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Mr. Goschen's scheme for reform of the bank acts : an address delivered to the Institute of Bankers in Scotland, January 7th, 1892 online

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UNIVERSITY OF CALIFORNIA.



Clots



>



MR. GOSCHEN'S SCHEME FOR
REFORM OF THE BANK ACTS,

AN ADDRESS



DELIVERED TO



THE INSTITUTE OF BANKEES IN SCOTLAND,



JANUARY 7th, 1892.



BY
CHARLES GAIRDNER, LL.D.,

PRESIDENT OF THE INSTITUTE.



GLASGOW :

JAMES MACLEHOSE & SONS,
to ilu
1892.



MR. GOSC HEN'S SCHEME FOR
REFORM OF THE BANK ACTS

AN ADDRESS



DELIVERED TO



THE INSTITUTE OF BANKEBS IN SCOTLAND,



JANUARY 7th, 1892.



BY
CHARLES GAIRDNER, LL.D.,

PRESIDENT OF THE INSTITUTE.




GLASGOW :

JAMES MACLEHOSE & SONS,
to th<
1892.



GENERAL




MR. GOSCHEN'S SCHEME FOE REFORM OF
THE BANK ACTS.



I PROPOSE to offer you some remarks on Mr. Goschen's
address of the 2nd December, in which he has
further developed his plans for the reform of the
Bank Acts. On this occasion he has devoted himself
exclusively to the question of increasing the central
stock of gold by means apart from the reserves of
bankers, and he has explained in some detail how he
hopes to accomplish this by an issue of one-pound
notes. He also aims at introducing a slight amount
of elasticity into the Acts. The scheme presents
several points requiring serious consideration, and,
while it is to be earnestly desired that Mr. Goschen's
main object, the adding to the gold reserves, may
be completely attained, it is necessary to see that the
plan is based on principles that are sound and prac-
ticable, or the result may be an increase of weakness
rather than of strength.

The plan is as follows :

(a) The provisions of the existing Act, by which
the Bank of England is authorised to issue notes of

12297!



5 and upwards against securities and gold the
limit of the former being at present 16,450,000
are to be continued undisturbed.

(b) When the gold in the Issue Department shall
exceed 21,550,000 this being the average sum
held during the ten years ending in 1890 notes of
1 may be issued from the Department, provided
that there shall be held in the Department, in excess
of the sum of 21,550,000, and ear-marked to the
1 notes, gold to the value of four-fifths, and Govern-
ment securities to the value of one-fifth of the 1
notes so issued.

(c) In the event of the addition to the stock of
gold through the issue of l notes bringing up the
aggregate stock to 30,000,000 a point which would
be reached by the issue of about 10,000,000 of 1
notes certain additional powers of issue will come
into operation available in times of emergency. This
would be by extending the right of issue against
securities, on condition, however, that a high rate of
interest, to be fixed by the Act, should be payable by
the Bank to the State on the extended issue.

By the means thus described Mr. Goschen hopes
to attain the two objects he has in view, viz., " an
increase of the stock of gold at the centre, and some
relaxation in the direction of elasticity in the Bank
Charter Act."

Let us now see how this plan may be expected to
work in times of financial pressure, for it is in such
times only that the test of its usefulness will come
into operation. Let us assume that the Issue Depart-
ment holds gold to the extent of 8,000,000 in excess



of the stipulated 21,550,000, and that against it and
2,000,000 of Government Securities there have been
given out to the Banking Department 10,000,000 of
1 notes. Let us further assume that these enjoy all
the popularity desired for them, and that the notes
have passed from the Banking Department into the
pockets and tills of the people. In this position of
affairs there springs up a sudden and abnormal
demand for gold whether from adverse foreign ex-
changes or from internal panic is immaterial from
what source is the Bank to meet the demand ? They
hold in all 29,550,000 of gold, of which, however,
8,000,000 is ear-marked to the 1 notes, and cannot,
therefore, be used for any other purpose than the
retiring of these notes. The 1 notes being popular
don't come in, and there is, therefore, only the
original 21,550,000 available to meet the abnor-
mal demand.

