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Collection: The Collected Works of John Stuart Mill

299.: THE BANK CHARTER QUESTION [3] MORNING CHRONICLE, 27 APR., 1844, P. 5 - John Stuart Mill, The Collected Works of John Stuart Mill, Volume XXIV - Newspaper Writings January 1835 - June 1847 Part III [1835]

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The Collected Works of John Stuart Mill, Volume XXIV - Newspaper Writings January 1835 - June 1847 Part III, 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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299.

THE BANK CHARTER QUESTION [3]

MORNING CHRONICLE, 27 APR., 1844, P. 5

For the background and other articles in the series, see Nos. 297-8 and 300. This unheaded leader is described in Mill’s bibliography as “A third leading article on the Bank Charter Question in the Morning Chronicle of 27th April 1844”

(MacMinn, p. 57).

the most serious of the imputations against the currency as now constituted, is liability to over-issue, by which is of course meant, issue in such abundance as to depreciate the currency, or what is the same thing, to raise general prices. The representatives of the most opposite interests, and of the most conflicting opinions on the practical part of the question, concur in ascribing this mischievous tendency to the present system; but they do not equally agree as to what is the peccant part of its construction. The country bankers almost unanimously charge all the evil upon the Bank of England, while that body and the advocates generally of a single bank of issue, represent the mischief as closely connected with the multiplicity of issuers, and especially as incurably inherent in the system acted upon by the country banks.

It is very curious to observe the vicissitudes of the public mind in this matter within one generation, and how rapidly the almost universal opinion of persons supposed to be practically conversant with the subject has passed over from one extreme to its opposite. There is a fashion in mercantile, as well as in medical opinions. There is generally a favourite disease and a favourite remedy; and to know what these are we have seldom so much to consider the nature of the case as the date of the year, whether it is 1814 or 1844.1 Between the years 1797 and 1819 the universal currency of the kingdom was paper not exchangeable for specie.2 An inconvertible paper currency is but another word for a currency which can be depreciated at pleasure. There is absolutely no limit to its quantity, except the will of the issuers. Yet, during the greater part of that interval, the mercantile public obstinately refused to believe that depreciation was possible. Nothing could induce the “great practical authorities” to listen to the doctrine that a currency issued by bankers upon bills of short dates, and grounded on actual transactions, could ever be susceptible of excess. Issued on such terms, its amount could never exceed the “wants of trade;” as if the wants of trade were not unlimited, and indefinitely extensible. Those whose memory does not reach to the period, and who are not familiar with its voluminous controversies, can have no idea what a world of argument and explanation were found necessary by Mr. Horner, Lord King, Mr. Blake, Mr. Huskisson, and Mr. Ricardo,3 before the mercantile men of the time could be made to understand that a currency, constituted like that of England, could be, and in fact was, depreciated. Ingenuity was exhausted to explain away all the appearances which proved it. Theories, each more absurd than its predecessor, were set up to account for the rise of gold, when paid for in paper, above the Mint valuation; for the permanently unfavourable exchanges; and for the general high prices. Any supposition—no matter what—was preferred to that of over-issue, although in an inconvertible currency. The currency is now convertible, in law and in fact, without the shadow of an obstacle; the smallest difference of value between gold and paper is rendered impossible, by the perfect liberty of exchanging, at any moment, the one for the other; and this, by the great writers on the bullion controversy, was thought a sufficient security. No one then supposed that a currency, really convertible, needed any additional contrivance to render it steady in its value. Yet the public, which then refused to see or hear such a thing as over-issue, now hears of nothing else. Over-issue is the word for every fluctuation of the markets. The most ordinary disturbance of prices from anticipation of deficiency, or expected variations of demand, can be explained by nothing but over-issue.

Although not going to this absurd length, some writers of merit and reputation contend that, even under the completely convertible currency which we now possess, over-issue is possible to such an extent as to be a very serious calamity. They are not without forcible arguments in support of their position.

They admit that, in a convertible currency, no issue of notes beyond the quantity which would otherwise circulate as coin, can be permanently kept in circulation. The superfluous paper is sure to be returned to the issuers, who have to pay for it in gold. But the removal of the excess requires some time, and takes place by means of a previous rise of prices. The steps of the process are said to be these: the excessive issue of paper raises prices; when prices rise, an inducement is afforded to send increased orders for the importation of foreign commodities; when the time arrives at which these increased importations are to be paid for, gold must be remitted, and this gold is procured from the Bank. But during the intervening period, which is sometimes of considerable duration, the rise of prices, at first occasioned by the over-issue, promotes a spirit of speculation. By speculative purchases prices are still further raised; and the speculators, to enable them to hold on without realising, apply to the banks for additional advances, which, if granted, produce a still further over-issue of paper. The rise of prices and increase of the currency may thus, in periods favourable to speculation, proceed to a great length before the inevitable revulsion, which, of course, will be of corresponding violence. When at last gold begins to leave the country, the fall of prices, which must sooner or later occur, will give rise to commercial distress, proportioned to the previous false appearance of prosperity. But this evil is liable to be greatly heightened by the conduct of the banks. If they become alarmed at the rapidity with which their treasure leaves them, they “put on the screw,” for the purpose of contracting the currency and stopping the drain of gold; they refuse even the usual accommodation to the merchants, who are thus deprived of their accustomed resources at a time of more than ordinary need; or they may, on the contrary, adopt a course less immediately harsh, but ultimately still more fatal. Under the urgent demands made by the embarrassed merchants, and for the sake of “supporting trade,” they may disregard the drain of gold, and re-issue, in loans, the surplus paper which has been returned upon their hands. By doing this, they prolong the crisis; they prevent the complete relapse of prices which would have brought things back rapidly to the natural course. Additional gold is now demanded for exportation proportional to the fresh over-issue; and the issuers are at last compelled to apply “the screw” with still greater violence, in order to prevent the total exhaustion of their treasure.

