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Currency

69. Since the checks above described had been removed, the
Committee were anxious to know upon what principles the
Directors had regulated their issues. The Directors and some
of the merchants shewed a great anxiety to state a doctrine,
of whose truth they were thoroughly convinced, that there could
be no possible excess in the issue of Bank of England paper, so
long as the advances in which it is issued consist of the discount
of mercantile bills of undoubted solidity, arising out of real com-
niercial transactions, and payable at short and fixed periods.
These were the principles which then governed the Bank, and
what they said indicated the only true limit that need be imposed
on their issues. Nevertheless, the Eeport says such a doctrine is
wholly erroneous in principle, and pregnant with dangerous con-
sequences. The Eeport then proceeds to shew the fallacy of this
theory of Paper Currency, which, as we have already observed,
we shall reserve for future consideration, along with several other
theories upon the subject

70. The limitation of the rate of interest by law to 5 per
cent, produced injurious effects, by fanning a spirit of specu-
lation, and making more extensive demands for discounts.
,Consequently, the Directors themselves had been obliged fre-
quently to limit their advances, and did not act up to their own
principles, which they considered sound and safe, and, conse-"
quently, they had no distinct or certain rule to guide them

71. The suspension of cash payments had thrown into the
hands of the Directors of the Bank the important charge of
supplying the circulating medium of the country at their sole
discretion. That the most complete knowledge of the state



ANALYSIS OF THE BULLION REPORT 45

of trade,' combined with the most profound Bcience in all the
principles of Money and Currency, could not enable any set
of men always to adjust the circulating medium properly to the
trade of the country. That the precious metals were the only
natural adjusters of these things, which could not be replaced by
any human wisdom or skill. That the Directors of the Bank
had exercised the new and extraordinary discretionary powers
entrusted to them, with great integrity and regard to the public
interests,, according to their conception of it, and with more
forbearance than might have been expected ; but, unfortunately,
ohe principles upon which they acted, were fundamentally erro-
neous, and they had been in a great measure the cause of the
continuance of the great disturbance in the monetary system

72. The Eeport then gave some statistics regarding the
quantity of notes in circulation at different periods since the
restriction. However, they said that the actual numerical
amount of notes in circulation at any given time was no cri-
terion whatever, as to whether it was excessive or not. Different
states of trade, and different extents of commercial operations,
would require different amounts of notes. "When public credit
was good, a smaller amount would be required than when public
alarm was felt, and people had recourse to hoarding. Moreover,
the different methods of doing business, and economising the use
of the Currency, much influenced the amount which might b6
proper and necessary at any period. The improved methods
of business, the policy of the Bank, the increased issues of
country bankers, had all tended to diminish the quantity of
Bank Notes necessary for commerce. Consequently, the nu-
merical amount alone was no criterion whatever; a surer test
must be applied, and that sure criterion was only to be found it
the state of the Exchanges, and the price of Gold Bullion

73, The experience of the crisis of 1793 had proved that
an enlarged accommodation was the true remedy for the failiire
of confidence in country districts, such as the system of Paper
Credit was occasionally exposed to. That it was true that the
Bank had refused the enlarged accommodation in 1793. But the
issue of Exchequer Bills was exactly the same in principle, and



4'6 THEORY AND PEACTICE OF BANKING

the good effects that followed that issue proved the truth of the
principle, that if the Bank had had the courage to extend its
- aopommodation in 1797, instead of contracting it as they did, the
catastrophe which followed might probably have been avoided.
Some persons thought so at that time, and many of the Directors,
since the experience of 1797, were now quite satisfied that the
course adopted by the Bank in that year increased the public
distress, in which opinion the Committee fully concurred

74. A very important distinction, however, was to be ob-
served between a demand for gold for domestic purposes,
sometimes great and sudden, and caused by a temporary failure
of confidence, and a drain arising from the unfavourable state
of f^he Foreign Exchanges, that a judicious increase of accommo-
dation was the proper remedy for the former phenomenon, but a
diminution of its issues the correct course to adopt in the latter

