It should be recollected, too, that previous to the passing of the Act of 1844, the bank had the power of rectifying the exchanges by means of foreign credits, as they did in the year 1839.2 But the directors, being now relieved from all responsibility with regard to the issue department, have no inducement to engage in such an operation. Indeed, they might be censured for interfering with the principle of the Act, that the exchanges shall be rectified by a transmission of gold and silver.
1 Commons, No. 94.
2 Several of the witnesses made suggestions for rectifying this exchange by other means than the exportation of gold. - See Commons, 97, 2018, 2023, 2579, 2614, 2620.
It would appear from the evidence, that the sole advantage now claimed for the Act, is that it has secured the convertibility of the note. Other advantages, however, were expected to result. Those expectations are thus disposed of in the Eeport of the Lords' Committee: -
"It is true that to those who may have expected that the 7 & 8 Vict. c. 32, would effectually prevent a recurrence of cycles of commercial excitement and depression, the contrast between the years 1845 and 1847 must produce a grievous disappointment. To those who anticipated that the Act would put a check on improvident speculation the disappointment cannot be less, if reliance is to be placed (as the committee are confident it may) on the statement of the governor of the bank, and of other witnesses, that 'speculations were never carried to such an enormous extent as in 1846 and the beginning of 1847.' If the Act were relied on as a security against violent fluctuations in the value of money, the fallaciousness of such anticipation is conclusively proved by the fact, that whilst the difference between the highest and lowest rate of discount was in the calamitous years 1837 and 1839 but 2 1/4 to 2 3/4 percent.,the difference in 1847 rose to 6 3/4. If it was contemplated that the number and the extent of commercial failures would have been lessened, the deplorable narrative of the governor of the bank, recording the failure of thirty-three houses comparatively in large business, in London alone, to the amount of £8,129,000, is a conclusive reply. If the enormous extent to which railroad speculation has been carried be considered as an evil to which a sound system of banking could have applied a corrective, such a corrective has not been found in an Act, since the passing of which, during a period of three years, an increased railway capital of upwards of £221,000,000 has been authorized to be raised by Parliament; and when the enormous sum of
£76,390,000 is stated, on high financial authority, to have been actually expended on railways in two years and a half. If the power of obtaining banking accommodation on moderate terms were considered to be promoted by the Act of 1844, it cannot be said that this important object has been attained, since it appears in evidence that in 1847, in addition to an interest of 9 or 10 per cent., a commission was also frequently paid, raising the charge to 10, 20, or 30 per cent., according to the time which bills had to run."
The Report might have added, that if it was expected that the amount of notes in the hands of the public would fluctuate in exact correspondence with the fluctuations in the amount of gold in the Bank of England, that expectation has not been fulfilled. From the censure cast on the Bank of England before the Act was passed for not producing this correspondence, it may be inferred that such an expectation was entertained.1
Those who are opposed to the Act of 1844 bring against it the following accusations: -
First. The Act of 1844 is accused of having produced an abundance of money and a low rate of interest, and thus to have stimulated to excessive speculation. We showed, in the last section, that these are always the precursors of a pressure.
According to this Act, all persons are entitled to demand from the issue department of the Bank of England, Bank of England notes in exchange for gold bullion at the rate of £3 17s. 9d. per ounce of standard gold. When, therefore, the foreign exchanges are favourable to the importation of gold, this gold, consisting of gold bars and foreign gold coin, which could not be used as money in this country, is taken to the issue department, and instantly converted into Bank of England notes. The amount of notes is thus increased beyond what the transactions of the country require. Money becomes plentiful, the rate of interest falls, and the low rate of interest gives facilities to speculative undertalrings.
1 See the Evidence taken before the Committee on Banks of Issue, No. 2677 - 2713.
It must be acknowledged that, previous to the passing of this Act, the bank directors had adopted the principle of purchasing all foreign gold that might be offered them at £3 17s. 9d. an ounce; and it formed a feature of their system of management, as explained before a committee of the House of Commons in the year 1832. When the advocates of the Act say that it is only during a season of pressure that the Act comes into operation,1 they can mean only that it is during such a season that the system established by the Act differs from the system previously in existence. The Act is as much in operation when it gives out notes as when it gives out gold.
It must also be acknowledged that on the 31st August, 1844, when the Act came into operation, there was a large amount of gold in the bank, and a low rate of interest consequently prevailed. This gold had accumulated, not literally in consequence of the Act, but in consequence of the principle embodied in the Act. From the adoption of this principle, the gold in the vaults of the bank still farther increased after the passing of the Act.
It must be farther acknowledged, that although the Act requires the issue department at all times to issue notes against gold, it does not require that the Bank of England shall at all times issue £14,000,000 against securities. The Act merely requires that the amount shall not exceed £14,000,000. And a London banker who was examined as a witness before the Lords' Committee, said he expected that when the Act came into operation the bank would not issue at first more than £11,000,000 against securities, and that the remaining £3,000,000 would not be issued until the rate of interest had advanced to 3 1/2 or 4 per cent. But the Act did not require the Bank of England to adopt this course; and its adoption would probably have been considered by some parties as a departure from its principle. For it is a fundamental principle of the Act, that the amount of circulation shall jerk up and down in exact conformity to the importations or exportations of gold. And hence during a favourable course of exchange money must be abundant, and interest must be low.