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209.: THE MINISTERIAL MEASURE RESPECTING THE BANK EXAMINER, 7 JULY, 1833, PP. 417-18 - John Stuart Mill, The Collected Works of John Stuart Mill, Volume XXIII - Newspaper Writings August 1831 - October 1834 Part II [1831]

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The Collected Works of John Stuart Mill, Volume XXIII - Newspaper Writings August 1831 - October 1834 Part II, ed. Ann P. Robson and John M. Robson, Introduction by Ann P. Robson and John M. Robson (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1986).

Part of: Collected Works of John Stuart Mill, in 33 vols.

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209.

THE MINISTERIAL MEASURE RESPECTING THE BANK

EXAMINER, 7 JULY, 1833, PP. 417-18

Mill here redeems the promise in No. 208 (q.v.), though he seems not to have been proud of his performance, for he wrote to his friend J.P. Nichol on 10 July that “the article was superficial, and could not consistently with its purpose be otherwise” (EL, CW, Vol. XII, p. 167). He is commenting on the “Bill for Giving to the Corporation of the Governor and Company of the Bank of England Certain Privileges, for a Limited Period, under Certain Conditions,” 4 William IV (5 July, 1833), PP, 1833, I, 69-76, eventually enacted as 3 & 4 William IV, c. 98; it had received first reading on 5 July. The leader, which appeared in the “Political Examiner,” headed as title, is described in Mill’s bibliography as “An article headed ‘The Ministerial Measure respecting the Bank’ in the Examiner of 7th July 1833” (MacMinn, p. 32). In the Somerville College set of the Examiner, it is listed as title and enclosed in square brackets, with three emendations: at 577.31 “opinions” is altered to “opinion”; at 582.7 “lest” is changed to “last”; and at 582.10 “fact” is changed to “part”. The second of these is clearly an inaccurate correction, and we have given “least” as what the sense requires.

the proposed measure for the renewal of the Bank Charter is a specimen of the sort of legislation to be expected from the sort of men by whom, for want of better, the instrument of Government is likely for some time longer to be wielded. In one respect, the reputation of Ministers ought to benefit by it. Those who have been accustomed to see in the timid, vacillating, and truckling policy of the present Administration, evidence of intentions hostile to the interests of the community, may incline to a more charitable judgment on seeing them exhibit, even on a question like this, where their greatest enemies cannot suspect them of any undue bias in point of interest, exactly the same kind of mental incapacity; no power of grasping any principle; no attempt to ground their proceedings upon any comprehensive, even though false, views; no appearance of understanding the subject, or even of thinking they understand it; nothing contemplated which rises to the dignity of even a half-measure—only quarter and half-quarter measures; a little scratching on the surface of one or two existing evils, but no courage to attempt their excision, because there has been no vigour or skill to probe them to the bottom. It is only in points of comparative detail that even the tendency is towards improvement; the general system of our currency, so far as altered at all, is to be altered for the worse; the exclusive privileges of the Bank of England are to be even extended.

From the tenor of the evidence delivered before the Parliamentary Committee of last Session,1 joined to the fact that the Committee was not reappointed to hear the other side of the question this year, it was probable that Ministers had made up their minds, (as far as minds like theirs are ever made up,) to maintain the Bank monopoly unimpaired, at least in the leading point of being the sole bank of issue in the metropolis. They appear to have been wholly governed by the authority of the London bankers, who had the natural prejudice of practical men in favour of the system under which they had thriven, and against changes which would raise up powerful rivals to themselves. Even able and honest men are apt to confide too exclusively in the modes of transacting business with which they are familiar, and the securities on which they have been accustomed safely to rely; they do not learn all at once to have equal trust in other though perfectly effectual securities, nor even in the same securities when the circumstances are apparently different. The opinion of the London bankers in favour of the Bank monopoly does not appear to us to be the result of argument. If they had given no reasons whatever it might have been supposed they had excellent ones to give; but since they have given reasons, if those reasons are mere assumptions, it must be supposed that they had a predisposition, (though, we are convinced, in the case of some of them, a perfectly unconscious one,) in favour of the conclusion they have arrived at; and that the merit of their argument, like that of a jest, lies “in the favour of him that receives it.”2

The principal reason assigned, the only one upon which any stress is laid, is the danger of competition. If banking was free, and bankers striving against each other to put forth their notes, there would be over-issue. But why? Tell us why? In all other branches of business competition is the great preventive and corrector of excess: the greater the competition the more accurately is the supply proportioned to the demand. If the markets of London were supplied with provisions by one single dealer, or one single company of dealers, there would be frequent over-supply and frequent deficiency. Every blunder, every miscalculation of a single individual would inflict upon the town one of these evils or the other. If there were two dealers, or three, and no more, they might all chance to miscalculate the same way. But there is so great a number, that their mistakes neutralize one another, and the markets are consequently supplied with a regularity and an equality, which the foresight of the ablest man, or body of men, could not make the most distant approach to; accident seems to have lost its powers over this portion of human affairs; there is no fluctuation, except where there is rational cause for it.

