Great Britain. Parliament. House of Commons. Sele William Graham Sumner.

A history of American currency: with chapters on the English bank ... online

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lic confidence in the funds of the Bank ; for its stock sold for
no per cent., though only 60 per cent, upon the subscriptions
had been paid in. By the conjoint effect of this depreciation
of the paper of the Bank from excess, and of the dejireciation
of the silver coin from wear and clip])ing, the price of gold
bullion was so much raised, that guineas were as high as 30J. ; all
that had remained of good silver gradually disappeared from the
circulation ; and the exchange with Holland, which had been
before a little affected by the remittances for the army, sunk
as low as 25 per cent, under par, when the Bank f notes were



* See a short account of the Bank by Mr. Godfrey, one of the original
Directors; and a Short History of the Last Parliament, 1699, by Dr.
Drake ; both in Lord Somers' Collection of Tracts.

f Macleod (Diet, of P. E. L 303) takes exception to this statement, and
in the form in which it stands, it is liable to be misunderstood. The his-
tory of American currency shows how much nominal convertibility may dif-
fer from actual convertibility, but notes cannot fall to 17 per cent, discount,
while the Bank offers to pay on demand. The Bank stopped payment in
May, 1696, and then its notes fell to the discount named.



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»' THE BULLio:; nr.rcRTr 365

at a discount of 17 per cent. Several expedients were tried,
both by Parliament and by the Bank, to force a better silver coin
into circulation, and to reduce the price of guineas, but with-
out effect. At length the true remedies were resorted to : first,
by a new coinage of silver, which restored that part of the cur-
rency to its standard value, though the scarcity of money occa-
sioned by calling in the old coin brought the Bank into
straits, and even for a time affected its credit ; secondly, by
taking out of the circulation the excess of Bank notes. This
last operation appears to have been elTccted very judiciously.
Parliament consented to enlarge the capital stock of the Bank,
but annexed a condition, directing that a certain i^roportion of
the new subscriptions should be made good in Bank notes. In
j)roportion to the amount of notes sunk in this manner, the
value of those which remained in circulation began pres-
ently to rise ; in a short liujc the notes were at par, and the
foreign exchanges nearly so. These details are all very fully
mentioned in authentic tracts published at the time, and the
case appears to your Committee to afford much instruction
upon the subject of their present inquiry.

Your Committee must next refer to the confirmation and
sanction which all their reasonings receive from the labours of
the Committee of this House, which was appointed in a former
Parliament to examine into the causes of the great depreciation
of the Irish exchange with England in 1804. Most of the mer-
cantile persons who gave evidence before that Committee, in-
cluding two Directors of the Bank of Ireland, were unwilling to
admit that the fall of the exchange was in any degree to be as-
cribed to an excess of the paper currency arising out of the re-
striction of 1797 ; the whole fall in that case, as hi the pres-
ent, was referred to an unfavourable balance of trade or of
payments ; and it was also then affirmed, that " notes issued
only in pro|>ortion to the demand, in exchange for good and
convertible securities, payable at specific periods, could not
tend to any excess in the circulation, or to any depreciation."
This doctrine, though more or less qualified by some of the
witnesses, pervades most of the evidence given before that
Committee, with the remarkable exception of Mr. Mansfield,
whose knowledge of the effects of that over issue of Scotch
paper, which has just been mentioned, led him to deliver a
more just opinion on the subject. Many of the witnesses be-
fore the Committee, however unwilling to acknowledge the
real nature of the evil, made important concessions, which
necessarily involved them in inconsistency. They could not,



