed amount.
In the great monetary crisis of 1825, it was shown that the only method of arresting the run on the bankers, and saving their existence, was by greatly extending the bank’s issues. For three days after the panic began, the bank restricted its issues with extreme severity; then, when every banker and merchant in London was in danger of stopping payment, the bank extended its issues with the greatest liberality; and in an instant the whole commercial world, mercantile and banking, was saved. Consequently, although the commercial crisis was alleged to have been greatly aggravated, if not originally produced, by the excessive issues of country bankers, no sane statesman breathed a word as to imposing a cast-iron limit on the issues of the Bank of England. Mr. Secretary Peel was convinced that the root of the evil lay in the monopoly of the Bank of England, and that if, in the year 1793, a set of banks had existed in this country on the Scotch system, it would have escaped the danger it was then involved in, as well as the calamity which had just occurred.
In 1793, upwards of 100 banks had failed. In seven years, from 1810 to 1817, 157 commissions in bankruptcy were issued against country bankers; in the crisis which had just occurred, seventy-six failures had taken place. But from the different ways of making compositions, etc., the number of failures should probably be estimated at four times the number of the commissions of bankruptcy. What system could be worse or more prejudicial to every interest in the country, than one which admitted of such an enormous amount of failures? Contrast what had been the case in Scotland, under a different system. Mr. Gilchrist, a manager of one of the Scotch banks, had been asked by the committee of 1819 how many failures there had been in Scotland within his recollection, and said, that there had been only one; that the creditors had been paid 14s. in the pound immediately, and, finally, the whole of their claims. These facts were a strong presumption that the Scotch system, if not quite perfect, was at least far superior to the one existing in England. The present system of country banking was most prejudicial in every point of view. He then described the misery caused by the failure of the country banks. He trusted that the institution of joint-stock banks would place the currency on a firmer footing. He most sincerely trusted that the great obstacle to the proposed institutions, the want of a charter, would be removed. He hoped that the directors of the Bank of England would seriously consider what advantage they would derive from refusing charters to these banks. He, himself, could not imagine what benefit they would derive from it; they, no doubt, had the right to prevent such charters being granted, but he hoped they would refrain from exercising their right.
On the renewal of the charter in 1833, Sir Robert Peel maintained the same opinion. He had, however, recanted his opinion as to the evil of the monopoly of the bank, and the expediency of adopting the Scotch system of a multiplicity of banks. He was of opinion that it was 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 danger, which it could not give with the same effect if it were subject to the rivalry of another establishment. This, however, is an obiter dictum—a long way from proof.
Thus, up to 1833, all statesmen, financiers and economists held that the circulating medium or currency, the measure of value in which the price of commodities is expressed, consists of and comprehends money and credit in all its forms, both written and unwritten; that it had no definite fixed limit; that the sole test of its value is the price of gold and the state of the foreign exchanges, and that commercial crises, when they attain a certain degree of intensity, can only be alleviated and allayed by cautious and judicious but liberal extension of the issues of the bank. And as Sir Robert Peel is to play such a conspicuous part in the monetary legislation of the country, it is well to note the phases of opinion he underwent on the subject.
In 1811 he voted in the majority against the principles of the Bullion Report. In 1819 he had adopted to the full the principles of the Bullion Report; saw the necessity of leaving the bank free to assist commercial difficulties, and declared that at no period, however remote, would he ever consent to impose a cast-iron limit on the issues of the bank. In 1826 he was dead against the monopoly of the bank, which he declared was the root of all the evil in the banking system of England, and recognized the superiority of the Scotch system of a multiplicity of banks. In 1833 he was decidedly in favor of perpetuating the monopoly of the bank.
THE BANK ACT OF 1844.
In 1844, Sir Robert Peel cast all his own opinions and the opinions of the Bullion Report, and of all the soundest and most able economists and statesmen, to the winds. The bank in 1827 had at last adopted the principles of the Bullion Report, and had endeavored to carry them into effect. But the measures they adopted so utterly failed, and brought the bank into such discredit and up to the very verge of bankruptcy, that Sir Robert was naturally irritated and disgusted, and he delivered himself over, bound hand and foot, to the dogmas of Lord Overstone and his sect. which we have explained in a previous chapter. Hopeless of discovering any other method of controlling and curbing the mismanagement of the bank, Peel at length, after long hesitation and doubt, determined to impose a legal cast-iron limit on the bank’s power of issue. If Peel had done this simply as a plain, practical measure; if he had said that the directors seemed so utterly incapable of managing the bank with unlimited powers of issue, that he saw no alternative but to try the effect of imposing a legal limit on their power, it might perhaps have been difficult to gainsay him. But, unfortunately, he founded his act upon a whole nest of theories. He adopted Lord Overstone’s dogmatic heresy, that bank notes payable to bearer on demand alone are currency, to the exclusion of all other forms of credit, even cheques. He then adopted the theory which his supporters designate the “Currency Principle”—that is, that when bank notes are permitted to be issued, they should exactly equal the gold they are alleged to displace; and that for every five sovereigns drawn out of the bank, a £5 note should be withdrawn from circulation; and that any excess of notes above the gold they displace is a depreciation of the currency. He was aware that the doctrine was in diametrical contradiction to his own often-expressed opinion, and to the unanimous doctrine of every statesman in 1819. He then deliberately took away the power of the bank to act in support of commerce in a crisis, by propounding the astounding dogma that all commercial crises originate in excessive issues of notes by banks; and, therefore, he concluded that if he could prevent excessive issues by banks, he would thereby prevent the occurrence of commercial crises, and, therefore, there would be no need for the bank to have this power.
