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THE BANK ACTS 1857 - John Stuart Mill, The Collected Works of John Stuart Mill, Volume V - Essays on Economics and Society Part II 
The Collected Works of John Stuart Mill, Volume V - Essays on Economics and Society Part II, ed. John M. Robson, introduction by Lord Robbins (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1967).
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THE BANK ACTS
Parliamentary Papers, 1857 (Session 2), X.i., 189-218. Not republished. Original heading: “John Stuart Mill, Esq., called in; and Examined.” Running heads: “Minutes of Evidence taken before the/Select Committee on the Bank Acts.” The evidence was taken on 12 June, 1857, with Sir George Cornwall Lewis, the Chancellor of the Exchequer, in the Chair, and the following members of the Committee present: Edward Ball, Sir Francis Baring, Peter Blackburn, Benjamin Disraeli, John Fergus, George G. Glyn, Sir James Graham, Thomson Hankey, Robert Hildyard, Hope Johnstone, Christopher Puller, Martin Smith, Richard Spooner, William Tite, John Vance, Thomas Weguelin, James Wilson, and Sir Charles Wood. Not mentioned in JSM’s bibliography or Autobiography. No copy in Somerville College.
JSM’s examination includes questions 2010 to 2318 of the evidence before the Committee.
The Bank Acts
sir g. c. lewis:Have you had occasion to consider the provisions and the operation of the Bank Act of 1844?[*] As much so as any person can do who has no practical acquaintance with commercial business, and knows only at second hand facts which are known at first hand by those concerned in business.
In the first place, what is your opinion as to the policy of imposing by law any restriction upon the Directors of the Bank of England with respect to the issue of notes? My opinion is that there should not be any restriction by law, except that of convertibility, which appears to me to be sufficient for all the purposes for which restriction is intended.
Are you aware of the nature of the limit which Mr. Tooke has proposed in his book[†]with respect to the bullion reserve of the Bank? Mr. Tooke, I believe, proposes what cannot possibly be imposed by law, namely, a limit which should consist in the Bank’s retaining a much larger average reserve than it has hitherto done, an average reserve of 12,000,000l. Public opinion might enforce a restriction of that sort, but it is incapable in its terms of being enforced by law.
Does not he recommend that it should be made to depend upon an agreement with the Government, that they should have a discretion as to relaxing the limit, if they thought fit? I was not aware that he had recommended that there should be any positive minimum, but I know he recommends that the Bank should keep an average reserve of 12,000,000l., which of course would be kept for the purpose of being allowed partially to run out when necessary. Now, the difficulty would be, how to bind the Bank otherwise than by general considerations of policy.
If the Bank were in any way bound to keep an average amount of bullion, would not the effect be that if the reserve was below that average in certain times, it would be necessary that the Bank should keep more than the average at certain other times? Yes; there might be an honourable understanding to that effect, but I do not see how it could be anything more.
Would there be any advantage in a rule, which required the Bank to keep more than was necessary at certain times, because it had kept less than was desirable at other times? It is desirable, I think, that the Bank should keep a larger reserve than the average at some times, as well as a smaller at others, in order to prevent the Bank, at times when there is a tendency to over-speculation, from encouraging that tendency by making loans at a much lower rate of interest than the average rate. I am not prepared to say that I would impose on the Bank any compulsory rule in respect to the amount of its reserve. It might probably be better done by fixing a rate of interest below which they should not be permitted to lend. I am not giving an opinion in favour of any restriction, but if any were necessary, I think that would be the best restriction to impose.
At present, the Bank of England are not required by law to keep any fixed amount of bullion? The Bank is not required to keep any fixed amount of bullion. The only restriction is, that the Bank cannot issue notes beyond a certain amount, except on bullion; therefore, under the Act, for all the notes which they issue beyond that amount, they have a corresponding quantity of bullion in their coffers.
Under the present law, if the circulation of the Bank did not exceed 14,500,000l., it would not be required to keep a single sovereign in its reserve? No.
Therefore, a limit such as Mr. Tooke proposes, would tie up the hands of the Bank much more than the limit fixed by the existing law, would it not? I do not know whether it would tie them up more or less, but it would tie them up more usefully, and less hurtfully.
Then your opinion is, that if a limit is to be fixed by law, it would be better to fix it on some such principle as that proposed by Mr. Tooke than on the principle embodied in the present Act? Decidedly.
Have you observed the operation of the present Act in such a manner as to enable you to form any opinion whether the mode of fixing the limit which the Act prescribes has worked well, or in a mischievous manner in practice? I think it has worked well in one particular case only; viz., in a certain stage of a period of over speculation and over trading. At all other times I think it has either had no effect at all, or a bad effect.
Do you believe that the effect of the present law has been to induce the Bank Directors to keep a larger reserve of bullion than they would otherwise have kept? To give any answer to that question which would be of use, it would be necessary to enter into particulars. It would be necessary first to distinguish between the two departments of the Bank, the issue and the banking department.
But taking the bullion of both departments as a whole, do you thinkthat the Bank has kept a larger reserve of bullion since 1844 than it would have kept if the Act of that year had not passed? Taking both branches together, I would not undertake to say; but this I will undertake to say, that under the Act the Bank has kept a much less reserve of bullion than the Act makes necessary, because I think it can be shown that in order to prevent the Act from operating very perniciously in certain cases, it would be necessary that the banking department alone should keep as large a reserve as, but for the Act, need have been kept in both departments together.
Will you be so good as to cast your eye over that Table (Paper No. 19, Appendix),[*]and to say whether, comparing the greatest and the least of the average amounts of bullion in the 10 years before 1844 and in the years since 1844, it does not appear probable that the operation of the Act has been such as to induce the Bank to keep a larger bullion reserve than it would have kept if the Act had not been in existence? This Table leaves no doubt that they have kept a much larger reserve than they kept previously to 1844; but whether larger than they would have kept, in consequence of the increased knowledge of the subject which now exists, if the Act had never existed, I cannot say. I think the tendency of the opinion of competent persons of late years has been in favour of the necessity of keeping a much larger reserve than was formerly thought necessary; and the circumstances of trade have really required a larger amount of reserve, because the great increase in the magnitude of transactions, and particularly the unexampled drains of bullion which have occurred, have rendered it necessary to keep a larger reserve in order to meet those drains.
If the change in the practice of the Bank had taken place in consequence of a change of opinion on the part of the Bank Directors, in the exercise of their discretion, would it not have been likely that the change would have been gradual, whereas it appears from that Table that the change was sudden, and took place exactly in the year 1844? In the years 1844 and 1845 there was a great quantity of gold coming into this country, therefore there would naturally have been a much larger quantity of bullion in the Bank at that time than there was before; and after 1847 the change of opinion had begun, because the drain of that year was such as had never been known before.
Then your opinion is that, as respects the total amount of bullion found in the Bank, in both branches, its quantity has not been affected to any considerable amount by the operation of the Act of 1844? I do not give any opinion on that subject; I am not prepared to say either that it has or that it has not.
You expressed an opinion that the operation of the Act of 1844 hadbeen detrimental in causing the Bank to keep an unnecessary large amount of bullion in the banking department? Not in causing them to do so. If it had really caused them to do so, I think the Act would not have been so mischievous as it has been. It is precisely because, to make their position safe under the Act, or to make the Act work well, it would have been necessary for them to keep a much larger reserve than they did, that I think the Act has worked mischievously. Those who framed the Act do not seem to have adverted to what may be called the double action of drains. They provided against drains, just as if drains acted upon the issue department only. Now every drain, as a general rule, is drawn from the deposits. Therefore, when the two departments are separated, the drain comes first on the deposits. Notes are drawn out of the deposits, and those notes are presented to the issue department to obtain bullion for exportation. The consequence is, that supposing there is a drain of 3,000,000l. only, the effect on the Bank previously to the Act would have been that of a drain of 3,000,000l.; but now, when the two departments are separated, and neither of them can in the most extreme case help the other, the effect on the Bank is the same as if there were a drain of 6,000,000l., because the banking reserve is diminished 3,000,000l., and the issue department has parted with 3,000,000l. of gold from its reserve also. Now, it appears to me that one convertible currency differs from another mainly in the degree in which it tends to produce frequent and violent revulsions of credit; and inasmuch as all the circumstances which lead to revulsions of credit, operate upon the banking department of the Bank of England before they can get to the issue department, the violence of the shock is almost always first felt by the amount of reserve available to meet the demands on the banking department. If, therefore, the Bank cannot help its banking department by sending notes or gold from its issue department, it must either keep in the banking department as great a reserve as it would otherwise be requisite to keep for both departments together; or if not, having a much smaller reserve available to meet the demands on the banking department, it must necessarily, the moment there is the smallest drain, contract its discounts and raise its rate of interest. It thus appears to me that the effect of the Act is, that whenever any drain, however small or temporary, commences, the Bank will be likely, with its present reserve in the banking department, at once to contract its discounts, or to sell securities, in a manner which, if the Act had not existed, it would only do in the case of a very considerable drain.
Are you of opinion that the separation of the two departments has an influence upon the Bank’s rate of interest? A very great influence. I should think that it produces much more violent and frequent fluctuations in the rate of discount; and there is no doubt that the variations have been much more frequent, in point of fact, than they were before.
Do you hold that the Bank rate of discount determines the general rate of discount in the market? No; not that it determines it, but it is certainly a very important element in determining it, because the Bank is so large an establishment, and its loans form so large a portion of the total amount of loans.
c. puller:Do you say that the variations have been in the Bank rate of discount, or in the general rate of discount? In the Bank rate of discount.
sir g. c. lewis:Is it your opinion that the separation of the two departments, created by the Act of 1844, is prejudicial, as well as the fixing a limit upon the issues? Yes; I think the separation of the two departments is the most prejudicial part of the whole. I think the fixing a limit to the issues is also prejudicial; but I may perhaps be permitted to explain what I said on this point in answer to a former question.[*] I do not think the effect prejudicial in all cases; I think it useful in one particular case; I think it is useful at a certain stage in the progress of a revulsion of credit which has been the effect of a previous over extension of it.
In what way do you think it operates well in those circumstances? In this way. One particular kind of commercial crisis, and perhaps the worst kind, is occasioned by previous over speculation and over trading, which is always accompanied by an undue extension of credit, and by a rise of prices of a speculative character, having no sufficient justification in the circumstances of the markets. Now when this is the case, there must necessarily come a revulsion, which is normally brought about by an increase of imports owing to the rise of prices, and by a diminution of exports. That produces a drain of bullion and a collapse of prices, and this collapse of prices is generally brought about by the necessity which the speculators are in of selling in order to fulfil their engagements. Now this speculative rise of prices, I apprehend, is usually attended by an increased quantity of bank notes. It does not follow that it is caused by it, because the speculative purchases generally take place on credit for a certain term; and even if they did not, the transactions between dealers are generally not liquidated by means of bank notes. However, there comes a time in this series of phenomena when the dealers begin to be pressed, when the rise of prices has stopped, but when the speculators do not yet despair of their rising again. At such a time there are generally great applications to bankers for loans, in order to enable the speculators to hold on; and I think the effect of the Act of 1844 is to prevent them from getting those loans to the extent to which they might do but for the Act. And I think that very often the speculative rise of prices is upheld, and has been upheld, as a matter of history, by loans which the Bank of England and other banks have made to merchants and holders of goods, the effect of which has been to prevent them from being under the necessity of selling so soon as they otherwise must have done. The consequence of this is, that the fall of prices is retarded, that the drain of gold continues longer, and that therefore the reserve of the Bank comes nearer to being exhausted; and when the time comes that they are really alarmed about their reserve, they are obliged to pull up more suddenly, and to make a greater reduction of discounts or a larger sale of securities then they otherwise need do, and thereby produce a greater alarm, sometimes amounting to panic, and a greater destruction of credit in the country, and the whole thing is rendered more calamitous than it otherwise would be. In that case, I think, the provisions of the Act do good, because there is no doubt that before the Act existed, the Bank used often in such cases to make loans by the reissue of notes which had been returned to it in exchange for bullion. This appears to me to be the great advantage of the Act; but against it there are two things to be set. One is, I do not think that this mode of operation is so much required now as it perhaps was at one time, because the commercial public generally, and the Bank Directors, understand much better than they did the nature of a commercial crisis, and the extreme mischief which they do both to themselves and to the public by upholding over speculation, and I do not think that they at all need the provisions of the Act in order to induce them in that case to conduct themselves as the Act would make them. In the next place, I think that if in the first stage of this process the Act operates usefully, it operates exceedingly injuriously in the latter stage; that is to say, when the revulsion has actually come, and when, instead of there being an inflated state of credit, there has been an extraordinary destruction of credit, and there is nothing like the usual amount of credit that there is at other times. At such a time the Bank can hardly lend too much; it can hardly make advances to too great an extent, as long as it is to solvent firms, because its advances only supply the place of the ordinary and wholesome amount of credit, which is then in deficiency. But the Bank, under the operation of the Act, can only make those advances at such a time from their deposits. Now it is very true that the deposits are likely to be large at those times, because at those times people leave their money in deposit; they leave it within call, to be able to have it at any moment when they want it, and therefore the Bank deposits are larger than usual. But still this resource is not sufficient, as was proved in 1847, when the Bank Directors, after doing the very utmost which they could do from their deposits to relieve the distressed state of trade by advances to solvent firms, were obliged to go to the Government to ask for a suspension of the Act, and the Government were obliged to grant it.
