Henry Dunning Macleod.

The theory and practice of banking online

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CORNELL UNIVERSITY LIBRARY



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THEOEY AND PEACTICE



OF



BANKING



THE



THEOET AND PRACTICE



OP



BANKING

BY

HENRY DIJNMNG MACLEOD, M.A.

OP TRINITY COLLEGE, OAMBBID&E, AND THE INNER TEMPLE, BAREISTEB-AT-LAW ;

SELECTED BY THE ROYAL COMMISSIONERS FOR THE DIGEST OF THE LAW TO PREPARE
THE DIGEST OF THE LAW OF BILLS OF EXCHANGE, BANK NOTES, ETC.

HONORARY MEMBER OF THE JURIDICAL SOCIETY OF PALERMO

FOURTH EDITION
VOLUME II

LONDON
LONGMANS, GEEEN, EEADER AND DYER

1886

THE AUTHOR BESEBVE3 THB EIGax OF TRANSLATION



"cornellX,

university'"



LONDON:

Printed by A. P. Blundell & Co.,

26, Gakliok HiLl, Cannon Stbiset, E.G.



CONTENTS



THE SECOND VOLUME



CHAPTBE X

FEOM THE EENBWAL OP THE BANK CHAETEE IN 1800,
TO THE ACT FOB THE EESUMPTION OP CASH PAY-
MENTS IN 1819

PAQB

§ 1. Great failure of the harvest in 1800 1

2. Opinions held in 1696, respecting the depreciation of paper . 2

3. Opinion of Adam Smith respecting the market price of

Bullion S

4. After the restriction prices estimated in Bank paper . . 3

5. Sudden rise in the market price of Gold in 1801 ... 3

6. Discovery of the truth that a rise in the market price of gold

Bullion was a proof of the depreciation of the paper cur-
rency 4

7. This discovery due to Mr, Boyd, Lord King, and Mr. Thorn-

ton 4

8. Peace of Amiens — continuation of the restriction ... 4

9. Mr. Poz first declares the cause of the adverse exchange in

the House of Commons 5

10. Declaration of War in 1808 — Lord King's principles of a

paper currency 7

11. The issues of country banks based upon Bank paper . . 8

12. Par of Exchange between England and Ireland ... 8

13. The Bank of Ireland directed to suspend payments in cash. . 9

14. Extraordinary depression of the Exchange between London

and Dublin 9

15. Appointment of a Committee to inquire into the state of the

Irish Currency • . 9

16. First investigation into dihe theory of the paper currency by

Parhament 10

17. Opinions of the Directors of the Bank of Ireland . . .10



VI CONTENTS

FAOB

§ 18. Their deseripiion of the extraordinary debasement of the

Irish Currency .......•• ■'•^

19. Exchange with Belfast favourable to Ireland, while that with

Dublin adverse 1^

20. Difference of 12 per cent, between Exchange with DubliB and

withBeUast 14

21. The fact proved that a balance of payments was due to

Ireland, while the Exchange was so depressed . . .14

22. First declaration of the opinion that gold had risen, and paper

had not fallen 14

23. Opinion of Mr. Marshall that Irish Bank notes were depre-

ciated 15

24. His evidence on the subject 16

25. The Theory of the Directors of the Bank of Ireland as to the

regulation of the paper currency 17

26. Eeport of the Committee 18

27. The Committee report that the Directors should regulate

their issues by the price of guineas and the foreign Ex-
changes 19

28. Very debased state of the coinage 19

29. The Committee do not discuss the new theory of paper

currency 20

30. They recommend an assimilation of the English and Irish

currencies .......... 20

31. Mr. Fox declares it to be a fantastical opinion that paper was

not depreciated, and that gold had risen . . . .20

32. First declaration by a Parliamentary Committee that the

paper currency should be regulated by the Foreign Ex-
changes 21

38. Eenewal of the Bank's loan to Government . . .22

34. Circumstances which lead to the great depreciation of the

British Currency 22

35. Perfidious conduct of Prussia in 1805 23

36. The Berlin decree against British commerce in 1807 . . 24

