The Sun.
London, England, 1857-02-07 00:00:00

teal circnlation was 21,000,0001., leaving unemployed notes
to the amount of 13,000,000/. The rate of discount was 3
per cant. Everything rose in price ; great facilities
were given to trade; many new undertakings were
launched upon the world ; but the inevitable crisis soon
arrived, and traders suddenly found themselves over-
whelmed with interest at the rate of 6,7, and. 8 per cent.
That was the rate of discount at the Bank of England ;
the amount actually paid by traders was much higher.
When spending his Christmas vacation in the country he
met a banker, doing considerable business, and asked him
what his rate of discount was. His reply was, " I charge
three per cent. more than the Bank of England," indicat-
ing a state of things fraught with ruin to the traling com-
munity. (Hear, hoar.) The readers of the " city articles"
of the journals must have observed the panting anxiety
with which this country waited the arrival of a vessel with
300,0001. in gold, as if the nation actually depended upon
it to save it from bankruptcy. What was the meaning of
that anxiety, and how was it to be accounted for ? The
answer was that it was not gold that the country wanted,
but bank notes. He would endeavour to make this clear.
Thera was in the coffers of the Bank of England 10,000,0001.
in gold, and the notes in circulation were 20,000,0001.
Now, the minimum circulation of notes for the 10 years
previous to 1341 was 15,000,000/. ; during the 10 years
between 1844 and 1851 it had never gone so low for any
duration as 18,000,0001. ; and he ventured to say that it
would be impossible by any process now to reduce the
circulation below that amount. In order to take the
10,000,0001.0 f gold from the Bank, however, the circulation
must be reduced, not to 18,000,0001., but to 10,000,0001.
The public had in hand ]at the present moment—say.
20,000,0001. of notes ; and if the whole British community
were to present those notes at once the Bank of England
must necessarily stop payment, because the much vaunted
£ysteln which, according to the Chancellor of Exchequer,
it was impossible to improve, permitted 20,000,09 e/.
of notes to be in circulation when there was only
10,100,0001. of gold to meet them. Sir R. Peel, however,
knew that the circulation never would fall so low, and
he assumed that it would never be reduced to less than
14,000,0901.; and therefore he allowed that number of notes
to be issued upon imaginary security, every note being
payable in gold, although there was no gold to meet
(Hear.) It was impossible at this time to reduce the notes
in circulation to below 18,000,000/. ; but, as the Bank was
possessed of 10,000,0001. of gold, the Bank could never be
inconvenienced, unless the circulation were reduced to
10,000,000/. ; and therefore it was not gold but bank notes
that the country wanted. Then, asthe Bank of England was
compelled to buy gold at the rate of 31. 17s. 9d. an ounce,
people were anxious for the arrival of ships with gold, in
order that they might take it to the Bank, and thus com-
pel the issue of additional notes. His assertion that it was
the deficiency of bank notes which led to commercial dis-
aster was borne out, by what occurred in 1847, when we
were upon the eve of a national bankruptcy. On the 25th
October in that year, when the celebrated letter was writ-
ten, the gold in the Bank was 8,000,0001., and the circula-
tion was 21,00,000/. It was impossible that there could
have been any stoppage of the Bank, therefore, unless the
circulation had been reduced to 13,000,0301. Thera was
no fear of that; but this difficulty might have arisen—that
while there was 8,000,0001. of gold in the Bank! the direc-
tors might not have a single note to issue. The unem-
ployed notes were then reduced to 1,500,001., and repre-
sentations were made to the then Chancellor of the Exche-
quer (Sir C. Wood) that unless something wore done there
would be a national bankruptcy. Something was done ;
the Bank was authorised to issue notes beyond the
14,000,0001. to the additional extent of the quantity of
gold in the Bank, and by that means the difficulty was sur-
mounted. A relaxation took place, and the rate of discount
rapidly fell. He was surprised that the Chancellor of the
Exchequer, with that example before hiss, should say that
there should be no relaxation now, but that it would be
better to leave these cases always to the extraordinary
intervention of Government, preferring, as it seemed
to him (Mr. Mathis), the transgression of the law to
-leaving the remedying power within the law itself.
