1 Lords, 1632. 2 Commons, 3009. 3 Commons, 3722.
At the close of this period we find that the London discounts had increased from £113,000 to £2,365,000, and the "City Bonds, etc." had increased from £3,357,000 to £4,009,000, owing, it is presumed, to the purchase of railway debentures. The circulation of the issuing department had increased from £28,351,295 to £28,953,300, and the minimum rate of interest charged by the bank was 2 1/2 per cent.
II. The Administration of the Banking Department from September 6, 1845, to September 5, 1846.
During this period there were three alterations in the minimum rate of interest. On October 16, 1845, it was raised from 2 1/2 to 3 per cent.; on November 6, to 3 1/2 per cent.; and on August 17, 1846, it was again reduced to 3 per cent. In fixing the rate of discount, the directors took into account the amount of bullion in the issue department, the reserve in the banking department, and the amount of the discounts. The amount of bullion virtually regulated the other two; and thus the interest was governed by the foreign exchanges. At the same time, the directors, as practical bankers, would pay the greatest attention to their reserve, as it was only from this source that any advances could be made. Hence, sometimes, one object of raising the rate of discount was to diminish the number of applications. It was thought better to protect the reserve by raising the rate than by positively refusing to discount.
In the beginning of 1846 a circumstance occurred which increased both the deposits and the discounts of the bank, and added greatly to its profits. The railway companies who were desirous of obtaining Acts of Parliament to authorize the construction of their lines, were required to pay into the Bank of England, within fourteen days after the meeting of Parliament, 10 per cent. on the estimated amount of their capital - to be returned when the company had obtained the Act, or when the application had been rejected. Everybody wondered beforehand how so large a sum could be paid out of the amount of notes then in circulation. But the bank acted with the railway deposits as she had been accustomed to act with the public deposits previous to the payment of dividends. As fast as the money came in, it was lent out, and thus a transaction of large magnitude was effected without much difficulty. This shows the importance of a Government bank. Had the deposits been required to be lodged in the exchequer, and there to remain until reclaimed by the railway companies, the operation could not have been effected. The bank could have performed it with greater facility previous to the passing of the Act of 1844. She could then have lent out her notes before the lodgments were required to be made; there would have been no previous apprehensions, nor any tightness during the operation.
III. The Administration of the Banking Department from September 5, 1846, to September 4, 1847.
In September, 1846, the minimum rate of discount was 3 per cent. On January the 14th, 1847, it was raised to 3 1/2 per cent., and on the 20th of the same month to 4 per cent. On April the 8th to 5 per cent., and on the 5th of August to 5 1/2 per cent.
During the whole of this period the foreign exchanges were unfavourable, and the circulation of the issuing department declined from £29,760,870 to £22,396,845.1 This was attended by a decline in the reserve of the banking department, and an increase in the amount of loans and discounts.
The bank directors did not raise their rate of discount above 3 per cent. until the month of January, 1847. For this they have been severely censured by parties who have had the advantage of not being compelled to form any opinion until after the result was known. The month of April was an important month. From the deficiency of the harvest, large importations of corn took place. These imports were paid for in gold, which was suddenly withdrawn from the issue department, for exportation.
Contemporaneous with this export of gold, the Government required to borrow £3,500,000 upon deficiency bills in order to pay the dividends. Under the old system this might not have been a matter of much importance, but the case was different under the Act of 1844. The banking department was rather in danger of getting into what the Americans call "a fix." To avoid this "fix," the directors raised the rate of discount to 5 per cent.; they refused to lend money even upon exchequer bills; they limited their discounts; and they borrowed £1,275,000 on consols. These measures caused a severe pressure on the money market, but it soon subsided. From this period the foreign exchanges were favourable to this country.
1 By deducting £14,000,000 from this sum, we see the amount of gold and silver bullion on hand in the issue department.
The operations of this month of April, 1847, have given rise to much discussion.
The advocates of the Act of 1844 have pointed to the transactions of this month to prove that the management of the issue department cannot be safely entrusted to the bank directors. They say that if the bank had advanced its rate of interest it might have prevented the unfavourable course of exchange, and consequently have avoided the pressure which then occurred. On the other hand, it has been stated that the bank ought to be guided in its rates of interest by the amount of its reserve - that from November, 1846, to April, 1847, the reserve was above one-third of its deposits, a greater reserve than any other bank would think it necessary to keep - that the demand for gold was so sudden, and for so large an amount, that no ordinary rules could have prevented it; and even had it been prevented, it might have been injurious to the country, as it would have checked the importation of corn, which was then required in consequence of the deficiency in the harvest. There can be no doubt that, under the Act of 1844, a sudden exportation of gold must cause a sudden contraction of the amount of notes in circulation. This "self-acting machine" acts by jerks, like a steam-engine without a fly-wheel; and its advocates look to the banking department to supply the fly-wheel, and to cause the machine to move smoothly and equably. It may be doubted whether the banking department has the power of doing this. But when this is not done the advocates of the Act throw the blame upon that department. They resemble the court preceptor, who, when the royal pupil did anything wrong, inflicted the beating on his fellow-student. If on this occasion the bank did wrong, it may be feared that it was its court connection which led it astray. The Government were then negotiating a loan of eight millions for the relief of Ireland. And "there was a feeling in the court that, in the face of the Government negotiating a loan, it would be an act of want of courtesy to put up the rate of interest immediately."l In the secret history of the Bank of England we may possibly find other instances of similar faults. But if on the present occasion it was influenced by such considerations, it did not act "like any other banking concern."