Is it your opinion that the measures of the Bank, during the last two years with respect to high rate of discount and the duration of bills, have been more restrictive than was judicious? I think the Bank has acted on the principle which was laid down for them by great authorities at the time when the Act of 1844 was passed, viz., that in the management of their banking department they had nothing whatever to consider but their interest as a bank. I think they have taken that view of their position. They have thought, therefore, that they were not under the necessity of keeping a much larger reserve than ordinary banking principles required. I think they at first began, after the Act of 1844, to act entirely upon that principle; they took the word of Sir Robert Peel, the author of the Act, anything they did as mere bankers, in the management of their deposits, was no concern of the public, but only their own concern. I think that in 1847 that error was, to a great degree, corrected. I think that since that time the Bank have been quite aware, and the public have been aware, that that view of the theory of the Act of 1844 is not sustainable; and that an establishment like the Bank is not like other bankers, who are at liberty to think that their single transactions cannot affect the commercial world generally, and that they have only their own position to consider. The transactions of the Bank necessarily affect the whole transactions of the country, and it is incumbent upon them to do all that a bank can do to prevent or to mitigate a commercial crisis. This being the position of the Bank, and the Bank being much more aware of it since 1847 than they were before, they have not acted so entirely as before on the principle that they had nothing to consider but their own safety. Still, however, as bankers, they have not kept in the banking department the whole reserve necessary to meet a drain, and being obliged, as bankers, to consider the solvency of their banking department, they have been obliged to vary their rates of discount more violently and more frequently than they did before; which, I think, is owing to the Act.
Do not you believe that, although the law requires the accounts of the Bank to be kept in a certain form, and to be exhibited to the public as partly in the banking department and partly in the issue department, the Bank Directors who manage both look at them as a whole, and consider the bullion in both departments as one quantity? I think that if they do so, they commit a very great mistake. They have to consider, on the contrary, that each of their two reserves is now liable to all the demands to which the joint reserve was liable before. The reserve of the Bank can only be acted upon to any great extent by a drain of bullion. When this drain of bullion took place before the Act of 1844, they had a single reserve, and if that reserve was sufficient to meet the drain, it was enough; but now the drain acts doubly, first on the banking reserve, and afterwards on the reserve in the issue department. Therefore, it seems to me that, in order that there might not be more violent fluctuations of credit than before, it would be necessary that they should now have in each department as large a reserve as previously sufficed for both.
Then you believe that the Bank Directors administer the Bank as if the issue and the banking departments were not only legally but practically distinct? Certainly, I think they are practically distinct. I think the fact that under no circumstances can the issue department afford either notes or coin to the banking department, makes them as completely distinct as if they belonged to separate establishments; and it is undoubtedly the intention of the Act that they should be as distinct as if they belonged to separate establishments.
Are you of opinion that if the Act of 1844 had never passed, the Bank rates of discount would have been lower during the last two years than they have actually been? I do not know whether they would have been lower; I think they would have fluctuated less; I think they have been both lower and higher than they would have been but for the Act.
If you compare the rates of discount on the Continent during the last two years, do you not find that they bear a very close resemblance to the rates of discount in this country, and that whatever difference there is between them is in favour of this country, and not against it? The commercial world is so much one world now, that whatever acts upon one country acts upon another.
Then if we find that there is an uniform rate of discount in London and Amsterdam and Paris and Hamburgh, inasmuch as the Bank Act of 1844 is not in force on the Continent, does not that rather raise a presumption that the rate of discount in London is independent of that Act? It does not follow that the Act may not, by operating on so important a market for securities as the London market is, have influenced all the other markets also. In fact, it could not materially affect the English market without affecting in something like a corresponding degree all others, because securities of an equal degree of safety in one country cannot fall below their rate in others without attracting capital to buy them from other countries.
That answer assumes that the Bank of England has very great power over the rate of discount in this country? I do not think that in ordinary times, either the Act or the operations of the Bank have much influence on the rate of interest, but only that under the Act the Bank is obliged to follow the variations in the rate of interest much more closely than it otherwise would do. The occasions on which the operation of the Act seems to me to be decidedly mischievous, are those cases of drain which do not arise from previous over speculation; such as those arising from a great import of corn, or a greatly increased price of raw materials of manufacture, such as cotton, or great foreign remittances by the government, or exportations of capital.
You know that the Act of 1844 imposes a limit upon the issues of all country banks which existed in that year, founded upon an account taken of their circulation, and that it also prohibits the establishment of any new banks of issue in England. Do you approve of that regulation? I do not think it is of very much consequence whether there is one bank of issue or many in the country. It seems to me quite a minor question; but inasmuch as there have always been many, and I believe the local feeling is always in favour of having many, it probably is desirable that there should be.
The Act of 1844 seems to have contemplated the voluntary extinction of country banks of issue in England, does it not? Yes.
Hitherto the operation of the voluntary clause has been but limited; do you think it would be desirable to accelerate its operation by taking stronger measures for either suppressing or diminishing the issues of country notes in England? I see no reason for thinking so.
Does it appear to you that the law at present is in a satisfactory state with regard to country banks of issue in England? Not in a satisfactory state theoretically, certainly, because it is grounded on a principle which it does not carry fully out; but as I think the principle a wrong one, I am not desirous that it should be carried out.
Then you would be in favour of removing the present restriction upon country issues? I would remove it both from the Bank of England and from all other banks.
Does it appear to you desirable that the country banks in England should have a power of issue unlimited by law, and limited merely by the convertibility of the note, and that they should not be required to issue against either securities or bullion to any extent? As far as excess of issues is concerned, I think there is no reason for any restriction. There might be a reason in consequence of the probability of insolvency, which is not to be apprehended in the case of the Bank of England. There have been lately instances of such gross mismanagement and consequent insolvency of banks, that I cannot give a positive opinion against requiring special security to be given for the notes; but I am not inclined to think that it is necessary, now that there are no small notes. As long as there are no notes in England below 5l., the probability is that the holders of 5l. notes can as well take care of themselves as the depositors, who have generally been the greatest sufferers by those mismanagements.
Do you think that there would be any advantage in the issue of any denomination of notes under 5l., in England? I think it is much better that there should be no notes below 5l., because this retains a quantity of gold in the country which may be used to replenish the banking reserve in case of necessity, without waiting for the slower process of its importation. Besides, 1l. notes are liable to be used in the payment of wages, and a currency which is used in payment of wages is much more liable to produce evils from over issue, than any currency which is only issued to the mercantile public.
Then, on the whole, your opinion is in favour of maintaining the present law with respect to the denomination of bank notes in England? Yes.
What would you say with respect to the expediency of a single bank of issue, either for England or for the whole country? The principal advantage of it would be, that the profit of the issue might be to a great degree secured by the public. I do not think that as to the working of the currency, it would make any material difference whether it came from one issuer or more.
Is it your opinion that the profit to the public of a bank of issue would be considerable, or that there would be any profit at all, assuming that it was a bank of issue and nothing else? Supposing the wants of the country require 30,000,000l. of notes, and those were supplied by the public, the public would obtain a loan to that amount without interest; that is the extent of the advantage that the public would gain.
But then you would have to set against that advantage to the public the expense of the establishment and the expense of management? Yes.
Would not the nation be obliged to establish a great number of branch banks? Yes, certainly.
Is it your belief that the expenses of the central establishment in London, together with the expense of a large number of branches in the country, would not be greater than the profit derived from the issue of the paper? It is not so, I presume, in the case of the Bank of England, although that does not supply the whole country.
The Bank of England has a banking business besides its business of issue? Yes; but I presume that it derives profit from its business of issue, and that it would not be in a better position pecuniarily if it were not permitted to issue.
Is it not conceivable that the Bank of England may derive profit from the issue business and the banking business combined, when it might derive no profit from the issue business separate from the banking business? If an establishment which has the power of lending 30,000,000l., for which it pays nothing, cannot make that a source of profit, I cannot conceive how money-lending can, under any circumstances, yield a profit.
You are of opinion that the only benefit which the public would derive from having a single bank of issue in the hands of the Government would be the profit of the circulation, and nothing else? Nothing else.
As far as the management and control of the circulation itself is concerned,you think that would be as well left in private hands? Yes. I would add, that if it were thought that there should be only one bank of issue, I do not think that bank of issue should be the Government itself. I think the currency should not be provided by the Government, but by such an establishment as the Bank of England, the public making a bargain with it for so much of the profit as they thought they could reasonably require.
With regard to Scotland and Ireland, you are aware that in Ireland and Scotland the same law prevails as in England with respect to the country banks, but that the banks can issue against bullion in excess of their fixed circulation? In that respect they are in the position of the Bank of England, not in the position of the English country banks.
Only that their limit is fixed upon their average circulation, and they are not required to hold securities against the fixed credit circulation? I have not paid any particular attention to the Scotch and Irish Acts,[*] and I would rather not give any opinion upon them.
Do you approve of the action of the Acts with regard to Ireland and Scotland? I apprehend that the Acts with respect to Ireland and Scotland have for their object and effect to extend to those countries, making allowance for local circumstances, the provisions of the Act of 1844; and as I think that the Act of 1844 is more hurtful than useful with respect to England, I think that the Scotch and Irish Acts are so too.
In Ireland and Scotland there are notes under 5l. circulated; do you approve of allowing 1l. as capital to continue to be circulated in Scotland and Ireland? I believe that in Scotland it is perfectly safe; that there are no failures of banks there, or very rarely, and that if they did happen the notes would probably be taken up by other banks. Therefore I do not believe that there is there that danger of insolvency which constituted so great an evil in the case of the poor holders of 1l. notes when they existed in England. And that being the case I think it very likely that 1l. notes may do more good than harm in Scotland. In Ireland probably it is the reverse, because there are bank failures, sometimes of a very bad kind.
j. vance:Are you not aware that the joint stock banks in Ireland possess a very large capital, and that they are in a high state of solvency at the present moment? Yes, I believe so; and I believe the same is the case with the joint stock banks in England. At the same time we know that there have been, both in England and in Ireland, very bad cases of insolvency of joint stock banks, and it is to provide against those exceptional cases that it seems to me necessary to have some restriction on 1l. notes.
Do you think you are justified in saying that the Scotch banks are in a higher position of solvency than the Irish ones at the present moment? I do not mean to say that the Irish banks are generally less solvent; but it is the fact that nobody has lost anything for a long while, I believe for a century almost, by the non-payment of notes of Scotch banks. I believe that cannot be said to the same degree of the Irish.
What failures do you refer to in Ireland? The Tipperary Bank is the most notorious instance.
Are you aware that the Tipperary Bank was not a bank of issue? I was not aware of that; but I do not know that if it had been a bank of issue, it would have been on that account the less liable to fail, or the less liable to be mismanaged.
