The Bank Charter Act
Jonathan Duncan
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 all. Division of the Bank into the Banking and Issue Departments. The Lords’ Report on the Suspension of the Act of 1844 in 1847. Errors of Sir Robert Peel.
The Bank Charter Act of 1844
A CONSTANTLY failing revenue overwhelmed the Whigs with unpopularity. Their parliamentary majorities became fractional. To weather the storm they proposed an eight shilling duty on wheat. This most paltry expedient clearly showed that they were grossly ignorant of the true state of the nation. The object of the corn laws had been to raise and sustain prices at the taxation level, but the object of the money laws had been to drag down all prices to the barter level. This antagonism between the two conflicting statutes the Whigs never perceived, and hence the grand and fundamental error of their policy. What the people wanted was high prices, for these alone could yield high profits and high wages; and these again were the necessary antecedents to a high revenue, derived from indirect taxes levied on articles of consumption. A population unemployed, or, if employed, unrewarded, cannot purchase; ceasing to purchase they cannot recruit the funds of an exhausted treasury; and the deficiency in the whig revenue might be accurately measured by the deficiency of recompense earned by the industrious classes. To them high wages, not cheap bread, was the primary consideration, for if wages were not obtained bread was beyond their reach. It was under these lamentable blunders that the Whigs were ignominously driven from Downing-street, and Sir Robert Peel took the helm of the state vessel.
The failure of Mr. Baring’s scheme had convinced the new minister that the consumption of those who lived on wages had reached its limits. Out of them no more was to be squeezed under a system of metallic money, to which he pertinaciously adhered. Therefore the Property and Income Tax were introduced to make up the deficiency in the revenue; but no effort was made to raise the condition of the labourer by augmenting his purchasing power over commodities through increased wages. Whig and Tory both agreed in keeping him down in the scale of civilisation; and in order that this slavery of the industrious classes should be riveted by the strongest and heaviest fetters, Sir Robert Peel proposed and carried the Bank Charter Act of 1844, which was complementary to the Act of 1819. The real author of this measure was Mr. Samuel Jones Loyd, now Lord Overstone.
The Act of 1844 proceeds an the assumption that an equilibrium of prices exists all over the world. The assumption is wholly false. Prices are made up of two constituent parts, intrinsic value and taxes; consequently if taxes are unequal in different countries, there can be no equilibrium of prices. The national debt of England is about equal to the aggregate of all the national debts of Europe; the standard of living is superior to that of all the other countries in Europe; these two circumstances compel higher prices in England than in any other country in Europe. The assumption of Peel is, therefore, false.
“It is evident,” writes Mr. Capps, “that with such a currency as Sir Robert Peel proposes, where the pound is invariably 5 dwts. 3 grs. of gold, any increase of prices must be a larger quantity of gold. If the pound of 20s. be 5 dwts. of gold, 30s. must be 7½ dwts. of gold. Now suppose, for the sake of argument, that a commodity which is naturally worth 5 dwts. of gold, or 20s., should be required to be sold for 30s., in consequence of the additional charges caused by taxation, how, we ask, is 30s., which would be 7½ dwts. of gold, to be obtained from the foreigner for the article, if it is only intrinsically worth 5 dwts.? No ordinance of government can ever make things exchange in a free market for more of the commodity gold, or of the commodity silver, than they are intrinsically worth. Government may choose to put a tax of 5s., 10s., or 15s. upon any article beyond its intrinsic value; but it cannot make the foreigner give the 5s., 10s., or 15s. more for the article, if that be so much beyond its intrinsic value; nor can it make the home consumer pay it, if he has free access to a cheaper foreign market. .......... If the higher prices which indirect taxation renders necessary are to be secured to the producers, who, in the first instance, advance the taxes, a currency system must be established upon a totally different principle to that of Sir Robert Peel’s currency scheme. It is useless to look for higher prices, if those prices are to be realised in a gold currency; for the laws of nature and commerce forbid such prices to be realised.”
Experience had tought Sir Robert Peel that foreigners preferred cheap gold to dear goods. His device, therefore, was to prevent goods becoming dearer than gold. It was obvious that the difference in value between gold and goods could be prevented by limiting the circulation of legal tender money in England, in accordance with the foreign demand for gold. Now, this foreign demand depended on the prices of our products; if the home prices rose above the mint price of gold, at that instant the foreign demand for gold commenced and continued till the price of taxed products fell to the level of untaxed gold. Then, but not till then, the drain of metal ceased. Now, prices can only rise in the medium of money; increase the quantity of money, prices ascend; contract the quantity of money, prices descend. Accordingly the Bill of 1844 enacts, that as soon as prices reach the point at which it becomes more profitable to the foreigner to take gold than goods, the Bank shall draw in its notes and refuse to discount except at enhanced rates. Then all holders of goods, who are under acceptances and liabilities, are forced to sell, prices sink to the level of untaxed gold, and the threatened drain of bullion is averted. The system is termed, “The theory of regulating the issues of the Bank of England by the foreign exchanges.” The contrivance is ingenious; the means are admirably adapted to the end; but the perfection of the machinery is the condemnation of the inventor. It is the Procrustean bed of industry. It is a bill to depreciate the value of British labour. While it exists it is hopeless for the mechanic to expect any improvement in his condition. No prudence can ensure the merchant from the stealthy steps of ruin. No young man can hope to rise above the status in which he starts in life. Cheapened labour and cheapened commodities will continue to swell the opulence of all who live on fixed incomes—Belgravia will shine with burnished gold; Bethnalia will be squalid in sackcloth and ashes.