Now, it shows Peel’s want of knowledge of the simplest mechanism of banking to suppose that the Act of 1844 really does carry out the “currency principle.” It has been shown that, in order really to carry out the “currency principle” into effect, it would have been necessary to prohibit the Bank of England from discounting bills of exchange, because every bill a bank discounts is a violation of the “currency principle.” The banks really constructed on the “currency principle” never discounted bills of exchange, and never made, and by no possibility ever could make, any profits. Secondly, if Peel had been acquainted with commercial history, he would have known that the “currency principle” is no preventive against commercial crises, because some of the very worst commercial crises on record took place in those very cities where the “currency principle” was really in force. Lastly, it was the very worst delusion of all to suppose that all commercial crises are produced by excessive issues of notes. Speculation originates with the mercantile community; and all rapid and sudden changes of price, all new fields of operation and new markets suddenly thrown open, naturally produce over-speculation. Banks, no doubt, may and do foster over-speculation and aggravate commercial crises; but the speculations do not originate with bankers; it is merchants who originate speculations, and who frequently drag bankers into them by the most unscrupulous. nefarious and (though not legally, yet morally) fraudulent means. To suppose that it is possible to prevent mercantile speculation and commercial crises by imposing an absolute limit on the currency, is as vain a delusion as that of the London alderman who declared that he would put down suicide.
On the 6th of May, 1844, Sir Robert Peel moved a resolution of the House that it was expedient to continue for a limited time certain of the privileges of the Bank of England, subject to any provisions that might be passed by any act for that purpose. In bringing this resolution forward, he gave a preliminary sketch of the evils of the paper currency as it then stood, and the methods he proposed for placing it on a sounder footing. After dwelling on the importance of a metallic standard, and exposing the absurdity of the theories which were so prevalent during the Restriction Act (by which he himself was beguiled), and the advantage of having a single standard of value, he addressed himself to the more immediate subject of consideration—the state of the paper circulation of the country, and the principles which ought to regulate it, remarking:
“I must state at the outset that, in using the word money, I mean to designate by that word the coin of the realm and promissory notes payable to bearer on demand. In using the word paper currency, I mean only such promissory notes. I do not include in these terms bills of exchange, drafts on bankers, or other forms of credit. (But unfortunately all judges do.) There is a natural distinction, in my opinion, between the character of a promissory note payable to bearer on demand and other forms of paper credit; and between the effects which they respectively produce upon the price of commodities and the foreign exchanges.
[There is no real difference on its effect on price between a note and a bill of exchange. They both aggravate prices, and thus by causing goods to be too dear to export they lead to an export of gold. An excessive importance was attached to notes in those days, because notes were almost the only credit payable to bearer in circulation. But at the present day cheques have, to a very large extent, superseded notes, and have increased at an enormously greater rate than notes, and cheques are in all respects absolutely identical with notes.]