To guard against these evils, it is affirmed to be indispensable to place the issuing bodies under such regulation that they shall increase their issues only when gold is flowing into the country, whereby the currency, even if metallic, would be increased; and shall always contract their issues when the exchanges show that gold is on the point of flowing out. There cannot, it is justly said, be any better standard of value than the metals. The fluctuations to which a metallic currency would be liable, it is necessary to bear with. But to these inevitable variations it ought not to be permitted that paper money should superadd others. A paper currency should be so constituted, as to be always of the same value as a currency composed wholly of the metals. In order to be of the same value as a metallic currency, it must be the same in quantity: it must increase and diminish only when, and exactly as much as, a purely metallic currency would increase and diminish. Whenever the state of the exchange tends to bring gold into the country, the paper issues ought to increase; whenever it carries gold out, they ought to diminish. The turn of the exchange ought to be the sole regulator of the currency; and the more mechanically, the more automatically it operates, the better.

Those who take this view of a paper currency—among whom Mr. Loyd, Mr. Norman, Colonel Torrens, Mr. M’Culloch,4 and other high authorities may be counted—think that the issue of notes should be confined to a single body. The joint-stock banks and country bankers, they say, do not, and perhaps cannot, regulate their issues by the exchanges. A multiplicity of issuers is not compatible with such regulation. Each bank is urged, by competition, to put forth its own notes, hoping that when the revulsion comes, the loss will fall upon other banks, rather than upon itself. The issue of a paper currency, according to these writers, should be a public function, entrusted to the responsibility of a single body. This body should be either a national board, or, if a corporation like the Bank of England, it should be compelled by law to keep its banking transactions entirely distinct from its circulation. As an issuing body, it should hold a fixed amount of securities, to be neither increased nor diminished; and beyond that amount, should be permitted to issue its notes only in exchange for bullion. It should be obliged to give its notes for bullion, or bullion for notes, whenever required. Under this regulation, the amount of the circulation would, it is affirmed, always be exactly the same as with a metallic currency. Whenever the course of trade carried gold out of the country, the gold would be obtained from the Bank in payment of its notes, and the notes not being re-issued, the same amount would be subtracted from the paper as would have been subtracted from a metallic currency. When the balance of trade brings gold in, which, if the currency were metallic, would have constituted an addition to its amount, the gold will be sold to the Bank, and the notes delivered in exchange for it will be an addition to the paper currency exactly equivalent. In this manner, according to the opinion of these authorities, it is possible to secure the great fundamental requisite of a paper currency, steadiness of value, by making the variations in its quantity exactly conform to those which would occur in a currency altogether metallic.

On another occasion we shall state the considerations by which these arguments, powerful as they appear, have been at least balanced, if not completely overruled.

[1 ]To allow the Government to borrow to finance the war, under 37 George III, cc. 45 and 91 (1797), the Bank of England was forbidden to cash notes in gold, and was authorized to issue notes under £5. This policy was deliberately continued, though the war was thought to be over, by 54 George III, c. 52 (1814).

[2 ]In 1819, 59 George III, c. 49 (“Peel’s Act”) allowed a gradual return to cash payments.

[3 ]See, for example, Francis Horner (1778-1817), M.P. from 1806, Resolutions Proposed to the House of Commons (London: Hatchard, 1811); Peter King (1776-1833), 7th Baron King, Thoughts on the Restriction of Payments in Specie at the Banks of England and Ireland (London: Cadell and Davies, et al., 1803); William Blake, F.R.S. (ca. 1774-1852), writer on currency and foreign exchanges, Observations on the Principles Which Regulate the Course of Exchange; and on the Depreciated State of the Currency (London: Lloyd, 1810); Huskisson, The Question Concerning the Depreciation of Our Currency Stated and Examined (London: Murray, 1810); and Ricardo, The High Price of Bullion (ibid., 1810), and Reply to Mr. Bosanquet’s Practical Observations on the Report of the Bullion Committee (ibid., 1811).

[4 ]Samuel Jones Loyd (1796-1883; later Baron Overstone), banker, Thoughts on the Separation of the Departments of the Bank of England (London: Richardson, 1844); Norman, Remarks upon Some Prevalent Errors, with Respect to Currency and Banking, and Letter to Charles Wood, Esq., M.P., on Money (ibid., 1841); Torrens, An Inquiry into the Practical Working of the Proposed Arrangements for the Renewal of the Charter of the Bank of England (London: Smith, Elder, 1844); McCulloch, Historical Sketch, and “State of the Currency, the Bank of England and the Country Banks,” Edinburgh Review, LXV (Apr. 1837), 61-87.