“The idea of making it (money) exclusively metallic,” said General Harrison, President of the United States, “however well intended, appears to me fraught with more fatal consequences than any other scheme, having no relation to the personal rights of the citizens, that has ever been devised. If any single scheme could produce the effect of arresting at once that mutation of condition by which thousands of our most indigent citizens, by their industry and enterprise, are raised to the position of wealth, this is one. If there is one measure better calculated than another to produce that state of things so much deprecated by all true republicans, by which they are daily adding to their hoards, and the poor sinking deeper into penury, it is an exclusive metallic currency. Or, if there is a process by which the character of the country for generosity and nobleness of feeling may be destroyed by the great increase and necessary toleration of usury, it is an exclusive metallic currency.”
The bill of 1819 had proved a failure. It had been accompanied by frequent and destructive panics. Sir Robert Peel, and his tutor, Mr. Loyd, felt the urgency of some change. They were too much committed to bullionism to abandon it, and determined to make the system more stringent; for this end they proposed to take from the Bank Directors all discretionary power. It is proper in this place to put Mr. Loyd’s monetary views before the reader, as he has expressed them in his various pamphlets and in his evidence before parliamentary committees.
“ 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 certain and safe test of the favorable or unfavorable 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 bullion in the possession of the Bank.”[1]
In this passage the requirements of the home trade are absolutely ignored; no provision whatever is made for sustaining our domestic agriculture or manufactures; so that when foreigners drain away gold, internal production and distribution are to be suspended, if not entirely destroyed.
“ In the case of the contraction of the paper circulation of any given country, the void created by the contraction cannot be filled up by a corresponding increase of the paper issues of any other country; the contracted circulation must produce its legitimate effects in enhancing the value of money and lowering prices in the country in which it takes place.”[2]
The following passage is to the same effect, but the atrocity of the measure is more unblushingly avowed.
“Against the actual exhaustion of its treasure by a drain through the foreign exchanges, the Bank, under almost any circumstances, has the power of protecting herself; but to do this she must produce upon the money market a pressure ruinous from its suddenness and severity; she must save herself by the destruction of all around her.”[3]
What description of bullionism can be more condemnatory of its character ?
“ Unless the paper circulation of the country be regulated by a fixed rule, not fitful and capricious in its operation, but constant and invariable, its convertibility cannot at all times be effectually secured, and the maintenance of the value of the currency, as measured by its ancient metallic standard, must become precarious and uncertain.”
The word “ancient” requires some comment. It would be uncourteous to say that it was used for the purposes of wilful deception, but most assuredly it does not express truth, but the very reverse of truth; and it has already been shown that the act of 1819, professing to restore the ancient system of cash payments, did nothing of the kind, but introduced a totally new system, violating the ancient standard in five different points. But we shall refer again to this matter when we examine Sir Robert Peel’s definition of a pound.
“ It is not sufficient merely to ordain, as Peel’s Bill did, (the act of 1819) the convertibility of the note; it is further necessary to see that effectual means are provided for that end. It is now discovered that there is a liability to excessive issues of paper, even while that paper is convertible at will; and that to preserve the value of a paper circulation, not only must that paper be convertible into metallic money, but that the whole of its oscillations must be made to correspond exactly, both in time and amount, with what would be the oscillations of a metallic currency, as indicated by the state of the bullion. Such a system, therefore, for the management of the circulation must be constructed as shall secure that due and steady regulation, of the amount of the issues through which alone any permanent security for their convertibility can be maintained.”[4]
If Mr. Loyd had been consistent with himself he ought to have insisted on the complete disuse of bank notes, which would have saved all the trouble of inquiring from week to week whether the paper and the gold were exactly proportionate; but he knew perfectly well that a purely and strictly gold circulation was impracticable, that it could not last for forty-eight hours; had paper been abolished, the blind would have been removed from the eyes of the public; they could no longer have been plundered, for all trade must have been annihilated.
The following questions and answers are extracted from the evidence of Mr. Loyd, given by him before the Bank Committee of the House of Commons in 1840.
“By the Committee.—Do you think that the internal trade of the country should be regulated and maintained by as steady and equable prices as possible ?
“ Mr. Loyd.—The idea of regulating the trade of the country by equable prices, if I may say so with proper deference to the Committee, seems to me to be nonsense.
“By the Committee.—Have you ever considered what would be the effect upon the minds of the industrious classes, if their wages fluctuated with the foreign exchanges; or, what would be the feeling of the internal trading community towards the sole bank of issue were their stocks to be subjected to sudden depression by the sale of foreign stock, or the payment of an instalment of a foreign loan, occasioning temporary depression in the exchanges ?
“Mr. Loyd.—I must admit that I have never reflected upon such topics, because I am quite sure that if I was to make the attempt, I should only lead my own intellect into great confusion, and come to no satisfactory or useful result, either to myself or to the community.”
The first member of this last sentence is a confession of ignorance, the second is a mean evasion; and neither are the fitting qualifications of a teacher of such inflated pretensions as Mr. Loyd. Had he pursued the subject to the extent which the Committee fairly presumed he had done, considering that he deems himself an oracle, it is probable that his conscience might have reproved his avarice; but, at any rate, he must have seen that as a banker he gained enormously whenever the Bank of England put on the screw. When he said that “equable prices” were “nonsense”, he assigned no reason for that censure; we are, therefore, driven to conjecture what were the grounds of his condemnation; are we to conclude that “equable prices” were “nonsense,” because they are accompanied by equable discounts, which are not so profitable to bankers as variable discounts ? That gambling speculations are preferable to steady trade, or that the sudden rise and fall of markets are the sheet anchors of mercantile stability ? Mr. Loyd has never been a producer or seller of commodities; he has simply been an agent of distribution, in which character he has realized millions, while hundreds of thousands of upright traders have been ruined by his system. On that system he has built up what may be termed a “Theory of Trade,” enunciated in the following terms :—
“ The history of what we are in the habit of calling the ‘state of trade’ is an instructive lesson. We find it subject to various conditions which are periodically returning; it revolves apparently in an established cycle. First we find it in a state of quiescence — next improvement — growing confidence — prosperity — excitement — over-trading — convulsion — pressure — stagnation — distress, ending again in quiesence.”