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366



APPENDIX,



as practical men, controvert the truth of the general iwsition,
that **the fluctuations of exchange between two countries are
generally Hniited by the price at which any given quantity of
bullion can be purchased in the circulating medium of the
debtor country, and converted into the circulating medium of
the creditor country, together with the insurances and charges
of transporting it from the one to the other." It was at tJie
same time admitted, that the expense of transporting gold
from England to Ireland, including insurance, was then under
one per cent. ; that before the restriction, the fluctuations had
never long and much exceeded this limit ; and, moreover, at
the exchange with Belfast, where guineas freely circulated at
the time of the investigation by that Committee was then i J in
favor of Ireland, while the exchange with Dublin, where only
paper was in use, was lo/. per cent, against that country. It
also appeared from such imperfect documents as it was practi-
cable to furnish, that the balance of trade was then favourable
to Ireland. Still, however, it was contended, that there was no
depreciation of Irish paper, that there was a scarcity and conse-
quent high price of gold, and that the diminution of Irish paper
would not rectify the exchange. " The depreciation of Bank
paper in Ireland" (it was said by one of the witnesses, a
Director of the Bank of Ireland) " is entirely a relative term
with respect to the man who buys and sells in Dublin by tliat
common medium : to him it is not depreciated at all ; but to the
purchaser of a bill on London, to him in that relation, and un-
der that circumstance, there is a depreciation of lo per cent."
By thus avoiding all comparison with a view to the point in
issue between the value of their own paper and that of either
the then circulating medium of this country or of gold bullion,
or even of gold coin then passing at a premium in other parts
of Ireland, they appear to have retained a confident opinion,
that no depreciation of Irish paper had taken place.

It is further observable, that the value of a considerable
quantity of dollars put into circulation by the Bank of Ireland
at this period was raised to ^s, a dollar, for the professed pur-
pose of rendering the new silver coin conformable to the exist-
ing state of the exchange, a circumstance on which the Commit-
tee animadverted in their Report, and which serves to show that
the Irish paper currency could not stand a comparison with the
standard price of silver, any more than with that of gold bul-
lion, with gold in coin, or with the then paper currency of
this kingdom.

A fact was mentioned to that Committee on tlie evidence



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« THE BULLION REPORTr 367^

of Mr. Colville, a Director of the Bank of Ireland, which
though it carried no conviction to his mind of the tendency of
a limitation of paper to lower exchanges, seems very deci-
sive on this point. He statecj that in 1753 ^md 1754, the
Dublin exchange being remarkably unfavourable, and the
notes of the Dublin Bank being suddenly withdrawn, the
exchange became singularly favourable. The mercantile dis-
tress produced on that occasion was great, through the sudden-
ness of the operation, for it was effected, not by the gradual
and prudential measures of the several Banks, but through the
violent pressure which their unguarded issues had brought
upon thenx The general result, however, is not the less
observable.

With a view to the further elucidation of the subject of the
Irish exchanges, which so lately attracted the attention of Par-
liament, it may be proper to remark that Ireland has no deal-
ings in exchange with foreign countries, except through Lon-
don, and that the payments from Ireland to the Continent are
consequently converted into English currency, and then into
the currency of the countries to which Ireland is indebted. \w
the spring of 1804 the Exchange of England with the Conti-
nent was above par, and the Exchange of Ireland was in such
a state that 118/. \os, of the notes of the Bank of Ireland
would purchase only 100/. of those of the Bank of England.
Therefore, if the notes of the Bank of Ireland were not depre-
ciated, and it was so maintained, it followed that the notes of
the Bank of England were at more than 10 per cent, premium
above the standard coin of the two countries.

The principles laid down by the Committee of 1804, had
probably some weight with the Directors of the Bank of Ire-
land ; for between the period of their Report (June, 1804) and
January, 1806, the circulation of the notes of the Bank of Ire-
land was gradually (though with small occasional fluctuations)
reduced from about three millions to 2,410,000/., being a dinjinu-
tion of nearly one-fifth ; at the same time, all the currency which
had been issued under the name of silver tokens, was by law
suj)pressed. The paper currency, both of the Bank of England
and of the English country Banks, seems during the same
period to have gradually increased. The combination of these
two causes is likely to have had a material effect in restoring
to par the Irish exchange with England.

