The Bank Charter Act : ought the Bank of England or the people of England to receive the profits of the national circulation?

Front matter

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Preface To The Second Edition

A second suspension of the Bank Charter Act is the prelude to its repeal. It can no longer be permitted to disgrace the Statute Book. The most credulous must now be convinced that this golden machine is charged with explosive materials, harmless while it remains in a state of rest, but certain to scatter ruin in all direc¬ tions whenever it begins to move and act.

Whatever measures of relief Government may have in contemplation, none ought to satisfy the public which does not provide a safe and sufficient instrument of exchange for internal trade. Bitter experience has shown the folly of regulating the legal tender of the country by the foreign demand for gold. This perni¬ cious system has called into existence a class of money dealers whose interest it is, in constantly recurring cycles, to prostrate domestic industry, by exporting or hoarding the coin of the realm. Then prices fall below the cost of production ; commodities are purchased by the wary and heartless usurer who has lurked in ambush for his prey ; having seized it, the coin is restored to circulation, and prices rise, the usurer gaining what the producer has lost. This insidious operation has been too long concealed from public view, but any statesman who permits its renewal, after the dreadful catastrophe we are now witnessing, betrays his Queen and plunders his country.

Gold money, fixed in price by the Act of 1816, is only suited to semi-barbarous nations, whose traffic is o carried on by rude barter; it is in no respect adapted to the magnitude of international commerce which is now linking together all the inhabitants of the globe in an ever lengthening chain. An increasing population imperiously demands an increasing trade, but trade cannot expand unless^ the instrument of production and distribution is permitted to expand in an equivalent proportion. Free trade and a fettered currency are contradictory propositions, and to will the end and refuse the means, brings back to memory the saddening reflection of Oxenstiern, “ With what little wisdom the world is governed.”

On Tuesday, the 17th of November, 1857, the City Editor of the Times put forward what may be deemed his “ Confession of Faith,” in a carefully matured manifesto of bullionist principles. “ In England,” he says, u every contract is made in gold. Any man who comes under an engagement to pay a certain sum on a certain day, pledges himself to deliver so many sove¬ reigns.” The law is correctly stated, but it is the wisdom of the law that is impugned. Jephtha made a rash vow that he would sacrifice the first person he met, if he returned victorious from his expedition against the enemy. He met his own daughter, thus committing himself to an act of murder. His guilt did not consist in breaking his promise, but in making it. In a similar manner the error of the British legis¬ lature does not consist in superseding, but in enacting an iniquitous law.

The City Editor thus proceeds : “ Every engagement being based on gold, gold was to be left to its natural course. No man who had contracted to deliver it, would be subjected to any other risk than that resulting from the legitimate variations in its market value. He might find when his payments fell due, that the use of it was worth 10 per cent, per annum, or 3 per cent., but that would be a risk voluntarily undertaken when

Ill he entered into his contracts. What he would lose, the other parties to the contracts would gain, and vice versa. Government could no more interfere with justice to alter his relation than they could seek to give relief to a man who had promised to deliver a quarter of wheat on a certain day, and who found it inconvenient to do so, because he had accepted 50s. and the price had meanwhile advanced to 80s.”

In these passages the rascality of the system is plainly avowed and audaciously defended, hut the gross igno¬ rance of the writer has irretrievably damaged his cause. He has told the world a hundred times that gold is the standard of value, but immutability is the essence of a standard. He knows that the metal contained in the coin is tied down by Act of Parliament to the mint price of £3 17s. 10^d. per ounce, and yet he speaks u of the legitimate variations in its market value.” Here it is admitted that gold as a commodity is in conflict with gold as a coin ; the former rises under the law of supply and demand, while the latter is forcibly restrained from rising under the same law. What analogy then can be drawn between coin and wheat? Wheat is not our standard, but gold is. No monied denomination is put on the wheat, therefore its price fluctuates from day to day ; but a monied denomination is put on the gold coin, and therefore its price is fixed. Eaw bullion, not having the mint mark, is not legal tender. When Abraham Newland was examined before the Lords’ Committee of Secrecy in 1797, he declared that the Bank, in its purchases of gold had frequently given for it more than the mint price, even as much as £4 8s. per ounce : but when that bullion was reduced into coin, the Bank could only pass it as legal tender for c£3 17s. 10|d. per ounce, and were of course losers by every such transaction. The great contradiction in our system is, that the law fixes the price of the gold coin, while it cannot fix the price of the bullion out of

