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"Starting on the 19th of September with a reserve of more than one-third of the deposits, the Bank reserve was reduced on the 11th of November to less than one-eighteenth; and even supposing the 2,000,000l. said to have been withdrawn for Scotland and Ireland not to have been so withdrawn, that reserve would have been under one-fifth." Now these are figures which can be read not only by a man who runs, but by a man running very fast. The most inconsiderate mind must be struck by an account which shows so frightful a decrease of available resources. Every one, in truth, was so struck at a much earlier period than the last of the above dates; and the result was the panic of 1857. We think all candid persons should allow, that whatever other advantages the act of 1844 may have, its effect just then was to aggravate seriousness into apprehension, and apprehension into terror.
This effect is the more perverse, because the first of the accounts, as legal authorities tell us, represents the real state of the Bank, and the other only embodies a theoretical form of account. This may seem unlikely to persons only slightly familiar with the subject; but it will not seem so to those who have studied the controversies in which the theory of the Act of 1844 originated. According to the accomplished persons who suggested that theory, it was desirable that the amount of the paper circulation (whether including the reserve of notes in the Bank of England, or excluding it, was by no means clear) should conform to the fluctuation of the bullion in the Bank; that for every new five pounds of bullion there should be a new fivepound note somewhere, and that for every new five-pound note there should be a new five pounds of bullion somewhere. The framers of the act looked at the matter with the eyes of the economists rather than with those of lawyers. They wished that the five-pound note and the five pounds of bullion should always co-exist; but they did not care to appropriate or earmark the bullion for the payment of the note. They wished, as Lord Overstone has expressed it, that the note should be "the
shadow" of the metal; but they did not especially care to enforce a legal tie between them. In the same way, the same school of legislators and thinkers enacted expressly that gold should go down to Scotland as a basis for the note circulation (above a certain limit); and yet did not at all specifically appropriate it to that circulation. In a word, it was rather the representative character of the note that they were anxious to secure, and not its convertibility, in its obvious meaning that whoever has a five-pound note should be sure of having five pounds in gold for it. It struck these theorists as immaterial whether the note-holder had the five pounds, or some one else had it.
The consequence has been, that a fictitious form of account, which really gives no priority to the note-holder over the depositor, appears to give such priority, and that the depositor is frightened into panic by the idea of his postponement; although it is not true.
The evils of a crisis so produced and so aggravated are of a complicated nature; and it would require much more space than we have at our disposal to specify all of them. A knowledge of one of them, however, is particularly important to a correct understanding of very recent events. By one of the most elaborate contrivances of our commercial system, credit, in its various forms, is largely employed as a currency. The bank-note is one of the most obvious forms of this; it is a mere promise to pay, but in its transference from hand to hand it closes bargains as effectually as gold itself. The bank-note, however, though the earliest and simplest, is not by any means in our refined commerce the most operative form of the credit currency. The large wholesale transactions, which really determine the general price of important articles, are rarely now settled in bank-notes. The real instrument of large operations is the cheque. It is within the familiar experience of every one, that all the ordinary purchases of private life are now so settled; the large purchases of trade are so also. Some people have a notion that a cheque is not currency because it is immediately paid and cancelled; but this is a mistake of fact. Very few cheques, in comparison with the whole number, are really paid over the counter in sovereigns. The person who receives a cheque probably keeps a banker, and pays the cheque in to his account with such banker: if the latter is the banker on whom the cheque is drawn, the cheque is "paid" by a simple transfer from the account of the drawer to that of the payee; even if the banker of the drawer is a different person from the banker of the payee, the process is the same. The rural bankers, as a rule, settle their accounts in London. All London bankers settle their accounts at the "clearing-house;" that is, they see
what cheques each holds payable by the others, set off an equal amount one against another, and pay the balance themselves by a cheque on the Bank of England. Every London banker has an account at the Bank of England, from which the cheque so drawn, by a slightly complex machinery of book-keeping which we need not explain, is transferred to the account of the banker who is to receive it. By this artificial arrangement, cheques drawn in Dorsetshire or Lancashire are really paid by transfers in the deposits of the Bank of England. No sovereigns or notes pass at all; the whole is a matter of bookkeeping. It is evident that all this supposes a general feeling of confidence in the banking community. If every person who received a cheque took fright about the stability of the banker on whom it was drawn, or the adequacy of the provision made by such drawer in the hands of that banker for its payment, the system would be at an end. If every person who received a cheque rushed at once to the banker and obtained coin for it, there would be no room for this currency of set-offs, and the work of the clearing-house would cease altogether. In times of panic there is a good deal of this. If at such a period there is a run on the bill-brokers of Lombard Street (as there is understood to have been last November for two or three days after the stoppage of Messrs. Sandeman and Saunderson), a good deal of it is taken in bank-notes. Nervous persons do not like to trust to the operations of the clearing-house, which they will not know for some hours; especially if they hold securities, they will be very unwilling to rely on this distant process, or to part with them except on the payment of bank-notes. The expectation of this process produces even a worse effect than its reality. Every money-dealer, especially every country banker, who cannot from geographical difficulties at once replenish his stores, strengthens himself to meet the sudden demands of apprehensive persons. He has no confidence that other people will have confidence, and he provides accordingly. The consequence is, that a larger amount of coin and bank-notes is required in times when credit is large than in times when credit is small, because in our elaborate commercial civilisation we have coined credit itself into a currency.
