IT would not be consistent with the practical character of this work to discuss, at great length, any theory of the currency. But the Act of 1844, though founded on a theory, was a practical measure, and has so important a bearing on the administration of banking affairs, that our work would be regarded as incomplete were the subject altogether omitted.
"The Act of 1844" is the 7 & 8 Vict. cap. 32, and is entitled, "An Act to regulate the Issue of Bank Notes, and for giving to the Governor and Company of the Bank of England certain privileges for a limited period." It enacts that from and after the 31st August, 1844, the Issue department of the Bank of England shall be separated from the Banking department - that the issuing department may issue notes to the extent of £14,000,000 upon securities set apart for that purpose, of which the debt of £11,015,100 due from the Government to the bank shall form a part - that no amount of notes above £14,000,000 shall be issued, except against gold coin, or gold or silver bullion; and that the silver bullion shall not exceed one-fourth the amount of gold coin and bullion. Any person is entitled to demand notes from the issuing department, in exchange for gold bullion, at the rate of £3 17s. 9d. per ounce. Should any banker discontinue his issue of notes, the Bank of England may, upon application, be empowered by an Order of Council to increase its issue upon securities to the extent of two-thirds of the issue thus withdrawn; but all the profit of this increased issue must go to the Government.
1 See also vol. ii, Section XXVI.
The theory on which this Act was founded had, for several years previously, been brought before the public in pamphlets written by men of distinguished talent. Upon some of these pamphlets we wrote a critique, which appeared in the "Westminster Review" of January, 1841. That article was afterwards published separately, under the title of " Currency and Banking: a Review of some of the Principles and Plans that have recently engaged public attention, with reference to the administration of the Currency." In this review we made the following observations on the plan then proposed, and subsequently carried out in the Act of 1844: -
"The plan of making the amount of the circulation fluctuate in exact correspondence with the amount of gold in the Bank of England.
"This plan is open to the following objections: -
"Upon this plan there must be a perpetual increase and diminution in the stock of gold; consequently a perpetual increase and diminution in the amount of the currency The increase in the amount of the currency would raise prices and stimulate speculation. The diminution in the amount of the currency would reduce prices and produce distress. And thus there must be a constant alteration from high prices to low prices, and again from low prices to high prices - from speculation to distress, and from distress to speculation.
"2. But depression of prices, and its attendant miseries, may not be experienced only when the foreign exchanges are unfavourable. Excessive caution, an apprehension of war, or political feeling, may cause a domestic demand for gold, and this would cause for a while a contraction of the currency as severe as that which would arise from an unfavourable exchange; and, as the bank directors would have no discretionary power, but would be required ' to adhere to principle,' by giving gold for notes, or notes for gold, they could do nothing to assuage these calamities. According to Mr. Loyd, a drain, from whatever cause it may arise, must be met by a contraction of the currency. Mr. Palmer, in laying down his rule, put in a saving clause ' except under special circumstances,' but Mr. Loydl makes no exceptions.
"3. To carry this system into operation would require a separation of the issuing department from the other departments of the business of the bank, and this would cause still farther inconveniences. The management of the issuing department would be exceedingly simple. The office of the directors would be a complete sinecure, and, for anything they would have to do, their places might be as well supplied by four-and-twenty broomsticks. A few cashiers to exchange gold for notes, or notes for gold, would be all the establishment required; and could Mr. Babbage be induced to construct a 'self-acting' machine to perform these operations, the whole business of the currency department might be carried on without human agency. But the deposit department would require more attention. ' It is in the nature of banking business.' says Mr. Loyd, 'that the amount of its deposits should vary with a variety of circumstances; and, as the amount of deposits varies, the amount of that in which those deposits are invested (viz., the securities) must vary also. It is, therefore, quite absurd to talk of the bank, in its character of a banking concern, keeping the amount of its securities invariable.' As, therefore, the deposits might vary, the bank would be a buyer or a seller of Government securities; and as these variations are sometimes to a very large amount, the fluctuations in the price of the public funds, and of exchequer bills, would be very considerable. Thus the property of those who held these securities would be always changing in value. Again, the deposits would be withdrawn chiefly in seasons of pressure, and the bank would then be compelled to sell her securities. But suppose the scarcity of money should be so great that the securities would be unsaleable even at a reduced price, how then could the bank pay off her deposits?
1 I wish I could have made this quotation without introducing the names. It would greatly assist our inquiries after truth, and lead to the formation of an independent judgment, if we could engage in discussions of this kind without any reference to those talented men who may have distinguished themselves as either the advocates or the opponents of the doctrines we investigate.