It was said of those who did not approve the act of 1314
that they were in favour of an inconvertible issue. Now
he for one could not be included in that list, for he did not
see any occasion for the inconvertibility of the bank-note,
for during the year 1817, and during the past year, the
gold in the Bank had never been exhausted. The effect of
creating two departments, as the act of 1844 had done,
had been to lock up the gold, and to make the rate of dis-
count to depend on the quantity of reeervo notes, and the
result had been that the commercial transactions of this
country had never been in a satisfactory state when the
reserve notes fell below 5,0)0,000/. ; for if they fell below
that amount up went the rate of discount, for the increase
iu the rate of discount was not occasioned by any scarcity
of gold, bat by the diminution of the reserve notes. The
effect of those changes in the rate of discount, and the un-
certainty with regard to them, was highly injurious to
commercial transactions, for transactions commenced when
the rate of discount was 3 per cent. might not be concluded
before it had risen nominally to 7, but in reality to 10 per
cent., and so commercial men were deprived of the power
of making accurate calculations before embarking in any
enterprise. It was of the greatest importance to commer-
cial men that the rate of discount should be well known,
and that there should not be much fluctuation. Before
the act of 1811 it appeared from the evidenco of Mr. Pal-
mer, given before the committee, that the maximum rate
of discount seldom exceeded 3, and never was below 4 per
cent., whereas in the 10 years ending at Christmas, 1835,
there had been no less than 40 variations in the rate of
discount, and in the year 1856 alone there had been 9
or 10 variations from a minimum of 3 to a maximum of
7 per cent.—a circumstance highly injurious to commercial
transactions. The subject was one of the greatest import-
ance to a commercial community, and ho trusted that the
committee would not enter into tho inquiry with fore-
gone conclusions, but that they would remember that even
Sir R. Peel himself did not consider the act of 1811 a
perfect measure, and that they would not, like " Mkrca-
ter"—the language of whose letters was most clear, but
whose ideas appeared to be as confused as they possibly
could upon tho subject—stoat by looking upon all those
who did not vie T the act of 1'44 as a perfect act as mere
idealists. (Hear, hear.)
Mr. HEIDLAI considered that if an investigation did
take place it ought to be a most careful and complete one,
and, judging from the strong and discordant views which
had been expressed, it must necessarily occupy a consider-
able period of time. He wished to press upon the Govern-
ment the propriety of not mixing up with the investigation
any inquiry with regard to joint-stock banks, for if they
did speedy legislation upon that subject would be impos-
sible. As regarded joint-stock banks there were two ques-
tions to be considered. The ono was as to the application
of the principle of limited liability to those baulee, and he
confessed that he did not soo why they should be made an
exception to the general rule ; and the other related to the
legislative machinery for winding them up in case of fai-
lure. For his own part, he did not see the slightest neces-
sity for referring either of these questions to a select com-
mittee, and he believed that Government would best deal
with the subject by, on their own responsibility, bringing
in a clear and definite measure relating to it, which would
put a speedy end to the inconveniences which, as had been
shown in the case of the Royal British Bank, at present
existed. ((Tear, hear.)

Mr. LAING said that when the hon. and learned mem-
ber for Wallingford advocated an unlimited issue of bank
notes. Dir. Malins—" I did not."] The argument of the
hon. and learned gentleman was that the pressure in the
money market arose from the small circulation of bank
notes, and yet he was in favour of their convertibility.