37. Immense speculation in 1808, and subsequent years . . 25

38. Great multiplication of country banks in 1809 . . .25

39. Great rise in the market price of gold 26

40. Appointment of the Bullion Committee . , .26

41. Beport of 1810 identical in principal with that of 1804 . 26

42. Names of the Committee 27

43. Identity in sentiment between the witnesses examined before

both Committees 07

44. Eemarks upon some of the evidence 28

45. State of facts agreed upon ■...., 29

46. Issues maintained by one party ..... 29

47. Issues maintained by the other party .... 30

48. Discussion of the points of difference . . . . .31



CONTENTS VU

49. Evidence of Mr. Chambers 32

50. Eemark of Mr. Huskissou ....... 34

51. Fallacy of Mr. Cliambers's opinions 34

52. Another illustration 35

63. One argument to shew that there was no diEferenoe in value

between guineas and bank notes 35

54. Diseussiou on second point of difference between the two

parties . 36

55. Opinion of a foreign merchant 37

56. Discussion of the third point of difference between the parties 38

57. Discussion of the fourth point of difference reserved . . 39

58. Analysis of tlie Bullion Report . . . .39

59. The same continued 39

60. The same continued 40

61. The same continued 40

62. The same continued ........ 41

63. The same continued 41

64. The same continued 41

65. The same continued 42

66. The same continued 43

67. The same continued 43

68. The same continued 43

69. The same contiuued 44

70. The same continued ........ 44

71. The same continued 44

72. The same continued 45

73. The same continued 45

74. The same continued ........ 46

75. The same continued 46

76. The same continued 46

77. The same continued 47

78. The same continued 47

79. The same continued 47

80. The Bullion Eeport is the standard by which all legislation

regarding the paper currency should be regulated . . 47

81. Eesolutions of Mr. Horner 48

82. Mr. Bose's reply to Mr. Horner 49

83. Speech of Mr. Thornton 49

84. Mr. Vansittart's resolutions 50

85. Historical untruth of the doctrine that the coinage never was

intended to contain any fixed quantity of bullion . .52

86. Prevalence of a paper price and a cash price for goods . 52

87. Examples of this given by Mr. Sharp 58

88. Instances given by Sir Francis Burdett . . . .53

89. Theory of the opponents of the Bullion Eeport . . .53

90. Eejeetion of the BuUion Eeport — Mr. Peel votes with the

majority 54



Vni CONTENTS

FAGB

§ 91. Eesolutions of Mr. Vausittart 64

92. Mr. Canning tries to persuade Mr. Vansittart to abstain from

pressing Ms resolution ....... 55

93. Great absurdity of the law regarding the sale of guineas . 55

94. Letter of Lord King 56

95. Lord Stanhope's Act in 1811 56

96. Opposed by Lord Grenville ....... 57

97. Observations of Lord Stanhope ...... 58

98. Absurdity of these opinions ....... 58

99. Lord Stanhope's Bill passed ...... 58

100. Eemarks upon overtrading of 1809 reserved . . .68

101. Alleged injustice of making the Bank buy gold at the market

price 59

102. High price of corn in 1812 59

103. Great speculations and increase of country banks in 1813 . 60

104. Very abundant harvest of 1813, and revulsion of credit in

1815-16 61

105. Great destruction of country bank paper in 1816 ; rise in the

foreign exchanges, and fall in the market price of gold . 61

106. Which is an example of the truth of the principles of the

Bullion Beport 62

107. Partial resumption of cash payments in 1816 . . .62

108. Eestriotion prolonged till July, 1818 . . . . .63

109. Mismanagement of the Bank in 1818 63

110. Great drain of bullion in 1818-19 — appointment of Com-

mittee by both Houses of Parhament to enquire into the
expediency of resuming cash payments . . . .64