Were this theory founded on truth, melancholy would be the condition of the human race. The fabled Sisyphus, condemned to the eternal toil of heaving a stone up a hill only to roll down again to his feet, while an inexorable destiny compelled him for ever to renew his unavailing efforts, would be the type of human industry. According to the theory, labour may climb the mercantile ladder and reach its summit, not, however, to retain a firm footing on the eminence reached, but to be precipitated to the earth. Prosperity may be touched, not grasped; it eludes the hand, as the stream of water approached the parched lips of Tantalus only to retreat. We may till and sow, but the crop vanishes before it can be garnered. Thus doomed to perpetual and unrewarded toil, it is our hard fate to pass our lives,—
Still dropping buckets into empty wells,
And growing old in drawing nothing up.
Surely this is not a law of Providence. It is difficult to understand, if industry, guided by intelligence, is capable of raising a nation to prosperity, that the same industry, improved by its exercise, and the same intelligence matured by experience, should not, at least, render that state of prosperity permanent ! The reasonable presumption, indeed, would be that the state of prosperity would advance, since practice sharpens aptitude, and experience discovers and amends defects. But, according to Mr. Loyd, the theory of trade is an exception to this rule; the cycles of prosperity and ruin are inevitable. Before giving our assent to this disheartening doctrine, let us inquire if the evils said to be inherent in the system are not the consequences of ignorant or fraudulent legislation; for if they are, then they are remediable.
If the intrinsic value of a commodity be represented by x, and that commodity is not charged with any taxation, it can be sold for x, giving to the producer the ordinary rate of profit; but if it is charged with a tax, represented by y, then it cannot be sold for less than x plus y, if the producer is still to receive the ordinary rate of profit. If x equals four, and y equals two, then x plus y must equal six, whether six express pounds, shillings, or pence. By the application of this simple formula, we propose to test Mr. Loyd’s theory of trade.
His initial point is quiescence, which we shall designate by x. The culminating point in the ascending scale is prosperity, which we shall denote by x plus y. The final point in the descending scale is again quiescence, which again we must express by x.
Quiescence, then, is that state in which commodities are sold for their barter price, from which taxation is altogether excluded. In that state, employment is difficult to be obtained, wages and profits being at the lowest ebb. In this sense, quiescence does not signify an invigorating repose, but a death-like torpor. Improvement denotes that prices have somewhat risen above the barter level, so that the productive classes are enabled to recover from the consumers a slight proportion of the tax they have advanced. Growing confidence shows that a further rise in prices has taken place, that wages and profits have risen, and that additional taxation has been recovered by the productive classes. When we have reached prosperity, we have completely attained to the taxation level, expressed by x plus y; and the industrial classes are fully employed and self-sustaining. But we cannot, according to the theory of Mr. Loyd, retain our position; we already tread upon the slopes of the declivity, and enter upon the descending scale. Excitement denotes the giddiness with which we are seized while standing on the summit of the ascent, and overtrading the slipping of the feet. Some disturbing power, presently to be described, has commenced to drag prices down. Terror seizes the holders of commodities, who all, and simultaneously, become sellers, lest prices should still further decline, and convulsion agitates the markets. Panic ensues; none are able or willing to buy, except the bullionists, who have been watching their opportunity. We proceed from panic to stagnation. Pressure follows, and drives the merchant, the manufacturer, and the tradesman into the Gazette. Having now travelled through the cycle, we reach the final point in the descending scale—quiescence—denoted by x, where no particle of taxation can be added, and we sink to the barter level. Such, according to Mr. Loyd, is the circle in which trade is compelled to revolve.
But is this compulsory ? Under bullionism, as taught and applied by Mr. Loyd and Sir Robert Peel, it is; but that is the condemnation of the system. Having reached prosperity, why are we unable to keep our ground ? In other words, why cannot we sustain prices at the taxation level, which alone can be remunerating ? We have alluded to a disturbing power which drags prices down. That power is the fixed price of gold in our coinage. Coined gold being tied down by Act of Parliament to the barter level, represented by x, above which it can never rise, when commodities rise to the taxation level, they become dearer than gold—dearer by the exact difference between the barter level and the taxation level. In such circumstances, the foreigner will not take our commodities in payment of his commodities, but our cheap gold, because, though it is his interest to sell in our dear market, it is not his interest to buy in our dear market. Thus our senseless legislation offers the foreigner a premium to export our gold, and leave our goods in the warehouses.