The Bank of Ireland has again gradually enlarged its issues
to about 3,100,000/., being somewhat higher than they stood
in 1804, a" increase probably not disproportionate to that



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368 APPENDIX.

which has occurred in England within the same period. Per-
haps, however, it ought not to be assumed, that the diminution
of issues of the IJank of Ireland bi-tween 1804 ^^^ 1806, would
])roduce a corresponding reduction in the issues of private
lianks in Ireland, exactly in the same manner in which a dim-
inution of Bank of England paper produces that effect on the
country banks in Great Britain ; because the Bank of Ireland does
not possess the same exclusive ])ower of supplying any part of
that country with a paper currency, which the Bank of England
enjoys in respect to the metropolis of the empire. The IJank
of England, by restricting the quantity of this necessary article
in that important quarter, can more effectually secure the im-
provement of its value ; and every such improvement must
necessarily lead, by a corresponding diminution in amount, to
a similar augmentation of the value of country Bank ]>aper ex-
changeable for it. That the same diminution of the circulation
of private Banks took place in Ireland is more than probable,
for the private Banks in Ireland are accustomed to give Bank
of Ireland paper for their own circulating notes when required
to do so, and therefore could not but feel the effect of any new
limitation of that paper for which their own was exchangeable.

It is due, however, in justice to the present Directors of the
Bank of England, to remind the House that the susjiension
of their cash payments, though it api)ears in some degree to
have originated in a mistaken view taken by the Bank of the
peculiar difficulties of that time was not a measure sought for
by the Bank, but imposed upon it by the Legislature for what
were held to be urgent reasons of state policy and public ex-
pediency. And it ought not to be urged as matter of charge
against the Directors, if in this novel situation in which their
conunercial company was placed by the law, and entrusted with
the regulation and control of the whole circulating medium of the
country, they were not fully aware of the principles by which
so delicate a trust should be executed, but continued to con-
duct their business of discounts and advances according to
their former routine.

It is important at the same time, to observe, that under tlvj
former system, when the Bank was bound to answer its notes
in specie upon demand, the state of the foreign exchanges and
the price of gold did most materially influence its conduct in
the issue of those notes, though it was not the practice of the
Directors systematically to watch cither the one or the other.
So long as gold was demandable for their paper, they were
Bpeedily apprised of a depression of the exchange, and a rise in



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** THE BULLION REPORTr 369

the price of gold, by a run upon them for that article. If at
any time they incautiously exceeded the proper limit of their
advances and issues, the paper was quickly brought back to
them, by those who were tempted to profit by the market ])rice
of gold or by the rate of exchange. In this manner tlie evil
soon cured itself. The Directors of the Bank having their ajv
l)rehensions excited by the reduction of their stock of gold, and
being able to replace their loss only by reiterated purchases
of bullion at a very losing price, naturally contracted their
issues of paper, and thus gave to the remaining paper, as well
as to the coin for which it was interchangeable, an increased
value, while the clandestine exportation either of the coin, or
the gold produced from it, combined in im|)roving the state of
the exchange and in producing a corresponding diminution of
the difference between the market price and Mint price of gold,
or of [)a])er convertible into gold.

Your Committee do not mean to re])resent that the manner
in which this effect resulted from the conduct wiiich they have
described, was distinctly perceived by the liank Directors. The
fact of limiting their paper as often as they experienced any
great drain of gold, is, however, unquestionable. Mr. r>osanf|uet
stated, in his evidence before the secret Committee of the House
of I^ords, in the year 1797, that in 1783, when the Bank experi-
enced a drain of cash, which alarmed them, the Directors took a
bold step and refused to make the advances on the loan of that
year. This, he said, answered the ])ur|)ose of making a tem-
porary suspension in the amount of the drain of their specie.
And all the three Directors who have been examined before
your Committee, represent some restriction of the Hank issues
as having usually taken place at those ])erio(ls antecedent to
this suspension of the cash payments of the Hank when they
experienced any material run. A very urgent demand for
guineas, though arising not from the high price of gold and the
state of the exchange, but from a fear of invasion, occtnrcd in
1793, and also in 1797, and in each of these perioils ilie Hank
restrained their discounts, and consequently also the amount of
their notes, very much below the demands of the merchants.
Your Committee question the policy of thus limi'ing the accom-
modation in a i)eriod of alarm, unaccompanied wiih an un-
favorable exchange and high price of bullion ; but they consider
the conduct of the Bank at the two last mentioned periods, as
affording illustration of their general disposition, antecedently
to 1797, to contract their loans and their pai)er, when they
found their gold to be taken from them.
16*