111. Names of the Committee 64

112. Great change in the opinions of the mercantile world regard-

ing the principles of the BuUion Beport . . . .65

113. Opinion of Mr. Dorrein, Governor of the Bank . . .65

114. Opinion of Mr. Pole, Deputy-Governor of the Bank . . 66

115. Opinion of Mr. Haldimand, Director of the Bank . . 67

116. Optaion of Mr. "Ward, Director of the Bank . . .71

117. Opinion of Mr. Samuel Thornton, late Director of the Bank. 72

118. Opinion of Mr. Irving 72

119. Opinion of Mr. Holland 72

120. Opinion of Mr. Thomas Tooke 74

121. Opinion of Mr. Eicardo 75

122. Opinion of Mr. Baring 77

123. Opinion of Mr. John Ward 79

124. Eesolution of the Bank of England in opposition to the
evidence of the mercantile witnesses 79

125. Eeports of the Committees to both Houses . . . ,80

126. Ministerial resolutions gj

127. Speech of Lord Liverpool gj

128. Speeches of Lord Lauderdale and Lord King . . .83



J



CONTENTS IX

FAGS

5 129. Speech of Lord GreuviUe 83

ISO. The speeches of Lords Liverpool and Grenville deserve to be

carefully studied 86

131. Speech of Mr. Peel in the House of Commons . . .86

182. Speeches of various members 89

133. Chief provisions of the Act 90

134. Act to prohibit the Bank making advances to (Jovernment . 91

135. Enthusiastic adoption by Parliament of the principles of the

Bullion Eeport in 1819 91

136. The Bank of England resists the principles of the Bullion

Eeport for eight years longer, but finally adopts them in
1827 92

137. Cause of the fallacy which so long deceived the public on

this subject 92

138. The principles of the Bullion Beport are not matters of

Opinion but of Demonstration 93

Table shewing the chief variations in the market-price of
Gold Bullion from 171J0 to 1819, and the real value of the
£1 Bank note during the restriction 95

CHAPTEE XI

FEOM THE ACT FOB THE EESUMPTION OF CASH PAYMENTS
IN 1819, TO THE BANK ACT OF 1844
1. Great disturbance in the proportions of supply and demand