75. That the present issues were excessive, but that it was
essential to the commercial interests of the country, and to- the

, general fulfilment of mercantile engagements contracted during
the too free issue of paper, that the reduction should be made
gradually and with great caution and discretion. They then give
some details of the great increase of coimtry Bank Notes, and the
facilities of abuse and excessive issues afforded hy the then state
of the Law respecting them

76. Upon all those facts and reasonings, then, the general
conclusions arrived at were : That at that time there was an
excessive Paper Currency, of which the most unequivocal symptom
was the very high price of gold bullion, and next to that the very
depressed state of the Foreign Exchanges. That the excess was
to be attributed to the removal of all control on the issues of the
Bank of England by the suspension of cash payments. It was
greatly to be regretted, therefore, that this Act, which at best was
only intended to be temporary, has been continued as a permanent
■war measure. The enormous evUs and injury to all classes of the
community by the great derangement of the measure of value,
were too notorious to be necessary to describe, and there was every
prospect of their continuing and increasing : that the int^rity



ANALYSIS OF THE BULLION BEPOET 47

and honour of Parliament imperatively required that an end should
be put to this state of things at the earliest practicable moment

77. That the continuance of this state of matters held out
a temptation to Parliament, to have recourse to a depreciation of
the gold coin, by an alteration of the standard, which had been
done by many Governments under similar circumstances, and
which might be the easiest remedy to the evil. But it would be
a great breach of public faith and of the primary duty of Govern-
ment, to prefer the reduction of the coin down to the paper, rather
than the restoration of the paper to the legal standard of the coin

78. Some proposals had been made of remedying the evil,
by a compulsory limitation of the amount of the Bank's advances
or discounts, or of its profits or dividends. All these, however,
were futile, because the necessary proportions never could be fixed,
and even if it were so, might very much aggravate the incon-
veniences of a temporary pressure, and even if their efficacy could
be made to appear, they would be most hurtful and improper
interferences with the rights of commercial property

79. The only true and proper remedy for all these evils was
therefore, a resumption of cash, payments. That,
however, was an operation of the greatest delicacy,, and it must
be left entirely to the discretion and prudence of the Bank to
carry it into effect. Parliament should merely fix the time, and
leave it to them to carry out the details. Under all the circum-
stances, a period of two years seemed to be not longer than
necessary, and at the same time sufficient to enable them to
prepare for it. The Committee finally concluded by recom-
mending an Act to be passed to compel the resumption of cash
payments in two years from that time

80. Such, we trust, is a fair analysis of this famous Eeport,
which has acquired a celebrity probably exceeding any report
that has ever been presented to Parliament. It contains the
eternal, and imm utable prlncigles w h ich m ust ; regulate every
Paper tinifeiicy w hich mak^ anv attempt to conform to the
value of the gold it represents, and if any legislatiop on Paper



