The Sun.
London, England, 1858-10-08 00:00:00

TILE RATE OF INTEREST AND THE
CURRENCY.

"A Country Banker" writes to the Times as
follows :

" While the country is slowly recovering from
the effects of one of the severest monetary panics
within the memory of living men—a panic having
its origin in a great measure in a redundant cur-
rency and low rates of interest—it is a question
which demands the gravest deliberation whether
the present rate of discount at the Bank of England
should be further reduced.

" The rate is now 3 per cent., and in the open
market it is even lower, surely a moderate rate for
all legitimate purposes of commerce. Can any pos-
sible good arise by reducing it further ? We may
by this means certainly place the schemer and the
speculator on a nearer equality than they now are
with men of capital, if that be desirable. We may
thus foster excessive trading, and drive prices up
beyond their proper level, until we check exports,
turn the exchanges against us, lose our bullion,
and end a few years hence, as usual, in a general
crash and a money panic ; but it would be difficult
to show what other results ever have flown or ever
can flow from an excessive circulation, and a reduc-
tion in the rate of discount below the rate ®f inte-
rest on Consols.

" From 18-18 to 1853 we gave ourselves the full
advantages of cheap money. The bank rate was
reduced to 21, and for six months in succession
to even 2 per cent., and we " sowed the wind" in
universal expansion. In November last we reaped
the whirlwind, the force and fary of which were
but faintly indicated by the ascent of the minimum
rate to 10 per cent., on the principle that, in mone-
tary as in other affairs extremes beget extremes.
Would it be too much to affirm that if the rate had
never gone below 3 per cent. it would never have
risen so high as 10
"It is urged, however, that the directors of the
Bank of England should employ their funds like
any other bank, that is, simply to the best advan-
tage of their proprietors, and without troubling
their minds at all about the advantage of the coun-
try, all responsibility in that direction having been
taken off them by the self-acting machinery of the
issue department.

" But-it is at least a point open to discussion whe-
ther a reduction in the present minimum rate of in-
terest would benefit the proprietors. The discounts
and advances now stand at £15,000,000, and, at 3
per cent., contribute of course £150,00t) t:ic
annual revenue of the Bank. To produce an equal
amount of contribution at 21 per cent. the discounts
would have to be increased to £18,000,000 ; and if
the reduction is to 2 per cent. the discounts must be
increased to £22,500,000. To obtain a return at 2 per
cent. equivalent to the present, therefore, the Bank
must increase its discounts 50 per cent., and, by
consequence, its risk of loss to a like extent.
" Neither is it certain that by a reduction in the
rate the Bank would command the required increase
of discounts. It can hardly hope to derive the in-
crease by an abstraction of business from discount
houses or the London joint-stock banks; because
the very day the Bank rate is reduced to 21 they
will, no doubt, as heretofore, reduce theirs to 21,
and if the Bank should boldly drop the rate to 2,
they, with an equal daring, will drop theirs to 11.
" The required increase of discount business, there-
fore, if it come at all, must come from an enormous
increase of those commercial operations out of which
discount transactions arise ; but this must neces-
sarily be a work of time ; and, on the whole, the
probabilities would seem to favour the assumption
that, under existing circumstances, the holders of
Bank stock would rather lose than gain by a reduc-
tion of the present rate.
"And now, as regards the larger question—the
operation of the issue department. The act of 1844
wisely made provision that the note circulation
should not under any circumstances fall below a
certain level, but it placed no limit whatever on the
amount to which the note circulation might be ex-
tended. The Bank, in fact, is bound by the act to
issue notes in exchange for bullion to any con-
ceivable (amount. This is one of the features of the
act which requires reconsideration. It is the weak
point of the act, the flaw to which it would be easy
to trace the source of any evils which thus far
-gave sprung directly from the operation of the
measure. If it be right on principle to prescribe
a minimum for our note issues, surely it cannot be
wrong on principle to provide a maximum as well,
seeing that there is as much danger in excess as in
scarcity—the one, indeed, being the parent of the
other.
"The period of a sufficient currency is supposed,
0 fin notesthe
hands of the public, and m
by those very competent to judge, to be attained
when there are some I200,00e,0£080:0o0fo,n000tcr