in several articles after 1819



96



2. High prices of com in 1818 96

3. Market-price of gold at par with Mint-price in 1819 . . 97

4. Great fall in the price of corn at the end of 1822 . . .98
6. The Bank resumes cash payments 1st May, 1821 . . .98

6. Corn Act of 1815 to secure price of wheat at 80s. a quarter . 99

7. Committee on agricultural distress in 1822 .... 100

8. Prolongation of the issues of the £1 country bank notes . 100

9. Mr. Western's attack on the Currency Act of 1819, in June,

1822 101

10. Proposal for the " equitable adjustment " of contracts . . 102

11. The price of agricultural produce more depressed on the Con-

tinent than in England 103

12. The Currency Act of 1819 produced no con-

traction of tlie Currency 103

13. Sir Eobert Peel is entitled to neither the merit nor the blame

of the Currency Act of 1819 104

14. Fallacy of the supposition that the increased prices of agri-

cultural produce in 1823 were owing to increased issues , 104

15. Second attack by Mr. "Western on the Currency Act, in June,

1823 105

16. Speech of the Marquis of Titchfield 106



CONTENTS

FAQB

17. The Marquis of Titchfield's description of " Currency " . 108

18. Fallacy of alleging that the paper currency was depreciated

during the whole of the restriction from 1797 to 1819 . 109

19. General revival of prosperity in 1823 110

20. Origin of the disaster in 1825 began at the close of 1824 . Ill

21. Great speculation caused by the recognition of the inde-

pendeifce of the South American colonies of Spain by
Great Britain in 1824 Ill

22. Great apparent prosperity at the beginning of 1825 . .- Ill

23. Description of the speculative mania of 1825 . . . 112

24. Fatal conduct of the Bank of England at this period . . 113

25. Collapse of Credit in the autumn of 1825 .... 113

26. Eapid efflux of Bullion from the Bank of England in 1824

and 1825 114

27. Banking panic in the autumn and-winter of 1825 . 116

28. General run upon the London and country bankers . . 116

29. Description of the great crisis of December .... 116

30. PoUcy of the Bank 116

31. The great pressure in the money-market turns the exchanges

in favour of England ....... 117

32. Sudden change of policy by the Bank — profuse issue of

£5,000,000 Bank Notes in four days 117

33. Issue of £1 notes by the Bank, which stays the panic in the

country .......... 118

34. The crisis an example of the truth of the principles of the

BuUion Eeport . . . . 118

35. The speculative mania not attributable to the Bank or to

the country banks 120

36. Speculative manias have occurred both before and after-

wards, not attributable to the Bank ..... 120

37. The bold policy of the Bank saved it from bankruptcy . 121

38. Determination of Government that the monopoly of the

Bank must be modified 12i

39. Discussion in Parliament on the commercial crisis in

1826 121

40. Abolition of £1 and £2 bank notes 122

41. Mr. Baring's condemnation of the small notes . . . 123

42. Speech of Mr. Huskisson 123

43. Opinion of Sir John Newport 125

44. Speech of Sir Robert Peel 12g

45. Provisions of the Act suppressing small notes in England . 127

46. Intention of the Government to suppress the small notes in

Scotland abandoned, in consequence of the recommenda-
tion of Committees of both Houses 128

47. Adoption by the Bank of England of the

Principles of the Bullion Report— The Keso-
lution of 1819 expunged from their books . 128



CONTENTS X

PAGE

48. The circulation of Scotch £1 notes in England forbidden . 129

49. Eun on the Bank in 1832, during the diseussiou on the

BeformBiU 129

50 . Committee of the Commons on the Bank Charter . . 130
61. The inquiry left incomplete 130