Now, he could not understand how both those propositions
could hold. If there had been a continually increasing
drain upon the bullion, and more bank notes were issued,
how could that drain be resisted if the notes were conver-
tible? This was no theoretical question ; for had they not
seen only recently in the neighbouring country no less than
2,000,0001. of bullion disappear from its coffers in a single
month ? If that process had gone on for a short time in this'
country it would have brought us completely to the end of
our tether, and then what would have come of the incon-
vertibility of the note? If it was true that the country was
labouring under a deficiency of bank notes, how was it that
the aggregate amount of bank notes was now positively
greater than at several former periods when money was a
drugin the market at 2 per cent? The total amount of the
circulation in the hands of the public towards the close of
last year was 40,000,0001, and the circulation of the Bank
of England alone was 21,031000/. Lot the house look
back towards the close of 1846, when speculation was
rampant, and the rate of interest was unprecedently low.
What, then was the circulation of Bank of England notes ?
Why, in Sept. of that year it amountel to 21,465,0001 , or
within a mere fraction of what it was now. The hon. and
learned gentleman had been led into error by, his interpre-
tation of the term " money." In one sense money meant
capital. It meant that portion of the capital of the country
which wasavailable for commercial purposes ; but that was
a very different thing from the total capital of the country
the great bulk of which was invested in the funds or on
mortgage, and the owners of which would never lend it in
Lombard-street at 61. per cent., knowing, as they did, that
in 12 months that might mean 2/. per cent. Turn it as they
would, there was no way of dealing with the subject except-
upon the principle of adjusting the supply to the demand.
If the demand for money exceeded the supply, money
would be scarce in spite of any expedient they might adopt
to make it otherwise. When the money market was dear
there was no way in which they could restore the equili-
brium except by diminishing the demand or increasing the
supply. How could they do that? Why, manifestly by
increasing their rate of interest. That, he believed, was
the whole art and mystery of banking—(hear)—namely, to
regulate the supply according to the demand. Although
he agreed with the Chancellor of the Exchequer in the
main in the soundness both of his principles and his con-
clusion, he thought the right hon. gentleman had hardly
shown a velcient case for going into committee in one re-
pect. The right hon. gentleman described tho act of 1814
as having been passed simply and solely for the purpose of
insuring the convertibility of the paper money issued by
the Bank. That might be true if they looked merely at
the letter of the Act of Parliament, but it was not true if
they looked at the circumstances under which the act was
introduced. It was introduced on the theory that if they
regulated their circulation by a self-acting process the sim-
ple effect of the regulation of the circulation would be to
keep them right on all other points. Of that theory Lord
Overstone was the most distinguished advocate, and every
one wished it to bo true, but unfortunately it was not true
("Hear, hear!" from Mr. Malins) ; it was contradicted by
fact. If they looked to any of the returns of the circulation
in periode of ereat pressure ea the money market they would
find there was absolutely no connexion between them. The
period of 1817 was a remarkable one. It was proved in evi-
dence before the committee that between Oct. 1846, and
Sept. 1817, upwards of 7,000,0001. had been drained away
while the amount of notes in the hands of the public remained
almost exactly the same. He contended therefore that the
theory was contradicted by fact, and the reason was, that it
overlooked the operation of the reserve of gold existing in the
Bank. The effect of the act of 1614 undoubtedly was, that
it provided for the convertibility of the circulation, but it
made no other provision for the banking reserve. That, at
this moment, depended upon the sound discretion of the
Directors of the Bank of England as much as it did before
the act of 1814 was passed. In 1847 it had a mischievous
effect, in that it induced a false confidence on the part both
of the Directors of the Bank of England and of the public,
which prevented recourse being had to restrictive measures;
but he thought that error had been completely exploded by
subsequent experience, for latterlythe Directoraof the Bank
had exercised a sound discretion, and had carried the
country through a period of great difficulty and trial. That
error, he thought, was now so perfectly well known and
understood by all men of business that, in looking now at
the act of 1844, the house might leave out of view the
erroneous theory on which it was founded. He had said
that the whole question resolved itself into one of
the banking reserve. It was desirable that the bank-
note should be always convertible, and that, ho thought,
was effectually done by the act of 1844. One point
to be observed was to secure the solvency of the Back,
and insure its power to meet its notes. It was also
desirablee
s.3h4soo.eshouse
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L capital in unavailable resources ; but he meant that the

Bank of England, possessing privileges which no other
bank ha 1, and being the bankers of the Government, it had
a peculiar power which made it the last resort and founda-
tion of that large supersiructure of commercial credit in this
country. All _the operations of the private banks were based
in a great measure upon the conviction that in times of
difficulty or pressure they could obtain assistance from the
Bank of England by the deposit of securities. If the Bank
permitted its reserve to run too low it created panic, be-
cause persons in trade perceive the risk, not of an exces-
sively high rate of interest, which they could bear and
which cannot be prevented, but they fear an absolute
stoppage, and that a period may arrive when the Bank of
England will not be able to make advances upon the best
was compelled private or Government securities. That was the state of
tihtsing suffered
reservesn \SO!