We have never heard any argument to show that the currency of London could not safely be supplied by private bankers, which would not also show that the food of London cannot safely be supplied by private dealers. If London had always hitherto, like a town in expectation of a siege, been victualled by the Government, what a clamour would be raised when the first proposal was made of trusting to private interest for the supply! Every man of routine would prophesy the utter failure of the plan; would predict that the metropolis would one day be left without food, that another day food would be brought to market in such quantities that it would spoil before it could find a purchaser; the subsistence of a million and a half of people would be declared too vast a concern to be managed by private hands, too all-important to be risked upon the faith of theories. These fears, anterior to experience, would not have been altogether so absurd as they seem: but with this experience, trusting with the steadiest confidence to competition for our food, it is strange we should think ourselves unable to trust to it for our circulating medium.

But let us grapple with this question somewhat more closely. It would be the interest of private bankers to put forth a super-abundance of paper and depreciate the currency. What then? Such is also the interest of the Bank of England. In order to make it not the interest of the Bank of England, that body is required to pay its notes in gold, in order that when they become depreciated, they may be brought back to the Bank, and gold demanded in exchange. This security is either sufficient or it is not:—if not, we are liable to depreciation from the Bank of England; if it be sufficient, the same obligation to give gold for their notes will operate with the same efficacy as a restraint upon private bankers.

It is supposed that if competition were allowed, every bank would strive to fill the entire circulation with its own notes: that each would attempt to put forth as much paper as if itself were the sole bank of issue; hoping that while itself derived all the profit, its rivals would bear a share of the subsequent loss, as the run for gold, occasioned by depreciation, would probably affect all the banks, not that alone whose over-issues had occasioned it. We state the argument as strongly as it can be stated; much more strongly than it is commonly put by those whom we are supposing to be influenced by it.

Our answer is, that after the first rush consequent on the removal of the restriction was over, and the supply of the circulation had divided itself among the various banks according to the extent of their connexions, and of the credit reposed in them, they would be very cautious of extending their issues unless to fill up a gap in the circulation produced by the discrediting of a rival bank, or unless the state of the money transactions of the country was such as admitted of an increase of the currency without depreciating it. If one of the banks commenced an imprudent extension of its issues, the other banks would be immediately warned of the fact by the increased number of its notes which would come into their possession in the course of trade; and they would immediately return those notes on the hands of the issuers in exchange for gold. Indeed this would be done, even without any express design on their part, the very first day, by the ordinary operations of the clearing-house. It is well known that the London bankers every afternoon pay over to each other the cheques drawn upon any one of them which have been paid into any other house during the day, and receive or pay the differences. If they were banks of issue they would at the same time, and in the same manner, interchange their notes as well as cheques. Consequently if any one bank had increased its issues while others had not, more of its notes would be returned to it at the clearing-house, than would be balanced by the notes of other banks paid into itself, and it would be called upon to pay the difference in cash that very day. The check would, therefore, operate instantaneously.

This is not only a necessary conclusion from the theory of the subject, but is borne out by specific experience. The Scotch banks, which, as every one knows, are the most stable banking establishments in the world, actually do exchange their notes in this precise manner; and the consequence is that there is nothing like the dreaded struggle of rival banks to supplant one another, but each rests satisfied with the share of the circulation which custom has assigned to it. The system, however, altogether prevents the existence of any bank of doubtful credit. No such bank exists, or has existed, except in one or two instances and for very short periods, in all Scotland for the last hundred years.

The arguments, therefore, of the supporters of the Bank monopoly are equally in contradiction to the reason of the case and to the most obvious and particular experience on the very point.

