The Bank of England note issue and its error. An address to the holders of Bank of England stock, and to bankers and economists generally

Front matter

Slibcatg

Cornell University Library The Bank of England note issue and its e

3 1924 014 049 682

Preface

Next to the painful task of writing a book on the Controversy of the Bank of England, comes the task of reading it. This is one of the difficulties of which the swarm of authors seem aware, who, ever since 1844, have inundated us with hundreds of short pamphlets and press articles, forming, in the aggregate, a mass of literature of the most extraordinary kind. The differences of opinions expressed in these short, firmtoned, and authoritative pamphlets, range from "unlimited right of issue of Bank-notes, to be given, not only to all Banks and merchants, but to everybody," to the total abolition of all Bank-notes, "including those of the Bank of England." Within these extremes come classes of opinions advocating the issue of notes by Banks and Bankers only, some without, others with restrictions, and requirements of capital — "say, one million cash " — are laid down, which shall entitle a Bank or Banker to issue notes. Occasionally the proposal is made : " let Banks and Bankers issue notes only in times of crises and panics." Others boldly recommend the American Bank-note system. More reasonable authors seek to reform the Bank of England system itself, and call for an extension of its issue, or advocate the issue of a kind of Exchequer Bill to help us over a " crisis." In each of the many sub -divisions of opinions on the Bank of England system there are again many dissentients on points of detail, which happen to turn uppermost for the moment. The whole mass of suggestions, not to speak of the heavy parliamentary blue-books on Koyal Commissions Enquiries, has hitherto had no result — it leaves us as we were. The want of success of all these pamphleteers is due, perhaps, to the fact that they make their pamphlets too short and concise, not so much for the sake of the reader, but because the authors themselves are unable to grasp the subject in all its bearings.

By one who has closely followed all this, — from the insufficient declarations of Adam Smith to the dogmas of later economists, from the history of John Law to that of Mr. Lowe's proposal for reform in 1873 ; from the occasional attempts of publications, akin to the Family Herald, to that of the daily and weekly articles of the leading modem press, — all these unlucky endeavours are easily understood. The cause of their failure lies in their one-sideclness. In the first place, the majority appears to have regard only to one thing, more Bank-notes ! The minority recognises that the mere printing of Bank-notes does not solve the problem, and it endeavours to deal more reasonably with what may be called the elements of monetary science, or the factors to which regard must be had in a system of Bank-note issue. In their turn the writers of the latter class make this great mistake : in the inventions which they submit to the public thej fix their minds upon one principal factor, and manipulate it so as to suit one of the others ; when, having done so, they are contented. They entirely ignore, or are not aware of the fact, that there are a number of factors to be considered, that each of them has its characteristics and variations, and that, whereas they have only fitted one to the variations of the next, there is a third, a fourth, and fifth, each with its variations, which must all be fitted into the system. Thus, as far as our own note issue is concerned, an author succeeds in providing a scheme between issue and circulation, forgetting however that bullion, the rate of interest and reserve, are aU in mutual relationship. He may even succeed in hinting at a combination between two factors and a third, but when the fourth and fifth are to be considered, the problem becomes confused. He concludes with some emphatic declaration, or quotes somebody else's opinion (dating from last century perhaps), and feels confident that his suggestions are valuable. So much for the short authoritative pamphlets, which, in the aggregate, make up a respectable library.

In writing this longer book, in which I, on my part, shall endeavour to lay before you certain facts in fair order, and point out the factors involved, I am fully aware that I am open to the charge of writing at too much length.

This charge will be increased when I mention to you that I have akeady written another book on the subject, to which allusion is made in this publication. I must bow to the reproach, but as my intention is that of instructing persons not thoroughly familiar with all the features of the case, I have not only written at greater length than would suit a practised economist, but I have purposely, when I thought proper, repeated matters for the sake of enabling the inexperienced reader to maintain the string of facts.