These considerations afford the best reply to those theorists who seem to consider the letter from Lord Palmerston and Sir G. C. Lewis, permitting an additional issue of bank-notes upon securities, as a "debasement of the currency." The exact state of things was this:-The knowledge of a limit prescribed by former legislation has produced a feeling of apprehension which has destroyed the efficiency of a portion of your currency. The real bargaining medium of the country is as much diminished,
or rather is even more diminished, by the diffused nervousness which we have spoken of, than it would be by the failure of a country bank issuing notes. Yet it has been generally admitted that, in the case of such a failure, economical principle did not forbid, and obvious common sense warranted, an issue of other paper by solvent persons of credit to supply the vacuum which had been so created. We can acknowledge no distinction for this purpose between bank-notes and other forms of credit. The circulating medium of the country, in this relation, must be regarded as an entire whole; whatever by the course of usage settles our domestic transactions, is a part of it; and when any important part of it is destroyed or impaired, we can recognise no violation of principle in a development of that which is unimpaired. The place of that which is wanting may surely be supplied by the substitution of that which we have. In the instance before us, the case is even a stronger one. What caused the panic was the apprehension of the legislative limit; the mere removal of that limit was in itself equivalent to a great increase of currency, because it supported so much credit which by custom and habit was performing the functions of currency. Lord Overstone has observed of the circumstances of a former panic: "Look to the Government letter of 1847. What was the Government letter of 1847? Why, it was an indefinite increase of the Bank reserve. What was its effect?
Not one note was put into what is called its active state. Not one single note passed out of the Bank in consequence of it; but the Bank reserve was instantaneously augmented. What was the result? A miracle was instantaneously worked. The want of confidence was removed; every thing became smooth and easy. The whole machinery of the credit system of the country, which had been brought to a dead-lock, was immediately put in order, and every thing went on with perfect ease." Can there be a more satisfactory testimony to the effect of the limit upon the issue of bank-notes in impairing the efficiency of the "credit currency" of the country, or of the instantaneous rapidity with which that credit currency is repaired by its removal? On the present occasion it has been necessary not only to erase, but to overstep the limit. There is hardly any one, in the midst of the facts, but will find, however, that the amount of circulating credit impaired by apprehension is very much greater than the not very considerable sum which has been issued beyond the law.
This affords also the reply to the suggestion of Lord Grey, that an issue of Exchequer-bills or stock would be more appropriate than an issue of notes. Neither of these would, however, repair the deficiency. A portion of the transferable credit which effects the purposes of money in the community has
become inefficient; you can only substitute for it some other form of credit which will be efficient; and neither Exchequerbills nor stock are, in our present practice, capable of being used as money.*
There is, indeed, no other credit so well adapted as that of the Bank of England for sustaining and replacing other credits. Its central position, its great capital, its peculiar prestige, fit it especially for so doing; and if it kept a sufficient bullion reserve, and were unhampered by the restrictive operation of the Act of 1844, it could do so safely and without difficulty. The knowledge that it was able to do so would very likely prevent a panic; and a judicious use of its power would mitigate and relieve a panic if it should occur. We are aware that this involves the necessity of intrusting our entire bullion reserve to the discretion of the Bank directors. But, as we have seen, all of our bullion reserve which is held for the banking liabilities of the country (or, if any one likes it better, all the reserve of notes in the banking department) is at present intrusted to their discretion. They can, by errors in judgment and miscalculations of events, with facility reduce this part of our reserve to the zero at which it lately stood. Is there any great additional risk in giving them an entire control over the whole?
It is, indeed, alleged, and in part truly alleged, that the operation of Sir R. Peel's Act is to compel the Bank to make provision for a drain of bullion at an earlier period than it would otherwise have done. No one can deny that the Act of 1844 has been a most instructive scientific experiment; and the evidence recently given by the Bank authorities, as compared with that given by them ten years ago, certainly proves that they have learnt a good deal that is very valuable. But now that the precedent of breaking the Act is thoroughly established, we may well question whether the conduct of the Bank under it will be different from what that conduct would be without it. The resource of breaking the law will always be in the background of the mind. In overt argument the Directors may allege that they are not relying on such a resource; but patent facts will have their influence. They know that they can have a letter of license if they choose; and they will never act as though they could not have it. Although, therefore, Sir R. Peel's Act, and the reasonings on its working, have taught
*To the issue of Exchequer-bills there would be the further objection that they were scarcely saleable; and if there had been a dream of any large new issue, they would have become unsaleable. The high price of stock, and the readiness with which loans could be obtained upon it, arises from the number of trustees and similar persons who are confined by settlements, &c. to that invest