Have you a recollection of what bank failure has taken place in Ireland previously to that of the Tipperary Bank? I have no particular recollection on the subject. I know so little about Irish banks, that I would rather not be asked for an opinion upon them. What I said was merely that I might not be supposed to speak of the Irish banks as I did of the Scotch, and not from a wish to say anything against the Irish banks; which I have no ground for doing.
sir f. baring:You stated that you objected to an issue of 1l. notes, because it was more liable to over-issue. What do you mean by over-issue? In order to explain that, it is necessary to go into some particulars. I think that as long as the Bank confines its advances to merchants and general dealers, to what is called the mercantile public, people who deal in goods but who do not pay wages, its issues never originate a rise of prices, because a dealer only uses notes for the purpose of fulfilling previous engagements. Dealers never make purchases in the first instance with Bank notes; the dealers to whom Bank notes are paid usually either send them into deposit, or pay them to persons who send them into deposit. But the operation is different when advances are made to manufacturers or others who pay wages. When that is the case, the notes do or may get into the hands of labourers and others who expend them for consumption, and in that case the notes do constitute in themselves a demand for commodities, and may for some time tend to promote a rise of prices; and when they do so, and there is not any other cause for that rise of prices than the issue of notes, that constitutes over-issue, that is to say, an issue that will be followed by a revulsion.
In that case the Bank would have been the moving power to raise the prices? The notes would have been the moving power to raise the prices: but that I do not think is ever the case now.
w. tite:I understand you to say that you attribute to the operation of the present Bank Act, the sudden and rather violent fluctuations in the rate of interest which have occurred of late years? I think the natural effect of the Act is to necessitate more frequent and more violent fluctuations in the rate of interest than would otherwise take place.
That in your opinion is due to the division into the issue department and the banking department, and the necessity involved of keeping up two reserves? Yes; there is a double action of drains, which, instead of acting upon the joint reserve, act to their full extent, first upon the one, and then through that upon the other.
Is it your opinion that the Bank should in any manner be limited to a minimum rate of discount according to the practice that existed before the passing of the Act of 1844? I think that since the Act of 1844, the Bank have lowered their rate of interest very unnecessarily and undesirably, at times when they might have foreseen that the low rate of interest would not last, that the then replenished state of their reserve which induced them to lower the rate of discount was only temporary, and that there would soon be a demand on their reserve again. I think the Bank has several times made that mistake. Whether it would be desirable to cut them off from ever lowering their rate of discount below a certain rate, is a question upon which I have not made up my mind.
You are not able to say whether or not they should be fettered in the discretion which an ordinary banker exercises of doing as he pleases with his own money and taking any rate of interest that he thinks fit? I think that the Bank, as being a great public body, exercising public functions, cannot in all respects be properly guided only by its banking interest. Whether it should be subject to restriction by law in this particular I do not know; but I think that it cannot rightly be governed by its pecuniary interest, in circumstances in which a private banker might reasonably be so; that the Directors ought not always, when the market rate of interest is temporarily low, to conform their rate to it, but rather to allow their reserve to accumulate at those times, in order not to minister to a spirit of speculation, which a low rate of interest does.
I understood you to say, that all that you would seek with regard to a change in the law, under which the management of the Bank is now conducted is, that there should be a sort of understanding that the capital of the Bank should range from 10,000,000l. to 12,000,000l. on the average? Something like that.
What would be the enactment you would propose? There is a distinction to be drawn between two kinds of drains. One may be called an unlimited, another a limited drain. A drain occasioned by a revulsion from a state of over-speculation is in its nature unlimited; unless there be something done to stop it, it will go on. If the high state of prices, occasioned by an inflated state of credit, continues, the drain will continue; and it can only be stopped when the high prices have ceased by a diminution of the currency, or a diminution of loans. But the case is different with all other drains; for instance, a drain occasioned by payments for the import of corn, or by foreign payments by Government, or the exportation of capital for foreign investment. That drain stops of itself as soon as the purpose is effected which caused it; and, therefore, it seems to me that the reserve should always be such as may be equal to the probable demand on account of a drain of this sort; and that in the case of such a drain, bullion may be allowed to run out from the reserve, without any violent action on credit to stop it. For that reason it seems to me necessary now, when drains to a large amount are liable to arise from causes of that sort, that the Bank should keep habitually a much larger reserve than it used to keep, in order to meet a drain.
That seems to involve a sort of foreknowledge on the part of the Bank as to how long a drain is to continue; but, with knowing that, surely they must exercise some power of controlling it? Of course they have that power; and they may in any case be obliged at last to contract their discounts; but if they have a large reserve, and if, from the circumstances of the times, and from the knowledge which they have, and which the public have, of the causes producing the drain, they think that the drain that is existing is of the one kind, and not of the other, they will act accordingly. If they find that the drain exceeds their provision for it, notwithstanding their having kept so large a reserve, then they must take measures to replenish their reserve; but the effect of this would only be, that they would be then obliged to bring on the public in a smaller degree, and at a later period, inconveniences which, under the present system, they must bring on at once, and much more frequently, and in a much greater degree.
I understand you to say that you would recommend the Committee to return to the provisions of the law as it was before 1844, only with some understanding as to the amount of the reserve that the Bank should keep? That would be my idea. Although, as I have already stated, I think in the commencement of a revulsion from a state of over speculation the Act at times has operated beneficially, yet I am of opinion that with the experience that we now have, and the principles on which the Bank of England is likely to continue to act, even if the Act were repealed the Directors would probably do spontaneously, in that particular case, what the Act now compels them to do; that is, they would not reissue notes sent back to them in exchange for bullion.
With regard to relieving their reserve by the sale of securities, do you think that much could be done in that way in the event of a drain? It could be done. The effect of it upon the money market would be the same as that of a refusal to make advances, because the money paid by the buyer of those securities would be so much withdrawn from the loan market.
You spoke of an issue of 30,000,000l. of money as being in the nature of a loan. Supposing it were issued by one body, and that body the Bankof England, is it possible to state approximately what the profit of the loan might be; would it be 2 or 2½ per cent., or any other appreciable per-centage? The value of the difference between getting a loan for nothing and having to pay interest upon it, of course depends upon what the rate of interest at the time might be, and it must be different in every different condition of the money market. I think it is fair to take it at the lowest rate; it may perhaps be taken at 3 per cent.
Then the first element of the profit would be the market rate of interest of such a loan, against which would have to be set the expense of the establishment and the machinery necessary for the issuing of the money? Yes, the expense of management.
Three per cent. on 30,000,000l. would be 900,000l.? Yes, which is not a very great object to a great country.
Do you imagine that although these principles are tolerably accurate theoretically, in point of fact there are no disturbing elements in their consideration? There are disturbing elements in almost every question relating to commerce, but what they are in this case I do not exactly see.
In point of fact you do not know what profit the Bank do make out of the issue which is placed in their hands? No.
Does your position in the East India House give you any opportunities of knowing the amount of the exportation of silver which has been going on for some years past to India and China? I am not acquainted with the details; but I have seen a calculation which makes out that for a certain number of years the average export of silver to India has been 6,000,000l. sterling.
That amount of drain is in excess of commodities brought back? Yes; it is a payment for commodities imported from England, and it is probably in a great measure the result of the great gold discoveries; the gold discoveries having raised the price of silver in many countries in Europe beyond the mint valuation as compared with gold; and having thus made gold the standard in those countries, and the medium of payments. For instance, in France gold was always at a premium before the gold discoveries, and therefore silver was practically the standard; but since the gold discoveries, gold has practically been the standard, because it has been cheaper to pay debts in gold. Therefore the gold coinage has immensely increased in France, and has taken the place of silver; which silver having retained its bullion value in reference to commodities, became an advantageous remittance.
What is your notion as to the cause of what is called popularly the drain of silver which has been going on to the extent of 6,000,000l. annually to India? The cause is the great increase of production and exportation from the East, and the habit of the people of India of hoarding. A large portion of whatever increase of wealth comes into the hands of a native of India, he usually either hoards, or if he expends it, he expends it in ornaments, which are generally silver ornaments, and hoards it in that shape. In fact, the reserved funds, similar to those which a person in this country invests at interest, are generally by a native of the East converted into ornaments; and therefore, any increase of money payments, from any other country to India, usually, to a very great extent, takes the form of ornaments; the remainder being mostly hoarded as treasure. Now, as the currency of India is mainly silver, at present they hoard in silver chiefly; but, no doubt, if they had a gold currency, they would be as ready to hoard in gold, and there would still be a considerable swallowing up either of gold or silver in the East, just as there always has been since the beginning of history. The general tendency from the earliest period was a flow of the precious metals towards the East, not from it, on account of this practice of hoarding.
Then this practice of hoarding is no new practice? It is no new practice, but it is a very general practice. Everybody who has the means of hoarding does hoard, and whenever they get more they hoard more.
m. t. smith:Has not the price of the great articles of production in the east risen very much throughout Europe, more particularly sugar, indigo, silk, and spices? Latterly.
Is not it natural that an increased quantity should be sent to this country on account of the increased price in these markets? Yes, but I think the drain to the East had commenced before this rise of price happened in either sugar or silk.
But not to the extent to which it exists at this moment; not to the extent of 7,000,000l. or 8,000,000l.; but of course the best that goes is from England? It is natural to suppose that the rise of prices must cause a much greater debt to be due to India.
Is not it equally true that the same cause, namely, an increased production of gold in Australia and California, which has caused a rise in the prices of Asiatic goods in this country, has also caused a rise in the price of manufactured goods in this country, and has thereby prevented the same quantity of manufactured goods going back to India in return for the productions imported from India as used to go before? It is so unsettled a point yet, to what extent general prices in this country have been raised by the gold discoveries, that I should hardly feel able to answer that question.
Should you be disposed to attribute the increased efflux of silver from this country to India to the increased production in India, stimulated by the higher prices in this country? Yes, I should think so, or at all events to the increased production, and the greatly increased importation from India; which naturally produces a great balance of trade in favour of India, unless there were an equal demand there for English goods, which there is not.
Is not that, in a great degree, on account of the prices being higher than they used to be? Opinions differ on that subject.
sir c. wood:Do you conceive that there is a much greater quantity of goods coming from India either to England direct, or to other countries through England, than the quantity which is sent from this country to India; so that there is a balance of trade against this country, which is sent in bullion? Yes; that is the normal state of affairs between this country and India.
Do you conceive that that has been increased of late years? Yes, I think it has.
Then there has been of late years a necessity for sending a larger quantity of bullion to India than was the case in former years? Yes.
Do you conceive that the demand for expenditure on railways in India has much to do with the necessity of exporting bullion from this country? The export of capital, for the purpose of constructing railways, must have contributed to it.
Do you suppose that that is the case to any great extent? The amount of capital which has gone from this country to India for that purpose is already considerable. Of course that is, so far, an addition to the export of bullion.
Do I rightly understand you to say that you attribute the necessity of sending silver partly to the demand in India for that metal in preference to gold, and partly to the diminished value of gold as compared with silver in Europe? Yes.
Do you suppose that a considerable portion of the export from this country to India, for the purpose of railways, has gone out in iron-work and other materials for the construction of railways, rather than in coin? A great deal of it, no doubt.
Do you suppose that the quantity of coin and bullion sent to India for the purpose of the construction of railways has been of very considerable amount? I am not able to say; I have not made myself acquainted with those particulars; I have no practical acquaintance with that department of Indian affairs, and I have no other knowledge of it than anybody else has.
sir f. baring:You do not know whether the quantity of silver has increased considerably? It must have increased considerably by the continued import. It is known from the returns that there has been a very great importation of silver into India, but where it goes is only matter of speculation. It is generally supposed to go into hoards; it has not told upon prices there to the degree that might have been expected.
sir c. wood:Do you recollect the circumstance that at a period of great commercial distress in Madras the natives sent in their silver ornaments to be coined? I believe such things have happened. Money which goes into the form of ornaments, and is hoarded in that form, is brought out when there is a high rate of interest, and goes back again when the rate of interest falls.