“The one answers all the purposes of money, passes from hand to hand without indorsement, without examination, if there be no suspicion of forgery; and it is, in fact, what its designations imply it to be, currency or circulating medium (which words, though having radically different meanings, comprehend exactly the same quantities). * * * I think that experience shows that the paper currency—that is, promissory notes payable to bearer on demand—stands in a certain relation to the gold coin and the foreign exchanges in which other forms of paper credit do not stand. [Cheques and notes stand exactly in the same relation to the gold coin and the foreign exchanges; and, as we shall see, it was this extraordinary oversight which brought about the failure of the Bank Act of 1844.] There are striking examples of this adduced in the report of the Bullion Committee of 1810, in the case both of the Bank of England and of the Irish and Scotch banks. In the case of the Bank of England, and shortly after its establishment, there was a material depreciation of paper in consequence of excessive issues. The notes of the Bank of England were at a discount of seventeen per cent. After trying various expedients, it was at length determined to reduce the amount of notes outstanding. The consequence was an immediate increase in the value of those which remained in circulation, the restoration of them to par and a corresponding improvement in the foreign exchanges. [The troubles of the bank were not brought about by excessive issues, but by the shameful state of the coinage; and the bank having promised to pay twelve ounces of coin for every seven it had received, as soon as the new good silver coin came into general circulation, the exchanges were restored to par, while the note was at a discount of twenty per cent. and eleven months before the note was brought to par. Moreover, the notes were not reduced in amount. It is true that £200,000 were added to the new capital of the bank, but at the same time £800,000 in exchequer tallies were also added, and made the new capital exceed a million; and the bank was allowed to issue new notes to the full amount of its new capital, tallies and notes together; so that, in fact, the notes, instead of being reduced, were greatly increased.] In the case of Ireland, in 1804 the exchange with England was extremely unfavorable. A committee was appointed to consider the causes. It was denied by most of the witnesses from Ireland that they were at all connected with excessive issues of Irish notes. In the spring of 1804, the exchange of Ireland with England was so unfavorable that it required £118 10s. of the notes of the Bank of Ireland to purchase £100 of the notes of the Bank of England. Between the years 1804 and 1806, the notes of the Bank of Ireland were reduced from £3,000,000 to £2,410,000, and the effect of this, taken in conjunction with an increase of the English circulation, was to restore the relative value of Irish paper and the exchange with England to par. [At this time Bank of Ireland notes were inconvertible and the sole medium of paying the exchanges, and consequently excessive issues would necessarily cause a heavy depression of the exchanges.] In the same manner an unfavorable state of the exchange between England and Scotland has been more than once corrected by a contraction of the paper circulation of Scotland. [Not more than once. The cause of the Scotch notes falling to a discount was the optional clause, which in fact made them payable at six months after demand, at the will of the bank. As soon as the optional clause was abolished by law, the Scotch notes at once rose to par, and have never varied from it since.] In all these cases the action has been on that part of the paper credit of the country which has consisted of promissory notes payable to bearer on demand. There had been no interference with other forms of paper credit, nor was it contended then, as it is now contended by some, that promissory notes are identical in their nature with bills of exchange, and with cheques on bankers and with deposits, and that they cannot be dealt with on any separate principle.”
It is well known now that all these ideas are entirely antiquated. They are in direct contradiction to the doctrines of Ricardo and the Bullion Report. All statesmen, economists and financiers of that time held that the actual amount of paper issues was no proof of excess; the sole criterion was the price of gold and the state of the foreign exchanges. All modern economists of reflection have reverted to the doctrines of Ricardo and the Bullion Report; and it is now well known that the true way of restricting paper currency, i. e., credit, is not by imposing an arbitrary cast-iron limit on its amount, but by sedulously regulating the rate of discount by the bullion in the bank and the state of the foreign exchanges. The truth of this doctrine, which had not even been thought of in Peel’s time, is now universally recognized, and it is the principle on which the Bank of England has been managed for more than thirty years.
Mr. Peel then proceeded to expatiate on the evils of the unlimited competition of issues:
“Are the lessons of experience at variance with the conclusions we are entitled to draw from reason and from evidence? What has been the result of unlimited competition in the United States? In the United States the paper circulation was supplied, not by private bankers, but by joint-stock banks established on principles the most satisfactory. There was every precaution taken against insolvency, unlimited responsibility of partners, excellent regulations for the publication and audit of accounts, immediate convertibility of paper into gold. If the principle of unlimited competition, controlled by such checks be safe, why has it utterly failed in the United States? How can it be shown that the experiment was not fairly made in that country? Observe this fact, while there existed a central bank (the United States Bank) standing in some relation to the other banks of the United States as the Bank of England stands to the banks of this country, there was some degree (imperfect it is true) of control over the general issues of paper. But when the privileges of the central bank ceased, when the principle of free competition was left unchecked, then came, notwithstanding professed convertibility, immoderate issues of paper, extravagant speculation, and the natural consequences, suspension of cash payments and complete insolvency. Hence, I conclude, that reason, evidence, and experience combine to demonstrate the impolicy and danger of unlimited competition in the issue of paper.”