Suppose an Act of Parliament were to decide that all our measures of weight, length, or capacity, were to be of gold of a certain fineness, certified by a Mint mark, and fixed in price; and let us further suppose that the foreigner got possessed of them, and took them out of the country, or even locked them up in a warehouse. What would the draper do without his measure of length ? His shop might be full of goods, and crowded with customers, but he could not sell a yard of cloth. He must either abandon his business, or submit to any terms the foreigner might dictate. If the foreigner proposed to return the gold measure on receiving 48 or 56 inches for the yard, instead of 36, the draper would have to yield to this sacrifice on his cloth, and on all the other articles of his trade. Here the illustration is direct; but precisely the same result happens, though in an indirect form, when our gold coin is abstracted. Then discounts are suspended, or only granted at ruinous rates. The private banks are paralysed as well as the Bank of England, since none of them dare advance their notes, except for very short periods, even to the most solvent customers, lest the notes should be presented; and gold demanded in payment. The banks must save themselves, but they can only do so by prostrating trade, and unwillingly driving the most prudent, upright, and established firms into the Gazette. The interpretation we have given of the ascending and descending scale in Mr. Loyd’s “Theory of Trade,” clearly shows that his cycles are not caused by any law of nature, but by incompetent or malignant legislation; that periodical ruin is not, as he contends, an irresistible necessity, but the wicked contrivance of Parliament. That the system should find favour with the monied class, who sweep into their pockets, every five or six years, the hardly-earned savings of labour, through the most usurious extortions when panics arise, is not surprising, considering the short-sighted selfishness of human nature. They who live on fixed annuities also have their avarice gratified by the fraud. It is their interest to keep prices down to x, or the barter level, for then the purchasing power of their annuities is maximised; but when prices rise to the taxation level, or x plus y, the purchasing power of those annuities is minimised. Therefore it is that the monied classes, and those who live on fixed annuities, make an ally of the foreigner through Mr. Loyd’s system, and offer him a premium to knock down home prices by abstracting gold, whenever those prices reach or are tending to reach the taxation level.
The distinction pointed out between the barter level and the taxation level, will enable as to point out more fully than we have already done the fallacy involved in the indiscriminate use of the term “cheapness.” It has been observed that cheapness is of two kinds; it may mean a great deal of money for few products, or many products for little money. In the little algebraic formula we have used, x denotes cheapness; while x plus y denotes dearness. Let x, expressed in figures, be 4, and y, expressed in figures, be 2; then x plus y must be 6. Now introduce cheapness, so that x plus y be reduced to 5. But this diminution of one must come out of x or out of y. If out of y, there is no possible objection to such a form of cheapness, for y represents taxation, and the fall in prices would in this case be evidence that taxation had been reduced. If, however, the diminution comes out of x, then there must be deduction either from the profits of the employer or from the wages of the employed, while taxes remain as high as ever. If the profits of the employer fail, wages must fall, for the very condition of high wages is a state of high profits, since high wages cannot continue to be paid out of low profits. Wages are paid for creating products to be sold in a market; to suppose, then, that they can be permanently sustained at a high scale while products are permanently sold at a low scale, is absurd, and indeed contradicted by all experience. When, therefore, the fall in prices is effected by taking one out of x, this form of cheapness reduces the income of working men, while it adds to the purchasing power of all who live on fixed annuities. The injustice to the working man is really greater than as yet described. Taxes remaining the same as they were before this second form of cheapness was introduced, he has now only three pounds to spend on his own wants, whereas before this second form of cheapness was established, he had four pounds to spend on his own wants.
Such is the system which finds favour with Mr. Loyd, and to render it obligatory on the productive classes was his object when presenting his plan to Sir Robert Peel.
The Bank Charter Act of 1844 was introduced into the House of Commons on the 6th May, 1844, when Sir Robert Peel made the following statement. “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 certain quantity of gold, with a mark upon it to determine its weight and fineness; and that the engagement to pay a pound means nothing else than the promise to pay the holder on demand, when he demands it, a definite quantity of the precious metals.”
Supposing this statement were true, it would simply show what is a pound, not what a pound ought to be; and then the question would fairly arise, if our ancestors fixed on a pound which suited them, but which is unsuited to us, are we to be bound by their decision ? If so, there would be an end to all progress, and we need not dwell on so silly a proposition.
A pound, according to Sir Robert Peel, is a definite quantity of gold or of silver. There he is vague, for he may mean a definite or unchanging quantity from the foundation of the monarchy; or only a definite quantity at the time a bargain is made. If he means the former, he is greatly in error, as the reader will have perceived from the table of Lord Liverpool, in which the successive variations in the weight of our gold and silver coins have been traced. It is true that in a later part of his speech Sir Robert Peel confined the invariability of the gold pound to the period which has elapsed since the concluding part of the reign of Queen Elizabeth, that is since 1601; but here also he displays his ignorance of history, for the sovereign of Elizabeth weighed 7 dwts. 6½ grains, whereas that of Victoria weighes only 5 dwts. 3 grains.
When Sir Robert was palming his false definition on the ignorance or credulity of the House of Commons, he took a sovereign from his waistcoat pocket, threw it up in the air, and caught it in his hand as it descended; then with a smiling and self-complacent countenance, as if exulting in the ingenuity of his felicitous illustration, he exclaimed, showing the sovereign, “This, gentlemen of the House of Commons, is a Pound.” It was the exhibition of a mountebank. Any other member of the House of Commons might have held up eight half crowns, or twenty shillings, or forty sixpences, and exclaimed “Behold a Pound.” If any member, prepared with a blow pipe, had fused the sovereign, and then asked Sir Robert Peel, “Is this ingot a pound ? is it legal tender for a debt?” the absurdity of the whole process would have been apparent to the dullest man whoever parted with Bank notes to obtain a seat in the House of Commons. The silliness of the whole proceeding is so ably exposed by Lieut. Colonel Macdonald, a recent but most able writer on monetary science, that we shall submit his criticism to our readers.