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370



APPENDIX,



It was a necessary consequence of the suspension of cash
payments, to exempt the Bank from that drain of gold, which,
in former times, was sure to result from an unfavorable
exchange and a high price of bullion. And the Directors,
released from all fears of such a drain, and no longer feeling
any inconvenience from such a state of things, have not been
prompted lo restore the exchanges and the price of gold to their
proper level by a reduction of their advances and issues. The
l)irectors, in former times, did not perhaps perceive and
acknowledge the principle more distinctly than those of the
present day, but they felt the inconvenience, and obeyed its
impulse; which practically established . a check and limitation
to the issue of paper. In the present times the inconvenience
is not felt ; and the check, accordingly, is no longer in force.

But your Committee beg leave to report it to the House as
their most clear opinion, that so long as the suspension of cash
payments is permitted to subsist, the price of gold bullion and
the general course of exchange with foreign countries, taken for
any considerable period of time, form the best general criterion
from which any inference can be drawn, as to the sufficiency or
excess of paper currency in circulation ; and that the Bank of
England cannot safely regulate the amount of its issues, without
having reference to the criterion presented by these two circum-
stances. And upon a review of all the facts and reasonings
which have already been stated, your Committee are further of
opinion, that, although the commercial state of this country,
and the political state of the continent, may have had some
influence on the high price of gold bullion and the unfavourable
course of exchange with foreign countries, this price, and this
depreciation, are also to be ascribed to the want of a perma-
nent check, and a sufficient limitation of the paper currency in
this country.

\w connection with the general subject of this part of their
report, the policy of the Bank of England respecting the
amount of their circulation, your Committee have now to call
the attention of the House to another to])ic, which was brought
under their notice in the course of their inquiry, and which in
their judgtnent demands the most serious consideration. The
Bank Directors, as well as some of the merchants who have
been examined, shewed a great anxiety to state to your Com-
mittee a doctrine, of the truth of which they professed them-
selves to be most thoroughly convinced, that there can be no
possible excess in the issue of Bank of England paper, so long
as the advances in which it is issued are made upon the princi-



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THE BULLION REPORT."



zn



pies which at present guide the conduct of the Directors, that
is, so long as the discount of mercantile bills are confined to
paper of undoubted solidity, arising out of real commercial
transactions, and payable at short and fixed periods. 'I'hat the
discounts should be made only upon bills growing out of real
commercial transactions, and falling due in a fixed and short
period, are sound and well-established principles. But that,
while the Bank is restrained from paying in specie, there need
be no other limit to the issue of their paper than what is fixed
by such rules of discount, and that during the sus[)ension of
cash payments the discount of good bills falling due at short
periods cannot lead to any excess in the amount of bank paper
in circulation, appears to your Committee to be a doctrine
wholly erroneeus in principle, and pregnant with dangerous
consequences in practice.

But before your Committee proceed to make such observa-
tions upon this theory as it appears to them to deserve, they
think it right to shew from the evidence, to what extent it is
entertained by some of those individuals who have been at the
head of the affairs of the Bank. The opinions held by those
individuals are likely to have an imi)ortant practical influence ;
and appeared to your Conmiittee, moreover, the best evidence
of what has constituted the actual policy of that establishment
in its corporate capacity.

Mr. VVhitmore, the late Governor of the Bank, expressly
states, " The Bank never force a note in circulation, and there
will not remain a note in circulation more than the immediate
wants of the public require ; for no banker, I presume, will
keep a larger stock of bank notes by him than his immediate
payments require, as he can at all times procure them." The
reason here assigned is more particularly explained by Mr.
Whitmore, when he says, " The Bank notes would revert to us
if there was a redundancy in circulation, as no one would pay
interest for a bank note that he did not want to make use of."
Mr. Whitmore further states, "The criterion by which 1 judge
of the exact proportion to be maintained between the occa-
sions of the public, and the issues of the Bank, is by avoiding
as much as possible to discount what does not appear to be
legitimate mercantile paper." And further when asked, What
measure the court of Directors has to judge by, whether the
quantity of bank notes out in circulation is at any time exces-
sive ? Mr. Whitmore states, that their measure of the security
or abundance of bank notes is certainly by the greater or less
application that is made to them for the discount of good paper.