Ostensibly, this publication is addressed to the Stockholders of the Bank of England, and my respect for them and the Directors of the Bank induce me here to make the following declaration : In trying to point out the error in the present note issue system of the Bank, I am necessarily obliged to show certain matters in the criticism of which I attack the " admirers " of the present Act. It might, therefore, be imagined that I attack or speak disparagingly of the Directors. Nothing is farther from my intention ; but the controversy requires that the critic should occupy an opposing point of view. Any man of candour, who professes fuUy to understand the nature of the issue, rather than blame the Directors, must, on the contrary, recognise that they have done well with the difficulty before them. The more he enters into the conception of the error, and its palpable serious consequences, the more he must admit that the nation should be grateful to the set of men who have thus far so well succeeded in counteracting a persistently ruinous system. Very few are able to understand this, for the confusion and helplessness into which the subject under discussion has fallen are so great, and the demoralisation of intelligence on this subject has gone so far, that there are actually persons who lay the whole blame on the shoulders of the Directors, and say, " the Bank is mismanaged." In a mercantile community like ours, — so rich and prosperous,- — at the head of which stand the Directors of the Bank of England, chosen from the highest ranks of commerce, such a charge of personal failing in intelligence is an absurd one, and must be repudiated with indignation.

The Directors of the Bank must guide the operations of the institution, in accordance with the Act of 1844, the law itself, and they have responded to its requirements as far as it was possible for them to do. For the error in this Act they are less responsible than the statesmen and the host of economists who framed and uphold it. They cannot undo the law, on the contrary, it is their province, not only from right, but from dictates of prudence, to be conservative — rather to maintain that to which they are accustomed and have shaped their practice, until they feel themselves on fairly safe ground — than listen to other schemes which may necessitate a total reversal of action in so precarious a problem as that here to be discussed. All the fearful sacrifices which are made on behalf of this just policy, as I shall demonstrate them to you, are, after all, to be preferred to any of the wild schemes started by amateurs. The question here is : What is the Act of 1844 itself ; what is the experience made under it, has it worked with ease and satisfaction, or with difficulties and mischief — is it indeed so constructed that human intelligence can deal with it without gigantic efforts ? I hope to be able to show you that the Act of 1844 contains a practical error which baffles all efforts at proper management, and extends its disorganising influences far beyond the range of -our own national interests. I may also succeed in showing you that the remedy is in the Act itself, and that a sUght alteration in one of its minor clauses will setaside the error ; leaving the Act in full force in other respects. It might be supposed that if the alteration is so slight, a few lines would suffice to explain it. But if you read through Part I. of this book, which deals with the anomalies caused by the error, you will find that its core could not be laid bare until the overlying masses of evil effects were removed first, when, in Part II. of the Book the remedy and a better system of adjustment can be laid before you for your couBideratiou.

CONTENTS,

(N.B. — A perusal of tMs abstract of contents will enahle the reader to obtwin an idea of the pla/n wnd general tenor of this Boole. The reader who is aVrtady acquainted with the controversy may pass over certain matters, and fix his attention on what may seem noteworthy to him.)

Part I

The Want of Progress of the Bank of England.— wealth must increase as

if by a natural law The teat of figures can be applied England's wealth, *' local"

and " international^^ England's decided supremacy in international wealth The

manifest universal increase in all directions Import and export trade increased fourfold The only exception in this universal increase is the Bank of England The

Bank of England must not he wantonly abused But there are facts bearing upon

a long-standing controversy Concerning plain practical matters State of the

controversy as regards the Bank Vain attempts at reCorm Natural conservative

tendency of the Directors — •- Baneful influence of dogmas of bygone times Dogmatic

wisdom versus figures and facts The most fetal of the dogmas concerns " speculation '*

The Bank is unable to keep itself fr^ from its effects That is plain proof of

either its participation or its weakness A fault in the nucleus of a system repeats itself

many thousandfold The mere appeal to strength of capital does not solve a problem