IV which the coin is fabricated. The bank note is the sign of the coin, which is the thing signified ; to raise discounts is to raise the value of the sign, while the Act of Parliament forbids, under the penalty of impri¬ sonment, any rise in the thing signified. Thus the representative and the thing represented are diametri¬ cally opposed to each other. For such monstrous anomalies there is but one remedy ; liberate the coin from its shackles, restore it to its natural character of a commodity, and in common with all other commodi¬ ties allow it to find its market price under the free action of supply and demand in national paper money guaranteed by the whole wealth of the Empire. Can the most craven coward demand an ampler and sounder security? The bullionists alone may object to it, as indeed they assuredly will, because of its perfect safety and freedom from fluctuations; it would effectually give checkmate to the whole gang of usurers, as dis¬ counts would remain steady whether gold was abundant or scarce.

It is this system of national money that the following pages seek to enforce. A Bank of England should be a Bank of English money, not a place of deposit for a foreign and fugitive metal. The trade and commerce of this kingdom ought not to be dependent on the success or failure of a few diggers of gold in California and Australia; nor ought the hopes or fears of our merchants to be affected by the slow or rapid voyage of ships arriving from the auriferous regions. We want a system based on such enduring principles that the necessity of suspending the law may never occur, and a statesman who has not the intellect to discover such a plan and the courage to enforce it, should retire from a position the duties of which he is incompetent to discharge.

Preface

A Parliamentary Committee has been appointed to investigate the merits and demerits of the Bank Charter Act of 1844, and to report to the House of Commons whether that Act ought to be renewed, modified, or abrogated. Under these circumstances this pamphlet is submitted to public consideration.

That law known as the u Bank Charter Act” is one of a series of monetary enactments coflunencing in 1816, consolidated in 1819, and complemented in 1854; and those collective measures are erroneously believed by many to have restored the ancient standard of value, the action of which was suspended during the Bank Restriction Act.

When the Bill of 1819 was passed, it was supposed that it would only lower prices four or five per cent. in fact, it doubled the amount of the national debt. Mr. Ricardo was the author of that gigantic and ruinous mistake; but he honestly confessed the mag¬ nitude of his error before his death. Mr. Bankes declared that every member of the committee who yin

PREFACE.

reported to the House of Commons in favour of the Bill of 1819 were grossly deceived as to its character. It was a measure passed in ignorance.

After the practical experience of a quarter of a century, its evils had become so patent that Sir Bobert Peel, who had introduced it, brought forward the Act of 1844 as a buttress to prop up a falling edifice. That Act has been characterised by Mr. Samuel Jones Loyd, now Lord Overstone, in the fol¬ lowing terms: —

“ It has been justly described by its author as the complement of the Bill of 1819 — as the further step which was necessary to render that measure complete, and to give to the public every possible security for the effectual maintenance of specie payments. This is the true object of the measure; and by its efficacy or otherwise in this respect, the success or failure of the measure ought to be tested.”*

The panic of 1847 was the result of the Act of 1844, and thus both the original building and its sus¬ taining buttress were condemned.

Committees of both Houses of Parliament were appointed to inquire into the causes of that panic. The committee of the House of Commons held nineteen meetings. Of those members who recorded their votes in favour of the legislation of 1844, in support of the report of the Chancellor of the Exchequer, Sir Charles Wood, who was chairman of the committee, one never attended, and therefore never heard one word of the

* Thoughts on the Separation of the Two Departments of the Bank of England, p. 1 and 2.

PREFACE.

IX evidence ; two attended four times, and one five times. Of those who opposed the report embodying the resolu¬ tions, and who were present and voted when the resolutions were discussed, none attended the committee less than twelve times. Government only carried the Keport by a majority of two votes ; but the votes would have been equal had not Mr. Herries and Mr. Thomas Baring who had manifested a decided opposition to the Act of 1844, been unavoidably absent.

Seventeen witnesses were examined before the com¬ mittee; of these, thirteen condemned the Act of 1844, and its four supporters were three directors of the Bank of England, who supported their own monopoly; and Mr. Samuel Jones Loyd, its real author.

