[The English Bank Act of 1844]^[1]

It will be recollected that in 1857 the British Parliament was hastily called together in consequence of the suspension of the Bank Charter Act[2], which, by letter of Nov. 12, in the midst of the monetary panic, the Premier and the Chancellor of the Exchequer[a] had assumed the responsibility of decreeing. The Indemnity bill once passed[b], Parliament adjourned, leaving behind a select Committee appointed "to inquire into the operations of the Bank acts of 1844 and 1845, as well as into the causes of the recent commercial distress." The Committee had, in fact, sat since the beginning of 1857, and had already published two heavy volumes, one of evidence, the other appendix, both relating to the operations and effects of the Bank Acts of 1844-45[c]. Its labors were almost forgotten when the occurrence of the commercial crisis recalled it to life, and afforded it an "additional element of inquiry." In the two heavy volumes to which we have referred, trade, just two months before its tremendous collapse, was declared to be "sound" and "safe." As to the working of Sir Robert Peel's Bank Act, Lord Overstone expressed himself before the Committee, on July 14, 1857, in these rather dithyrambic strains:

"By strict and prompt adherence," he said, "to the principles of the act of 1844, everything has passed off with regularity and ease; the monetary system is safe and unshaken; the prosperity of the country is undisputed; the public confidence in the wisdom of the act of 1844 is daily gaining strength; and if the Committee wish for further practical illustration of the soundness of the principle on which it rests, or of the beneficial results which it has insured, the true and sufficient answer to the Committee is, look around you; look at the present state of trade of the country; [...] look at the contentment of the people; look at the wealth and prosperity which every class of the country presents; and then, having done so, the Committee may be fairly called upon to decide whether they will interfere with the continuance of an act under which those results have been developed."[d]

Six months later, the same Committee had to congratulate Government upon having suspended this very same act!

The Committee numbered among its members not less than five Chancellors or ex-Chancellors of the Exchequer, viz.: Mr. Disraeli, Sir G. C. Lewis, Mr. Gladstone, Sir Charles Wood, and Sir Francis Baring, backed by Mr. Wilson and Mr. Cardwell, two men long accustomed to find brains for Ministers of Finance. Beside these, all the magnates of the English bureaucracy had been added to it. In fact, it mustered about two dozen strong, and was a remarkable conclave of financial and economical wisdom. The questions to be decided were, first, the principles of the bank act, of 1844; secondly, the influence on commercial crises of the issue of bank-notes, payable on demand; and, lastly, the general causes of the recent distress. We propose, succinctly, to review the answers given to these different questions.

Sir Robert Peel, the Parliamentary godfather, and Lord Over-stone, the scientific father, of the act of 1844[e], which prohibited the Bank of England from issuing notes beyond the amount of 14,500,000, save on the security of bullion, flattered themselves they had prevented such pressures and panics as had periodically occurred from 1815 to 1844. Twice in ten years their expectation has been baffled, despite the extraordinary and unexpected aid afforded to the working of the act by the great gold discoveries[3]. In 1847 and 1857, as is shown by the evidence laid before the Committee, the panics were even of a more intense and destructive character than any ever witnessed before. Twice, in 1847 and 1857, the Government had to infringe the bank act, in order to save the bank and the monetary world revolving around it.

The Committee, it would appear, had to decide on a very simple alternative. Either the periodical violation of the law by the Government was right, and then the law must be wrong, or the law was right, and then the Government ought to be interdicted from arbitrarily tampering with it. But will it be believed that the Committee has contrived to simultaneously vindicate the perpetuity of the law and the periodical recurrence of its infraction? Laws have usually been designed to circumscribe the discretionary power of Government. Here, on the contrary, the law seems only continued in order to continue to the Executive the discretionary power of overruling it. The Government letter, authorizing the Bank of England to meet the demands for discount and advances upon approved securities beyond the limits of the circulation prescribed by the Act of 1844, was issued on Nov. 12; but up to the 30th the Bank had, on a daily average, to throw into circulation about half a million of notes beyond the legal margin. On Nov. 20, the illegal surplus circulation had risen to about a million. What other proof was wanted of the mischievous futility of Sir Robert Peel's attempt at "regulating" the currency? The Committee are quite right in affirming "that no system of currency can secure a commercial country against the consequences of its own imprudence."[f] But this sage remark is not to the point. The question was, rather, whether the monetary panic, which forms only one phase of the commercial crisis, may or may not be artificially aggravated by legislative enactments.