You stated that in your opinion the variations in the rate of interest charged by the Bank of England had been increased by the operation of the Act of 1844. In what way do you attribute that effect to the Act of 1844? In this way. At present all drains operate, in the first place, upon the banking department of the Bank of England. As the private bankers now keep the bulk of their deposits at the Bank of England, the deposits at the Bank of England comprise the bulk of the disposable capital of the country, the bulk of that which is available for exportation in case of a drain of bullion for that purpose. Hence, whenever there is a drain, this drain operates in the first place on the reserve of bullion in the banking department. As long as the banking department and the issue department were one, the whole reserve of the Bank was available to meet these demands on its deposits; and so it would still be, notwithstanding the separation of the departments as a matter of account, if in an extremity the issue department was allowed to come to the assistance of the banking department; because in that case, supposing, for example, that 3,000,000l. were drawn out of the reserve of the deposit department, the Bank, instead of selling securities, or contracting its discounts in order to replenish its reserve, would simply transfer the necessary number of millions from the issue department, either in notes or in gold, to the reserve of the banking department; not for the purpose of lending it to the public, but simply to meet the demands of its depositors if they should continue to draw their deposits out. In that case, therefore, the Bank would not be obliged to take immediate means for contracting its credit in order to replenish its reserve; but now it must. The Bank is now exactly in the position, with regard to the solvency of its banking department, that it would be in if the issue department were annihilated altogether. The Bank is obliged to depend for the solvency of its banking department upon what it can do to replenish the reserve in that department; and therefore as soon as it finds that there is any drain in progress, it is obliged to look to the safety of its reserve, and to commence contracting its discounts, or selling securities.
Is not the operation which you contemplate in your answer an issue of notes from the issue department at a time when a drain is going on, and when, if the circulation is to be viewed as a metallic circulation, the quantity of Bank notes ought to be diminished rather than increased? Yes, according to the principle of the Act of 1844; but I think that principle a wrong one.
Would not such an operation as that take place exactly at a time when you stated that you thought the operation of the Act of 1844 had been beneficial, namely, to prevent the continuance of a large circulation of paper, so as to keep up prices when it would be more advantageous that they should fall? I think the operation of the Act is beneficial when the drain arises from one particular cause, viz., previous over speculation. When that is the case, it appears to me desirable not only that the Bank should not re-issue notes that are returned to it, but also that it should take measures moderately and discreetly to reduce its discounts, in order, by action on the rate of interest in a moderate degree, to prevent that violent operation on discounts which would otherwise become inevitable, in order to put a stop to the drain.
Would not an issue of notes from the issue department, in the manner you stated in your last answer but one, operate precisely in contravention of what you stated to be desirable, viz., would it not operate to maintain a rise of prices, originally produced by speculation, after the exchanges had taken an unfavourable turn, when, according to your last answer, the Bank ought to take moderate measures to restrain speculation? It would, or at least it might, and therefore I admit that the Act, in that particular case and stage of drain, is beneficial; but that is not the most usual cause of drain; other causes are much more frequent, namely, unusual foreign payments that have not originated in any undue extension of credit or general rise of prices; and in those cases, I think, it is desirable that the Bank should be able to replenish the reserve of its banking department from its issue department.
Do you think that the Bank can, with sufficient certainty, distinguish between the separate causes of drain, so as to be able to pursue a different course according to the cause which, in their opinion, produces the drain? The causes are matters of public notoriety. Everybody knows whether there has been a bad harvest, or whether the price of cotton has risen in America to a great extent, and generally whether a considerable export of capital is taking place. Then, on the other side of the question, all persons who pay attention to commercial transactions know well when there has been an inflation of credit, and, great speculation going on in goods; therefore, I think, the Bank have very sufficient means of distinguishing between the causes of a drain. The only case in which there can be any difficulty is, when there are causes of both sorts operating; in which case it may be difficult to determine exactly how much of the effect is due to each; but still, even in such a case as that, a course of action founded upon the judgment that experienced men can form upon the subject, seems to me much better than deciding by a mechanical rule that is only applicable to the extreme of one case, and pernicious in every other.
At certain times the Bank of England raises its rate of interest in order to maintain its reserve of notes; and in that case you think the operation of the Act of 1844 has tended to increase the rate of interest charged at certain times? Yes.
Do you think it has had the effect of lowering the rate of interest at other times? It has had that effect in point of fact, but I am not sure that it is fair to charge it upon the Act, because it is rather the effect of the doctrines put forth by the supporters of the Act than of the Act itself. When the Act was introduced, the language usually held by its supporters was, that the Bank in the management of its deposits was no more bound to consider the public interest than any other bank, and that it was to regulate its conduct with a view solely to its own safety; and so far as the Bank have acted upon that opinion, they have no doubt been led by it, not only to contract their discounts when they otherwise might not have been obliged to do so, but also to extend them at periods when probably otherwise they would not have done so; because seeing that they were at liberty, like other bankers, to lend their money to any extent that they thought prudent for their own interest, at the market rate, that they have lent money at less than 4 per cent., and upon some occasions at as little as 2 per cent. But that is not a necessary effect of the Act. The Act does not oblige them to do that, and the Bank may, if they please, abandon the doctrine that they are at liberty to act in the same way as other bankers; and seeing that such a body as the Bank must, in the management of its ordinary banking business, produce so great an effect upon the public interest, they may come to the conclusion that they are bound to consider that, and therefore ought not to lend below 4 per cent. or some such rate.
Then so far as the lowering the rate of interest is concerned, that has been the effect of the course taken by the Bank Directors, rather than any effect produced by the Act itself? I think it is more the effect of the mistaken grounds upon which the Act was first defended, and which have been partly abandoned by its defenders, than any effect of the Act itself.
Are you acquainted with the constitution of the banks of Hamburgh and Amsterdam? I have a general acquaintance with them.
In the case of both of those banks, are not all the notes which they issue represented by bullion actually existing in their coffers? Yes; that was the supposition, but it was found not to be the case in the bank of Amsterdam at the time of the events which followed the French Revolution; the bullion in deposit in the bank of Amsterdam was found to have been deficient.
Was not that supposed to be an accidental circumstance owing to the pressure of the revolutionary war at the time? I think it was supposed that the deficiency had existed long before that time.
But it was a principle in the constitution of those two banks, that all the notes were actually represented by bullion in their coffers? Yes.
Therefore, their circulation must have varied exactly upon the principle which has been laid down in the Act of 1844, viz., that it should vary exactly as a metallic circulation would vary? Yes.
Are you aware whether they were ever unable to afford the requisite accommodation to the trade, either of Hamburgh and its neighbourhood, or of Holland, in consequence of that regulation? I cannot answer that question; I should think it would require a very minute acquaintance with the history of commerce to be able to answer it.
You are not aware of any complaints having been made of want of accommodation, such as we have heard of in this country, in consequence of that state of things? Even if there were no such complaints, it might have been owing to their having never been accustomed to a different system.
Are you at all acquainted with the variations in the rate of interest, either in Holland or at Hamburgh? I cannot say that I am.
You cannot say whether they have been greater or less than the variations in the rate of interest charged by the Bank of England? I should expect that they were less; commercial transactions are now upon so much larger a scale, that we must expect more violent variations.
Do you not suppose that the variations in the rate of interest charged by the Bank of England latterly, are very much due to great influxes of bullion at one time, and an export of it at another, which must have had the effect of making practically a considerable difference in the amount of capital available for discounts at different times? Certainly, but if that were the only cause in operation, there would probably be very few variations, because the gold comes with tolerable regularity. I do not suppose that there are often considerable fluctuations in the rate of interest owing to the arrivals of gold, unless there is an unexpected retardation of an arrival; then of course that may operate for a short time on the money market, but not to any violent degree.
You are in favour of the Bank retaining a large reserve, but without the restriction of the Act of 1844. Would any amount of reserve secure the Bank against the effect of a drain, unless measures were taken by the Bank in reference to the amount of its circulation? The Bank may be driven to such measures ultimately. Even if the Bank has a reserve that is equal to the probable amount of the drain, it may undoubtedly happen that the drain may exceed that probable amount and if so, the Bank will at last be obliged to have recourse to other measures; but it is plain that if the Bank may allow 10,000,000l. of gold to run out without taking measures, it will not be obliged to resort to such violent measures to stop the drain, as if it were necessary to stop it at the beginning.
Do not you think that earlier measures of a moderate degree may check an incipient drain, which if suffered to go on, would require much stronger measures in the end? Yes, in the case of a drain arising from over speculation; but in the case of a drain arising from no cause affecting prices generally, it seems to me a great deal better that the drain should be provided for by bullion kept in reserve to meet it, rather than that the bullion to meet it should be obtained by a violent action on credit or on prices.
Do you recollect the drain of 1839? Yes, I think that was the occasion on which the Bank was obliged to have recourse to the Bank of France.
Was not it the fact that that drain of gold, unchecked by any measures on the part of the Bank, went to such a length that the Bank was saved only by borrowing 2,000,000l. from the Bank of France? Yes.
In point of fact, the ultimate measures that the Bank had to take after having suffered it to go on for some time, were of a more stringent nature than anything they had done in former days? That will naturally be the case if the Bank does not keep a sufficient reserve.
Do you recollect whether the reserve of the Bank of England previously to the commencement of that drain was not of an adequate amount according to the then received notions? I have not the details in my memory.
Will you look at Paper 19 before the Committee,[*]and state the amount of bullion which appears to have been in the Bank in December 1838? In Decembeer 1838 it was 9,683,000l.
Will you state in what month in 1839 it was lowest? It appears to have been lowest in August 1838.
The drain appears to have commenced from December 1838? Yes.
What was the lowest point to which the bullion was reduced in the course of 1839? 2,444,000l., in the month of August.
Does it not appear that the drain actually went to the extent of 7,000,000l. of bullion, gone from the coffers of the Bank of England? Yes.
I understood you to say, that after the experience we have had of the discretion of the Bank of England, you think it might be thoroughly trusted not to re-issue notes in cases when they might be called for to strengthen the banking department? Not to re-issue notes in cases in which the return of those notes upon their hands was the effect of previous over-speculation.
Have not almost all the great drains in this country, the drain in 1847, the drain in 1849, the drain in 1839, and the drain in 1836 all been, if not entirely, in a great measure caused by over-speculation previously occurring? That can hardly be said, I think, in the case of the drain of 1847, because the over-speculation which there had been at that time was principally in railway shares, which had very little tendency to produce a drain.
Do not you recollect the evidence which was given as to the system ofdrawing bills creating fictitious credits to a most inordinate amount, particularly at Manchester and Liverpool? To whatever extent that might be the case, unless it was for the purpose of making speculative purchases in goods, it would have no tendency to produce a drain.
Did not it produce very great discredit, and when the means of paying those bills failed, did not it cause great demands upon the Bank to furnish accommodation to those persons who could not obtain it in any other way? Accommodation in notes, but not necessarily in gold.
w. tite:May we take it, that the distinction which you intend to make between the different kinds of drain may be described by the expressions used in the Committee in 1848, namely, “a home drain,” and “a foreign drain”?[*] Yes.
With regard to a foreign drain, would not the state of the exchanges show very much what was operating upon the English market? The state of the exchanges would show whether there was, or whether there was likely to be, a drain; but it would not show from what cause the drain proceeded.
Do you think that the causes operating to produce either a home drain or a foreign drain, may be accurately distinguished? Yes.
With regard to the banks of Hamburgh and Amsterdam, do you know whether they were bound by law to keep bullion equal to their circulation, or whether it was left in the discretion of the Government? I always understood that they were bound by law, or by the constitution of those banks.
But I believe it is an historical fact that at the time of the failure of the Amsterdam bank, at the time of the French Revolution, it was found very deficient? Yes.
You do not know the amount of deficiency? No.
t. weguelin:In a question that was put to you with regard to the drain in 1839, it was said that it was unchecked by any measures on the part of the Bank. Are you aware that the circulation of the Bank in the hands of the public, which was the only circulation then known, in 1839 was reduced lower than ever it was known before or since in modern times? I remember that the variations in the circulation in the hands of the public did not at all correspond with the state of the Bank reserve.
Does it not appear that at that time the bullion in December 1838 in the Bank of England was 9,686,000l.? Yes.
The circulation in the hands of the public was then 17,718,750l.? Yes.
In December 1839 the bullion in the Bank of England was 4,139,400l., and the circulation in the hands of the public was 15,823,000l.? Yes.
Then, whatever measures were taken, they had the effect of reducing the circulation in the hands of the public at that period? Yes; it had been from some cause or other reduced.
You conceive that the circulation in the hands of the public is not always affected by the measures which the Bank may take? Not always.
Was not the drain of 1839 caused almost entirely by a demand for corn to supply a deficiency in consequence of a bad harvest? I have not the circumstances in my recollection, but I believe that was the main cause.