It is impossible to say which is the more remarkable—the evidence Sir Robert Peel omitted, or the evidence he adduced. What was the need for Sir Robert Peel to cross the Atlantic in search of an example of joint-stock banks with unlimited competition of issues? Why did he not cross the Tweed? On the north side of the Tweed there had existed joint-stock banks with unlimited issues for 150 years, and no central bank to control the others; the principle of free competition had been left unchecked, and the natural consequences, “suspension of cash payments and complete insolvency,” had never occurred. In 1826, Sir Robert Peel had denounced the monopoly of the Bank of England in the severest terms, and lauded the Scotch system of competing banks with unlimited issues to the skies. Why had his zeal for the Scotch system cooled down to zero in 1844? But he carefully avoided saying one word about that case, because it militated against the theory he was determined to carry at all hazards—namely, that of one Central Bank of Issue. But the evidence he adduced was as great a misrepresentation of historical fact as what we have already quoted in a former section. The American banks, indeed, established on principles the most satisfactory! Why, John Law was the inspiring genius of American banking in 1834 till the subsequent crash. It was not because they were unlimited that was the cause of the catastrophe, but because the American legislatures fostered Law’s wildest ideas of paper money. But as to the fact of the Central Bank of the United States exercising any due controlling influence over the other banks, we need only cite a passage from President Van Buren’s message to Congress in 1839.
“I am aware that it has been urged that the control over the operations of the local banks may be best attained and exerted by means of a national bank. The history of the late national bank, through all its mutations, shows that it was not so; on the contrary, it may, after a careful consideration of the subject be, I think, safely stated that at every period of banking excess it took the lead; that in 1817 and 1818, in 1823 and in 1833, and in 1834, its vast expansions, followed by distressing contractions, led to those of the State institutions. It swelled and maddened the tides of the banking system, but seldom allayed or safely directed them. At a few periods only was a salutary control exercised, but an eager desire on the contrary exhibited for profit in the first place; and, if afterwards its measures were severe towards other institutions, it was because its own safety compelled it to adopt them. It did not differ from them in principle or in form; its measures emanated from the same spirit of gain; it felt the same temptation to over-issue; it suffered from, and was totally unable to avert, these inevitable laws of trade by which it was itself affected, equally with them, and at least on one occasion, at any early day, it was saved only by extraordinary exertion from the same fate that attended the weakest institution it professed to supervise. In 1837 it failed, equally with others, in redeeming its notes, though the two years allowed by its charter had not expired, a large amount of which remains at the present time outstanding.”
Such was the language held by the Government regarding that bank which Peel held up as a model for that of England, and to whose abolition he attributed the destruction of American credit! And if we were to descend from the language of the Executive to that of private writers, such as Gallatin, Lee and Appleton, and others, we shall find that the most reckless mismanagement was the chief characteristic of that bank. When it stopped payment it was found to be utterly insolvent. So much for the value of it as an argument in support of Peel’s views.
Sir Robert Peel then stated that it was the intention of the Government to increase as much as possible the power of a single bank of issue, and that bank should be the Bank of England. The bank was, therefore, to continue its privileges of issue, but it was to be divided into two departments—the one for the purpose of issuing notes, and the other for the ordinary business of banking. But the bank was to be deprived, once for all, of the power of unlimited issues. These were to take place in future on two foundations only: 1st. A fixed amount of public securities. 2d. Bullion. The amount of issues upon public securities was permanently fixed at £14,000,000; every other note was to be issued in exchange for bullion only, so that the amount of notes issued on bullion should be governed solely by the action of the public. Although he wished that there should only be a single bank of issue, yet existing interests were to be regarded, and those banks which were at that time lawfully issuing their own notes might remain banks of issue, but their amount was to be strictly limited to a certain definite average.
On the 20th of May, Sir Robert introduced further resolutions, and proposed that, in the event of any country banks of issue failing, or withdrawing their notes voluntarily from circulation, the bank might, with the consent of the Crown, increase its issues to a definite proportion of the notes thus withdrawn. And further, that the bank should be obliged to buy all gold bullion presented for purchase at £3 17s. 9d. per ounce. It had only previously been giving £3 17s. 6d.; and a certain proportion was allowed on silver bullion, as the export of that was a proper remedy for the inconvenience of our standard differing from that of other nations. It was, therefore, of great importance to insure such a stock of silver in this country as might meet the wants of merchants, and prevent them having to send to the Continent for it. He proposed that the silver bullion on which the bank might issue notes should not exceed one-fourth of the gold bullion.