In what respect j then, is the reserve made stronger
through the issue of 1 notes ? It appears to me to
be stronger in no respect whatever. It may, perhaps,
be said that there will be a contraction of notes of
the larger denominations corresponding to the demand
for gold, but this expectation is at variance with
experience. No such contraction took place on any
one of the three occasions on which the Bank Act
was suspended, and on the last occasion there was
actually an expansion of over 3,000,000. To expect
a contraction of the note circulation because of a
demand for gold to meet adverse exchanges or in-
ternal demand proceeding from panic is to adhere
blindly to the old fallacy on which the Bank Act

A2



proceeded, as I endeavoured to show in a paper 1 read
last year. Sir Robert Peel's contention was that
when the exchanges turned against the country, the
Banks of Issue ought to contract their circulation, and
he complained that instead of doing so they allowed
it to be increased. In point of fact they have no
such power as that attributed to them. A demand
for gold from abroad causes a diminution, not in the
circulation, which is regulated by wholly different
influences, but in the deposits, and the true mode of
counteracting it is to raise the rate of discount,
whereby prices are lowered, and imports of gold take
the place of imports of other commodities. It is
because of this, and to secure the necessary time for
the remedy to operate, that reserves are imperatively
required, and must be freely available to meet all
demands made upon the Bank.

My first objection, then, to Mr. Goschen's plan is
that the addition which it will make to the central
stock of gold is not an addition to the reserve.
It is to be ear-marked to a newly created liability of
the Bank, and it is inconsistent with the nature of
a reserve that it should be ear-marked to any par-
ticular class of obligations. A reserve is intended for
use in meeting the Bank's liabilities in the day of
need, and whether used or not must be available for
use, or it ceases to be a reserve in any sense
material or moral.

While my first objection to Mr. Goschen's plan
thus shows its ineffectiveness in practice, my second

1 Vide " The Making of the Gold Eeserves," page 8. Jas. MacLehose
& Sons, Glasgow.



goescleepcr, and attacks the principle he proposes to
introduce of issuing notes secured over gold. It some-
times has been assumed that to pledge, or, as we say
in Scotland, to hypothecate, by Act of Parliament the
gold and securities in the Issue Department against
the notes would be to complete the carrying out of
Sir Robert Peel's ideal. I venture to say there is no
justification whatever for this supposition. There is
not a word in the Bank Act to support it. The
division of the accounts into Issue and Banking-
sections may serve to explain how such an idea
subsequently arose, but it is all but impossible that
a principle involving so fundamental a change, un-
recognised before in England, or, as far as is known
in any other country, would have been intentionally
slipped into an Act of Parliament without full
discussion. This view is confirmed by the fact that
in the Bank Acts of 1845 for Scotland and Ireland,
which were declared to be based on the same principles
as that of 1844, there is no reference whatever made
to securing the notes, in the sense of pledging securi-
ties, nor was any such suggestion made in the
debates in either House, nor is a form of accounts pre-
scribed to show the notes separately from other liabili-
ties. I therefore feel compelled to dissent altogether
from Mr. Goschen when he declares "he is not quite
sure that the suspension of the Bank Charter Act is
not a violent breach of a contract with holders of
existing notes, to wlwm the bullion of the Bank of
England is practically pledged." I submit that Par-
liament has made no such pledge ; that if the principle
were now adopted with reference to 1 notes it would



8

be done for the first time ; that we should then have
two kinds and qualities of notes issued by the Bank
of England, the one secured the other unsecured, tend-
ing to the disparagement of the existing notes which
now rightly enjoy the very highest credit. I farther
maintain, for the reason to be presently stated, that
the principle is unsound in itself, and, if adopted,
would at a time of financial pressure add needlessly
and gratuitously to the difficulties to be overcome.

It appears to be forgotten, or not clearly apprehended,
that a promissory note secured over gold is no longer
a note, it is a warrant; and a warrant for 1000 is a
much better thing than a bag of a thousand sovereigns,
for, while of equal intrinsic value, the warrant is
infinitely more convenient and more capable of being
securely concealed. In a time of panic, if a depositor
with 1000 at his banker's gets alarmed and with-
draws his money, he, under a natural or non-artificial
system, gets paid in gold, which is the single thing he
is entitled to demand. He no sooner reaches the
street than he discovers the necessity of replacing the
gold in a Bank. He dare not retain it for fear of
being robbed, and thus he is at once brought face to
face with the fundamental principle of banking, viz.,
the instinctive desire to deposit one's coin in a place
of security. In this way the coin is returned to its
natural use as part of the gold reserves of the country.
But give the panic-stricken depositor the choice of
gold or gold warrants and he will assuredly demand
the warrants. These he can place in his pocket, or
stamp with his name, and wait in security the return
of quiet times.