(11



48 THEORY AND PRACTICE OF BANKING

Currency be considered necessary, it must endeayi)urio_enforce

tHe'l)ractical applSationrof the principles of this Report, and

just in so far as it deviates from or contravenes "them, so^rt

will be found to thwart and contravene the eternal principles of

Economics. All legislation, then, on the Currency should have as

its object merely to provide the best machinery-for ensuring the

practical application of these principles. The general principles

I laid down in this Report are as complete a matter of demonstra-i

tion as any in Euclid ; the method of treating the subject is as

Scientific as any of the great discoveries in natural philosophy,

which have excited the. admiration of the world, nor could it

fail to carry conviction to any one of ordinary intelligence who

was capable of understanding the force of the arguments. No

sooner, however, was it published, than it was assailed by a whole

multitude of pamphleteers, whose obscure memory it is not worth

ivhile to revive now. The interests affected by the Report were

;oo deep and extensive for it not to be attacked by every species

)f ridicule and acrimonious controversy. We must now advert to

ts reception and treatment in the House of Commons

81. The Report was presented by Mr. Horner on the
9th June, 1810, but was not formally taken into consideration
till the 6th May, 1811. It was the joint composiMon of Mr.
Horner, Mr. Huskisson, and Mr. Henry Thornton. The debate
was opened by Mr. Horner, who addressed the house for upwards
of three hours in a speech which obtained the admiration of all
who heard it. It is unnecessary to go over that speech here,
because its line of argument has already been anticipated. He
ended by moving a series of sixteen resolutions. The first seven
related to the legal standard of value in this country, with
reference to which all contracts were made in this country.
8. That the promissory notes of the Bank were stipulations to
pay on demand the number of pounds sterling specified upon
them. 9. That when Parliament passed the Restriction Act it
had no intention that the value of these notes should be altered.
10. That, nevertheless, they had for a considerable time been
below their legal value, (11) which was caused by the excessive
issues of them, both by the Bank of England and the country
banks. 12, 13. That the extraordinary depression of the Foreign



DEBATE ON THE BULLION REPORT 49

Exchanges was in great part owing to the depreciation of the
Currency of this country, relatiyely to that of other countries.
14. That during the suspension, the Directors of the Bank ought
to regulate their issues by the price of bullion and the Foreign
Exchanges. 15. That the only method of preserving the Paper
Currency at its proper value was to make it payable on demand
in the legal coin of the realm. 16. That cash payments ought to
be resumed at the period of two years from that time

82. Mr. Rose replied to Mr. Horner — "He said that he
could shew that there was no depreciation of Bank Paper from
excessive issue, and that the Eeport was more full of errors and
misstatements than any that had ever been made to Parliament.
He was convinced that the issue of Bank Notes could have no
effect on the price of gold, or on the Foreign Exchanges. He
denied that the increased price of commodities was in any way
to be attributed to the increase of Bank Paper. The Report
of the Committee was directly in opposition to the opinions of
all the witnesses examined, except two. All " experience " was
against the " reasonings " of the Report. He produced a table
shewing the number of Bank Notes in circulation at different
jJeriods, and the Market price of bullion and the Exchange with
Hamburg, to shew that there was no connection whatever
between, them. However the Committee had themselves most
pointedly remarked that the numerical amount of Notes alone
was no test of their depreciation. The enormous payments which
England made to the continent during the last two years were
quite sufficient to account for the fall in the Exchange. That
the rise in the prices of all commodities on the continent had
been equally great in countries where there was no Paper
Currency as here. He went into arguments at' great length to
disprove the idea that the issue of Bank Notes had any effect on
the price of gold or the Exchanges

83. Mr. Henry Thornton stated that the great question at
issue between the BuUion Committee and the Bank was, whether
its issues should be regulated by the price of gold and the
Foreign Exchanges, and if its excessive issues produced any effect
upon them. Mr. Thornton argued at great length in support

VOL. II. E



50 THEORY AND PEACTICE OF BANKING

of the principles of the Eeport, and cited the case of the Bank
of France in 1805 as a remarkable confirmation of the truth
of its principles. The French Government, having occasion for a
loan, applied to the merchants for it, such a transaction being
contrary to the rules of the Bank. The merchants proceeded to
fabricate among themselves bills to the requisite amount, which
they discounted at the Bank, which thus ultimately became the
real lender. There was, in consequence, an enormous increase
of the Bank paper, a great demand for specie. The Bank had to
bring back specie from the provinces at a great loss — at length
it stopped payment. Bank Notes fell to a discount of 10 or 12
per cent., and the Foreign Exchanges fell 10 per cent. But the
Bank reduced its paper, and in three months resumed payment
without difficulty, and the Foreign Exchanges were rectified.
Mr. Thornton also quoted several other cases of other countries
where the same phenomenon had occurred. He then passed on
to the question of the standard of the Currency, which he said
was becoming endangered by this continued depreciation. In-
deed, the argument in favour of a deterioration of the coin grew
stronger every day. The very argument of justice, after a certain
time, passes over to the side of deterioration. If we have been
only two or three years using a depreciated paper, justice is on
the side of the former standard; if ten or twenty years have
passed since paper fell, it may be deemed unfair to restore the
ancient standard. He concluded by strongly urging Parliament
to return to the ancient standard before it was too late