52. Principal points inquired into 130

53. Mr. Horsley Palmer's description of the method adopted by

the Bank, to carry out the principles of the Bullion Beport 131

54. Opinions of the witnesses 131

55. First appearance of the heresy that biUs of exchange form

no part of the circulating medium 132

56. Mr. Attwood's attack on the Currency Law of 1819 . . 132

57. Besolutions of the House of Commons, renewing the Bank

Charter 132

58. Definition of the Bank's exclusive privilege of banking . 133

59. The Bank's privilege held not to exclude the formation of

Joint Stock Banks of deposit 134

60. Provisions of the Act renewing the Bank Charter in 1833 . 135

61. Depression of the price of wheat in 1834-35-36 . . . 136

62. Else of speculation, and Joint Stock Companies . . . 136

63. Position of the Bank in 1833-34-35 138

64. Decline of buUion in the Bank in 1836 . . . .139

65. Negotiation of American securities in England . . . 139

66. The Bank of England refuses to discount any bill indorsed

hy a Joint Stock Bank of issue 139

67. Difficulties of the Agricultural and Commercial Bank in

Ireland 140

68. Failure of the Northern and Central Bank .... 140

69. Position of the Bank in March, 1838 142

70. Failure of the Bank of Belgium in 1838 . . . .142

71. The Bank sends a million of sovereigns to America . . 143

72. Eapid drain of buUion from the Bank in 1839 . . . 143

73. The bank rate of discount much below the market rate . 144

74. On the 13th July, 1839, the Bank offers annuities for sale . 144

75. The Bank is obliged to create two foreign credits . . 144

76. Appointment of the Committee on banks of issue in 1840 . 145

77. Lord Overstone points out the fundamental vice of the bank

principle of 1832 147

78. Unsatisfactory character of the inquiry .... 148

79. State of the country from 1838 to 1844 . . . .149



CHAPTER Xn
FROM THE BANK ACT OF 1844 TO THE PRESENT TIME

1. Sir Robert Peel's views regarding the Currency on introducing

the Bank Act of 1844 150



Xll CONTENTS

PAGE

§ 2. Errors committed by him ' • .151

3. Continuation of Sir Eobert Peel's speech .... 152

4. Unfairness of his illustration 153

5. Opinion of President Van Buren regarding the Bank of the

United States 163

6. Continuation of Sir Eobert Peel's speech .... 155

7. Further proposals of Sir Eobert Peel 156

8. He acknowledges the inconsistency of his measure of 1844

with his former views 156

9. Extract from Sir Charles Wood's speech .... 157

10. The BiU becomes law 157

11. Chief provisions of the Act 168

12. The Act authorises a violation of its own principle . . 160

13. Incorrect to say that the Act of 1844 is the complement of

the Act of 1819 161

14. The Act of 1844 is a combination of two very erroneous

theories of currency 161

15. Unusual accumulation of Capital in 1844 .... 161

16. Great error of v?riters who think that prices must vary

exactly with the amount of the Currency .... 162

17. Variations in the Bank rate of discount after the Act of 1844 162

18. Eapid drain of bullion in the Autumn of 1846 and Spring of

1847 163

19. The Bank Act shewn to be subject to the same radical vice

as the bank principle of 1832 165

20. Monetary pressure in April, 1847 166

21. Passes oft after the first week of May 167

22. Error of the Bank in keeping down the rate of discount too

long 167

23. The Chancellor of the Exchequer notices the pressure in

Parliament , . 167

24. Corn speculations in the Summer of 1847 .... 167

25. Great failures in the Autumn of 1847 168

26. Unsound state of commercial credit in 1847 — the panic . 168

27. The Government letter authorising the Bank of England to

issue notes beyond the limits prescribed by the Act of 1844 170

28. Extraordinary aid afforded by the Bank of England to Com-

mercial houses in the Autumn of 1847 . . . .171

29. Meeting of Parliament in November, 1847 .... 172

30. Speech of the Chancellor of the Exchequer on moving for a

Committee of Inquiry into the commercial distress, 30th
November, 1847 172

31. Speech of Sir Eobert Peel 175

32. The same continued 176

33. Opinion of the Governor and Deputy -Governor of the Bank'

of England on the Act of 1844 177

34. Mr. Gurney's opinion 178



CONTENTS XI

PAGl

S 35. Mr. Loyd's opinion I79

36. Mr. Glyn's opinion 180

37. Eeports of the Committees 180

38. Mr. Herries' motion 180

89. Drain of bullion in the Autumn of 1855 .... 180

40. Comparative view of the bullion, and the rate of discount of

the Bank of England during 1855 182

41. Judicious conduct of the Bank during this drain . . . 183

42. The Bank of England allowed to increase its issues on

securities 183

43. Pressure in 1856 184

44. Unexpected crisis of 1857 184

45. Improved management of the Bank 185

46. Commencement of the crisis of 1857 186

47. Increase of the panic 187

48. Second Suspension of the Bank Charter Act . 187

49. Evidence of the Governor 188

50. Notes issued in excess of the Act 190

51. "What was to be the next mania ? 190

62. Pressure in 1863 and 1864 191

53. Bank of England joins the Clearing House .... 192

54. Commencement of the crisis of 1866 192

55. Third Suspension of the Bank Charter Act . 193

56. Great Bank failures 195

57. Eemarkable difference between the rates of discount of the

Banks of England and France 196

CHAPTEK Xni

HISTOBICAL SKETCH OF THE EISB AND PEOGRESS 03
BANKING IN SCOTLAND

1. Foundation of the Bank of Scotland in 1695 . . . .198

2. Eivalry to the Bank 199

3. The Bank issues £1 notes 200

4. Proposals to the Bank . . . ' 201

o. Foundation of the Eoyal Bank in 1727 202

6. The " optional clauses " in the Bank Notes . . . .205

Fall in the Scotch Exchanges 206

Act to forbid the optional clauses 208

7. The British Linen Bank founded in 1746 . . . - 208
Extract from Adam Smith 209

8. The Ayr Bank 213

9. The Bank of Scotland increases its Capital .... 216

10. Great Commercial Crisis in 1793 216

11. The Scotch Banks suspend payments in cash in 1797 . . 217

12. The Commercial Bank founded in 1810 218



XIV CONTENTS

PAOB

§ 13. Committees of Parliament on Scotch Banks .... 219

14. Scotch Banking Act of 1845 220

15. FaUure of the Western Bank in 1857 221

DetaUs of this failure 222

16. The circumstances of this failure prove the solidity of the

Scotch Banking system 233

17. On the Eight of the Scotch Banks to open Branches in England 287

18. Stoppage of the City of Glasgow Bank 241

19. Statistics of the Scotch Banks in 1883 241

CHAPTER XIV
ON SOME THEORIES OF CTJEEENCY.