Now the difference to the Banks, and through them
to the public generally, of these two modes of pay-
ment is all-important. In the first case the extent
to which gold may be withdrawn is limited and con-
trolled by the impossibility of hoarding safely and
suddenly any large quantity. All experience of
panics in modern times supports this view, and goes
to show that panic can always be arrested by the
presence of a comparatively small amount of gold
actually available. On the other hand if bank notes
are to be converted into the equivalent of gold
warrants there is no assignable limit to the demand
which might arise, short of the aggregate of banking
liabilities, and to all who know the unreasoning
character of panic it will require no effort of imagina-
tion to foresee how easily the whole banking and
trading system of the country might, in any great
commercial convulsion, be thus brought into peril.
On these grounds I submit that, however plausible
and attractive at first sight the idea of notes secured
on gold undoubtedly is, it cannot be put in practice
without introducing a new and grave danger into our
national finances.

To these two serious objections to Mr. Goschen's
plan I may add the remark that to attempt to popu-
larize 1 notes by granting them a special security is
to mistake the nature of the difficulty to be overcome.
This does not proceed from any misgivings as to the
convertibility of the Bank of England note. No such
doubt exists or is likely to arise. The difficulty rests
in the fact that to substitute the paper note for the
gold sovereign now carried in the pocket is mainly an



10

affair of personal taste and habit. This has got to be
changed, and it is a process which from its nature
must be gradual, and which may more probably be
retarded than accelerated if an inducement is held out
in the superficially attractive form proposed by Mr.
Goschen. It is, I imagine, quite certain that the
Bank of England acting alone could not successfully
accomplish this operation, because they are not in
touch with the people. It will only have a chance of
success if entrusted to the deposit Banks, who in
the provinces are in direct contact with the people
through officials, who, to a large extent, are the trusted
advisers of the people in their daily monetary affairs.
While 1 have thus found it necessary to offer grave
objections to the particular plan of issuing 1 notes
proposed by Mr. Goschen, I cannot but regard it as
unfortunate that, for the present at least, it seems to
be criticised adversely without the suggestion of any
amendment or other alternative. The sentimental
dislike in London to 1 notes has been allowed to
outweigh the vitally important demand for an increase
in .the central gold reserves, and our national humilia-
tion of last year seems to be already forgotten. Now
I, for one, adhere to the opinion that in England, as in
Scotland, Ireland, France, 1 Belgium, Germany, and the
United States, not to mention our ow T n colonies, a
preference for paper money over coin would in all
probability grow up throughout the industrial districts
if the change were properly gone about, and if the
machinery of the deposit Banks were brought into

1 In France the demand for 50 franc notes is always in excess of
the supply.



11

operation in its behalf by the Banks being appointed
agents, for issuing purposes, of the Bank of Issue, on
terms safe for the latter and satisfactory to the
former. I hold that we might thus immensely
strengthen our central reserves by withdrawing gold
from the extremities, where it is performing a duty
which can be equally well done by notes, and
that, in combination with an elastic system which
allowed for the natural fluctuations in the active
circulation at particular seasons, we should be able
largely to diminish those oscillations in the rate of
discount which so perplex and annoy the regular trader.
I believe that this could be effected without causing
the export of a single sovereign, but at same time, I
fully recognise that such a scheme cannot be forced,
and 1 also admit that- from the point of view of the
Londoner, accustomed to the sovereign, and entertain-
ing a dislike to the 1 note, it may fairly be asked
whether there be not some other way by which the
objects aimed at can be attained. To this I answer,
Yes, there is another way, and although I consider it
would be rendered more complete and efficacious, as
well as more economical, by an issue of 1 notes, that
course is not essential, and it is possible without
it to accomplish all that Mr. Goschen in his last
address seemed to contemplate as necessary. This
plan, I believe, may be found by extending to the
circulation of the* United Kingdom the general prin-
ciple which Mr. Goschen would apply to an issue in
England of 1 notes, and by blending with the Act
of 1844 the more elastic regulations of the Acts of
1845,