It was condemned by the most eminent bankers and merchants; by the late Mr. Samuel Gurney, by Mr. George Carr Glynn, by Mr. Lister, Mr. Horsley Palmer, Mr. Bevan, Mr. Bates, Mr. Pease, and Mr. Birkbeck of the Craven Bank, Yorkshire, who, on that occasion, was the accredited representative of all the country bankers.

In defiance of this adverse, preponderatingly adverse evidence, Sir Charles Wood, as chairman of the com¬ mittee, reported to the House of Commons in favour of the Bill, in the following terms : —

u Your committee, after a careful review of all the evidence upon this part of the subject, are of opinion that it is not expedient to make any alteration in the provisions of the Bill.”

The committee of the House of Lords condemned the Bill.

X

PREFACE.

It is under such circumstances that the whole subject is to be reviewed ; and it is to be hoped that Mr. Cardwell, the chairman of the present committee, will not follow the unworthy example of Sir Charles Wood; that he will not act on his own preconceived opinions, whatever they may be, but on the evidence of the wit¬ nesses,^ as the judges act in the courts at Westminster. The nation requires the verdict of truth, not its per¬ version by the baleful spirit of party.

In all the efforts made by philanthropists to remove or mitigate the evils of society, the question of money has been ignored ; and hence their lamentable failures. It has never occurred to them that money is the half of every bargain, or that modern usury is extorted, not for the legitimate use of money, but for its artificial scarcity.

Interest at 3 per cent, replaces capital in 33 years.

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Is it surprising, then, under the Acts of 1819 and 1844, that the rich grew richer, and the poor poorer?

The people should be made to understand that their labour alone supplies the country with gold, and that cupidity exports that gold to foreign nations, in loans to governments, or to sustain foreign speculations, that usurious interest may be perpetuated at home. The currency question is emphatically a labour question, and till the working classes study it, and master it, they will never obtain any efficient relief from social

PREFACE.

XI evils or political grievances. It would be well also for the rich to study and to master it; for all history proves to those who can look beneath the surface, that usury is the precursor of revolution, and extinguishes nationality.

Panics, the offspring of metallic money, have destroyed in this country, since 1816, as much pro¬ perty as would have redeemed the national debt twice over; is such a system to continue for another period of ten years? Should that be the decision of par¬ liament, the measure of injustice will be full to over¬ flowing. But we will not despair. We look for the aid of the landed proprietors and of the old families of England ; for they have never said, as the money lords have said, “ Capital owes no allegiance to Country.” We hope much from Sir James Graham, a member of the new committee, for he has never formally repu¬ diated the admirable truths he expressed in w Corn and Currency.” Now that the gag is removed from his mouth, let him speak out boldly as a man, and atone for his long silence.

London, 25tli February, 1857.

Contents

PAGE.

Chapter I

The Nature of the Controversy between the Advocates of Bullion ism and the Supporters of Representative Money stated. Principles of Mr. Huskisson, of Lord Over¬ stone, of the second Sir Robert Peel, and of the Times newspaper. Those Principles examined and contro¬ verted. Mr. John Taylor’s Definition of Money - 1 — 11

CHAPTER II. Adam Smith’s Eighth Chapter “On "Wages” examined

David Plume on the Expansion of Money. Views of Sismondi. The Difference between Political Economy and the Science of Society. The Fallacies of Over¬ production, Over-trading, and Over-population. Mr.

James Mill on the Relation between Money and Com¬ modities. Views of Mr. Thomas Attwood and of Mr. Huskisson. The Representative Character of Imperial Money and of Commercial Currency. Opinions of Plato, Seneca, and Xenophon. Influence of Prejudice 12 — 31

XIV

CONTENTS.

Chapter III

Historical View of the Origin of Coin. Etymology of the words “Money” and Capital.” Ancient British Money.