It was impossible for Sir Robert Peel not to see that his measure of 1844 was in express contradiction with his recorded sentiments in 1819 and 1833, the emphatically expressed doctrine of the Bullion Report, all the statesmen and financiers of that period and of 1819; that it was impossible to limit the issues of the bank to any fixed amount, because in time of commercial trouble, increased issues were indispensable. Sir Robert Peel knew that he was now taking away this power from the bank, and he was, accordingly, obliged to meet this objection. He said:
“It is said that the Bank of England will not have the means which it has heretofore had of supporting public credit, and of affording assistance to the mercantile world in times of commercial difficulty. Now in the first place, the means of supporting public credit are not means exclusively possessed by banks. All who are possessed of unemployed capital, whether bankers or not, and who can gain an adequate return by the advance of capital, are enabled to afford, and do afford, that aid which it is supposed by some that banks alone are able to afford. In the scond place, it may be a question whether there be any permanent advantage in the maintenance of public or private credit, unless the means of maintaining it are derived from the bona fide advance of capital, and not from a temporary increase of promissory notes, issued for a special purpose. Some apprehend that the proposed restriction upon issue will diminish the power of the bank to act with energy at the period of monetary crisis and commercial alarm and derangement. But the object of the measure is to prevent (so far as legislation can prevent) the recurrence of those evils from which we suffered in 1825, 1836 and 1839. It is better to prevent the paroxysm than to excite it, and to trust to desperate remedies for the means of recovery.” Sir Robert Peel, therefore, deliberately took away the power of the bank to act on extreme occasions, because he fondly hoped that his act would prevent those extreme occasions from arising. We shall see how these hopes were fulfilled.
Sir Charles Wood followed Sir Robert Peel, whose mere alter ego he was, travelling over the same ground, and giving the same caricatured description of American banking as he had done. He, of course, was a zealous devotee of the “currency principle.” He said: “It is not enough, then, to enact that the bank notes shall be convertible. The paper circulation must not only be convertible, but must vary in amount from time to time as a metallic circulation would vary. A system, therefore, of paper circulation is required which will attain this object, and insure a constant and steady regulation of the issues on this principle. This, and this alone, affords a permanent security for the practical convertibility of the notes at all times, and for the consequent maintenance of the standard.” Thus, at length, the entire overthrow of the doctrines which had been held for half a century by the most experienced, the wisest, and the most sagacious statesmen, economists and financiers was effected, and doctrines which had been especially condemned and rejected, and which they had expressly declared would, if carried out, lead to universal failure, were exalted in their place. A nest of untried theories and facts set up against the lessons of experience and reasoning, and we shall see the result.
This was a striking instance of the mutability of fortune—
“Thus time, as it goes round, changes the seasons of things. That which was in esteem falls at length into utter disrepute, and then another thing mounts up, and issues out of its degraded state, and every day is more and more coveted, and blossoms forth high in honor when discovered, and is in marvellous repute with men.”—(Munro.)
But we shall find that fickle Fortune rolled her wheel a full round in the not very distant future.
THE ORGANIZATION OF THE BANK.
The chief provisions of the Bank Charter Act, Statute 1844, c. 32, are as follows:
1. After the 31st August, 1844, the issue of bank notes by the Bank of England should be kept wholly distinct from the general banking business, and be conducted by such a committee of the directors as the court might appoint, under the name of the “Issue Department of the Bank of England.”
2. On the same day the governor and company should transfer, appropriate and set apart to the issue department securities to the value of £14,000,000, of which the debt due by the public to the bank was to be a part; and also so much of the gold coin and gold and silver bullion as should not be required for the banking department. The issue department was then to deliver over to the banking department an amount of notes exactly equal to the securities, coin and bullion so deposited with them. The bank was then forbidden to increase the amount of securities in the issue department, but it might diminish them as much as it pleased, and increase them again to the limit defined, but no further. The banking department was forbidden to issue notes to any person whatever, except in exchange for notes, or such as they received from the issue department in terms of the act.
3. The proportion of silver bullion in the issue department on which notes were to be issued, was not at any time to exceed one-fourth part of the gold coin and bullion held at the time by the issue department.
4. All persons whatever, from the 31st August, 1844, were to be entitled to demand bank notes in exchange for standard gold bullion, at the rate of £3 17s. 9d. per ounce.
5. If any banker who, on the 6th May, 1844, was issuing his own notes, should cease to do so, it should be lawful for the Crown in council to authorize the bank to increase the amount of securities in the issue department to any amount not exceeding two-thirds of the amount of notes withdrawn from circulation.
6. Weekly accounts, in a specified form, were to be transmitted to Government, and published in the next “London Gazette.”
7. From the same date the bank was relieved from all stamp duty on their notes.
8. The annual sum payable by the bank for their exclusive privileges should be increased from £120,000, as settled in 1833, to £180,000. And all profits derived by the bank from the increase of their issues above the £14,000,000, as prescribed by the act, shall go to the public.
9. After the passing of the act, no person other than a banker, who was lawfully issuing his own notes on the 6th May, 1844, should issue bank notes in any part of the United Kingdom.
10. After the passing of the act, it was forbidden to any banker to draw, accept, make or issue in England or Wales any bill of exchange, or promissory note, or engagement for the payment of money payable to bearer on demand, or to borrow, owe or take up in England or Wales any sum or sums of money on the bills or notes of such banker, payable to bearer on demand, except such bankers as were on the 6th May, 1844, issuing their own bank notes, who were allowed to continue their issues in such manner and to such an extent as afterwards provided. The rights of any existing firm were not to be affected by the withdrawal, change or addition of any partner, provided the whole number did not exceed six persons.