An exclusive privilege of issuing paper-money, given to such an establishment as the Bank of England, is altogether an anomaly. Either the regulation of the currency may safely be left, under the security of convertibility, to the private interest of the issuers, or, if not, it is part of the business of Government, and should be under the control of a responsible Minister. The common notion seems to be, that if the issuers look only to their own interest they will best consult that by over-issue; and that it is necessary the currency should be every now and then tampered with on some principle of public policy. But if this were true, there could not be a more unfit body to be entrusted with absolute power of regulating the currency, than a private irresponsible company. We must have the security of private interest or the security of responsibility, one or the other; if we cannot trust to the former, we must be fools to let ourselves be jockeyed out of the latter. If issuing paper-money must be a public trust, it should be vested in a public functionary, who ought to be liable to displacement if he prove incompetent, to punishment if he neglect or violate the duties of his office.

Our own opinion is, that the interest of the issuers of notes when obliged to pay them in gold on demand, is identical with the interest of the public, and that by taking their measures prudently for their own interest, they are providing effectually against over-issue and all other dangers. We would, therefore have banking free. It is desirable, certainly, to secure to the public the largest possible share of the profits arising from the substitution of the cheaper for the more costly medium of exchange. This, however, might be accomplished, as it is to a certain extent even at present, by a stamp duty on bank notes.3 This duty we would raise as high as it would bear. We would then remove all restrictions on the establishment of banking partnerships, and would even allow the formation of joint-stock banking companies with limited responsibility, provided a certain large amount of capital was first paid up. With the example of Scotland before us, we can feel no doubt that the formation of safe banks would drive all unsafe ones out of the field, and that the failure of a bank would soon become as unheard of an event on this as it is on the other side of the Tweed: ultimately, therefore, the issue even of one pound notes might, as in Scotland, take place without any danger; but in the mean time we would even, if necessary, prohibit all notes below ten pounds, in order to confine the circulation of paper to those classes who may be trusted to judge for themselves of the solvency of a bank.

With this proviso we should have no apprehension of the effects of allowing the issues of paper money to be as free as that of bills of exchange. We should as soon dream of giving to one establishment a monopoly of the latter kind of security as of the former.*

The tendency of the Ministerial measure is “clean contrary.” The Bank of England is not only to remain the only bank of issue in London, but the wish of Government is that it should progressively become the issuer of paper for the whole country. With this view it is proposed to permit the formation of joint-stock banking companies, with limited responsibility, on condition that these companies shall not issue paper of their own, but transact all their business with the notes of the Bank of England. As these banks would probably, by the greater confidence of the public in their solvency, drive all or most of the present country bankers out of the field, Bank of England paper would wholly or in great measure supersede all the existing country paper. What advantage Lord Althorp anticipated from this substitution his Lordship omitted to inform us; but it is easy to see one obvious and inevitable disadvantage—a great increase of forgery. A country note never circulates beyond the neighbourhood of the issuers, and forged notes are presented for payment, or come into the bankers’ hands as deposits so very speedily that it is almost impossible to throw many of them into circulation without beng detected. But if Bank of England notes were the common circulating medium of Cumberland or Cornwall, the forger might continue his operations for months before a forged note passed into the hands of any one who could detect the forgery.

Lord Althorp has announced that for the present at least he will not press that part of his plan on which we are now remarking.4 He has not changed his opinion, but he candidly confesses that the country bankers are too strong for him, and that he cannot carry it. Along with the evil of this part of the project, we are therefore to be deprived of the good. The principle of permitting the formation of joint-stock companies for banking is for the present abandoned.

For the continuance of the Bank monopoly, so far as respects the issue of notes, there was at least a colour, a semblance of reason; men who had paid attention to the subject had advocated that side of the question. But what excuse, what pretext is there for continuing the exclusive privileges of the Bank of England as a bank of mere deposit? Would it have been credible a few years ago that any Ministry would have had the folly, or the boldness, to propose the renewal of the prohibition on the formation of banks with more than six partners, in London and 65 miles round it? Amidst so much cant about making banks secure, here is a law for the express purpose of making them insecure. Who that remembers Lord Liverpool’s letter to the Bank in 1826,5 and the warning he gave them of the little reason they had to expect any further prolongation of their monopoly after the expiration of their present Charter, could have believed it possible that a reforming Ministry, a Ministry the professed enemy of monopolies, would have proposed the renewal of even the least atom of the Bank monopoly, even that part of it for which no human being, instructed or ignorant, has yet ventured to utter one word of defence?