84. Mr; Vansittart, who moved the counter-resolutions to
Mr. Horner, controverted, at great length, the principles of the
Report. He asserted that the only mode in which a Metallic
Currency could have a favourable effect on the Exchanges was by
exportation, and that if exportation was prohibited by law, no
effect could be produced. The amazing absurdity of this assertion
has been suflSciently proved in the course of this work to need 'HO
repetition here. These assertions, however, were sober good
sense compared to the lengths of wild extravagance into which
he subsequently plunged. He said that the first seven resolutions
argued on the supposition that the standard was something visible
and tangible. " I affirm that a standard, in the sense used by



DEBATE ON THE BULLION REPORT 51

these gentlemen, namely, a fixed and invariable weight of the
precious metals as a measure of value never existed in this
country!!" He ridiculed the idea of the resolution that the
weight at which any such money is authorised to pass current is
fixed ! ! These extraordinary ideas he attempted to support by
reference to the degraded state the coin had been in at different
periods, but which were yet legal tender, and which, he con-
tendedj proved that the coin was not any definite weight of
bullion. It was upon this point, he said, that the question
of depreciation depended. "Now, I do not consider myself
bound either to admit or deny that Bank Notes have lost a value
which they never possessed, and which the legal coin of the
country never possessed, namely, a value estimated by a fixed
weight of gold or silver bullion. They never had any other than
current value, founded on the public confidence in the Bank, and
this value, I firmly believe, and have distinctly stated in my third
proposition, that they possess as much as ever." When the whole
of the rest of his speech was a mere repetition and development
of such crazy ideas, it is mere waste of time to give any more
details of it. There is one more specimen, however, which we
cannot refrain from extracting. He says — "It appears, then,
that a diminution of the value of Currency may have the effect
of improving the Exchange, but cannot by possibility depress
it!!" Which means that the more debased and worthless the
Currency of a country is, the more favourable should be the
Foreign Exchanges, or the higher should foreigners estimate it.
So that, while the French assignats were daily falling lower and
lower at home, the more should foreigners have given for them :
so that, while the French themselves gave one livre in coin for
1,200 in assignats, the English and other foreigners ought to
have given their full nominal value in coin, and even more
than that according to Mr. Vansittart. He then made several
triumphant observations about there being no difference in trans-
actions between Bank Notes and coin. He admitted that he had
been a member of the Irish Committee of 1804, and had con-
curred in the opinion that Irish Bank Notes were depreciated,
but he said that the two cases were not parallel ; for it appeared
not only that the current coin was openly sold at a premium, but
that an established difference of price existed between payments

E 2



52 THEORY AND PRACTICE OF BANKING

in coin. and in Irish paper, while Bank of England paper passed
as equivalent to guineas. This depreciation, however, he denied
had proceeded from excessive issues, but from the political
circumstances of the period

85. Such were the leading arguments against the con-
clusions of the Committee, which, though somewhat varied in
expression, were constantly repeated. After the exposition given
in our chapter on the Coinage, it would be waste of time
to attempt seriously to disprove the outrageous folly of the
proposition, that the coins of Great Britain never were intended
to contain any fixed or certain quantity of gold or silver bullion
in them. If this had been true, what was the need of having
any gold or silver in them at all ; if it was not to regulate their
value ?

86. With respect to the assertion that there was no difference
in common payments between guineas and Bank Notes, and that
guineas were not openly selling at a premium, as in Ireland, the
answer was simple and decisive : if it were so, it was merely
through the terrors of the penal law. At the very time of this
debate three men were lying under a conviction of the crime
of selling guineas for more than 21s. They had been convicted
under an old statute of Edward VI., which did not extend to
Ireland, so that the reason why guineas were sold publicly at a
premium in Ireland was, that there was no law against it; in
England it was a criminal offence, and, in consequence of this,
guineas had disappeared from circulation. But Mr. Vansittart
threw out another challenge : he acknowledged that it was legal
for tradesmen to make a distinction in prices, according as they
were paid in money, or in Bank Notes, and he denied that such
a distinction existed. On this point, however, he was met with
a distinct denial by Mr. Huskisson, who said — "If paper were
sustained at all in public estimation, it must be by a support
growing out of terror, by an estimation proceeding at that
moment from a consideration of a pending judgment. If this
were once settled, public estimation would soon shew what it
really was. In every part of the country there were already
two prices ; he had undoubted proof of the fact. He had in his