Patriotic declamation cannot override figures These figures show that the Bank

of England is not in accord with prosperity generally The interests of the stockholders In this matter as regards dividends The author will suggest nothing wild and

Bpeculativet and reasonable suggestions ought to receive attention • Pages 1 to 8

Comparative Figures. — TaUe l.—Note ctrculation—DeposUs^Bankers' batancee—SilU discoimted^ &c. — Exports and imports — Deposits of four joint stock fia7iA:j— Page 10 - — The

whole increase not equal even to the single item of increase of population No increase

from 1844 to 1866 Increase since 1866 owing to Bankers' balances Deposits actually

declined False reasonings must be set aside first The allegation that commerce has

increased at the expense of the Bank is quixotic The plea of conservatism cannot be

stretched to the excess of which the figures given are evidence This kind of rough

treatment of the question is not worthy of economical truths The rapid growth of

other banks proves the very fact that the Bank has missed its opportimities The

deposits at the Bank ought to have increased with general increase, independently of

the question of allowing interest for them Table 2. — Shoaing tlie increase^ in the

htmneaa of the Bank of France at the end of Februari/ each year — Page 15 ■ — - The

"public" duties of the Bank are quite separate from its own rights as a Bank The

progress of the clearing system has the tendency of increasing deposits Systems

akin to clearing are in operation in France and Grermany The insufficient increase of

buUion as the real metallic Reserve Not in accord with our increased conamerce;

still less with the discovery of the Califomian and Australian gold fields More gold

ought to have accumulated at tho Bank of England Pages 9 to 19 vm

The DiVidand of the Bank of England.— The dividend of the Bank of

England cannot "be called satisfactory The Bank's capital is very large, but the Bank

has enortnous privilege It holds its deposits free of interest It has the extra isBue

of fifteen millions of Notes Ita investments exceed the deposits It keeps the

State acccnintSj Scd. • Sliamng the proporiiona here a/rismg at the Bank ; and London and

Westminster Bank Another method of comparing resnlts The London and

Westminster Bank makes four times the profit Making due allowance for the difference

of position tootween the Banks in question Ibis nevertheless not unreasonable to

suggest that the Bank of England ought to hav^ paid higher dividends If only by

2 or 3 per cent -, — All the world has pfofitfld, excepting the holders of* Bank Stock trhe Discount Business of the Bank of England.— The great business

of this coimtry is condilcted chiefly by bills of exchange* 'Hheae instruments of

exchange are the staple of banking — — They amount to 1,200 haillions sterling per annum

Of which 300 to 350 millions are current at a time • The Bank of England might

be supposed to be the principal tolder of such bills In some proportion at least to its

resources But, in reality, the Bank holds but a comparatively insignificant amount of

bills— Frequently below 3 millions ■ Table 3. — The Bills under discount at the Bank of

Sngla/nd from 1845 to 1872— Page 27 •" — ' The temporary advances average 2 millions

The total average of bills discounted is 6 millions only The general public and

economista are not aware of this extraordinary matter The Bank appears to do a

Jjrofitable discount bnsineps only when c-ises and panics set in Commerce has a higher

right of enquiry into these facts The Bank of England is boimd to invest in Govern-'

inent securities But not to the overwhelming disadvantage of bills Government

securities require fresh contracts for their conversion Bills of exchange are the

Ultimate creators of currency ■ Bills Of exchange are continuous contracts already in

existence Issues of Bank notes bn credit are chiefly made for the support of active

commerce Other central Banks have a much greater share in commerce Footnote.