“ The error lies in not perceiving that these coins possess two distinct properties, the one as metal, the other as money. As metal, both the sovereign and the silver coins are of the value of a pound sterling; in other words, they possess value to that amount. As money, as the stamped coins of the realm, they are the legal representative of that amount or portion of value adopted by the nation as the measure of value, and are used solely for the purpose of facilitating exchanges of all things valuable. As a mere piece of gold, therefore, what Sir Robert Peel displayed was not a pound, but only a pound’s worth of gold. This he would speedily have discovered by melting the sovereign. For, although he would have exhibited the same identical piece of gold, he would not have ventured so to stultify himself with the House as to have held up the now shapeless lump of gold and declared it to be a ‘pound.’ He might with truth have stated that it was equal in value to a pound, but he might have displayed a new hat or umbrella, and with as much truth declared the same thing. But in neither case would he have displayed the pound itself. It was, therefore, solely in its representative character, as attested by the national stamp of authority, and thereby universally recognised throughout the country as legal tender to that amount, that the sovereign could be declared with any truth to be a pound sterling. If this be not so, then might Sir Robert Peel have held up his gold ring and declared it to be a pound, or two pounds, or ten pounds; and no bullionist will, I suppose, be bold enough to make any such assertion. If, then, the sovereign be a pound sterling, in its representative character as money, the important question arises—what does it represent ? I answer, what the sovereign represents is value. All money in its true character is only the legal representative of value; and a pound sterling in its present day is only the English term for a certain fixed portion of value, and which we may find contained in so many grains of gold, in so many ounces of silver, and in so much wheat, iron, calico, tea, sugar, and other valuable things. The sovereign, as the symbol of this pound, continues to represent this portion of value, and the shilling a less portion of the same property, long after the materials of which they are composed have been greatly reduced in quantity, and, therefore, are no longer equal to a pound. From these premises I conclude that a pound sterling is merely that portion of value employed by us in estimating or measuring the amount of value in all things possessing that property. But to conclude that any material substance, a portion of which may contain value to the amount thus fixed upon, must alone be this pound, is as illogical and unreasonable as to declare that any article which occupies or fills that portion of space we call a yard is itself that yard. To say that the piece of gold weighing 123 grains is necessarily a pound is as false and foolish as it would be to assert, that any piece of wood or iron, capable of being formed into the representative of a yard, is that yard; and we know the yard itself exists as much before as after its material representative is made. The fallacy, as I said before, lies in mistaking the material substance itself, as that portion of value we call a pound, which it is merely made to represent.”
Bearing in memory Sir Robert Peel’s definition of a pound, that it is “neither more nor less than a certain quantity of gold, with a mark 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 the holder on demand, when he demands it, a definite quantity of the precious metals,” let us consider whether he acted upon or violated his own definition when constructing the Bank Charter Act of 1844.
His arrangement with the Bank of England was to allow it to issue £14,000,000 of notes without its holding a single grain of gold to meet those issues; herein is involved the first palpable contradiction. For whatever amount of notes the Bank of England puts into circulation above and beyond those £14,000,000 it was compelled to hold gold in its coffers. Supposing, then, that the total issue was £21,000,000, two-thirds would be mere wind-bills, having no metallic basis or guarantee whatever, while for the other third there would be a metallic basis. This equivocation arose out of the fact of government being indebted to the Bank in the sum of £14,000,000; it could not pay that sum in gold, and therefore connived at this credit issue of wind bills, while rigorously exacting from every merchant, manufacturer, and tradesman the immediate payment of all their debts in gold, under pain of bankruptcy. Ought not the mercantile community to appreciate the justness and tender care of the paternal government !!
The English private banks and the English joint stock banks were dealt with in the following fashion. They were called upon to give a return of their average circulation of notes during four weeks after the 10th of October, 1843, and that was fixed upon as the maximum for all future time, the legislators of the day assuming to themselves a degree of foresight which enabled them to look into all the monetary wants and commercial operations of the most distant periods. To the extent of the average circulation during four weeks after the 10th October, 1843, these banks were allowed to issue notes without any metallic basis whatever; but beyond and above that amount they were to hold gold in their coffers. Here, again, Sir Robert Peel violated his definition of a pound; there was a shadow of an excuse in allowing the Bank of England to issue wind bills; but in the case of private and joint stock banks there was none. How admirable was his consistency !
The Banks of Scotland and of Ireland were placed upon the same footing (in 1845) as the English private and joint stock banks. The summary of wind bills, then, stands thus :—
1 The Bank of England ......... £14,000,000
196 English Private Banks ......... 4,999,444
67 English Joint Stock Banks ..... 3,418,277
294 English Banks, Total ........ £22,417,721
18 Banks in Scotland ............. 3,087,209
8 Banks in Ireland .............. 6,354,494
Total issues for the United Kingdom[5] £31,859,424
From this table it appears that, whilst the average amount of the fixed issues for the 264 banks of issue in England gives £32,000 for each bank, that of Ireland is £794,000 for each of its eight banks; and that, although Scotland has more than twice the number of banks that Ireland has, the amount of the circulation of Ireland is more than twice the amount of that of Scotland. Here, then, we discover no adaptation of means to an end, which is generally looked for in the wisdom of statesmen. Where trade is most extensive and most active, there the monetary instruments by which trade alone can be carried on, are the least. It may here be added that the 17th section of the Act provides that “any banker issuing notes beyond the amount authorised by the commissioners shall forfeit a sum equal to the amount in excess,” so that the section rigidly limits trade, and violates the important principle which proclaims to all men of common sense that it is trade that calls out monetary instruments, not monetary instruments which call out trade.