1. It is necessary not only to ascertain the true principles of

monetary science, but to point out the fallacy of false
theories 243

2. One of these may be called Lawism 243

3. Statement of the question 243

4. Peculiarity of Law's system 244

5. It is a violation of the fundamental conception of a Currency

established in this work 245

6. Precursors of Law 245

7. Some account of Law's Theory of Money .... 246

8. The same continued 247

9. The same continued 247

10. The same continued 248

11. The same continued 248

12. The same continued 249

13. The same continued 249

14. The same continued 250

15. The same continued 250

16. The essence of Lawism is that money represents commodities,

and that paper currency may be based upon commodities.
Money does not represent Commodities, but
only Debt, or Services Due, which, have not yet
received their equivalent in Commodities . . 251

17. The Theory of basing a paper currency upon commodities

involves the palpable contradiction in terms that a person
may buy commodities and keep his money as well , . 252

18. Law's idea 253

19. Law was no advocate of an unlimited inconvertible paper

currency 253

20. The most celebrated examples of Lawism .... 254

21. Accounts of the French Assignats 255

22. The same continued 256

23. The same continued 257



CONTENTS XV

TiOS

24. Acoounta of the French Assignats 257

25. The same oontiimed 258

26. The same continued 258

27. Extracts from Sir Archibald Alison's History regarding the

assignats 258

28. His extraordinary inconsistency 260

29. The same continued 262

30. Practical results of Law's Theory 263

31. Fourth example of Lawism — The Bank of Norway . . 263

32. Fifth example — The American banking convulsions of 1837-39 264

33. The principle of basing a paper currency on the public funds

is identical with, and is as vicious as, basing it on land . 266

34. Fundamental vice of the constitution of the Bank of England 267

35. The consequences of this vicious principle are prevented by

its being limited to that single instance .... 268

36. On the Theory of basing a Paper Currency on y

the discount of mercantile bills .... 268

37. Eefutation of this theory by the Bullion Committee . . 268

38. This refutation incomplete .... . . 271

39. Demonstration of the fallacy of this theory on the principles

of this work 271

40. The same continued 273

41. Specific meaning of over-issue 274

42. Fallacy of the expression " good bills " . . . .275

43. Adam Smith the parent of both these currency fallacies . 275

44. Bullion as the representative of debt is the only proper basis

upon which to found a paper currency .... 275

45. Bullion is only the regulator of its amount .... 276

46. Specie and credit form the only true circulating medium . 276

47. Specie and credit must always increase and decrease to-

gether 277

48. Problem to discover the true mode of acting upon the paper

currency ...... . , , 277

49. The rate of discount is the true mode of acting upon the

paper currency 278

50. Arguments applicable to the case of wheat also apply to

debt 278

51. Effects of the action of this principle 279

62. In all commercial crises production should be curbed . . 280
53. Consequences of violating this principle .... 280
64. The same continued 281

55. Perverse opposition to this law of nature .... 281

56. Error of a prevalent theory 281

67. Historical proof of the faUacy of this theory . . .282

68. Mistaken views of Sir Archibald Alison . . . .282
59. When the Foreign Exchanges are adverse the Bank must

contract its issues 283



XVI CONTENTS

PAOE

§ 60. Consequences of adopting Sir A. Alison's plan . . • 28B

61. Absurdity of it 284

62. Other considerations whicli prove that the rate of discount

is the true mode of acting on the paper currency . . 284

63. Advantages of a proper attention to the rate of discount . 285

64. The truth of the preceding principles exemplified in England

on various occasions 285

65. Conclusion 286



CHAPTER XV



ON THE DEFINITION OF CURRENCY



6.

7.

8.

9.
10.
11.
12.
13.
14.
15.
16.
17.
18.



The Bank Act based on a peculiar definition of Currency



Online LibraryHenry Dunning MacleodThe theory and practice of banking → online text (page 1 of 57)