— The account of the Bank ofFruasia — Page 32 The matter involves even the question

of morality No dogmatic and pompous statement can go against the facts here shown

The conflict requires the earnest consideration of all economists The undecided

action of the Bank as regards advances to discount brokers The method in which

brokers profit from advances of this kind In spite of the long practice, no definite

policy has been established, such as our valuation requires The Bank stands between

two sides, each of Which has legitimate claims Pages 23 to 37 vv lier6 IS tlie Error P — These remarkable accounts presuppose the existence of a

subtle disturbing error of system, in either the Issue or the Banking Department ■

The error cannot be in the Banking Department although the operation of that

Department may be seriously hampered by a subtle and hidden fault in a system with

which it is connected The violent fluctuations of the Bank's Reserve and Bullion are

not due to the Bank's investments The losses on investments are insignificant

Nor the withdrawal of ddposits, for these increase rather than diminish The question

of fresh advances is independent of this matter The fault lies solely iu the system

of the Issue Department The enigma involved in the present seemingly so perfect

arrangement Its evident conflict nevertheless with facts The remedy is possibly

hidden by a misconception, engendered in the practice of the system Pages 37 to 42

ThO Present State of the Controversy.— The absurd schemes being dismissed

The party divisions on the Bank of England issue remain The only practical

party is that which seeks reform inside the present system The subdivisions of this

party — - There are five leading opinions in the controversy — - Class 1 is impracticable

and impossible Class 2 admits of no reform Class 4 has an uncouth ground

Class 3 now rules the situation The main characteristic of this proposal is "exten-

eion " only Whereas both contraction and extension are required The primary cause oP the evil is the surplus created by the 15 millions The supposed strength of

large note reserves is in reality the weakness of the system The idea of caution

involved in the 15 millions fixed issue is fallacious Other causes ore independent of

this matter The plethora remaius in force The excess drives bullion fiom us

The scales must fall from the eyes of the authorities Mr. Fowler's proposals involves

the immeasurable ruin of our valuation The compensating system alone will satisfactorily polve the problem The "concentrated" point of the controversy Increase

of issue only versus Decrea.«e and iacrease of issue Tlie alte'-ation of a clause

of the Act is only re<iuired Clause 2 of the present Act already contains the spirit

of the reform The succeeding portions of the pamphlet enter into closer detail.

The Origin and the Main Principle of the Act of 1844.— The

"mix:ed" basis of all good bank note issues — — The term. " fiduciary" portion of a bank

note issue The disastrous experiments with over issue of fiduciary bank notes

The crude ideas prevailing even to this day The stockholders of the Bank of England

are concerned only in the issue as practised by the Bank of England The old Bank of

England Act. The Act of 1844 Its cardinal principle of hmit The Government

debt and secui-ities for the fiduciary issue Separation into Issue and Banking Department All issue above 15 millions to be made against bullion The real and the

deceptive merits of this method of issue The convertibility of the note Convertibility naust be secured first of all The security of the State and "other" securities

held against the 15 millions fiduciary issue The same security will be given in the

scheme of the author The separation of the Issue from the Banking Department • ■

The same system of separation will be maintained by the author's scheme A discussion

on the points enumerated is not necessary. The "real" point will appear all the more

readily The main point to be considered, viz., the 15 millions fixed issue The

supposed merit of the limit of 15 millions fixed issue The great chann involved in

the limit Its apparent principle of caution and prudence The extent of its

liberaUty Its want of phabihty - - Pages, 50 to 59

The Demerits of the Fixed Limit of 15 Millions.— The origin of the

amount of 15 millions The fallacy of the average in matters of this kind The

variations have since been most excessive ' Table 4. — Returns akotoing the amount of

total circulation of Sank of England notes, vrith ike amount of bullion held during the years 1824 to 1843, two in each year ; and the years 184:5 to 1871, four in each year ,- (at the respective periods mentioned before) and the consequent Jiducia/ry circulation, and the Reserves of notes. —

Pages 62-3 The previous average relied upon has been totally destroyed A

lamentable picture of confusion of results has followed The higher state of the

bullion average is due to our enhanced trade The Bank itself has been unable to

increase the stock of bullion proportionately But it has kept large idle Reserves of notes.