Its Representative Character. The Exchequer Tallies of King Henry the First of England. Reduction of the Metallic Standard in Rome and England. Lord Liverpool’s Statement. Report of Mr. William Lowndes in 1695. Duties of the King’s Exchanger. Effect of the Discovery of the Silver Mines of South America on our Money. Statement of Mr. Davenant. The Monetary Act of 1774. Suspension of Cash Payments by the Bank of England in 1797 - - - - 32 — 54

Chapter IV

Rise of Prices under the Bank Restriction Act. The Rise caused by increased Taxation, not by an increase of Bank Notes. Mr. Huskisson’s Pamphlet on the “ De¬ preciation of the Pound,” answered by Mr. John Taylor. Definition of the terms Debasement, De¬ terioration, and Depreciation. The effect of indirect Taxation on Money considered. Debates in the House of Commons on the Report of the Bullion Committee in 1811. Speeches of Lord Castlereagh and Mr. Can¬ ning. John Law’s Bank. The French Assignats. The Continental Money of the American Colonies. David Hume. Benjamin Franklin. View of a “Depreciated Pound,” taken by Mr. Ricardo, Mr. Tooke, and other Economists. Answered by Mr. Mathias Attwood. The Balance of Trade and the Foreign Exchanges - - 55 — 90

Chapter V

Attempts to renew Cash Payments. Letter of Mr. Mathias Attwood to Lord Archibald Hamilton. View of Sir James Graham. The Monetary Act of 1816. Did it fix the Price of Gold in British Coin ? Fallacies of the

CONTENTS.

XV

Bullionists on that subject. The Copper Coinage of 1798. Reports of Committees of both Houses of Par¬ liament on the Market and Mint price of Gold. Tes¬ timony of the late Lord Ashburton. The Monetary Act of 1819. Denounced by Sir James Graham. Pro¬ tested against by the first Sir Robert Peel. Repudi¬ ated by the Bank Directors. Its injustice pointed out by Mr. Mathias Attwood. Carried by the suppression of Evidence and the ignorance of Parliament. Re¬ tractation of his opinions by Mr. Ricardo. The fall of prices which followed the Act of 1819. Riots in the Manufacturing Districts. The Small Note Act of 1822. The Panic of 1825. Quieted by an issue of One Pound Notes. Abuse of the Country Bankers by the Government. Government Loans to the Manufacturing Districts to avert Revolution. The Reform Bill. Re¬ port of the Manchester Chamber of Commerce. Mone¬ tary disasters of 1836 and 1839. Fall of the Whig Party through the decline in the Revenue, the con¬ sequence of a vicious system of Money - 91 — 128

Chapter VI

Administration of Sir Robert Peel. The Monetary Act of 1844. The erroneous assumption on which it proceeds.

View of Mr. Edward Capps. Opinion of General Harrison, President of the United States. Dogmas of Lord Overstone. His Theory of Trade. “ What ought to be a Pound ?” versus “ What is a Pound ?” Clauses of the Bank Charter Act of 1844. Issues of Notes permitted on nominal Securities and on no Securities at ail. Division of the Bank into the Banking and Issue Departments. The Lords’ Report on the Sus¬ pension of the Act of 1844 in 1847. Errors of Sir Robert Peel -------- 129 — 159

XVI

CONTENTS.

Chapter VII

Lord Overstone on the Defects of the Bank of England.

Character of Imperial or National Money. Its limitation and periodical redemption, rendering depre¬ ciation impossible. The Guernsey Market. American Independence due to paper Money. The power of Napoleon broken by paper Money. Prussia reinvigorated by paper Money, by Frederick the Great.

Scotland enriched by paper Money. Commercial Money and Security Banks. Opinions of the first Sir Robert Peel. View of Mr. John Taylor on “Prices.” Gold at its Market Price. Evidence of Mr. W. Brown, M.P., before the Lords’ Committee on the rate of discount.

The late Sir Robert Peel’s defence of Usury. Answered by Mr. James Taylor. Arbitrary Limitation of Legal Tender. Opinion of Sir Josiah Child on interest of Money. The inverted pyramid of Gold. Error of Mr.

James Mill. View of David Hume. How markets are created and sustained. Mr. Cayley and the Governor of the Bank. The Fall of Rome. Sismondi. Michelet.

Gibbon. Summary of Monetary Principles - - 160 — 194

THE BANK CHARTER ACT,

ETC., ETC.

