They who contend that the Act of 1844 has not "in the slightest degree tended either to create or to increase the pressure"1 of 1847, seem to be inconsistent in contending, at the same time, that the Act has preserved the convertibility of the bank note. It was the pressure and the high rate of interest, and low prices consequent upon the pressure, that checked the efflux of gold, and turned the exchanges. Now, if the Act had no effect in producing or increasing that pressure, the convertibility of the note, by whatever causes it was secured, was not secured by the Act. If the Act did not in the slightest degree either create or increase the pressure, in what way, we ask, could it preserve the convertibility of the note? It appears to us that those who contend that the Act preserved the convertibility of the note, are bound by consistency to admit that the Act produced or increased the pressure.
1 Lords, 3106.
It is farther alleged that the Act aggravates a pressure by the "panic" which it creates. It is stated that, during the pressure of 1847, notes to the amount of £4,000,000 were hoarded under the influence of panic, and this hoarding was occasioned by the provisions of the Act. It must be acknowledged, however, that something of this kind has taken place in former pressures. We noticed this circumstance with reference to the pressure of 1836, and again with reference to the pressure of 1839.
A contraction of the circulation leads to a general apprehension of danger. Hence the bankers and others keep larger reserves of bank notes on hand, in order to be prepared for the worst, and thus the evils of the contraction are considerably increased. That portion of the notes of the Bank of England which is passing from hand to hand, may be called the active circulation. That portion which is hoarded, or kept in reserve to meet possible demands, may be called the dead circulation. Now, it is quite certain that the dead circulation, while it remains in that state, has no effect upon the prices of commodities - the spirit of speculation - or the foreign exchanges. These are affected only by the active circulation. In seasons of pressure the dead circulation is increased at the expense of the active circulation, because people hoard their money to meet contingencies. Hence we find the pressure is often more severe than the reduction of the bank circulation would seem to warrant. But the fact is, that the pressure is in proportion to the reduction of the active circulation, and not in proportion to the reduction of the whole circulation. On the other hand, in seasons of abundance, the dead circulation is diminished, the active circulation proportionally increased, and hence the stimulus given to trade and speculation is much greater than the returns of the Bank of England would warrant us to expect.
If this disposition to hoard - or, more properly, to make provision for future or contingent demands - existed in 1837 and 1839, when the Bank of England had the unrestricted power of issuing notes; When there was the most unbounded confidence in its ability to render assistance - and when every solvent person expected, if necessary, to receive that assistance - it is natural to suppose that this disposition would be stronger in 1847, when the Bank of England had become divided into two departments - one of which could issue no notes except against gold, and the other had barely notes enough to meet its own obligations. For this alteration in the condition of the Bank of England, and the consequent feelings it inspired, the Act of 1844 is clearly responsible.
It is said that this desire of "hoarding" arose from panic; and that the sum thus "hoarded" amounted to £4,000,000 of notes. It is difficult to state where prudence ends and panic begins. This hoarding was no doubt carried on by all the joint-stock and private bankers, who, having received from the public large sums of money payable on demand, deemed it prudent to put themselves in a condition to repay these sums in case they should be demanded. And, from the number of banking establishments that exist in London, and throughout the country, it is reasonable to suppose that the sums thus hoarded must have been considerable. Many private parties, too, from distrust of their bankers, probably kept their hoards in their own hands. No blame, however, can attach to the bankers; for, although this "hoarding" increases the pressure, yet, were they not to adopt this course, their banks might stop payment, and thus a heavier calamity would fall upon the public.
It is farther alleged that the Act of 1844 has deprived the Bank of England of the power of granting assistance by the issue of notes during a pressure, even when the pressure is most urgent, and the foreign exchanges are favourable. Before the passing of the Act, when there was no separation of departments, the bank directors restricted their issues when the exchanges were unfavourable, but extended them when the exchanges were favourable. Hence, during the pressure of 1837, they granted assistance by a farther issue of notes to the Northern and Central Bank, because the exchanges had become favourable. Between the periods of an efflux and an influx of gold there is always an interval of time. This interval is usually the highest point of the pressure; and heretofore the Bank of England would relieve the pressure by extending her issue of notes, in anticipation of the gold about to arrive. By this means solvent houses were prevented stopping. Confidence was restored, "hoarding" was diminished, and the pressure removed. But the Act of 1844 does not allow this. No additional notes can be issued until the gold has returned. The same course must be followed, whether the exchanges are favourable or unfavourable; and to anticipate the return of the gold by a farther issue of notes, under any circumstances, however urgent, would be a departure from the principle of the Act. That such a departure, howevermay be made with immense advantage to the public, is obvious from the effects which immediately followed the suspension of the Act in October, 1847.1