Pages 59 to QG

The Demerits of the Reserve arising from the Fixed Issue.— The

great misconception involved in the Reserve so arising A regular steady Reserve

must be kept The question here concerns only the Reserve arising under the present

system That Reserve drives away bullion Every milhon of more note issue keeps

away a milhon of bulHon The Reserve is useless for all practical purposes The

manifold mysteries -of the money market afford one or two simple main points To

what are due the enormous divergencies in the rate of interest? They are not due to

the nujnerical increase of circulation or actual use of more money The amount of

money used remains the same, the rate of interest bemg in question only The only

causes are the extreme variations in the stock of bullion which the Bank fails in preventing

The task and the instrumental power to perform it The rate of interest is the

automaton and unfttUing power The Bank is absolutely free :u exercifling this power

' As any regulating force can be exercised with due watchfiilneBS — — The lamentable

failure of the Bank in this respect The Bank is too late in raising the rate, and too

quick in lowering it j and cannot even keep a margin for unknown contingencies The

idle and useless reserve of notes are the sole cause of the impossibility to keep interest

at proper levels Example showing how the present system works The Bank of

England poises the rate in accordance with the amount of actual note Reserve The

diminution or increase of fiduciary issue in lieu of the fixed amount Will regulate the

rate of interest, and consequently regulate the stock of bullion The plainest intelU-

gence can discern the rights of this matter The post facto action of the present

system The voluntary of reduction the fiduciary issue would have the effect of retaining

bullion in its stead This rule applies to all conditions and states of the market -—

The almost ludicrous consequences of this Reserve of notes So long as this fallacy as

to fixed fiduciary issue exists, a settlement is impossible, and aU our policy is false

The principle of reduction must have precedence over increase of issue Memorial

addressed to the Directora of the Bank of England Substantial facta are given in the

following portions of this Book - ■ - . - - Pages QQ to 79

The Effect of the 15 Millions of rixed Issue on Bullion and the

International Exchanges. — The laws of international exchange as connected with rates of interest must be appreciated False allegations as to the causes of withdrawals of buUion The world does not come to the Bank of England for gold

Our bullion market is open to the Bank of England as well as other hanks Other

nations are important traders and dealers in Bullion, as the foot note shows Footnote.

— Tahle 5. — Imports wnd exports of bullion and coin of England, from 1850 to 1872 inclusive, — Page 81. — Tahle 6. — Imports and exports of buUion imd coin of France, from 1860 to 1872 inclusioe. — Page 83. — Table 7. — Oold exports and imports between England and France.

—Page 84 The suggestion that foreigners prey upon our gold coinage is utterly false

and contemptible The great international movements of bullion rest upon the purest

basis of arithmetical truths The balance of trade determines the rates of exchange

Arbitrations of exchanges precede shipments of bullion - — Their refinement and

delicacy at the present day The action of the rate of interest in regard to exchanges

The regular and legitimate action of true rates of interest The influence of imdue

rates of interest The ahsolute force of the estahhshed rate ■ — — The insidious nature

of an unduly low rate of interest — =— The export of bullion in defiance of the balance of

trade The consequent necessity for sudden and extreme rises in our rate The

extreme efEbrts required for balancing fluctuations caused by extremes The moderate

efforts required for the maintenance of a status quo The breaks in the chain of progress

in bullion and note issue ... . . . - Pages 79 to 91

The International Rate of Interest, the Market Rate, and the

Sank Rate* — variations in the international value of money Instancing the

supply of precious metals since 1848 The effect on increased production The

counter effect of increased production The changes in the valuation The

variations in the international rate of interest are gradual The want of accord

between the international rates and the Bank of England rates The annexed table

shows the result Tahl'e 8. — Showing the variations in the Banlc rates of interest in

England, France, wnd Prussia, from September 18i4 to December 1873 MtciMBiuri— Page 94. -

The continental bank's protecting action ismore efficient The kej^note for the reform

of our system indicated by this table Table 9. — Showing the number of cha/nges in th6

rates of interest, and the number of weeks duri/ng which the rates lasted, of tkeBwiiks ofEngland^

France, and Prussia, from Ist September 1841 to Slst December 1873^Page 98 The Bank of