Chapter I

The Nature of the Controversy between the Advocates of Bullionism and the Supporters of Representative Money stated. Principles of Mr. Huskisson, of Lord Overstone, of the second Sir Robert Peel, and of the Times Newspaper. Those Principles examined and con¬ troverted. Mr. John Taylor’s Definition of Money.

The Currency Question is generally represented as abstruse, and difficult of comprehension. Perhaps the confusion in which it is involved arises from the mode in which it has been argued, each controversialist putting forward a theory of his own, and entirely sup¬ pressing the arguments of his opponents. By such tactics an easy victory is obtained, but truth is never reached. On the threshold of this inquiry, the nature of money ought to be clearly defined, or we shall waste time in a mere verbal dispute, and realise the fable of the two knights, who looked only at opposite sides of the same shield. In the following pages, an attempt is made to join issue on all major points hitherto discussed in print, or debated in parliament. It is therefore proposed, as an introductory text, to state succinctly the leading principles of those who advocate bullionism, and the objections urged against it by those who recom¬ mend the adoption of representative money. Thus both parties will be brought before the court of a candid criticism, and the pretensions of each fairly exhibited. Tbe substance of this pamphlet will be an expanded commentary on their conflicting opinions.

THE ARGUMENT STATED. - BULLIONISM.

1 . Mr. Huskisson assumed that it wa& the essence of money to possess intrinsic value.

2. Mr. Samuel Jones Loyd, now Lord Overstone, and who is generally understood to be the u Mercator” of The Times , accepting the definition of Mr. Huskisson, insists that the expansion or contraction of bank notes should exactly correspond with the oscillations of bullion held by the Bank issuing the notes. In his judgment, the perfection of a monetary system requires the con¬ vertibility of the paper pound into the gold pound. In this theory, all the processes of exchange must be subordinate to the instrument of exchange; and he contends that, whenever bullion is withdrawn from the Bank, from whatever cause, the circulation of notes must be proportionately curtailed. Referring to the Reports of the Select Committees of both Houses of Parliament, upon the expediency of resuming cash payments, in 1819, Mr. Loyd makes the following remarks : —

u The convertibility of the notes of the Bank was to be secured by regulating the amount of the issues with reference to the state of the foreign exchanges; and the increase or diminution of gold, in the hands of the Bank, was to be taken as the only safe and certain test of the favourable or unfavourable state of the ex¬ changes ; consequently, the amount of her paper issues was to vary with a direct reference to the fluctuations in the amount of the bullion in the possession of the Bank.”*

* Remarks on the Management of the Circulation, p. 1. Lon¬ don, 1840.

Mr. Loyd gives the following definition of money : —

u Money, it must be remembered, is not only useful as a medium of exchange in lieu of barter or credit, but also as a measure of value ; and when paper, in itself possessing no intrinsic value, is used as a substitute or representative of the precious metals, the convertibility of that paper becomes essential for preserving its cha¬ racter as a standard of value. When the convertibility ceases, there is no longer any fixed limit to the amount which may be issued, nor any means of obtaining in exchange for the notes that of which they purport to be the representative.

Mr. Loyd thus describes the effect of a contraction of the currency : —

u A reduction of the circulation must at all times tend to check the facility of credit and to lower prices ; an arbitrary or capricious reduction is, therefore, wholly unwarrantable. But if the bullion is diminish¬ ing, then the Bank ought to have no option; it is bound to make a corresponding reduction of its issues, otherwise the paper circulation could not act as a me¬ tallic circulation would have acted.”f

3. The late Sir Robert Peel, on introducing the Bank Charter Act of 1844, expressed himself in the following terms : —

u The whole foundation of my measure rests on the assumption that, according to practice, according to law, according to the ancient monetary policy of this country, the meaning of a pound is neither more nor less than a definite quantity of gold, with a mark put upon it to determine its weight and fineness ; and that the engagement to pay a pound means nothing, and can mean nothing else than the promise to pay to the holder, when he demands it, a definite quantity of the precious metals.”

4. The Times newspaper, following the three autho-

* Ibidem, p. 105. + Ibidem.

