The Bank Charter Act
Jonathan Duncan
I FEEL it my duty to address this volume to you, as an enlightened and persevering advocate of monetary reform. To that important subject you have contributed a large and valuable amount of practical knowledge. Public indifference has never damped your energy, nor has your moral courage ever quailed before the sneers of ignorance and prejudice.
On personal grounds it is grateful to my feelings to associate your name with this publication, as it affords me an opportunity of testifying my appreciation of your generous and unswerving friendship.
Jonathan Duncan.
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 “Bank Charter Act” is one of a series of monetary enactments commencing in 1816, consolidated in 1819, and complemented in 1844; 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 magnitude of his error before his death. Mr. Bankes declared that every member of the committee who reported to the House of Commons in favour of the Bill of 1819 was 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 Robert 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 following 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.”[1]
The panic of 1847 was the result of the Act of 1844, and thus both the original building and its sustaining 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 evidence; two attended four times, and one five times. Of those who opposed the report embodying the resolutions, and who were present and voted when the resolutions were discussed, none attended the committee less than twelve times. Government carried the Report by a majority of only 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 committee; 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 committee, reported to the House of Commons in favour of the Bill, in the following terms :—
“ 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.
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 witnesses, as the judges act in the courts at Westminster. The nation requires the verdict of truth, not its perversion 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.
4 25
5 20
10 10
20 5
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 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 property 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 parliament, 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 repudiated the admirable truths he expressed in “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, 25th February, 1857.
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 Overetone, of the second Sir Robert Peel, and of the Times Newspaper. Those Principles examined and controverted. Mr. John Taylor’s Definition of Money.
The Currency Controversy
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 suppressing 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 vernal 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 kill 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 recommend 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. The substance of this pamphlet will be an expanded commentary on their conflicting opinions.
THE ARGUMENT STATED.—BULLIONISM.
1. Mr. Huskisson assumed that it was the essence of money to possess intrinsic value.
2. Mr. Samuel Jones Loyd, now Lord Overstone, and who is generally understood to be the “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 convertibility 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 :—
“ 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 exchanges; 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.”[2]
Mr. Loyd gives the following definition of money :—
“ 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 character 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.”[3]
Mr. Loyd thus describes the effect of a contraction of the currency :—
“ 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 diminishing, 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 metallic circulation would have acted.”[4]
3. The late Sir Robert Peel, on introducing the Bank Charter Act of 1844, expressed himself in the following terms :—
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 authorities whose names have been mentioned, asks its opponents, “How do you interpret the words inscribed on the Bank note, ‘I promise to pay on demand one pound?’ ”
Such, in substance and spirit, are the fundamental principles and leading propositions of the most accredited 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 necessity, 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 its 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, far 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 Abraham, when he purchased the field of Macpelah, for 400 shekels of silver, “money of the merchant.” We admit that debts due by us to foreigners ought to be discharged in bullion, coined or uncoined, of a definite 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,” is preferable to the term, “convertibility.”
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 out 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 “when the convertibility of the notes ceases, there is no longer any fixed limit to the amount which may be issued.” 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.
“ 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 bits of bullion, 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 promissory 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 regulating 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.”
Mr. Loyd insists, that when bullion is diminishing, the Bank ought to be compelled to diminish its note circulation; whence it follows, that if there were no bullion at all in the country, there ought not to be any legal tender whatever. If there is a danger that the notes and the bullion should not always be in exact equipoise, why permit the issue of a single note? Why not confine the legal tender of the country to bullion? Whether the trade of the country could go on for twenty-four hours under such a restriction, it is for Lord Overstone to prove, not for those who object to his whole system. If the theory cannot bear the strain of such a metallic test, it is worthless, for, to will the end and refuse the means, is folly.
That legal tender should diminish when a single commodity is scarce, and all other commodities are abundant, is to subordinate the general to the particular, and to inflict the most cruel injustice. Take a case. Government contracts for a certain number of steam vessels of war, and binds the contractor to complete the order within a specified time, under a penalty. Let us assume (and the assumption is founded on experience), that when the contract was taken, the Bank rate of discount was 3 per cent., but, before it is completed, that the rate rises to 8 per cent. This difference transfers the legitimate profits of the contractor into the till of the discounter; if the work is not finished, government enforces the penalty—the same government that maintains the Act of 1844, which raises the discount; thus, in either way the contractor suffers; and what is true in this case, is true in all others of a similar character. Work is stopped, because gold disappears, for, with its disappearance, notes are withdrawn from circulation.