You state that the Bank, by a low rate of interest, increased their discounts; do you state that as a matter of theory or as a matter of fact? I believe, on the contrary, that as a matter of fact, the discounts are usually greatest when the rate of interest is highest; but that is accounted for by this circumstance, that the Bank’s discounts are greatest at times when, in consequence of general commercial distress, there is greatest difficulty in obtaining assistance from other quarters; consequently, at the very time when the rate of interest is highest, the demands on the Bank are the greatest.
Therefore as far as the action of the Bank upon its securities is concerned, it is exactly the opposite to what the theory would induce you to suppose that it would be? It seems to me that the fact just mentioned is perfectly consistent with the theory; because although the Bank, not being the sole lenders, would be likely at the time when they get the lowest rate of interest (the facility of obtaining loans from other quarters being greater) to have a less demand upon them than at other times, and therefore might find it necessary to lower their rate of interest in order to employ their funds at all, still it does not follow that if they were to stop their loans till the rate of interest rose again, it would not have a very considerable effect on the money market generally. I believe that their refusal to lower their rate at such a time would be sufficient to have a very considerable effect on the rate of interest.
Does a reduction of the rate of discount on the part of the Bank necessarily increase the securities? Not necessarily.
Nor does a rise in the rate of discount necessarily diminish the securities? No; but perhaps I may be allowed to say that that does not affect the question about the operation of the Act; because in a time of difficulty when the Bank, in order to replenish their reserve, raise their rate of discount, if that rise in the rate of discount does not suffice to diminish their advances, they must do more, they must actually refuse to make advances; because their object is not to get a greater rate of interest, not to make more of their money, but to increase their reserve, and that is to be done either by their refusing to make advances, or by their selling securities, which will prevent somebody else from making advances to an equal amount.
Does selling securities increase the reserve of the Bank? Selling securities for the purpose of replenishing the reserve would do so.
Does not the reserve of the Bank consist of the notes unemployed? The notes, generally, that the Bank holds for the purpose of meeting the demands of the depositors.
Is not the reserve of the Bank affected only by a diminution of its bullion? The reserve of the Bank may be affected by any drawing out of their deposits.
The purpose of drawing out deposits is to meet a foreign drain, as expressed by a diminution of bullion? Yes.
Therefore any measures which the Bank take must be to increase its stock of bullion? It must be so now, but it need not be so but for the Act.
If the Act did not exist, the whole reserve would be in bullion, and the same effect might take place upon the bullion as does now? The whole reserve, in that sense, would be in bullion, but there would still be virtually a banking reserve that might exceed the amount of the bullion, or the Bank might, independently of the bullion that it kept to meet a foreign drain, keep in reserve notes also to meet the demands of depositors.
Notes unrepresented by bullion? Notes unrepresented by bullion; because the demands of depositors do not necessarily result from a demand for bullion, although they very commonly do.
You are aware that in consequence of the position which the Bank holds, being, as it were, the ultimate resort of all the banking expedients of the country, what it loses on one account it usually gains upon another, and the deposits usually remain pretty nearly equal under all circumstances? In a quiescent state of trade no doubt they do.
The principal fluctuation being in Government accounts, which increase from a certain period of the quarter up to the time of the payment of the dividends? In ordinary times that is the case.
Are you aware that the mode in which the expenditure on railways is conducted in India is by the Indian Government expending what is necessary for labour in India and placing it to the account of the Indian Government on this side? I do not know in what form those advances are made.
And that the amount so debited to the East India House here is between 3,000,000l. and 4,000,000l.? I cannot answer that question.
You stated that a high rate of discount charged in this country, attracts capital from the Continent? Yes.
The rate of discount on the Continent is for bills due upon the Continent? Yes; but I presume it may also be for bills due from this country.
But then there must be a question of exchange entering into it? Yes.
Therefore, when you talk of the rate of discount in London, and of the rate of discount in Paris, it is for two different articles; one is for a bill due in London, the other is for a bill due in Paris? Yes.
Before you can convert the one into the other, there must be an operation on the exchange? Yes; but that operation will very often consist in rectifying a previous operation; that is to say, supposing there was previously an exchange adverse to this country in consequence of foreign payments, a rise in the rate of interest here, by inducing those to whom those payments are due to invest their capital here, will tend to rectify the exchange.
You think that a high rate of discount here will cause investments to be made in this country? Yes.
Investments in permanent securities? Investments in permanent securities certainly, but very often, no doubt, not intended to be held permanently, but intended to be sold again after they have risen in price.
Do you think that a high rate of discount in London would induce bankers to send money over here to be employed in discounts? I think it is very likely to induce such a house as Rothschild’s to buy any quantity of securities here.
But not bills? It would come to the same thing, because, if Rothschild bought securities, the sellers of those securities would sell them for the purpose of employing the money here in other modes; they would be very likely to be either themselves discounting or sending their money to bankers, by whom it would be employed in discounts.
Then the operation would be, that foreign capitalists would be attracted by the low price of securities, not by the high rate of discount here? The two always come together.
Does a high rate of discount necessarily accompany a low price of public securities or of commodities, generally speaking? Not necessarily a low price of commodities. It is possible that the prices of commodities might not vary; but in most cases the prices of commodities are ultimately affected. When the low price of securities is owing to commercial difficulties, if those commercial difficulties continue, and there is great difficulty in raising money by discount or otherwise for temporary exigencies, the natural effect is to lower the prices of commodities, because the holders of goods, being unable to get money in any other way, are obliged to sell at a forced reduction of price.
But is it not the fact, that practically the rate of discount in the money market has upon very few occasions had any more than a limited effect upon the price of public securities? I do not imagine how that can possibly be.
The price of consols is now 94, and the rate of discount is 6 per cent. Is there any relation between those two rates that you can trace? Probably Exchequer bills would be a more suitable comparison, because it is generally Exchequer bills that are held by bankers, not consols. Of consols there is a very great proportion held by persons who keep them as permanent holders for the income they yield, and not as a reserve to meet their engagements.
But my question refers to the attraction which the high rate of discount affords to foreign capitalists to send their capital over to this country. You stated that you thought that a high rate of discount necessarily implied a low price of public securities? I am speaking of the high rate of discount that takes place in times of commercial difficulty. I apprehend that when there is a state of commercial difficulty there is always, as one of the features of that state, a considerable fall in the price of securities both private and public, and that all sorts of securities, railway shares for instance, fall very much. That is one of the forms in which these transfers from foreign countries take place; foreigners send over to buy railway shares in this country, or English holders of foreign railway shares sell their foreign railway shares abroad. That is one way in which the transfer takes place, and there is so much transfer of bullion prevented.
You say, that you think that a considerable rise in the rate of discount necessarily causes foreign capitalists to invest in securities in this country, and English capitalists to sell the securities which they hold in foreign countries? I do not say necessarily; I think that it is a probable and natural result, and that by means of this, which is under the circumstances supposed a profitable investment, the necessity of so great an exportation of bullion as would otherwise be required is in some degree saved. I have understood that in 1847 this occurred to a considerable extent.
You think that large investments were made by foreigners in this country in 1847? I believe there were considerable purchases by foreigners, either of English or foreign securities, which were previously held by persons in England.
Do you think they invested in consols much at that time? I should not think they invested much in consols, because consols are always at a much higher price than other securities, and, what is more important, there is not so much to be made by speculating in them, because the prices do not fluctuate so much. Those investments, I suppose, were made on speculation, with a view to sell again afterwards.
In a general way, when the market for securities is going down in this country, does not the market for securities on the Continent go down also? Yes, in some degree it does; but still it does not go down in the same degree. I apprehend that the country in which the cause of the fall originates, is always that in which it is greatest. And when it originates in a great payment of money from this country to foreign countries, it is natural to suppose that so far from the same phenomena taking place in the foreign country, to a certain extent, phenomena of a contrary description may be expected to take place there.
Do you think that the merchants in this country hold many foreign securities? I should think not as a general rule, though they may occasionally, on speculation.
Are those speculations, in your opinion, mainly confined to the capitalists, who upon occasions of commercial distress, are inclined to transfer their capital to foreign countries? There is a large and rich class of bankers and dealers in securities, through whom the equalization of the rate of interest and the equalization of commercial pressure between different countries usually takes place; and when disposable capital is to be transferred from one country to another, it is usually through the agency of these people that the transaction takes place. We know they are always on the look out to buy securities which are likely to rise; therefore if securities have fallen in one country from circumstances leading to an export of bullion, while in other countries bullion is coming in, the place for them to buy securities will be the country which is sending bullion away.
In point of fact the transfer of capital is a speculation in the permanent investments of that country, rather than in the rate of discount? Yes; but I apprehend the rate of discount is always affected by it, because those who buy securities buy them from somebody who previously held them, and who after the sale has the price of them instead, and he has probably sold his securities because he intends to make use of the price in a more profitable manner than the securities afford. This, at such a time, he would be best able to do by employing the money in discounts. Or he perhaps uses it to pay a debt of his own, and in that case the person to whom he pays the debt is probably a monied man, and employs it in discounts.
Of course the whole force of the argument depends upon the amount to which those investments are made in foreign countries. You think they are very large? I always understood that they took place to a very considerable extent in 1847, to a sufficient extent to have relieved the drain considerably.
r. hildyard:I understand you to state that, in your judgment, there ought to be no legislative restriction upon the Bank, but that the Bank Directors ought, as a general principle, to endeavour to keep a large reserve of bullion, amounting to the sum of about 12,000,000l., which you specified? Yes.
Do you advocate that they should keep that reserve with a view of meeting any sudden emergency that may come upon them, without being obliged to have recourse to extreme measures injurious to the commerce of the country? Just so.
Is the effect, in your opinion, of the Act of 1844 to deprive the Bank of the use of a large portion of the bullion actually in its hands, and to compel it to meet the requirements of the public out of the diminished portion over which they are permitted to have control? I think they are obliged in any case to meet all the demands of the public, or the greater part of those demands, from their banking reserve, and that if they could have recourse to their issue department, either for bullion or for notes, they would often not be obliged to limit their advances from the banking department, when now they are obliged to do so; or if they were obliged, it would not be to the same extent.
Would you illustrate your view by what occurred in 1847. Was it not the fact that the active circulation of the Bank of England during the crisis of 1847 was never below 20,000,000l. sterling? I presume that in 1847 the amount given as the circulation of the Bank of England represents all the notes out of the issue department, and therefore includes the banking reserve of notes. It appears to have been at the lowest, a little below 19,000,000l., in the month of September.
But the crisis did not occur till after September; will you state what the actual circulation was in October? On the 9th of October the circulation is stated to have been 19,182,000l.
Then, subtracting from the active circulation the credit circulation of the Bank, the Act compelled the Bank of England to hold bullion representing the difference between the active circulation and the credit circulation of 14,000,000l.? Yes; the Bank was obliged to retain bullion to represent the surplus of 19,000,000l. above 14,000,000l.; but they might still have been compelled to keep this bullion, and yet the inconvenience might have been prevented if the restriction on the issue of notes had not existed; because they might have made an advance to the banking department of notes from the issue department, which would not necessarily have been lent to the public at all.
But under the Act of Parliament they had no such power as that which you say would have obviated the difficulty? No.
Then were we not near experiencing this phenomena, that the Bank of England might have been compelled to declare its inability to comply with the Act at a time when it had between 6,000,000l. and 7,000,000l. of bullion in its coffers? What it might have been compelled to do would have been to stop payment in its banking department.
If on the Monday following the Saturday when the Chancellor of the Exchequer thought proper to give way, the bankers had chosen to withdraw their deposits, the Bank of England must have stopped payment, although it had at the time 6,000,000l. of bullion in its coffers? Yes; in the case of an internal panic that evil is liable to arise, because there is no knowing how far the panic may reach; the longer it goes on the longer it is likely to go on, because panic creates panic. Any amount of issue of notes which the Bank could possibly make at such a time could not under any circumstances do any harm, because all that people would want them for would be to keep by them; they would never go into circulation.
You stated that in your opinion, in every case but one, the action of the Act of 1844 has been prejudicial; but that in one case you think it is beneficial, that it to say, in the case of a drain resulting from an inflationof credit and over speculation? Yes; and even in that case, I think it is beneficial only in the first stage, and extremely injurious in the last stage.