11. Any banker who ceased to issue his own notes from any reason whatever, after the act, was not to resume such issues.
12. All existing banks of issue were forthwith to certify to the commissioners of stamps and taxes the place and name and firm at, and under which, they issued notes during the twelve weeks next preceding the 27th April, 1844. The commissioners were then to ascertain the average amount of each bank’s issues, and it should be lawful for such banker to continue his issues to that amount, provided that on an average of four weeks they were not to exceed the average so ascertained.
13. If any two or more banks of issue had become united during that twelve weeks, the united bank might issue notes to the aggregate amount of each separate bank.
14. The commissioners were to issue in the “London Gazette” a statement of the authorized issues of each bank.
15. If two or more banks afterwards became united, each of less than six partners, then the commissioners might authorize them to issue notes to the amount of the separate issues. But if the number of the united banks exceeded six, their privilege of issuing notes was to cease.
16. If any banker exceeded his authorized issue, he was to forfeit the excess.
17. Every bank of issue was to send a weekly account of its issues, which was to be published in the “London Gazette.”
18. The mode of taking the average was laid down, and bankers were to permit their books of accounts to be inspected by a Government officer properly appointed, and to make a return to Government once a year, within the first fortnight in January.
19. The Bank of England was allowed to compound with private banks of issue, to withdraw their own notes and issue Bank of England notes, for a sum not exceeding one per cent. per annum, up to the 1st August, 1856.
20. All banks whatever, in London or within sixty-five miles of it, were allowed after the passing of the act to draw, accept or indorse bills of exchange, not being payable to bearer on demand.
21. The privileges of the bank were to continue till twelve months to be given after the 1st August, 1855, and repayment of all the public debts and all the other debts whatever.
THE SCOTCH BANK ACT OF 1845.
Sir Robert Peel having carried his Bank Charter Act of 1844 with scarcely a breath of opposition, and which was considered at the time to be the ne plus ultra of human wisdom, passed acts in 1845 to regulate banking in Scotland and Ireland. The chief provisions of the Scotch Bank Act of 1845, Act, Statute 1845, c. 38, are as follows:
1. All persons had been prohibited by the Act, Statute 1844, c. 32, from commencing to issue notes in the United Kingdom after the 6th May, 1844; and all such persons in Scotland as were lawfully issuing their own notes between the 6th May, 1844, and the 1st May, 1845, were to certify to the Commissioners of Taxes the name of the firm and the places where they issued such notes.
2. The commissioners were to ascertain the average number of such bankers’ notes in circulation during the year ending 1st May, 1845.
3. Such bankers were authorized to have in circulation an amount of notes, whose average for four weeks was not to exceed the amount thus certified by the commissioners, together with an amount equal to the average amount of coin held by the banker during the same four weeks. Of the coin, three-fourths must be gold and one-fourth might be silver.
4. In case the bank exceeds the legal amount, it is to forfeit the excess.
5. If two or more banks unite, they are authorized to have an issue of notes to the aggregate amount of issues of the separate banks, as well as the amount of coin held by the united banks.
6. Notes of the Bank of England not to be legal tender in Scotland.
THE IRISH BANK ACT OF 1845.
The chief provisions of the Irish Bank Act, Act Statute, 1845, c. 37, are as follows:
1. All restrictions enacted by former acts, prohibiting banking partnerships of more than six persons to be formed and carry on business within fifty miles of Dublin, were repealed.
2. Interest was allowed to the Bank of Ireland on its capital of £2,630,769 at the rate of 3 1-2 per cent. per annum.
3. The bank was to manage the public debt of Ireland without any charge.
4. The bank might be dissolved at any time after twelve months’ notice, to be given after the 1st January, 1855, and repayment of all Government debts.
5. Bank of England notes were not to be legal tender in Ireland.
6. All bankers issuing notes in Ireland were, within one month after the passing of the act, to give in a statement to the Commissioners of Taxes of their claim, and the name and place of the firm where they issued such notes, during the year preceding the 1st May, 1845; and if they were found to be lawfully issuing notes between the 6th May, 1844, and the 1st May, 1845, they might continue to issue notes to the amount of the average they issued during that year, together with the amount of gold and silver coin held by the banker.
7. If two or more banks united, they might issue notes to the combined amount of the separate banks, together with the coin held by the united bank. Three-fourths of the coin must be gold and one-fourth might be silver.