The Currency Controversy .

rities whose names have been mentioned, asks its opponents, 44 How do you interpret the words inscribed on the Bank note, 4 I promise to pay on demand one pound?’ ”

Such, in substance and spirit, are the fundamental principles and leading propositions of the most ac¬ credited expositors of bullionism, and they demand an answer. It is here fully conceded, in limine , that if their premises are logical, their deductions must be admitted, however destructive of industry, however provocative of revolution. If man has no option in the choice of the instrument of exchange, if, of neces¬ sity, legal tender must be fabricated out of the precious metal, we must submit with patient resignation to the inexorable decree. But we contend that man is not bound by any such necessity, and that he has an option; that he is the MASTER, not the SLAVE of BULLION.

THE ARGUMENT STATED. - REPRESENTATIVE MONEY.

1. With every respect for Mr. Huskisson’s great abilities, it is submitted that an assertion is not a proof. It appears to us that he mistook an hypothesis for a demonstration. If an appeal be made to the usages of antiquity, as much evidence can be adduced in favour of representative as of metallic money; but that form of argument is inadmissible on either side of this controversy, for it negatives the law of progress, which law admonishes each generation to improve, if possible, on the practices of their ancestors. Surely we are not to be bound by the bargain made by Abra¬ ham, when he purchased the field of Macpelah, for 400 shekels of silver, 44 money of the merchant.” We admit that debts due by us to foreigners ought to be discharged in bullion, coined or uncoined, of a defi¬ nite weight and fineness ; but it does not follow that debts due among ourselves ought to be liquidated in the same metal. Finally, it is contended, in direct opposition to Mr. Huskisson, that money, confined in its circulation to the realm of an independent kingdom, need not and ought not to possess intrinsic value, but only a representative value.

2. In noticing the theory of Lord Overstone, there is no desire on our part to engage in a verbal dispute, for our business is with ideas, not with mere words ; but we submit that the term, “ exchangeability,57 is preferable to the term, “ convertibility.77

We take exception to the rule of regulating our issues of money by the state of the foreign exchanges. Why should our internal trade be in any degree coerced by our foreign trade? Why should not the several counties of England possess an instrument of exchange of their own? If the continent claims bullion from us, let it in all honour be paid ; but on what ground of policy or justice can it be argued that the home trade should be interrupted when the bullion is exported. If bankers, bullion brokers, or loan contractors send away gold to some foreign prince, is that a reason why our farmers, manufacturers, and shopkeepers should be deprived of the means of exchanging their commodities among each other?

In his definition of money, his lordship confounds the standard and measure of value — a source of many errors. The mistake is here only mentioned, as it will be dwelt upon more at length in subsequent pages.

He states that u when the convertibility of the notes ceases, there is no longer any fixed limit to the amount which may be issued.77 When we treat of the nature of Imperial and Commercial Money, it will be shown that a defined limit may be imposed on paper issues, and that they never can be issued in excess. Further, that they will always exchange for gold at its market price, which is all that justice and common sense can require. In contrast with Mr. Loyd’s definition of money, we submit that of Mr. John Taylor, which we entirely adopt.

u Money is a term properly applicable only to that sort of circulating medium which is constituted a universal legal tender in the country where it is issued ; which depends for its value not on its intrinsic worth as a commodity , but on the circumstance that the government which issues it at a certain rate in discharge of its obligations to the people, will receive it again at the same rate from the people in discharge of their obligations to the State. In this respect, coins of the genuine stamp , however deficient in weight, and that paper money also, which is issued by the authority of the State, are money. They are entitled to be universally current, and will be so among the people of that country to which they properly belong. All such money it is within the province of a government to interfere with and regulate. On the other hand: — 1. All coins which depend for their acceptance as a legal tender, on the condition that they shall be of full weight, are not money , but hits of bidlion , estimable in all countries according to their intrinsic value, and deriving no advantage in any way from privileges conferred by the State. 2. All promissory notes to pay on demand those same bits of bullion, of a certain weight and fineness, are not money , but evidence of a contract entered into between man and man. 3. All pro¬ missory notes to pay a certain sum in that legal tender which is money, are themselves not money ; they are merely an acknowledgment of debt, of the claim to which debt they constitute a transfer when they are endorsed and paid away. With all such commercial currency, improperly called money, a government has no more right to interfere, under the pretext of regu¬ lating its quantity , than it has to interfere with the manner in which men conduct their own affairs of business, and manage the concerns of their own families.”