It appears then that Sir Robert Peel’s Bank Charter Act flagrantly violates his own definition of a pound, since the total issues of the United Kingdom, not guaranteed by the deposit of a single grain of gold, are permitted to the extent of £31,859,424. Indeed, they have no guarantee whatever, and are essentially wind-bills; or, to use the choice and elegant phraseology of the bullionists, “kites, flimsies, rags, shin-plasters.” This violation of the definition of a pound clearly proves beyond all cavil, that a purely metallic circulation is impracticable; or else why did not Sir R. Peel establish such a circulation ? It also shows that Mr. Loyd’s dictum “that to preserve the value of a paper circulation, not only must that paper be convertible into metallic money, but the whole of its oscillations must be made to correspond, both in time and amount, with what would be the oscillations of a metallic currency, as indicated by the state of the bullion,” amounts to mere verbiage. In the case before us there is no bullion indicator whatever, since it is expelled front consideration. The £31,869,424 are completely independent of bullion. In the construction of the Bank Charter Act, bullion, the professed basis of the whole scheme, is made subsidiary and subordinate to the wind bills, since it only comes into play when the amount of circulation exceeds the amount of those wind bills.
The next important feature in the Act was the division of the Bank of England into two separate departments, called the Banking and Issue departments. On this ridiculous conceit was founded what its authors styled “the self-acting system.” In the panic of 1847 it covered them with ridicule, though Mr. Loyd had considered it the perfection of wisdom. In the Issue department was placed a credit for the £14,000,000 of debt due by government to the Bank, and notes to that amount were therein deposited, uncovered by an ounce of gold. For issue, beyond that amount gold was lodged in the same department. The notes thence issued are lodged in the Banking department. Now comes the juggle to those who are not initiated. It is well explained by Mr. Wright, the eminent banker of Nottingham.
“ The public labour under the fallacy of supposing, when they see the Bank has ten millions in her coffers, that she has ten millions to dispose of. No such thing. When the circulation of notes is twenty millions, and the entire stock of gold ten millions, the available surplus is only four millions. According to this new system, should the Banking Department say to the Issue Department, I want gold, or I want notes, the Issue Department would answer—you have got twenty millions of our notes, that is, six millions above the fourteen millions without gold to cover them; we have only six millions of bullion in our coffers, and, therefore, cannot give you gold unless you bring us notes, or give you notes unless you bring us gold. Thus the Banking Department cannot touch any portion of the six millions in the Issue Department without taking in a corresponding amount of notes to be can celled. The Banking Department obtains notes from the public by selling securities, and letting the bills of exchange she holds run out without discounting any more; and this plan is represented by the supporters of the Act as very easily accomplished. But what is the effect on the country ? The country is sacrificed to fulfil an improvident law; and yet, after all the stringent measures that may be adopted to pay the six millions in gold, the remaining fourteen millions are not convertible.”
It is difficult to conceive of any arrangement more absurd than the one described. It resembles the marshalling an army in the field where one arm of every soldier is tied up, or where a certain amount of powder and shot is brought into the field with an express order from the commander-in-chief that they are not to be used. It is sheer delusion to make a display of gold with an interdict against its circulation; and its barren exhibition can subserve no other purpose than to dupe the credulous public into the belief that a shadow, is a substance. But let us test the wisdom of this division of the Bank into two separate departments by stubborn facts and actual experience. The following is taken from the Lord’s Report of 1848, on the commercial distress which occurred in the PANIC year of 1847. For the sake of clearness we will first describe the condition of the Bank before we set down the questions and answers.
The reserve of notes, which had been £2,630,000 an the 16th October, 1847, had fallen on the 23rd to £1,547,000, and to £1,176,000 on the 30th October, having decreased nearly £1,500,000 within the short space of fourteen days. At this last period, of the total reserve of notes amounting to £1,176,740, no more than £568,470 was held in London, making with the gold coin in the Banking Deportment £719,523. At the same time the private deposits for which the Bank was responsible amounted to £8,580,000, independently of upwards of £4,766,000 of Government deposits. The total deposits on the 30th October were £14,500,000; the deposits of the London bankers being more than £2,000,000 at the same time. In reference to this state of things, the following important evidence was given by the governor and deputy governor of the Bank of England :—
“ Question—You had only £1,600,000 in the banking department for the payment of your liabilities ? Yes.
“ Question—If any body had called upon you for anything beyond that million and a half, you must have stopped payment ? Yes we must.
“ Question—At that time, if there had been no separation between the two departments, and the Bank of England had been conducted on its old principle, instead of being within one million and a half of stopping, there would have been nearly £8,500,000 of treasure in your vaults ? We should have had £8,500,000 in our vaults.”
So it appears from this evidence, the most complete evidence that could be given, since tendered by the governor and the deputy governor of the Bank, that under the same roof the establishment was bankrupt in one room and solvent in another room; that had the London bankers demanded their deposits, they would only have received about 15s. in the pound; that the Government deposits, the deposits of the merchants and all the notes in the hands of the public, must have been wholly repudiated; and that when the affairs of the Bank had been wound up, they would have shown £8,500,000 as their available assets. Surely no additional argument is needed to show that the division of the Bank of England into two separate departments was most unwise.