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372



APPENDIX.



Mr. Pearsc, late Deputy-Governor, and now Governor ol'the
Bank, stated very distinctly his concurrence in opinion with Mr.
Whitmore upon this particular point. He referred " to the
manner in which bank notes are issued, resulting from the aj)-
plications made for discounts to supply the necessary want of
bank notes, by which their issue in amount is so controlled
that it can never amount to an excess." He considers " the
amount of the bank notes in circulation as being controlled by
the occasions of the public, for internal purposes," and that,
** from the manner in which the issue of bank notes is con-
trolled, the public will never call for more than is absolutely
necessary for their wants."

Another Director of the Bank, Mr. Harman, being asked. If
he thought that the siun total of discounts applied for, even
though the accommodation afforded should be on the security
of good bills to safe persons, might be such as to produce
some excess in the quantity of the Bank issues, if fully com-
plied with ? he answered, " 1 think if we discount only for solid
j>ersons, and such paper as is for real bomX-fidc transactions,
we cannot materially err." And he afterwards states, that what
he should consider as the lest of a superabundance would be,
"money being more plentiful in the market."

It is material to observe, that both Mr. Whitniore and Mr.
Pearse state that " the Bank does not comply with the whole
demand upon them for discounts, and that they arc never in-
duced, by a view to their own profit, to push their issues be-
yond what they deem consistent with the public interest."

Another very important part of the evidence of these gen-
tlemen upon this point, is contained in the following ex-
tract :

" Is it your opinion that the same security would exist against
any excess in the issues of the Bank, if the rate of the discount
were reduced from 5/. to 4/. per cent. ? " Answer. — " The
security of an excess of issue would be, I conceive, precisely
the same." Mr. Pearse. — *' I concur in that answer."

**If it were reduced to 3/. per cent. ?" — Mr. Whitmore. — "I
conceive there would be no difference if our practice remained
the same as now, of not forcing a note into circulation." Mr.
Pearse, — " I concur in that answer."

Your Committee cannot help again calling the attention of
the House to the view which this evidence [)resenls, of the
consequences which have resulted from the ])eculiar situation
in which the Bank of England was placed by the suspension of
cash payments. So long as the paper of the Bank was con-



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''THE BULLION REPORTr



ZIZ



vertible into specie at the will of the holder, it was enough,
both for the safety of the Bank and for the public interest in
what regarded its circulating medium, that the Directors at-
tended only to the character and quality of the bills discounted,
as real ones and payable at fixed and short periods. They could
not much exceed the proper bounds in respect of the quantity
and amount of bills discounted, so as thereby to produce an ex-
cess of their paper in circulation, without quickly finding that
the surplus returned upon themselves in demand for specie.
The private interest of the Bank to guard themselves against
a continued demand of that nature, was a suflicient protection
for the public against any such excjss of Bank pai)er as
would occasion a material fall in the relative value of the cir-
culating medium. The restriction oC cash payments, as has
already been shown, having rendered the same preventive
policy no longer necessary to the Bank, has removed that check
upon its issues which was the public security against an
excess. When the Bank Directors were no longer exposed to
the inconvenience of a drain upon them for gold, they naturally
fsilt that they had no such inconvenience to guard against by a
jnore restrained system of discounts and advances ; and it was
very natural for them to puisue, as before (but without that sort
of guard and limitation which was now become unnecessary to
their own security), the same liberal and prudent system of
commercial advances from which the prosperity of their own
establishment had resulted, as well as in a great degree the


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Online LibraryGreat Britain. Parliament. House of Commons. Sele William Graham SumnerA history of American currency: with chapters on the English bank ... → online text (page 20 of 22)