In justification of the Bank Act, the Committee say:

"The main object of the legislation in question was undoubtedly to secure the variation of the paper currency of the kingdom according to the same laws by which a metallic circulation would vary. No one contends that the object has not been attained."[g]

We remark in the first place that the Committee decline to state their opinion as to the laws by which a metallic circulation would vary; because they were afraid "they would not be able to arrive at any conclusion without much difference of opinion."[h] In the opinion of the bullionists, led by Sir Robert Peel, a merely metallic circulation would contract or expand in accordance with the state of the exchange—that is to say, gold would flow in with a favorable exchange, while it would leave the country with an unfavorable one. In the former case, general prices would rise; in the latter, they would fall. Now, supposing these violent fluctuations of prices to be inherent in a purely metallic circulation, Mr. J. S. Mill was certainly right in stating before the Committee[i] that the condition to be aimed at by a paper currency was not to imitate but to correct and supersede such disastrous vicissitudes.

But the premises the bullionists proceed from in their reasonings have been proved to be imaginary. In countries where no credit operations exist, and consequently no paper circulation, as, comparatively speaking, was the case until recently in France, and is still the case on a much greater scale throughout Asia, private hoards of gold and silver are everywhere accumulated. When bullion is drained by an unfavorable exchange, these hoards open in consequence of a rise in the rate of interest. When the exchange turns, the hoards again absorb the surplus of the precious metals. In neither case, is a vacuum created in the currency, nor the opposite. The efflux and influx of bullion affect the state of the hoards, but not the state of the currency, and thus no action at all is exercised upon general prices. What, then, does the apology of the Committee amount to, that the Bank act of 1844, in periods of pressure, tends to create sudden fluctuations of prices which it falsely supposes would occur on the foundation of a purely metallic currency? But say the Committee, the convertibility of the notes, which it is the first duty of the Bank to maintain, is at least guaranteed by Sir Robert Peel's act. They add:

"The supply necessarily maintained in the coffers of that establishment under the provisions of the act of 1844, is greater than that which was ever maintained under circumstances of pressure in former times. During the crisis of 1825, the bullion fell to £1,261,000; in 1837 to £3,831,000, and in that of 1839 to £2,406,000, while the lowest points to which it has fallen since 1844 have been, in 1847 £8,313,000, and in 1857 £6,080,000."[j]

In the first instance, the convertibility of the notes was upheld in all those panics, not because the Bank possessed bullion enough to realize its promises, but simply because it was not asked to pay them in gold. In 1825, for instance, the Bank withstood the run by issuing £ 1 notes. If the comparatively greater bullion reserves in 1847 and 1857 are considered as simply the consequences of the act of 1844, then, on the same reasoning, to the same act must be attributed the fact that in 1857 the bullion reserve, despite California and Australia, had sunk by more than £2,000,000 below the level of 1847. But, although possessed of twice or thrice the amount of gold which it had owned in 1825 and 1836, the Bank of England, thanks to the provisions of Sir Robert Peel's act, trembled in 1847 and 1857 on the verge of bankruptcy. According to the evidence of the Governor of the Bank[k], the entire reserve of the banking department on Nov. 12, 1857, the day of the issue of the Treasury Letter, was only £580,751, its deposits at the same time amounting to £22,500,000, of which near £6,500,000 belonged to London Bankers. But for the appearance of the Treasury Letter, the shop must have been shut up. To raise or reduce the rate of interest—and the Bank confesses that it had no other means of acting upon the circulation—is an operation which was applied before the passing of the act of 1844, and which, of course, might still have been applied after its repeal. But, says the Bank, the Directors want their virtue to be fortified by the act, and it would not be expedient "to leave them to their own unresisted wisdom and firmness."[l] In ordinary times, when the act is notoriously a dead letter, they want to be fortified by the fiction of its legal operation, and in moments of pressure, the only moments in which it can operate at all, they want to get rid of it by a Government ukase.

Notes