12

Mr. Goschen proposed to find the new gold by
means of an issue in England of 1 notes. He
assumed that if one-fifth of the issue was represented
by securities, and four-fifths by gold, the revenue
from the securities would provide for the cost of
maintaining the notes, while gold, representing the
other four-fifths, would be set free and despatched to
the centre. This involved the supposition that there
was to be little or no profit allowed to the issuing
bank, and if no profit, then, presumably, no taxation.
But if this principle be a reasonable one for 1 notes
is it not equally so for all notes? If the 1 notes,
after providing for the cost of their own maintenance,
are to be devoted to the creation of a gold reserve,
ought not 5 notes to be similarly treated, and those
also of larger denomination ? At present they yield
a profit to the issuers, and more than 300,000 per
annum to the State, that is to say to the people,
who, as Mr. Goschen showed at Leeds, are the persons
chiefly to be benefited by the strengthening of the
gold reserves. Let us see what would be the effect of
extending this principle to the circulation of the United
Kingdom. It would involve the surrender, gradually,
over a series of years, of the taxation on notes, which
yields a sum equal to somewhat less than one- half of
one per cent, of the imperial revenue; but I think it
can be shown beyond question that the gain to the
nation by the stability given to the national finances
would be infinitely greater. It must be understood
that i 1 offer no opinion as to whether the particular
proportions of one-fifth and four-fifths are suitable to
the case, and this and all similar questions of detail
are for the present reserved.



13



The active circulation of the Bank of

England may be stated at - - 25,000,000



off one-fifth,

Average Scotch circulation, say
off one-fifth,

Average Irish circulation, say -
off one-fifth,

English Provincial, say
off one-fifth,



5,000,000 20,000,000
4,800,000
4,800,000



6,000,000
1,200,000



6,000,000
1,200,000



2,000,000
400,000



1,600,000



Suggested Contribution by Banks of Issue to gold

reserves 31,200,000

as compared with existing contribution.

Bank of England, 25,000,000

less authorised, - 16,500,000 8,500,000



Scotch,

less authorised, -



Irish,



less authorised, -



6,000,000
2,676,000

6,000,000
4,750,000



3,374,000
1,250,000



English Provincial excess nil,



13,074,000



Suggested addition to gold reserves by Banks of
Issue, -



18,126,000



Here, then, we appear to have a scheme capable of
yielding an addition to the gold reserves equal to
what Mr. Goschen would have obtained from an issue
of 22,500,000 of 1 notes, and that without any
increase in the liabilities of the issuing Banks. So
large an addition to the stock of gold would certainly
cause pressure in the gold market if carried out at
once, because this accession, unlike Mr. Goschen's,
could hardly, to any great extent, come from the



14

internal circulation, and would therefore require to be
imported from abroad. If, simultaneously with its
introduction, Mr. Goschen's 1 note scheme were
carried out, the lapsed proportion of one-fifth of gold,
over whose escape he laments, would be effectually
retained within the country and made to play an
important part in the operation. But, if this may
not be, it must be recognised that so large an
operation as the importation of 18,000,000 of gold
could only be carried out, with due regard to all the
interests affected, by extending it over a series of
years. This, however, is a question of detail, and the
scheme is not only in itself practicable, but it would
fully accomplish the more important of the two
objects Mr. Goscheri has set before him.

I now assume that it is possible to make an addition
to the gold reserves of 18,000,000, by applying the
principle proposed by Mr. Goschen for 1 notes to the
note circulation of the United Kingdom. I may also
assume that the contribution of the country Banks of
Issue may be held partly in the country, as at present,
and partly at the Bank of England, London being
the place where the engagements of the country Banks
have chiefly to be met, and where, therefore, a large
portion of their reserves is most conveniently main-
tained. I, of course, assume that there is to be no
ear marking of gold to notes ; and, further, I am now
to assume that an elastic principle, similar to that of
the Scotch and Irish Acts, shall be made applicable to
the Act of 1844. Under this the Bank of England
would have the same unlimited power of issue as is



15

enjoyed by the Banks in Scotland and Ireland,
but on the same condition, viz., that there should
be held gold and silver (in the proportions legally
defined) to an amount corresponding to four-fifths
of the active note circulation, ascertained, not day by
day as at present, but on the average of every four
weeks.