8. All bank notes under £1 prohibited, under a penalty of not less than £5 and not more than £20.
9. Bank notes above £1 and under £5 subject to certain regulations.
10. Any persons, except those specially authorized, issuing promissory notes payable to bearer on demand for less than £5, should forfeit £20.
11. All bank notes were to be for complete pounds.
Such are the acts which at the present time regulate the issue of bank notes in England, Scotland and Ireland; and we observe that, while the Bank of England was obliged to hold Government security for its fixed issue of £14,000,000, the country bankers in England were strictly confined to their fixed issue, and in Scotland and Ireland the banks might issue their fixed limit without any security, and in addition to that an amount equal to the gold and silver coin they hold. The English Bank Act was founded on certain specific theories of currency; but the Scotch and Irish acts were merely rough-and-ready methods of compelling the banks to hold a greater amount of specie in proportion to their liabilities than they had hitherto done. As the chief point of interest with regard to Sir Robert Peel’s banking legislation is the operation of the act in a commercial crisis and a monetary panic, we shall defer the consideration of its practical working till the chapter on monetary panics.
Sir Robert Peel had also passed an act in 1844 to regulate the joint-stock banks in England; but having turned out a complete failure, it was totally repealed in 1857, and so does not require further notice. By this Act, Statute 1857, c. 49, the number of partners allowed in a private bank was increased to ten.
EXTENSION OF LIMITED LIABILITY TO BANKS.
The question of admitting the principle of limited liability into commercial partnerships had long been resisted with the fiercest acrimony in England. The old theory of the law was expressed by Lord Eldon, who said that a man who entered into a commercial partnership rendered himself liable “to his last shilling and his last acre” for the debts of the company. And this was no doubt true with regard to ordinary private trading partnerships. But many great companies had been formed and incorporated, and being corporations they were, ipso facto, endowed with the privilege of limited liability. A principle may reasonably apply to a private partnership, whose members all take an active part in the business, and have full knowledge of all transactions, which does not apply to a large joint-stock company, whose affairs are expressly left in the hands of a small committee, and the great majority of the members are specially debarred from all knowledge of its transactions. Now, as there are many great objects in commerce which can only be effected by a large company, it had long been the practice in granting acts to these companies to limit the liability of the shareholders. This was done in the case of the Bank of England; in railway and other companies, and in the charters granted to colonial banks. But for a very long time, the application of this principle to private partnerships in England was vehemently resisted. This resistance, however, was at length overcome in 1855, and in that year the Act, Statute 1855, c. 133, permitted the formation of joint-stock companies with limited liability,
But though the principle was allowed to other companies, joint-stock banks were still jealously excluded from it, from some unintelligible distinction being drawn between banking and other kinds of trading. However, as is usual in this country, what good sense and reasoning could not effect was at last brought about by several most dreadful calamities. In 1857, some joint-stock banks failed. At that time there was no method of calling upon the shareholders to contribute ratably in proportion to their holding, to discharge the debts of the company. But the creditors might single out any individual shareholders they thought worth powder and shot, and claim their full debts from them. The consequence was, that on the failure of a joint-stock bank, the responsible shareholders disposed of their property, and put the Channel between themselves and their creditors, until they could make terms with them. The terrible bank failures of 1857 at length compelled the legislature to concede limited liability to banks.
The chief provisions of this Act, Statute 1858, c. 91, were:
1. So much of the statute of 1857 as prevented banks being formed with limited liability was repealed.
2. All banks which issued promissory notes were to be subject to unlimited liability with respect to their notes, for which they are to be liable, in addition to the sum for which they are liable to the general creditors.
3. Every existing banking company might register itself under the act, upon giving thirty days’ notice to each and all of its customers. Any customer to whom it failed to give notice retained his full rights as before.
This act, however, had a very limited success. It was adopted in very few instances. Banks do not readily change their constitution, and almost all the great banks had a pride in maintaining unlimited liability, and thought that adopting the act might endanger their credit. Not one of the London joint-stock banks, nor any of the Scotch banks—which, except the three chartered banks, were all of unlimited liability—brought themselves under the Act of 1858. But the stupendous catastrophe of the City of Glasgow Bank, in 1878, created such consternation among the shareholders of banks, that they made determined efforts to compel their directors to adopt the principle of limited liability. This was the case, especially in Scotland, where investment in bank shares was recognized by the law courts as a legitimate investment of trust funds. But banks do not recognize trusts. Consequently, unfortunate trustees were liable, not only personally for all losses sustained by the banks, but also to make good the losses of their clients. This created such alarm that the shares in the Scotch banks fell thirty per cent.
To facilitate the adoption of limited liability by banks, and also to preserve all reasonable security for creditors, the Act, Statute 1879, c. 76, was passed, which enacts:
1. That any unlimited company may increase the nominal amount of its capital by increasing the nominal amount of its shares; provided, that no part of such increased capital shall be capable of being called up, except in the event of and for the purpose of the company being wound up.