to avoid a complete stoppage, to curtail the accom-
nwthoeon
low,
,Biatn
wk
accom-
modation which it usually afforded to trade. The
great problem was how to prevent a recurrence of
that state of things. A suggestion had been made that
there should be an increase in the issue of notes beyond
the fixed limit of 14, 000,000/. , but he could not see how the
mere creation of paper would increase the amount of avail-
able capital to be employed in the business of the country.
It would simply displace so much bullion, which would
then find its way abroad. Some allusion had been made to
the limit of 14,000,001. to which the Bank was restricted,
and some hon. members could not see why that amount had
been chosen in preference to any other; and the reason was
that in practice that amount had been found to be suffi-
ciently below the minimum point to which the circulation
could be contracted to give valid security without risking
inconvertibility. It had been said that 14,000,0001.
was too little at one time and too much at another,
and if there were 20,000,0001. of bullion in the Bank
and notes were issued to the full extent, there
would then be 34,000,000'. in notes ; but, in fact, that
was not so, as the Bank could not keep out more than
20,000,003/., and the practical result would be a smaller
reserve. Such a state of things might affect the rate of
interest, but, practically, there could be no over issue of
notes—a circulation bona fide convertible could not be in
excess. The whole question hinged upon being able to keep
up the reserve to the highest point possible. In 1817 the
difficulty really arose from that cause—that, in a period of
pressure when the reserve had fallen inconveniently low,
the act of 141 prevented recourse being had to the issue
department, and taking from thence a certain portion of
the bullion, which was, as it were, pawned there for
specie purposes. The true remedy appeared to him to be
to accuanulate, in times of prosperity, a larger reserve, and
when pressure came, to adopt measures of contraction
earlier and more energetically, so as not to allow the re-
serve to fall too low. The real difficulty was that the in-
terests of the public and of the Bank of England were not
always identical. (Hear, hear.) It was the interest of
the Bank, with a view to the dividend for its shareholders,
to work with the minimum reserve compatible with its
own security, while the interests of the public was that a
large reserve should be accumulated in prosperous times,
and not suffered to fall too low in times of pressure. The
object to be desired could not be obtained without some
understanding between the Bank and the Government, as
it would not be reasonable to ask the shareholders of the
' Bank, without compensation, to make the sacrifice which
would be entailed by keeping up a larger reserve for the
national benefit.. If some plan could be devised to meet
that difficulty it would be most valuable. Something had
been said about a discretionary power to relax the rule
affecting the reserve, but he feared the knowledge of that
power would afford a temptati on to allow the reserve
to sink too low, and thus diminish the security of the
Bank. If anything was to be done in the way of creating
an extraurdinaryreserve, it must be by accumulating a bona
fide reserve upon securities or bullion, to bo brought out in
times of pressure by a temporary arrangement between the
Bank and the Government. It was important to go into
committee, if only to see whether some arrangement could
not be made by which the Bank might consent to the sacri-
fice of keeping up a larger reserve for the benefit of trade
and commerce. There were other questions—such as the
management of the Bank—which could be well considered
is committee. At present, if there was a good governor
or deputy-governor, there was no certainty that he would
remain in office above two years. It was desirable that a
committee should be appointed, and if it did nothing but
adopt some resolution upon that point it would not be
valueless.