Are you sure that you are right in saying that any merit exists in the Act of 1844, even in that particular; have not the Bank Directors, from their position, ample means of ascertaining that that over speculation and that inflation of credit is going on? Do not the character of the bills presented to them and their general knowledge of the commercial affairs of the country enable them to arrive at that conclusion? I should say that there never has been a time of over speculation to any great extent, when the fact has not been notorious to persons accustomed to attend to commercial affairs.
Must it not be particularly within the knowledge of the Bank Directors if they are men of intelligence? Undoubtedly.
Then would it not be their duty to check that over speculation by their own spontaneous action, even if they were not compelled to do so by the Act of 1844? I think it would be, and that they would probably do it with their present lights, but they certainly did not always do it.
You have stated that they would have a knowledge of what ought to be done and that they would be able to do it, and you think that now, with the experience they have had, they would do it? Yes.
If they did not do it would it not simply amount to this, that the Bank Direction is not properly constituted, and not that there is any necessity for any legislative enactment to effect it? I think so, certainly.
Therefore the Act of 1844 has really no merit, inasmuch as this one beneficial action which you ascribe to it, might and ought to follow from the intelligence and discretion of the Directors? At the same time I must say, that I am not aware that the Bank Directors have ever been in intelligence of commercial affairs behind the commercial public generally. I think they have always had quite as enlightened views as the bulk of the public had. They have not always had the best views. They had not in the time of the Bank restriction; but then neither had the public. They had improved views quite as soon as the public. When Sir Robert Peel found that the Bank of England had not been observing the requisite caution in checking speculation in its commencement, he might very naturally think that it would be beneficial to compel them to do so. But whether compulsion was required or not at that time, I think that the effect has now been produced. The feeling of the public is now even of an exaggerated kind on the subject of the necessity of checking speculation. The alarm is sounded very early, sometimes earlier than is necessary; and I do not think it is to be apprehended that, under the present constitution, the Bank of England is ever likely to be less alive than the commercial world in general are to that object, so as to require the restraint of the Act.
Therefore you would not recommend the continuance of this Act of 1844 in order to accomplish that beneficial action, which you say it may have produced in certain cases, but which you believe would be effected without the Act by the spontaneous action of the Bank Direction, with the improved intelligence and the experience that they now possess? Decidedly. I think that the degree of enlightenment of the Bank Directors has been constantly progressive; that they have advanced with the public, and are likely still to do so. I think they are now kept back more by the false theory upon which this Act rests, than by anything else; and that they would act in a more judicious way than the Act prescribes, if they had larger discretion entrusted to them.
Is not one mode, if not the only mode, of checking a drain, gradually raising the rate of discounts. Is not that the most important, if not the only engine which they possess for the purpose? And the limitation of their advances.
Do you remember the precise date of the repeal of the Usury Laws?[*] They have been repealed by degrees.
Have not the Bank since the year 1844, by the repeal of the Usury Laws, possessed an engine by which they can check the efflux of bullion and arrest over speculation, which was not possessed by their predecessors during the period that elapsed between 1819 and 1844? The Usury Laws were relaxed, as far as regarded bills of exchange, long before 1844.
That relaxation was confined to bills of exchange? Yes, and to bills of less than three months’ date; but those are the bills which the Bank discount, I believe, exclusively.
You have been asked whether larger reserves of bullion have not been held by the Bank in the 10 years subsequent to 1844 than were held in the 10 years previous to 1844. Will you look at the paper[†]before the Committee and see whether that appears to be a necessary consequence of the Act of 1844, or whether you do not find that the bullion in the Bank had actually risen previously to that Act. What was it in 1844? In January 1844 it exceeded 14,000,000l. In March it exceeded 16,000,000l.; then it began to diminish.
But previously to 1844, what was it? During the whole of 1843 it was from 10,000,000l. to 13,000,000l.; never so much as 13,000,000l.
When did the Act itself come into operation? In 1844; and that confirms what I stated, that during those years gold was flowing in in large quantities; therefore the quantity of bullion in the Bank would naturally have been very much greater, even if the Act had never passed.
Is it not evident that that great amount of bullion in 1844 could not bypossibility be the effect of the Act of 1844, but must have been the result of previous causes in action? So much so, that in all probability no one would have thought of venturing to separate the reserve into two parts, if it had not been so large. If the reserve had been no more than 7,000,000l., it is highly probable that Parliament would not have thought it safe to enact that only part of it should be available in each department.
It has been stated in this Committee that the supposed reason for adopting 14,000,000l. as the amount of circulation on securities, as fixed by the Act of 1844, was, that the minimum active circulation previously to 1844 was 15,600,000l.; of which 15,600,000l., 1,000,000l. consisted of bank post bills, not under the operation of the Act, and 600,000l. of lost notes which have subsequently been written off. Deducting therefore those two sums from the minimum circulation, we get at the 14,000,000l. which is made the amount of the credit circulation of the Bank. The Legislature, therefore, having regard simply to the then existing amount of the circulation, and not at all to the regulation of the banking department, seems to have assumed, that if they made provision for bullion against every note issued above the lowest amount that had ever been out in active circulation, they had secured convertibility? Yes.
Without asking you whether you agree in that view, but assuming that the minimum circulation since the passing of the Act has not been less than 16,700,000l., exclusive of bank post bills; and there being no amount worth speaking of of lost notes to write off, ought not the Legislature, if it follows the principle of 1844, to make 16,500,000l., or about that amount, the amount of the credit circulation which should be permitted to be issued? It is evident, that proceeding on that principle, if the framers of the Act had been framing it now, they would have fixed the larger amount instead of the smaller.
Upon the same principle they would have said, as we cannot contemplate a lower circulation than 16,500,000l., if we provide bullion for everything beyond that amount we provide for convertibility? That would have been their course probably.
Still, not asking you to pledge yourself to the principle, would not it seem a more rational thing to have the credit circulation expanding according to the wants of the country, as indicated by the minimum active circulation, than to adopt an arbitrary amount of 14,000,000l., as fixed in 1844, although the industrial operations of the country might increase to any extent? I am not sure that it would operate in that way, because the only difference that would exist as compared with the present state of things is, that the Bank would be obliged to hold bullion against 2,000,000l. of its circulation, which now it may issue on securities.
If you increased its credit circulation from 14,000,000l. to 16,500,000l., it would dispense with the legislative necessity on the part of the Bank tohold 2,000,000l. of gold? Yes, it would enable the country to part with 2,000,000l. of bullion which now it must hold.
It would therefore so far relax the operation of the Act of 1844? Yes.
If you think that the restriction of the Act of 1844 ought not to exist at all, I imagine you would advocate its relaxation to that extent, as going part of the way that you would propose to go? Provided that this permission to the Bank to issue 2,000,000l. more on securities than they can now do, did not cause their reserve in bullion to be less than what I think requisite for meeting the probable or possible drains.
You have already stated that you think that the principle of the Act of 1844 is defective, because it pays no regard to a drain that will fall upon the banking department (which you say is the first effect of a drain), but simply has reference to the issue department. Now adopting the principle of the Act of 1844, for the sake of the argument (without asking you to acquiesce in it, and to say that it is a right principle), if that principle is to be adopted by Parliament with respect to the legislation we are about to enter upon, ought it not consistently with what was done in 1844, to make this relaxation of 2,000,000l.? On the principle of the Act of 1844, I see no reason whatever against it.
You have been asked whether the Bank at Amsterdam and the Bank at Hamburgh were not bound to hold bullion to the full extent of every note issued; assuming that that was so, and that that was their habit (which you say you believe in the case of the Bank of Amsterdam was not practically their habit), what economy of capital would be gained if every note is represented by bullion? Of course none; the only advantage, then, of the paper currency would be its convenience.
It would be encountering the evils which are urged as objections against a paper currency, namely, liability to forgery and loss without any economy of capital whatever? None whatever.
And no profit resulting to the Bank which had to make the issue? No profit from the issues, of course; only expense.
You say you consider that, having reference simply to the question of circulation, it is a matter of importance whether the issue of notes is from one bank or from several banks; you qualified that remark by saying, “As a question of circulation”?[*] Yes; I consider that it may be of consequence with reference to the probability of forgery; the probability of forgery is, no doubt, greater when the same notes circulate all over the country, than when notes circulate only locally in a small district. At the same time that might possibly, in the case of the Bank of England, be provided against by means of branch banks, and by making the notes of those banks supply the whole local circulation.
Do you believe that, in fact, there are many districts where it wouldnot answer the purpose of a bank, like the Bank of England, to establish branch banks for the purpose of distributing its notes, and where the notes of private bankers are now circulated, affording great conveniences to the district? Yes; but the notes of branch banks would get distributed too. However, they would probably circulate over a much larger district than the notes of private bankers; and therefore the danger of forgery would be considerably greater.
But do you think that they would of necessity be distributed so conveniently as they now are, assuming that country bankers were prohibited altogether from issuing them? Possibly not.
Do you know the fact that the Bank of England has found it to be inexpedient, as a mercantile operation, to have branch banks even in such places as Norwich and Gloucester, and that they have withdrawn their branch banks from those places? It is not within my knowledge. It is a striking fact, certainly, but it does not follow that the notes of a central bank would not circulate in those districts just as much as if there were branch banks.
Can you not conceive that great practical inconvenience would result to many outlying districts if there were not the conveniences at present afforded by country banks? I think it is very useful to such districts, perhaps to less opulent districts even more than to opulent ones, that there should exist bankers ready to make advances of money on proper security. In some districts it is probable that a bank could not maintain itself by its deposits only, unless it had a profit on its issues also; and so far the inconvenience referred to in the question would certainly be produced, if there were only one bank of issue.
Do you not also know that in practice, if a farmer comes into a country bank and wants to draw 100l. from his deposit, he is asked, “In which will you have them?” and he invariably takes the notes of the district, and prefers them to Bank of England notes? Perhaps he does so only because he is more used to them.
Assuming that he is satisfied of the solvency of the bank, is not the danger of forgery less, in the case of a private note? Unquestionably that is the strongest argument for having private notes.
t. hankey:You said that you considered that it would be injurious to the public interest that the Bank of England should be managed in the same way as other banking establishments? I think that the operations of the Bank produce much too great and important effects on the general business of the country to admit of its considering, as other bankers may do, only its own safety and pecuniary interest.
You stated that you considered that the deposits of the Bank of England were the reserves of the disposable money, generally, throughout thecountry, and that that was one of the reasons why you thought it was not desirable that the Bank of England should act as any private banker would do? The private bankers keep all that portion of their reserves, which they do not immediately want, with the Bank of England; the consequence is, that the deposits of the Bank of England are the bulk of all the deposits in the country; and as the deposits of the Bank of England consist of the whole capital that is lying waiting for employment, they necessarily constitute the fund which is drawn upon when bullion is wanted for exportation.
Do you think that that remark applies to any other account of the Bank of England, except the account of the London bankers with the Bank of England? Possibly not; but at the same time the private country bankers are brought very much into connexion with the Bank of England through their London agents. I imagine that there are very few private country bankers that had not a portion of their funds in the hands of London agents.
If we exclude the account of the London bankers at the Bank of England, are not all the other deposits of the Bank of England very much of the same nature as those which are kept in any other banking establishment in London? Except that another London banker does not keep the whole of his reserve by him; he only keeps that portion which he thinks liable to be called for immediately. He keeps the rest with the Bank of England.
But my question is excluding the deposit account of the London banker at the Bank of England; are you aware of any other accounts which require a peculiar action on the part of the Bank of England different from that of any other ordinary well managed bank? I apprehend that the Bank is obliged so to conduct the management of its banking concerns, that it shall always be able to meet from its banking reserve any probable drain of bullion for exportation; because any drain for exportation comes as a general rule upon the banking branch, before it can reach the issue branch; and the Bank being under this obligation, and knowing that whatever drain of bullion takes place from the country will almost all come out of its banking reserve, is obliged to consider the probabilities of drains, and their probable extent, in its banking operations, as well as in its issue operations.
Are you aware whether, when there is a drain of bullion, any other deposit accounts in the Bank of England are withdrawn or diminished, except those which are of the nature to which I have alluded, namely, the deposit accounts of the London bankers? The accounts of the Government certainly are not generally liable to be diminished in that way.
Then it is only those other accounts, which you would not consider the public accounts, which are liable to be diminished by a drain of bullionfrom abroad? Yes; but there are cases in which the Government accounts also may be liable to be drawn upon, namely, when the Government itself has payments to make abroad.