England ought to be able to keep bulUon with lesser efforts than foreign banks The

reverse being the case, a false principle must be reversed — The conflict here concerns bullion only as subject to international competition or guardianship by rates of interest — — The wretched result as far as England is concerned —— The consequences fall chiefly on our own industry and commerce The losses occtmred on behalf of the recovery of

bullion exceed the amount forced back The angry confusion and just complaints to

which this gives rise The unhealthy and untrue expedients proposed The

London exchange market has become powerless through its want of true rates of interest All reciprocity ceases in this case Pages 91 to 106

The General Circulation and that of the Bank of England Note.—

The question of the use of money by the home trade of the country The false impression

that the demands of trade cause scarcity of money The comparative regularity of

the home circulation The gross amount of money in the country Partly in

circulation, partly in Reserve Characteristics of the constituents Firmness of the

gold coin in circulation A sudden addition to the circulation cannot take place

The subtraction of gold coin from circulation is resisted A general gradual increase

has taken place Silver and copper coin Country bankers' issues The Bank

of England note circulation ; is the supernatant constituent of the general circulation

The variations in the total circulation concentrate in the Issue Department of the

Bank of England -—^ Table 10. — Shom/ng the extreme variationa of the Bank of England Note Circulation in each Quarter (from let January) of the years 1845 to 1871 {in millioiis £

sterling) — Page 113. The regularity of the circulation of Bank notes within three or

four millions In spite of all movements, failures, crises, and paniesj the public does not

away with money, or uses too much of it On the contrai'y, it keeps what there is,

and steadfastly resists all attempts at inflation Through the continual offer of the

Bank's Reserve of idle notes The paramount importance of this fact The inexorable firmness of the circulation There is practically no scarcity of money, nor use for

any surplus The lessons to be derived from this facb The misuse of the term

"elasticity." It concerns gradual increase only The freedom of supply of gold

and development of the demand In accordance with the principles of international

valuation ■ The absurdity of schemes for indefinite or definite supplies of Bank notes

They would destroy the true elastic force of our currency The same spirit at work in

all such schemes, ignorant of and incapable of citing facts A current fallacy as

regards the distress for money Its untruth and the real truth - — The real cause of

panic — The true causes of the restoration from a panic • - • Pages 106 to 120

The Availability of the Reserve of the Bank of England.^

The difficulty of discussion as to Reserve The abolition of the present Reserve

The substitution of a better system, explained in Part II The connection between circulation and Reserve The clear definition of the purposes of Reserve The

reasonable considerations by which the use of the Reserve can be measured The

requiretaents of the Bank of England The use of the Reserve for the accommodation

of the public ■ Is comprised in andidentical with the circulation The importance of

Uiis fact and its confirmation by the most severe tests The pubHc refuses altogether

to make use of the surplus of fiduciary issue The Reserve of the Bank against

withdrawals of deposits The right of inquiry into this matter by a reasonable method

The capital and rest of the Bank offer overwhelming security Gradual withdrawals of deposits are met by realisation of securities Sudden withdrawals of

deposits The capricious and unbusinesshke nature of the supposition What

would be its effects? It would have no effect on the amount of money required

The final suggestion of general bankruptcy Such an event would lead to a plethora

ill the already existing supply -The remarkable fact of the increase of deposits in times

of pressure Demonstrating the real strength of the depositors The extreme

iiTegularity of the Reserve shows its failure The supposed purpose of the Reserve to

replace withdrawais of bulhon Its seenaingly natural application Its real

tnischieVDUs action is the cause of all the difficulties To demonstrate this is the object

Of this Book . ^ . . Pages 120 to 129

False Suggestions Founded on Reserve.— The remarks made before estab-

lish the reliability of the factor circulation False suggestions as regards Resex-ve ■

False method of estimating Bankers' liabilities against cash Reserve • ■ Without referonce to circulation The real state of the case of Bankers' Reserves Concema

the character of the inve&tment made Failures and want oF confidence result in