DEBATE ON THE BULLION REPORT 53

pocket a letter from a person intimately acquainted with such
matters, which said that two prices were prevalent in the country,
and that the usual premium for guineas was half-a-crown "

87. Mr. Sharp, a member of the Bullion Committee, adduced
further facts to prove that the Bank Notes were depreciated ; he
said it had been usual to send over specie to Guernsey to pay
the troops there. Each guinea had lately hem paid to the soldiers
at 23s.; one regiment, however, had refused to receive them at
that rate. In another case he knew of a person who had received
a legacy of 1,000 guineas which was paid in specie ; he went to
invest it in the funds, and, on asking the price of the 3 per cents.,
was told 64^. But, on asking what the price would be if paid in
real money, he was told, after some consideration, he might have
it at 60, which was the price actually paid. So that, while the
Government were arguing at Westminster that guineas were
of the same value as Bank Notes, they were at the same time
dishonest enough to pay them away to the soldiers at 23s.

88. Sir Francis Burdett stated that, in Jersey, Bank of
England Notes were at a discount of 3 per cent, as compared to
the notes of their own little bank ; that it was perfectly notorious
that two prices were common throughout the country. He knew
it from his own experience; he had been offered wine at far
different prices, according as he should pay for it either in Bank
Notes or in specie

89. We have now given so much space to this interesting
discussion, that we can scarcely afford room to notice any of the
other speeches upon the subject.- When we read the arguments
and evidence, which seem to be so perfectly satisfactory, according
to aU the usual principles that command assent, we feel some
curiosity to know what was the opposing theory set up against
them, and it was simply this, that the pound sterling was nothing
tangible at aU ! It was an imaginary vision ! a vague idea ! an
airy nothing ! which never had any existence in nature at all, and
that, accordingly, everything, money and bullion included, might
vary in endless changes round this ideal centre. It had even less
substantiality than a whiff of smoke ! It was " a sense of value "



54 THEORY AND PRACTICE OF BANKING

communicated in some mysterious way from one person to
another. Mr. Canning pursued the author of this insensate folly
with unsparing ridicule in his speech. He also ably pointed out
the consequence of not allowing guineas to circulate at their
market value, which had been followed by their total dis-
appearance, whereas dollars, which were beginning to disappear
when they were bound down to the value of the depreciated Bank
paper, were immediately restored to circulation when they were
allowed to pass current at their real value. However, though he
fully agreed in all the principles and reasonings of the Bullion
Eeport, he did not think it expedient that the Bank should be
-called upon to resume cash payments in so short a period as
two years

90. After a debate of four nights the Committee divided on
the first of Mr. Horner's resolutions, and it was negatived by a
majority of 151 to 75. The fourteen next were negatived
without a division, and the last was rejected by a majority
of 180 to 45. Among the names of the majority was that of
Robert Peel

91. The Ministry, having defeated the Bullion Committee
by so great a majority, would have done well to let the matter
rest. As to the matter of fact agitated between the parties, the
depreciation or the non-depreciation of the Bank Notes, it would
be useless to waste one word more, and in arguing against so
palpable a fact, the ministerial party shewed little discretion.
They might easily have saved their credit by admitting the fact,
but arguing that it was not expedient for the public service that
so momentous a change should be made during the war. Not
content, however, with procuring the total rejection of Mr.
Horner's resolutions, Mr. Vansittart, in the plenitude of his
power and party strength, and in the mere wantonness of
tyranny, determined to drag the House through the lowest
depths of ridicule and absurdity. He moved a series of reso-



Online LibraryHenry Dunning MacleodThe theory and practice of banking → online text (page 8 of 57)