In this way, as it appears to me, if a 1 note issue
is to be rejected by England, the objects Mr. Goschen
aims at. can be accomplished with the minimum of
variation from the principles laid clown by Sir Robert
Peel. 1 The addition made by the Banks of Issue
to the reserve would equal all that Mr. Goschen, in his
speech, has anticipated from the 1 notes. The
degree of elasticity conferred would not be everything
that could be desired, but it would be an important
step in the right direction, and would greatly loosen
the fetters in which the Issue Department of the Bank
of England is at present held. The proportion of the
note circulation to be represented by gold would be
so fixed as to allow the Banks a moderate remuner-
ation for the work they may do, and the State would
forego the profits now derived from a source which
thereafter would be directed to a purpose infinitely
more urgent and more advantageous, for it would

1 I have found myself hampered in the discussion by the desire, more
dear to statesmen than to practical bankers, to vary as little as possible
from Sir Robert Peel's principles, and I desire to protect myself from
being thought to be an unqualified approver of the average principle.
I believe the automatic German system, by which interest is paid to the
State on the sum by which at any time the gold' reserve may fall short
of the legal requirement, to be equally effective and to rest on a
sounder principle.



16

raise the most stable portion of our gold reserve from
13,000,000 to 31,000,000, and so give to the
foundations of our finance a solidity, greatly needed,
of which the whole nation would experience the
advantage.

At this point I might have closed my address, but
that in addressing the Institute of Bankers in Scotland,
it may be thought the bearing of my suggestions on
the Banks and the general public of Scotland ought
to have received more attention than I have yet given
to it. As regards the Banks, I have shown that,
if Mr. Goschen's proportions were adopted, they would
then, on average, contribute to the gold reserves of the
country 4,800,000 instead of 3,300,000 as at pres-
ent, an increase of .1,500,000. This at 3 per cent-
would involve a loss of income of 45,000 per annum,
but, on the other hand, there would no longer be paid
stamp or license duty, and this, although not affecting
the Banks in equal degrees, would probably prove to
be on the whole a fair equivalent. Apart, therefore,
from the difficulty of procuring the gold, to which I
have already referred, the scheme as applied to Scot-
land might be capable of adjustment without much
friction. But it must be observed, recalling Mr.
Goschen's demand of last year, that the Banks should
"take their share" in the work of maintaining the
reserves, that, in so far as the note issues are concerned,
Scotland is already far in advance of England in this
respect. At present the average contribution of gold
proceeding from the note issues in Scotland is about
3,300,000. If an equivalent sum were contributed



17

by England it would amount, taking the test of pop-
ulation as the guide, to seven times that sum or
23,100,000, whereas the sum produced by the note
circulation in England in aid of the reserve is only
8, 500, COO. If, instead of population, the test of
comparative wealth were applied, the contribution
would be at least ten times that of Scotland or
33,000,000. Moreover, if I am approximately correct?
as I believe I am, in stating that the State draws from
the aggregate note circulation somewhat over 300,000
per annum, and that Scotland's contribution toward
this is 45,000, it appears that the poorer country gets
no relief from taxation on notes, notwithstanding the
greater proportion of gold she provides against them,
and thus it becomes clearly apparent that, if the note
issues are to be regarded as a fund for maintaining
the gold reserves, as they are all but universally
admitted to be, the duty rests on our wealthy
southern neighbours, primarily, to make up their
contribution to the reserves from this source to a sum
proportionate to that already contributed by Scotland.
If this be not done by an issue of 1 notes some
other plan must be found, and if a better than that I
have suggested is not forthcoming I would venture to
press it on their consideration, and to invite their aid
in upholding the principle that the first and paramount
claim on the note circulation is for the provision of
National Keserves of gold, and not for the increase of
the ordinary revenue of the State.

1 have now to consider how far the general
interests of Scotland would be affected by the scheme



18

presented, and I daresay I shall be told by some
critics that I have put forward an ingenious plan for
riveting in perpetuity " the virtual monopoly " which
the Banks are popularly supposed to have turned
ruthlessly to their own advantage. To this I answer,
in the first place, that the monopoly was imposed on


1

Online LibraryCharles GairdnerMr. Goschen's scheme for reform of the bank acts : an address delivered to the Institute of Bankers in Scotland, January 7th, 1892 → online text (page 1 of 2)