But the admirers of the system take credit to themselves for securing the convertibility of the bank note. The statement is only true in this sense; that the holders of the notes did not press for payment; so that the vaunted convertibility was only one on sufferance. It is known that the London bankers who held the two millions of deposits, went to the governor of the Bank, and stated their reluctance to demand payment; but that unless a Treasury order was issued for the suspension of the Act of 1844, they would be compelled to do so in self-defence. The result was that the Act was suspended, and this shows that the convertibility of the note was really a fiction. Moreover, it was proved by calculation made by Mr. Ayres, of the “Banker’s Circular,” that in January, 1847, the power of the Bank to discharge its notes in gold was at the highest, or 11s. 9d. in the pound, while on the 30th of October it was reduced to 6s. 7d. in the Issue Department. On the 1st of May, 1847, in the Banking Department, the metallic power of the Bank, in silver and gold, was only one shilling and one penny in the pound; while on the 6th of October it barely exceeded fourpence in the pound, silver and gold included.
The third clause of the Bank Charter Act runs thus : “And whereas it is necessary to limit the amount of silver bullion on which it shall be lawful for the issue department of the Bank of England to issue Bank of England notes : Be it therefore enacted, that it shall not be lawful for the Bank of England to retain in the issue department of the said bank at any one time an amount of silver bullion exceeding one-fourth part of gold coin and bullion at such time held by the Bank in the issue department.”
In one sense this was a farce, in another a deliberate piece of deception. By the Act of 1816, still unrepealed and unchanged, silver was declared to be legal tender for only forty shillings at one payment; it was a mockery, therefore, to introduce silver as a basis for notes concomitantly with gold, since, practically, under the limitation mentioned, silver was no security at all; and this was proved in 1847, when Mr. Thomas Baring stated, in the House of Commons, that a foreign merchant arriving in London during the panic, with silver bullion worth £60,000, was unable to procure either bank notes or gold, to discharge some liabilities he had incurred.
Sir Robert Peel had two great advantages in the House of Commons; the first was his facility of assertion; the second, the credulity of his dupes. It cannot be denied that every alteration of plans or opinions is conclusive evidence of prior imperfection of judgment; and, tried by this interring canon of criticism, the intellect of Peel is reduced to small dimensions. He was among the last to seize truth. By his repeated tergiversations—and these, too, of the most flagrant character—he convicted himself of an absolute deficiency in foresight. Let us first quote an instance of his facility of assertion. When he introduced the bill for resuming cash payments into the House of Commons, on the 24th May, 1819, he made the following grossly unfounded statement, which threw dust into the eyes of many of the members. He said :—
“From 1774 to 1797, they (the Bank) did that to which now the objection is made,—during that period they confined their issues to the price of gold; and he challenged any man to produce an instance during that period when the price of gold exceeded £3 17s. 6d. per ounce.”
Mr. Abraham Newland, for many years Chief Cashier of the Bank of England, gave the following evidence before the Lords’ Committee of Secrecy, in 1797, and Sir Robert Peel, pluming himself on being an authority on finance, ought to have known the facts.
“ Question. Do the banks ever pay more in the purchase of gold than the Mint price ?—Frequently.
“ Question. Do the bank, in such cases, carry their gold to the Mint to be coined ?—They do.
“ Question. What is the highest price you ever knew the bank pay for gold per ounce ?—£4 1s. 0d.; £4 2s. 0d.; £4 6s. 0d.; and as high as £4 8s. 0d.; but very seldom at those prices.
“ Question. State to the Committee at what time the bank gave so large a price as £4 8s. 0d. per ounce for gold ?—I believe it was about two years since the bank gave so large a price as £4 8s. 0d. per ounce for gold; it was but a small quantity—it was soon stopped on account of its price; the bank at that time thought it expedient to obtain gold from Portugal, which their agent could not do at a less price than £4 8s. 0d. per ounce.”
This ought to be decisive of Peel’s historical ignorance on this important point in these inquiries, as it certainly is of the coolness with which he imposed on the House of Commons. But he knew his audience, and had not much fear of detection.
In introducing the Bank Charter of 1844, in one single speech he floundered in contradictions, nor were these errors of the newspaper reporters, for he revised that speech, and printed it as a pamphlet. These are specimens of the confusion of his ideas :—
“ I say that coin and bullion, as articles of commerce, are regulated by precisely the same principles as those which regulate other articles of commerce.”
Here coin and bullion are treated as identical, which is not true, for the former is money, and the latter is not money; moreover, we fix the price of coin, but do not fix the price of bullion.
In contrast to this foolish dictum we have the following :—
“ Bullion is distributed according to certain laws which we cannot understand, and which we cannot control.”
How this was reconciled with the former statements we are not told, but when a man does not understand a subject it is difficult for him to state it so as to be understood by others. Here is another extract :—
“ Now it is just because it (bullion) is an article of commerce, and subject to the same laws as other articles, that it becomes fit to be taken as the standard, and our security as a measure of value; because the same laws which regulate the import and possession of all articles of commerce, regulate the import by this country of bullion.”
The second passage contradicts the first, and the third demolishes the second. If we put the three together, the amalgamation is a chaos.