2. A limited company may declare that any portion of its still uncalled-for capital shall not be capable of being called up, except in the event of and for the purpose of the company being wound up.
3. All banks are subject to unlimited liability with respect to their notes in circulation.
The Bank of England and the three senior chartered banks in Scotland were created corporations before the Crown was authorized by act of Parliament to create trading corporations with unlimited liability. They therefore had always been limited banks, and did not require to avail themselves of the Act of 1879 to become so. But almost all the English jointstock banks and all the other Scotch banks, without loss of time, registered themselves as limited companies under the Act of 1879, and the result has been to show that all the fears which had been entertained that limited banks would sustain a diminution of credit were entirely groundless.
THE DIFFERENCES IN PRINCIPLE BETWEEN SUPPORTERS OF THE BANK ACT OF 1844 AND THOSE OF THE BULLION REPORT AND THE BANK ACT OF 1819.
The supporters of the Bank Act of 1844 strenuously maintain that it is the complement of, and in strict accordance with, the principles of the Bullion Report and of the Act of 1819. Such statements are, however, entirely incorrect. Beyond the simple fact that both were desirous to maintain the convertibility of the note, the principles maintained by the framers of the Bank Charter Act of 1844 are in all other respects radically different from those of the Bullion Report and of the supporters of the Bank Act of 1819.
The following are the differences of principle between them:
1. In all the great Parliamentary debates and in the opinion of statesmen, it was invariably assumed that the term currency includes money and credit in all its forms, written and unwritten, although no specific definition of currency was ever attempted.
Lord Overstone and his sect, whose doctrines prevailed with Sir Robert Peel, maintained that the term currency includes money and bank notes payable to bearer on demand only, to the exclusion of all other forms of credit. Does the definition of currency by the framers of the Bank Act of 1844 agree with that of those who supported the Bank Act of 1819?
2. The Bullion Report declares that the mere numerical amount of notes in circulation at any time is no criterion whether they are excessive or not.
The dogma of the framers of the Bank Act of 1844 is that the notes in circulation ought to be exactly equal in quantity to what the gold coin would be if there were no notes, and that any excess of notes above that quantity is a depreciation of the currency. Does the dogma of the framers of the Bank Act of 1844 agree with the principles of the Bullion Report on this point?
3. The Bullion Report declares, and the supporters of the Bank Act of 1819 uniformly maintained, that the sole test of the depreciation of the paper currency is to be found in the price of gold bullion and the state of the foreign exchanges.
Ricardo says:* “The issuers of paper money should regulate their issues solely by the price of bullion, and never by the quantity of their paper in circulation. The quantity can never be too great or too little while it preserves the same value as the standard.” The dogma of the framers of the Bank Act of 1844 is, that the true criterion of the depreciation of paper is whether the notes do or do not exceed in quantity the gold they displace. Is the dogma of the framers of the Bank Act of 1844 in accordance with the principles of the Bullion Report and of Ricardo on this point?
4. It was proposed to the Bullion Committee to impose a positive limit on the issues of the bank, in order to curb their power of mismanagement.
The Bullion Report expressly condemns any positive limitation on its issues; Peel himself in 1819 and in 1833 fully concurred in this opinion, and said that at no time, however distant, would he impose a positive limit on the issues of the bank. But, in 1844, Peel himself, by the Act of 1844, imposed a cast-iron limit on the issues of the bank. Was the dogma of Peel in 1844 in accordance with the doctrines of the Bullion Report and of himself in 1819 and 1833?
5. The Bullion Report, after discussing the most important monetary crises which had occurred up to that time, expressly declares that it is the proper policy for the bank in certain times of commercial crises to expand its issues to support commercial houses and avert a monetary panic. The history of commercial crises, both before and after the Bullion Report, has proved the indubitable wisdom of this doctrine.
The Bank Charter Act of 1844 expressly prevents this from being done. The consequence has been that on three several occasions since the passing of the Act of 1844 it has been found indispensable to suspend the act, in order to prevent every bank in England stopping payment, and probably nineteen merchants out of every twenty being ruined. Is the dogma embodied in the Act of 1844 in accordance with the principles of the Bullion Report?
The above are the glaring and radical differences of doctrine between the principles of the Bullion Report, the supporters of the Act of 1819, and those of the framers of the Act of 1844, and experience has fully demonstrated the superior wisdom of the principles of the Bullion Report and of the supporters of the Act of 1819, to those of the framers of the Bank Act of 1844.
[* ] An Inquiry into the Nature and Effects of the Paper Credit of Great Britain, 245.
[* ] Proposals for an Economical and Secure Currency, p. 3.