Against such a system the contractor might protest in the following language. “I have abundance of iron, timber, coal, machinery, and skilled and unskilled labour, and am quite willing to complete the contract; I have not hoarded, or exported gold, or lent it for profit to a foreign State; I had no control over its departure from the cellars of the Bank of England; is it then just that I should be plundered of my legitimate gains by extortionate discounts on account of the statutable scarcity of legal tender, or he ruined by government exacting the penalty for not executing the contract.” “Yes,” replies the theory of Lord Overstone; “you are justly impaled on one of the horns of the dilemma.” A reduction of circulation must at all times tend to check the facility of credit, and to lower prices.” Gold is thus made the master, not the servant of labour. Surely such a system is self-condemned.
Had the late Emperor Nicholas given through agents five pounds an ounce for coined sovereigns, the Mint price of them being only £3 17s. 10½d., could we have fitted out the military and naval armament which rescued Constantinople from his grasp ? Certainly not, on the theory of Lord Overstone.
3. Had Sir Robert Peel adhered to his own definition of a pound, he ought to have abolished all Bank notes, in which case there would have been no need of “I promise to pay on demand one pound,” and no possibility of the promise being violated. But, with strange inconsistency, his measure allowed the Bank of England, the Provincial Banks, the Banks of Ireland and Scotland, collectively, to issue among them upwards of 31 millions of promises to pay, without compelling them to hold a solitary grain of gold to redeem those promises. His scheme exploded in 1847, and the country was only saved from bankruptcy by the suspension of his law; and that law has only held its ground since, by the unexpected discovery of the mines of California and Australia.
If the present system is to continue, a distinction ought to be made in the appearance of the notes. Those issued against bullion might be printed, as at present; but those not issued against bullion ought to have their edges marked with a black border. A false credit arises when the bullion notes and the bubble notes are not distinguishable. But, we repeat it, put an end to all notes; circulate coin and nothing but coin, and thus honestly test the metallic theory.
4. The question asked by the Editor of The Times in every leading article which he devotes to the Currency Question proceeds on the fallacious assumption of Mr. Huskisson; and is but a repetition, under a changed form of words, of the interrogatory of Sir Robert Peel, “What is a Pound?” The Editor of The Times aims at no more than a puerile triumph when he seeks to puzzle or confound his opponents with a truism. Resolved and admitted that a pound means 123 grains of gold; then what is the promise to pay a pound? The question involves a foregone conclusion, and is plainly answered in the mind before it can be expressed in language. If the editor of The Times wished to solve a disputed or unsettled problem, he would ask, “What ought to be a pound?” When that is determined, it may be that the words, “I promise to pay,” would no longer be inscribed on the note; but the words, “I promise to receive.” It is the latter formula that will be supported in the following pages, when the reasons for its preference will be assigned.
It is objected to the city editor of The Times, that he constantly plays fast and loose with language. When it suits his purpose, he speaks of money with correctness as the medium of circulation and the instrument of exchange; at other times he treats it as capital. In this last sense, when sovereigns are exported, he declares the country has become poorer, as though the sovereigns were parted with without our receiving a full equivalent. If we sent away every ounce of bullion, coined and uncoined, and received wheat in exchange when we were starving, would it be correct to say we were poorer by the operation? The city editor of The Times exults when exports of capital, in the form of iron, or of cotton or woollen fabrics, increase; why, then, complain when capital is exported in the form of sovereigns? The city editor of The Times fails to perceive, or, if perceiving, conceals the fact from his readers, that, under our monetary system, bullion, in its character of commodity, is always fighting against bullion in its character of coin; as commodity, its market price varies under the law of supply and demand; as coin, it is tied down to the Mint price, be it abundant or scarce. In either character, we are none the poorer when it is exported; but as the coin is the basis of our notes, and these latter are withdrawn when the former disappears, the loss of the sovereign becomes the loss of legal tender. True, the foreigner gives us an equivalent in commodities, as wheat, wine, or sugar; but these are not legal tender; we give our money and receive goods, but those goods will not pay taxes, or discharge debts. Hence evil arises; but it could never arise if we had a legal tender not possessing intrinsic value; for, in that case, it never would be exported as a commodity; and it is only as a commodity that the foreigner estimates our gold coin, for to him it is the same as uncoined bullion.
We have now, with as much fairness as we can bring to bear on the subject, stated the main points in the controversy between the advocates of bullionism and the supporters of representative money. The former insist on that character and quality of money which is liable to exportation; the latter contend for a character and quality of money not liable to exportation. Bullionism demands a commodity for money; its opponents contend that money ought not to be a commodity. This is the real nature of the dispute; on the one side we have a reality, on the other side, the symbol of the reality. It is respectfully submitted to the memmbers of both Houses of Parliament that no sound conclusion can be arrived at till the nature of money is rigidly defined. The question is not, “What is a pound?” or, “What has been a pound in past ages?” but, “What ought now, and in future, to be a pound?”
1 Thoughts on the Separation of the Two Departments of the Plank of England, p. 1 and 2.
2 Remarks on the Management of the Circulation, p. 1. London, 1840.
3 Ibidem, p. 105.
4 Ibidem.