Sir Robert Peel, in the third extract, confounds the standard with the measure, the source of innumerable blunders. “Bread corn,” said Mr. Horner, “is the paramount and real standard of all values.” The difference between a standard and a measure may be readily explained. A perfect standard is only found in nature, and is therefore immutable at all times, and under all circumstances; but a measure is the creation of man, and variable at his will and pleasure. The annual revolution of the earth round the sun is an immutable standard of time, fixed in nature, but certain portions of that revolution which we call months, weeks, days, minutes, are measures of time. Speaking philosophically, a standard of length is found in the 400,000,000th part of the earth’s circumference, which is equal to 39.370 English inches. This is the length of the French metre, a measure deduced from the standard. In England the philosophical standard of length is a pendulum vibrating seconds in the latitude of Greenwich, which is acted upon by the earth’s attraction combined with its rotation, and is an invariable standard of length, because all laws of nature are invariable; from this standard we form the yard and all other measures of length. The standards of weight, and capacity are founded on similar philosophical principles, based on nature, while their corresponding measures are mere artificial arrangements. A very complete illustration of these distinctions is afforded by the thermometer. The points at which water boils or freezes constitute the standard of heat, while mercury, expanding or contracting in the tube as it receives or loses heat, constitutes the measure of heat. Thus in the three differently graduated scales of Fahrenheit, Reaumur, and Gay Lussac, the boiling and freezing points are indicated by different numerical degrees marked on the sides of the tube, but all of them are referable to the same standard. The standard of heat, being found in nature, is unchangeable by any act of man; but the measure of heat, being only a mode of testing the variations of its intensity, accommodates itself to the contrivances or the conveniences of the scientific, as it may seem to them best adapted to bring the virtues of the standard into practical operation.
Of these distinctions Sir Robert Peel does not appear to have had the most remote conception, treating the terms standard and measure as identical. The standard of value is bread corn; the measure of value is gold or silver. Every labourer must be subsisted by the produce of his labour; he must replace the food he has consumed while labouring; therefore he practically refers his wages to the quantity of corn (which is used here as a compendious term for “general subsistence”) which those wages will purchase. To such a man gold and silver can never be standards of value; the question with him is not whether he gets a shilling a day or a sovereign a day, a dwt. of gold or 5 dwts. of gold, but whether what he does get will buy half a loaf or a whole loaf, for the test of wages, as of all other income, is their purchasing power. The money contained in the wages is the measure of the standard to which they are referred, and that standard is corn.
The legislation of Peel and Loyd requires that all commodities shall be convertible, each into another, that is, exchangeable, each into another, not according to the measure of value, but actually into the measure of value itself. This obligation is not imposed on measures of length, weight, or capacity. In reference to them we are only bound to observe the measure or rule of proportion which they prescribe. We should laugh outright if parliament decreed that articles sold by length, weight, or capacity, should be converted into their respective measures, and not according to their respective measures; cloth into maple-yard wands, sugar into leaden weights, and wine into wooden pipes, thus substituting the thing containing for the thing contained, or the thing measuring for the thing measured; this, however, is the kind of absurdity we are compelled to perpetrate in reference to the measure of value, for unless, being indebted, we can convert or exchange our property into gold, even at the time when the government itself is exporting gold to take up a foreign loan, we are doomed to bankruptcy, however solvent we may be in land, houses, ships, and all other commodities except gold. Such an atrocious process could never be sanctioned by any legislature whose members understood the difference between a standard and a measure.
Considering the frequent tergiversations of Sir Robert Peel, it is highly probable that he would have repudiated his monetary opinions had his life been prolonged. This probability is more than a shadowy conjecture, considering a letter he wrote to Sir Roderick Impey Murchison, shortly before his death, and which appeared in the Quarterly Review, vol. xci., p. 530, June and September, 1852. We reprint it.
“On the 6th May, 1844, in bringing in the Bank Charter Act, I adverted to the rapid increase of the annual supply of gold from mines within the dominions of Russia, and recommended those who wished for a diminution in the standard of value to benefit the debtor, to consider whether their objects might not be effected by natural causes—the decreasing relative value of gold in consequence of a more abundant supply—without the aid of legislative intervention. Your arguments are powerful to show that there is no probability (risk I should say,) of precipitate and violent disturbance. It takes a long time and a great disproportion in the amount of supply to affect the relative value throughout the world of two such articles as gold and silver. The united influence of Siberia and California will, however, I think, justify my inference of 1844, that there is a tendency towards diminished value on the part of the gold. An extraordinary increase in the supply of both gold and silver might concurrently take place, not affecting their relative value between each other, but affecting the price of all other commodities, estimated with reference to the precious metals, and the interest of debtor and creditor.”
The first sentence in this extract would justify the conclusion that Sir Robert was aware of the iniquity of his system, and that he knew the creditor had an advantage over the debtor which he ought not to possess. But as we read on and come to the parenthesis (risk, I should say) the extract admits of a directly opposite interpretation. When the letter was written, Australia was not known as a gold field, but the writer expresses his conviction that the united influence of Siberia and California would diminish the value of gold; if so, the creditor would be wronged, and he would call for an equitable adjustment; as in past times, and as at present, the debtor called for, and still calls for, such an adjustment. If the recent discoveries do not lower the value of gold, injustice will be perpetuated; if they do, suffering must overtake the class hitherto favored. Peel had a glimpse of the future, and it is highly probable that, either to protect the bullionists, or to do an act of tardy justice, he would have brought the whole monetary system under a fresh discussion.
There is one more clause in the Act of 1844, allusion to which must not be omitted. It gave a banking monopoly to all existing bankers. Henceforward, no new bank of issue could be established, and this bribe secured the adhesion of all those who were established. In this arrangement Sir Robert Peel contradicted his free trade principles.
1 Remarks on the Management of the Circulation, by Samuel Jones Loyd, p. 21. Edition 1840.
2 Ibidem, p. 66.
3 Remarks, &c., p. 38. Edition 1839.
4 Ibidem, p. 111. Edition 1840.
5 By an order in Council, dated 7th December, 1855, the Bank obtained power to increase its issues to the extent of £475,000, being two-third, of the lapsed circulations of the provincial banks which had failed since 1844.