The importance of that part of the Ministerial measure which permits the country-bankers to pay their notes in Bank of England notes instead of specie, appears to us to have been greatly exaggerated both by its supporters and by its opponents. If the monopoly of the Bank is to be continued, we should, perhaps, approve of this provision. Considered as a further extension of the privileges of that body, we view it with decided disapprobation.

But what shall we say of the grandest improvement of all, the publicity of the Bank issues? When convertibility is secured, the greatest additional security which can be given to the currency is to let in the light upon all the accounts, and all the transactions of all banks of issue without any exception or reserve; that the public may know instantaneously when there is any danger of insolvency, or any danger of an excessive circulation, and that the check of convertibility may operate without a moment’s delay. This is the principle improvement which our monetary system, so far as its security is concerned, now admits of. And what do the Ministers propose? Publication once in three months, of the amount of notes in circulation only; and not even of the amount of notes circulating at the particular time, but of the average amount for three months previous. To the Government, indeed, weekly accounts are to be furnished; but the Government is the very party from whose tampering with the Bank, most danger is to be apprehended; the great over-issues of 1824 and 1825 were encouraged by the Government. As for the country bankers, they also were to disclose the amount of their issues to the Government, but the public were not to know even once in three months the amount in circulation of the notes of each bank, but only of all the country banks taken together. Even this has not been persisted in. The affairs of country bankers are to remain in the dark.

Thus every party or class which has interests opposed to the public, contrives to hold its own, and the public only are sacrificed. But that is because parties and classes look after their own interests, and the public neglect theirs.

There is only one other point which we shall notice. Doubtless any relaxation of the mischievous and contemptible Usury Laws,6 is a step towards good: but what sort of figure do a Ministry exhibit to any rational person, when they propose to the Legislature to declare that it shall be accounted right to borrow money at more than five per cent. interest for three months, and wrong for four; right, if the money is lent on a bill of exchange, and wrong if it is lent on mortgage? The fact is, that the country gentlemen, in their ineffable stupidity, do not choose to be allowed to borrow money at six per cent.; they prefer, when they cannot do without it, to borrow it by circuitous methods, at nine or ten per cent. contrary to law. The Ministers, instead of shaming the country gentlemen out of their ridiculous prejudices, give way to them, and dare not propose any measure which those sages would not like to pass. They therefore compromise the matter: instead of taking off the tight shoe, they make an incision into it where it pinches hardest.

[1 ]Report from the Committee of Secrecy on the Bank of England Charter, PP, 1831-32, VI, 1-699; see, e.g., pp. 234-5.

[2 ]Cf. Shakespeare, Love’s Labour’s Lost, V, ii, 861-2; in The Riverside Shakespeare, p. 211.

[3 ]Imposed by 31 George III, c. 25 (1791).

[* ]It is characteristic of the little attention paid to these subjects by all except those who are privately interested in them, that all the periodical publications of any importance, with one exception, have either taken part with the monopoly or been silent. The exception to which we allude is Tait’s Magazine, which has furnished the only refutation we have yet seen in print of the arguments for the exclusive privilege of the Bank. That work, which ranks high in so many other respects for ability and right principles, stands quite alone among the periodical works of the day in the general soundness and depth of its Political Economy. [“Ministers and the Bank Charter,” by William Tait (1793-1864), the proprietor and editor, appeared in Tait’s Edinburgh Magazine, II (Mar. 1833), 753-4. Mill’s own contributions to Tait’s included “The Currency Juggle,” II (Jan. 1833), 461-7 (CW, Vol. IV, pp. 181-92), which concludes with an editorial reference to “free trade in banking” as exposited in the series by Henry Brooke Parnell (see No. 217, n12), “The Bank Charter,” Tait’s, I (June 1832), 291-314; (July), 386-8; (Aug.), 559-620; and (Sept.), 664-5.]

[4 ]In his speech on the Bank Charter (3 July, 1833), PD, 3rd ser., Vol. 19, cols. 82-3, Althorp withdrew all that part of his proposals relating to country banks.

[5 ]“Copies of Communications between the First Lord of the Treasury and the Chancellor of the Exchequer, and the Governor and Deputy Governor of the Bank of England,” PP, 1826, XIX, 471-9; the warning is on pp. 474-5. Robert Banks Jenkinson (1770-1828), 2nd Earl Liverpool, M.P. from 1790, was Prime Minister, 1812-27.

[6 ]12 Anne, Second Session, c. 16 (1713), the application of which was reduced by the Bank Act of 1833.