Mr. JAMES MACGREGOR said he did not understand
how the Bank should have a large reserve except by having
a larger amount of bullion or of securities. He trusted that
some means would be adopted to avert the horrible state of
things which existed in 1847. It was a domestic panic, and
the moment it was known that notes could be had at the
Bank of England the panic ceased. He was of opinion that
limited liability would be better both for the joint-stock
bankiand the public. He hoped the Chancellor of the
Exchequer would agree to appoint a separate committee
on the joint-stock bank question.
Mr. POLLARD URQUHART remarked that there were
two separate questions to consider with regard to the act
of 1144, namely, was the act sufficient to maintain the
convertibility of the notes ; and next, did the act contain
provisions embarrassing to commerce. Lord Ashburton,
in a pamphlet published in 1343, said no act of Parliament
could give perfect convertibility to the bank note. He
believed, however, that the act had made the converti-
bility of the note morally certain. The crisis of 1817 af-
forded some expos lance as to what the present act enabled
the Back to do. The convertibility of the note would
have been in some danger of the Bank had not put on the
screw as early as April, 1337. In 1339 he believed the Bank
would have been in danger of suspending payments if it
hat not received assistance from the Bank of France. An-
other crisis occurred in 1825, which was caused mainly by
an internal demand for gold. If a similar crisis had occurred
in 1817 he behoved the convertibility of the note would
have been in danger. It appeared to him that the act of
1844 had no more to do with the panic of 1817 than Teeter-
den steeple had t) d ) with the Goodwin Sands. That panic
was casual by the drain of gold caused by a bid harvest,
and the failure in the potato crop. The act of 1814 could no
more be said to have caused the panic of 1847 than a moon-
light shadow at which a horse might start could be said to
make the way impassable. The act of 1841 might in fact
be said to put the horse on the back, and to mike it feel that
there was nothing to fear. He was aware that many people
objected to the act of 1841, because they thought it had
created a great number of minor panics in 1817 ; but it
was in reality no small merit of that act that it
made the public sensitive on the subject of their
credit. It instantly informed them when a screw was
loose in their transactions or in the state of the ex-
changes. On the other hand a system of credit which
would enable them to tido over periods of crisis without
taking any steps to put their affairs on a sounder footing
might last for a time, but it must in the long run bring
about disaster and ruin.' While he thus approved of the
principle of the Bank Act, he did not pledge himself to
the support of all its details. If, for instance, the minimum
of the circulation had increased since 1844, he thought the
limit of 14,000,0001. might also be enlarged. Nor was the
observation of the Chancellor of the Exchequer, namely,
that such a step would only enable the Bank to keep a
smaller amouut of gold in their coffers, any answer to such
a proposal; because if, while they secured the perfect con-
vertibility of the note, they could add a couple of millions
to the circulation of the country, they would bo conferring
a benefit upon the mercantile community. At the same
time he trusted that the Government would never consent
to any material alteration in a measure which had been
found in practice to answer the purpose for which it was
designed remarkably well. (Hear.)
Mr. NEWDEGATE said it was generally admitted that
the operation of the act of 1844 had been to deprive the
Bank of England in a great measure of its power of acting
as a bank of support. That fact had been strikingly illus-
trated by the experience of 1847 ; when, but for the
interference of the Government, the Bank would have been
obliged
to cease operations, although it had 8,000,0001.
of gold in its coffers. (Hear, hear.) If they gave the
Government the great and important privilege of infringing
the Bank Act, some provision ought to be made for calling
Parliament together within a reasonable time, to pass an
act of indemnity. (Hear.) It would also be highly advi-
sable to assign some limit to the issue of notes on securities.