If I could show you that the accounts at the Bank, other than the public accounts (excluding those of the bankers), have not varied materially with any drain of bullion, you would not perhaps attach so much importance to the argument? I imagine that if the deposits of the bankers vary, that is sufficient to make a very great action on the part of the Bank necessary to maintain its reserve.
Excluding the account of the London bankers, can you point out any other account at the Bank of England which is liable to diminution in consequence of a drain for bullion; have you ever observed any indication of any such thing in any accounts that you have seen? If any private merchant or dealer banks with the Bank of England, I apprehend that he may have foreign payments to make, and therefore his deposits may be drawn out in case of a demand for exportation; and I suppose that the public accounts and the bankers’ accounts, and the accounts of merchants and dealers, compose nearly the whole of the deposits of the Bank.
At times when the rate of interest was very low, do you imagine that the amount of deposits in the Bank of England, of an ordinary character, was larger or smaller than at other times? I cannot say.
Do you think that the amount of deposits in London is in any way affected by the current rate of interest at which people can employ their money? When the current rate of interest is unusually high, I should expect that, cæteris paribus, the deposits would be low; because the very fact of money bearing a high value proves that people want it either to meet their engagements, or because they are able to make unusual profit by the use of it.
Have you observed[*]that at the time when money was worth 7 per cent., the private deposits in the Bank of England were about 12,600,000l. Will you see what was the amount of private deposits in the Bank of England in the first week of January 1856? In the first week in January 1856 the public deposits were 5,500,000l.; the other deposits were rather more than 12,500,000l.
Now, will you refer to the amount of deposits on the 1st of January 1852, which is the period when money was extremely abundant? At that time the private deposits were 9,371,000l.
Then, at a time when money was extremely abundant, and the rate of interest very low, and when you would have expected there to have been an unusual amount of money unemployed, it appears from the return of the Bank of England that the deposits were considerably less than theywere at a time when the interest of money was extremely high, and when you would have expected a very considerable diminution of the deposits. Is not that the fact as it appears from the paper? Yes.
Therefore, as far as those facts go, there is no indication that the private deposits have been materially affected by a higher rate of interest? No.
The question is, whether it is true that the deposits generally, otherwise than those of the bankers, are of a nature which require any peculiar action on the part of the Bank of England? The Government deposits do not.
Therefore it is only the private deposits that do? Yes.
And in fact it would apply to no other account than that of the London bankers? Or the London merchants and dealers.
But we have seen from the account before the Committee that the amount of deposits in the Bank of England did not materially vary, according to the scarcity or abundance of money; and does it not follow, therefore, that it can only be the private bankers’ accounts at the Bank of England which are of that peculiar nature which requires a different action from that which would be pursued by every other bank? It strikes me, that when bankers withdraw their deposits it is because their customers are likely to withdraw their deposits for the purpose of meeting the demands to which they are liable in the peculiar state of the market.
You stated that you thought that since 1844 the Bank has lent money at lower rates of interest than it did previously? Yes.
And that that was partly caused by the Act of 1844? I said that I did not think the Act could be held responsible for it, because it is rather a circumstance which has accompanied the Act than the direct effect of the Act itself.
You believe it to be a matter of fact? Yes.
Is it not a notorious fact that the Bank of England lent money in 1843, at 1½ per cent.? That must have been under very peculiar circumstances.
Previously to 1844 the Bank never lowered their rate of discount below 4 per cent., but you are aware that the Bank when they had large amounts of money at their disposal made use of it, and were consequently obliged to employ it at the current rates of interest? Yes, they have I know been charged with having almost caused some commercial crises, by the use they have made of their large funds at certain periods of speculation and of consequent revulsion: I mean by the use which they made of extraordinary public deposits which they had for a time.
You think that at a time when the Bank of England has large deposits in its hands, and when the current rate of interest is from any causes below 4 per cent., it is not expedient for the Bank to enter into competition in the money market, or to employ that money at all? I would not lay down any general rule, but I think they are bound not to do it without great consideration of the circumstances; that is to say, not without considering whether there is likely to be a demand on their reserve; in fact, whether their superfluity of reserve is likely to last.
Would it not be rather difficult for the Bank Directors to foresee what may happen two or three months hence? Do you think that the Bank, having a large amount of money which had been paid in from taxation, ought to be prevented from circulating it among the public because the the rate of interest was not 4 per cent? Do you think that would be a wise, a wholesome action on the part of the Bank Directors? I should think that it would be necessary that they should consider a great many circumstances in order to decide that. I do not think any general rule can be laid down.
But without laying down a general rule, do you not think there are many cases which would justify the Bank in lending out money at the current rate of interest? I think they are bound to consider well the disadvantage which would be occasioned, at a time when there was a low rate of interest, by lending a very large sum of money in addition to what had been lent before, which would tend to encourage speculation, and whether that would be a greater evil than leaving a portion of their deposits for a time in their coffers.
You think that in those particular times they ought to depart from such principles of action as would guide any ordinary banking establishment? I think so, because a private banker may fairly think that his operations cannot produce any great effect upon the general circumstances of the money market, and that, therefore, it is enough if he considers himself.
Do you consider that the rates of interest have varied more frequently since the Act of 1844, than they did before? Yes.
Can you refer to any statement which shows that the variations in the rate of interest in London have been greater or more frequent since 1844 than they were previously to 1844? It is matter of notoriety that the variations in the Bank’s rates of discount have been much more frequent than they were before.
But seeing that before 1844 the Bank of England never discounted below four per cent., but employed their money in other ways below four per cent., would it be a fair thing to take the Bank’s rate of interest at that period as an indication of the value of money, and to found an argument upon it, that the variations in the rates of interest have been more frequent since 1844 than previously to 1844; would it not be more fair to take the current rates of interest in London, as indicated by the rates adopted by the great money dealers, such as Messrs. Overend & Co., whose money is generally employed in discounting bills? I have not doubt that the rate at which Overend & Co. lent would be a very correct indication of what the rate of interest was, but it would not at all show to what extent the general rate had been affected by the circumstance of the Bank lending or not lending at a low rate of interest, which cannot fail to affect it very materially.
The rate to which you are alluding is merely the rate at which the Bank have themselves lent money, having no reference whatever to the current rates of interest in London? Just so; but this distinction is not always important, because everybody feels that the operations of the Bank do very materially affect the general rate of interest in a period of commercial difficulty; and it is in a period of commercial difficulty, brought about by other causes than over speculation, that the restrictions imposed by the Act are particularly noxious. Although the Bank does even in ordinary times vary its rate of interest much more frequently than it did, no doubt it does so, merely following the market rate of interest, and I do not attach any great importance to the effect of what it does then. It is what it does in times of difficulty, that is of importance, and the restrictions under which it is then placed appear to me to be a source of evil.
As there has been a very large increase in the production of gold, which has been principally coined, and has therefore added to that extent to the circulating medium of the world, should you not expect that in the general distribution of the precious metals a great proportion of that increase would find its way to India? Certainly.
Would it not naturally continue to do so until India had received its share in its general distribution? Yes; but I apprehend that it will be found that the export of bullion to the East has been greater in proportion than to other countries.
Is not the alteration in the relative value of gold and silver which has taken place in consequence of the enormous increase in the production of gold, quite sufficient of itself to account for this large export of silver from Europe to India? It would no doubt account for the export of silver to the East to the same proportionate extent as to other places, but not for the greater proportional exportation, which I imagine has taken place to the East, than to other places.
Is it not natural that in this process of equalising the general increase of the precious metals all over the world, that increase should find its way in the shape of silver to the East, where silver alone is used as the circulating medium to a greater degree than to any country where gold and silver are used jointly as the circulating medium? Certainly.
Then it is natural to suppose that the large export of bullion which we have sent to India would have taken place quite irrespectively of any action of trade, or railways, or anything else? Not independently of any action of trade, because it must take place through the medium of that action.
But independently of any extraordinary action, different from the ordinary action of the trade of the country? Yes; but if it had not been for the practice of hoarding in the East, the probability is, that in a country like India, where prices depend much more on the metals than on any of those contrivances of credit which affect them so greatly here, the effect of this influx would have been felt much more upon prices than it has been; and in proportion as it affected prices, it would have diminished the export of the precious metals to India, which it has not done.
w. tite:I have now before me the statistics with regard to silver which were given to the Committee in March last,[*]from which it appears that the exports of silver to India and China in six years have been 36,530,000l., and the imports from the producing countries have been 25,820,000l., making the amount of silver abstracted from the European stock in the six years 10,700,000l., which is at the rate of about 1,600,000l. in a year. Do you apprehend that that drain of 1,600,000l. from Europe to the East is likely to continue? I should think that a drain to that extent or more is likely to continue.
Do you know the amount of circulation in France? I have not the figures in my possession, but there has been a great substitution of gold for silver in the French circulation, and a great part of the silver which has gone to the East has come from France.
It was suggested that the circulation of silver in France is about 120,000,000l. sterling? Not now, I think.
Supposing that drain to the East should go on to the extent of 1,500,000l. above the silver imported from the silver producing countries, would the effect be very important upon the commerce of the country, or what effect would it have, in your opinion? The probable effect will be to oblige countries whose standard is now silver to adopt a gold standard. If this took place in India, the effect would be in a great degree to stop the influx of silver, and to substitute an influx of gold.
No other effect? No other effect, that I know of.
r. spooner:Some questions have been put to you about country bankers being required to give securities for their notes; I understood you to say that you do not think that at all necessary as long as the issue of notes is limited to 5l. and upwards? I hardly think so; I admit that it is a question on which there may be a difference of opinion, but, inasmuch as the amount of deposits is generally greater than the amount of notes, and the holders of notes, when they are confined to 5l. notes, are much the same class of persons as the depositors, there probably is no reason for placing the holders of notes in a different position, or giving them any security which cannot be given to depositors.
Would it not be unjust and unfair towards one creditor of the Bank to give a better security to another creditor of the Bank? Not if it were known beforehand on what security they took the notes or made the deposits.
In what way could the security be given; how could it be practically worked out? The banker might be compelled to hold public securities of some description to the amount of his notes, which should not be liable to be taken to pay other debts.
Where should those securities be deposited? They might be entered in the books of the Bank, in such a manner as to secure them against other creditors. Means could easily be provided in some way equivalent to a distringas upon stock which is not permitted to be sold.
Suppose that were done, a banker must still keep in his possession a large reserve to meet the daily demands of his customers in respect of those notes? Certainly, he must, and he would hold, besides, a certain amount of securities which would be a pledge for his notes.
Would not that, in point of fact, be requiring the banker to provide for his notes in two places? He would not be required to provide so much for his depositors if his notes were otherwise provided for.
But you mean still to make the banker liable to pay his notes on demand in gold, although he has given security? Certainly.
Then you would make him provide for his notes in two ways, namely, by giving security for them, and by providing for the daily demands which are coming upon him? Yes, undoubtedly he must; but the securities which he was obliged to provide on account of his notes would be bringing him interest.
Would it not be in a time of panic or disturbance that he would require to realise his securities to meet his notes? That might be the case; and it might be necessary that some public officer should have power to authorise sales of the securities that were given for the notes.
At such a time, would not the securities most probably fall very much in value? Yes, undoubtedly they would.
Then while you ask security from the banker, would not you give him indemnity against that possible loss? That is a loss to which bankers are always subject; they are always liable to invest their money in securities when securities are dear, and to have to sell them out when they are cheap.
They change them according to the best of their judgment? Yes; but they invest what they receive in deposit, and the deposits are likely to come in to them in the greatest abundance when there is not much to be made by keeping them.
I understood you to say that your opinion is, that the theory upon which the Act of 1844 was grounded has been proved by experience to be completely erroneous? I think that some parts of the theory have been proved, by practical experience since, to be erroneous, and that they are mostly given up, even by the defenders of the Act.
What part do you say is not proved to be erroneous? I think the whole of the theory erroneous; but I think the part which experience has overset is chiefly that which turned upon inattention to the effects which the Bank produces by its deposits, the importance of which certainly, before 1844, was not sufficiently appreciated either by the Bank Directors or by the public generally.
I understand you to say that you are of opinion that the Act of 1844 has not answered the purposes which its promoters had in view, and that it would be better to repeal it? That is my opinion.