When, for iustanee, the issue reached a certain point, the
rate of interest ought to advance pari passu with the dimi-
nution of gold. (Hear.) The great vice of the act of
1814, however, was, that instead of making a payment to
the Bank for conducting the financial business of the
country, they placed the reserve in their hands, and told
them to go and. trade with it. (Hear, hear.) By that
means they gave the Bank enormous power in the market,
and enabled it practically to regulate the rate of interest.
They took no means to prevent it from making use of its
reserves, when they were very large, to depress the rate of
interest as to create an undue tendency to speculation.
Thera lay the great vice of the present system. (Hear,
hear.) The Bank was, in fact, expected to create various
rates of interest—first, when the amount of bullion in its
possession was large it was expected to stimulate that spe-
culation, and then when the reaction took place it was re-
quired to revenge it upon the public. (Hear, hear.)
Sir C. WOOD— I sin anxious to set the house right
upon one or two points of fact which have not been accu-
rately stated by hon. gentlemen who have preceded me.
It seems to me that while hon. gentlemen opposite protest
that they are advocates for the convertibility of the bank
note, yet that the doctrine they put forward is inconsistent
with the certain maintenance of that convertibility. (Hear.)
I am not quite certain as to the precise plan of the hon.
gentleman (Hr. Newdegate), but I have little doubt that
if the course he advocates had been adopted the security
for the convertibility of the note would have been very
seriously diminished. Let the house remember how the
question of the "little shilling" arose. After the suspen-
sion of cash payments, when the question arose of restoring
the convertibility of the note, the question also arose as to
the standard. Any course that renders paper inconvertible
may lead to a state of things in which that question must
be again urged, of not restoring the standard to the point
at which it had before been, and of paying a less amount
of gold than had been promised to be paid. That was the
doctrine of the "little shilling." The hon. member for the
Wick burghs told us what was the purpose of the act of
1811. Now, this is not the first tinie that gentlemen have
undertaken to describe the objects of this act, but I do
not think it fair to say what the objects of the bill were,
except in the words of its authors. The hon. gentleman
says that this bill was to be the remedy for all possible
evils, and that it was to prevent not only an over issue of
paper, but also any excess of speculation. I say that no
such doctrine was ever professed by those who advocated
the bill of 1844. (Hoar, hear.) 1 happened to take a
large part in the discussions on that bill, and I distinctly
remember what every one said was, that it was impossible
for any bill to deal with rash speculation, and with the
mismanagement of banking concerns ; but that there had
been superadded to those evils the mismanagement of the
circulation, and for that the bill would be d tan a Nue e
remedy. The evils of excessive credit and mismanagement
of banking concerns have occurred in all countries—in Hol-
land, where every note was represented by silver or gold in
the bank; in Belgium, and even in countries where no
paper circulation existed. It is not necessary in order
that banking mismanagement should exist that there
should be any notes in circulation. The bill of 1841 regu-
lated the circulation of the country, and its object was to
put a proper limit and check to thepossible mismanagement
of the circulation. We are apt in discussing measures of
this kind to forget the evils that were complained of when
they were past. In old times many complaints were
made that the management of the Bank was left to the dis-
cretion of the Bank directors. It was thought essential by
almost every one that there should bo some limit or check
or rule by which the circulation should be managed. The
hon. member for Kendal has laid down a rule which I will
not now discuss, bat that some rule should be laid down has
n
been the opinion of almost all persons who hold the
•
con-
vertibility of the note. It was necessary to take care, I
order to secure the convertibility of the note, that the note
circulation should vary exactly as the metallic circulation
should vary. The mode of attaining this objectwas by
issuing a certain number of notes on security, and taking
care that the rest shall be represented by an amount of gold
in the hands of the issuing parties. Hon. members have
asked why the sum of 14,000,e00e. WAS fixed upon, I be.