Do not you think that the convertibility of the note might be as well secured, or perhaps better secured, without the Act than under its provisions? I think the convertibility of the note is safe in any case, and Lord Overstone, in his evidence,[*] said as much. He said the Bank can always take care of itself, but it is at the expense of the public. I have no doubt the Bank always would take care of itself.
The convertibility of the note would, in your opinion, be as safe without the Act of 1844 as with it? Yes; while at the same time a much greater evil than the convertibility of the note, namely, suspension of payments by the banking department, is much more possible with the Act than it was before.
c. puller:You stated that, with respect to a drain of gold, since the Act of 1844 every drain had a sort of double action; that in the case of a drain extending, say to 3,000,000l., its first operation is upon the banking department, by drawing out 3,000,000l. of notes; and that then it acts upon the issue department, by the presentation of those notes, in drawing out 3,000,000l. of gold? Yes.
You went on to add those two sums together, as if they constituted a drain of 6,000,000l. upon the Bank? Yes; what I said was, that the two departments cannot help one another, but the Bank is obliged to take separate measures for the security of both. As to the issue department, the security of that is provided for by the Act; but, in addition, the Bank are now obliged, as the drain would come out of the deposits, to take measures for the security of the deposit department, which can only be done by a contraction of their credit.
Is it fair to add those two sums together, as representing a drain upon the resources of the Bank to the amount of 6,000,000l., the notes being, in fact, certificates of so much gold deposited in the issue department? If it were a question that concerned the solvency of the Bank, I admit that it would only operate to the extent of 3,000,000l.; but in as far as the operation upon the money market is concerned, I apprehend it operates virtually as a drain of 6,000,000l. would do upon the Bank.
But the 3,000,000l. of notes that are drawn out of the banking department are, in fact, the same identical portion of the resources of the Bank as the 3,000,000l. of gold which are afterwards drawn out of the issue department to meet those notes? It is as if a man having to lift a weight were restricted from using both hands to do it, and were only allowed to use one hand at a time; in which case it would be necessary that each of his hands should be as strong as the two together.
You say that, since the Act of 1844, the Bank has not kept so large a reserve in their banking department as was necessary? Not so large a reserve as would have been necessary to make the Act innocuous. To have prevented the Act from producing more violent revulsions of credit than would take place without it, it would be necessary for the Bank to keep in the deposit department alone, a reserve sufficient to meet any probable drain.
Was not the intention of the Act to make the circulation fluctuate exactly as a metallic circulation? Yes.
Has not that effect been successfully carried out? That effect has been carried out; but, I apprehend, that effect is not of the smallest consequence.
Do you think that the Act has the effect of causing the Bank to keep a less banking reserve now than it would have kept if we had had a purely metallic circulation at work, and therefore the Bank of England had been a mere bank of deposit? If the Bank had been a mere bank of deposit, and had continued to act as it has acted under the present system, namely, to consider only its own banking interest, it would have done just as it has done.
Therefore, there is nothing in the Act to cause less caution on the part of the Directors than they would have exercised if there had been a purely metallic circulation? Exactly so; but I think, in a system of credit like what we have in this country, you may have a very much more steady currency than a purely metallic currency would be.
But if there has been a less banking reserve kept than was necessary to meet the banking engagements, that result is due, not to the Act of 1844, but to the want of sufficient caution and discretion on the part of the Bank Directors? They have had a sufficient reserve to meet their liabilities; that is, they have always been able to replenish it in time; but they have been able to do so only by selling securities or diminishing their discounts very rapidly and suddenly, because of the insufficiency of their reserve to meet the whole of the drain. Now it appears to me that this is not a necessary evil, but an evil owing to the Act of 1844. By the authors of the Act it is laid down as a broad principle, that the paper currency should conform to a metallic currency. I apprehend the meaning of that is, that the permanent or standard value of the paper currency should be the same as that of a metallic currency; but not that it should have the same fluctuations. It does not follow, because we ought to make the permanent value of the paper currency conform to the value of a metallic currency, that therefore we ought to have the same fluctuations which occur in the value of a metallic currency. The fluctuations to which the value of a convertible currency is subject, depend not upon anything that affects either the metals or the bank notes, but upon general extensions or contractions of credit. The currency which is the least liable to violent contractions of credit, will be the currency with the fewest fluctuations. Therefore, if a convertible paper currency, issued by bankers and not restricted by Act of Parliament, is likely to lead to fewer variations in credit than a metallic currency, it appears to me better than a metallic currency, and better than a paper currency which is obliged to conform to a metallic currency.
Then I understand that the ill effect which you ascribe to the Act of 1844, is by comparing the actual state of things, not with any actual metallic currency, but with some imaginary system which you think would be more perfect? Not exactly so; what I mean is, that no currency can be good of which the permanent average value does not conform to the permanent average value of a metallic currency; but I do not admit the inference that in order to enable it to do this, its fluctuations in value must conform to the fluctuations in the value of a metallic currency; because it appears to me, that fluctuations in value are liable to occur from anything that affects credit; and I think that a metallic currency is liable to more severe revulsions of credit, than a mixed currency, such as ours was before the Act of 1844; and therefore, that a paper currency of the permanent value of a metallic currency, and convertible, but without any other restriction, is liable to less fluctuation than we now have under the Act of 1844.
I understand your opinion to be, that the great advantage of unrestricted issues, as compared with the existing system, would be this; that in times of great commercial difficulty the Bank might draw upon the additional quantity of bullion which it keeps as a security for its notes for the purpose of sustaining credit in times of panic? I should rather state it in this way, that they will not be obliged to contract credit in cases in which there had been no previous undue expansion of it.
I am supposing the case of a drain in consequence of over speculation; in that case I understood you to say that the advantage of the system of unrestricted issue which you advocated, would be this; that when a panic did come after periods of over speculation, the Bank then would be able to use its whole reserve, consisting of the bullion that is now in its banking department, and so much of the bullion as is now in the issue department, as it would keep under such circumstances; and that it would therefore havea larger fund to draw upon to sustain credit than it has now? I would state it even more strongly; because in the case you are supposing, which is not a case where there is any doubt about the convertibility of the Bank note, the Bank might issue notes to any extent they were asked for, as they did after 1825.
You admit that there might be a very great extension of its issues under those circumstances? I think there ought to be in those circumstances, because there is such a destruction of ordinary credit, that it is necessary that some credit should come in to take the place of what is destroyed, in order to prevent great calamities.
Such extension of issues would increase the total amount of circulation much beyond what it would be, if it were a purely metallic currency? Very much beyond. That is a great advantage, because one of the great inconveniences of a metallic currency is, that it is impossible for it to come to the assistance of a drain in those emergencies.
You do not agree with Mr. Tooke in thinking that a mixed circulation of convertible paper must fluctuate always as a metallic currency? I am not aware that Mr. Tooke thinks that it must fluctuate in quantity as a metallic currency would; I think it is a great advantage of our currency, as it would be without the Act, that it does not fluctuate exactly as a metallic currency would.
In stating the advantages that would be obtained in a time of extreme panic by the system you recommend, you admit that they would be purchased at the expense of a certain disadvantage, namely, that the commercial crisis, when it did come, would be more violent than it would be if it was checked in time, as it is now checked by the operation of the Act of 1844? I think the Act does check it in its earlier stages, when the crisis has proceeded from over speculation. At the same time, I think there is every probability that the Bank would now act in such cases exactly as the Act prescribes, even if the Act did not exist.
Would there not also be this possible great disadvantage, that under a system of unrestricted issues, if notwithstanding the assistance which the Bank rendered to the public they were unable to stop the panic, it would be enormously aggravated by the alarm of every note-holder throughout the country? That is supposing a case that is not likely to happen, unless the country were in possession of a foreign army. I can hardly imagine any other case in which there could be any doubt as to the sufficiency of the notes of the Bank of England to secure anybody who possessed them. We know that at the time of the panic in 1825, there was never a doubt for a single instant about the notes of the Bank of England.
But sometimes a panic is not always governed by reason? No; but in such an extreme case any system of credit or banking must break down.
With respect to a foreign drain, such a drain as is produced by a bad harvest, or by foreign remittances of the Government, of course turns the exchange against this country? Yes.
Must not that amount of drain ultimately be paid for and the exchanges corrected by the operation of the trade of the country? Not necessarily; it may be by mere transactions in securities, by transfers of securities from one country to another.
But as a general rule, would you not say that you must look to the trade of the country? It is of very great consequence, I apprehend, whether the effect is produced through an action on the prices of commodities, or without that action; because that affects a much larger class of persons than could be affected by changes in the price of securities.
You have expressed an opinion that such a drain ought to be met by the reserve of bullion in the Bank rather than by an action on discounts; now, supposing the reserve of bullion to be nearly drained out, would you think that such a state of things ought to be allowed to continue; or is it not desirable that the Bank should have every motive so to act, by contracting its discounts, as to correct the exchanges? It would always have that motive when its reserve got low; it would necessarily be obliged to take such measures; the only difference would be, that it need not take them so violently; because if the drain should be a limited drain, a drain arising from a cause not permanent, of course as to so much of the drain as had already taken place, it would be unnecessary for the Bank to provide for it by restricting its discounts.
Under a system of metallic currency all these matters would be regulated by the natural laws which govern the distribution of the precious metals? Yes.
Do not you think that upon the whole that system is more likely to be safe and right than by entrusting the regulation of them to the discretion of any body of men whatever? It seems to me that natural laws would equally operate in the other case. The course that would naturally be followed in a case of panic, for instance, is exactly the one which the Act prevents, namely, to come to the assistance of trade at a time when there is a great destruction of credit, which the Bank would always do if it were not prevented, but which it cannot do now in those cases, unless the Act is suspended.
You said that you were in favour of allowing country banks, as well as the Bank of England, to issue notes without any other restriction than convertibility,[*]or, at all events, that you saw no need of restriction from the fear of over-issues; will you state what you mean by “over-issues,” because you have already told us that you admit that it is possible thatissues of paper may be in excess of that which a metallic circulation would supply? By over-issues, I mean such as create undue speculation, or maintain it when it ought to be checked. In any other sense I do not conceive that there can be over-issues so long as convertibility is maintained.
Then your opinion is a theoretical opinion; it is not deduced from the fact that there have been no such issues? It is my interpretation of the facts that have taken place.
Do you remember the case of the American banks in 1835, when the issues rose from about 100,000,000l. to about 150,000,000l. in the course of one year? Yes, but I have always understood that there was not practical convertibility at that time.
They were legally convertible, were they not? The fact was, that either through the influence of the banks, or for some other reason, they were not convertible. In the next place, I admit that in a period of violent speculation, that speculation may be ministered to by banks; not that they do so in the commencement, at least not by means of their notes, but they may prevent speculation from being early checked by the necessity of re-selling goods that had been speculated upon.
t. weguelin:Has not your examination to-day turned entirely upon the management of the Bank as a bank of deposit? It seems to me to involve the whole management of the Bank, as far as the currency is affected by it.
Has it not turned mainly upon the management of its deposits? I think it has turned mainly upon the deposits, for this reason, that it is chiefly, in my opinion, by not attending to the management of the deposits that the promoters of the Act have been led to what I consider a wrong conclusion.
[[*] ]7 & 8 Victoria, c.32.
[[†] ]Tooke, Thomas. On the Bank Charter Act of 1844. London: Longman, Brown, Green, and Longmans, 1856, p. 105.
[[*] ]Parliamentary Papers, 1857 (Sess. 2), X. ii, pp. 156-60.
[[*] ]See p. 502 above.
[[*] ]8 & 9 Victoria, cc. 38 and 37.
[[*] ]Parliamentary Papers, 1857 (Sess. 2), X.ii, pp. 156-60.
[[*] ]Parliamentary Papers, 1847-8, VIII, i-ii.
[[*] ]See 2 & 3 Victoria, c.37.
[[†] ]Parliamentary Papers, 1857 (Sess. 2), X.ii, pp. 156-60.
[[*] ]See p. 510 above.
[[*] ]See Parliamentary Papers, 1857 (Sess. 2), X.ii, pp. 144-55.
[[*] ]Parliamentary Papers, 1857 (Sess. 2), X.i., p. 15.
[[*] ]Loyd, Samuel Jones. “Evidence,” Parliamentary Papers, 1857 (Sess. 2), X.i., pp. 339-431.
[[*] ]See p. 509 above.