1 Commons, 5387 - 5389.
It is chiefly in this respect that the system established by the Act differs from the system previously in operation. And some of the witnesses, looking no farther than this, merely recommended that a power to suspend the Act in cases of severe pressure, should be lodged either with the Government or the Bank. We feel no regret that the legislature did not comply with this recommendation. It is this inflexibility of the Act which makes the commercial classes feel the unsoundness of its whole principle. Had a dispensing power been granted, we should merely have fallen back upon the previous system, with the additional disadvantage that the bank would never be able to adopt a better system, even if so disposed. The directors had for several years professed to govern the issue of notes by the foreign exchanges, but departed from that principle according to their discretion. The Act of 1844, by its inflexible enactment, put this principle to the test of experiment. The principle could not bear that test, and hence the Act was suspended. There is now a chance, at least, that we shall, ultimately, get a better system. The following is the language we addressed to the joint-stock banks at the time the Act was passed: -
"It must be acknowledged that the principle of regulating the currency by the stock of bullion in the Bank of England, as proposed by Sir Robert Peel, is one which the joint-stock banks, as well as the private banks, have strongly condemned. But since we cannot obtain the adoption of our own views, the question for our consideration is, Whether the existing system or that now proposed will best promote the interests of our establishments? And we shall probably determine that it is better to have a uniform law, the operations of which may be subjected to some degree of calculation, than unknown laws, which are applied or suspended according to the impulse of caprice.
"The proposed measure is an experiment; and so excellent is the machinery, that the experiment interferes as little as possible with existing interests. And the old machinery being retained by the continuance of the country issues, the return is easy to the former system, if necessary, before any serious injury can be inflicted on the country.
"As practical bankers, we contend that experience is the only test of the soundness of a theory. Let, then, 'the currency principle' be tried by this test. If it succeeds, the joint-stock bankers, in common with every other class of the community, will share the advantage. If it fails, then other principles will, perhaps, be tried; and, notwithstanding all the denunciations we have heard upon the subject, it may perhaps be ultimately found that the principle of 'competing issues,' as practised in Scotland, is the only effective principle by which the currency throughout the United Kingdom can be managed."
It is obvious that "the currency principle" has been tried and has failed. It seems now to be the proper time to try the antagonistic principle - that the amount of the domestic currency should be wholly unaffected by the importations or exportations of bullion. We doubt not that the talent and ingenuity which framed the Act of 1844 can construct a plan for bringing this principle also to the test of experiment. When this is done, we will judge of the soundness of the principle by its results. So far as it has hitherto been tried, it has never failed.
We have thus endeavoured to trace (impartially, as we believe) the practical operation of the Act of 1844. It is reasonable to suppose, that under similar circumstances it will produce similar effects. What will be its effects under other circumstances we have yet to learn.
We may be reminded that, should the Act work unfavourably under any circumstances, there is one remedy always at hand - the remedy which has already been applied - to suspend it. And no doubt, under any Government, men will be found who will have the courage to apply this remedy. But this will not remove the previous evil. The suspension, too, may be long delayed, and in the meantime much mischief may arise. In the next pressure the nation will be like "a cat in an air-pump."The animal will not be allowed to die, but at what precise period of exhaustion relief will be afforded will depend upon the views and theories of the philosophic statesmen who may at the time be performing the experiment.
It will not be safe for practical bankers to calculate with too much confidence upon the suspension of the Act. They should make their arrangements on the supposition that it will not be suspended. And it behoves them to inquire what are the principles upon which, under such circumstances, their establishments ought to be administered. This we shall now proceed to do.
We pointed out at the passing of the Act the course which we thought prudent bankers ought to pursue.
"In future, the amount of notes in circulation," we observed, "will be regulated by the foreign exchanges. When the exchanges are favourable, money will be abundant; when they are unfavourable, it will be scarce. The evils arising from a scarcity of money can only be avoided by following a prudent line of conduct when money is abundant. We, then, as prudent bankers, ought at present to check our desires of making large profits and declaring high dividends, and be content to employ our funds at a low rate of interest, rather than lock them up in hazardous or inconvertible securities. We should call up our old overdrafts, and our dead loans, and, if necessary, increase our capital, so as to place ourselves in the position most favourable for meeting an adverse state of the foreign exchanges. In cases of pressure on the money market, arising from an unfavourable course of exchange, the Bank of England will not be able, as heretofore, to relieve that pressure by a farther issue of notes, and, so far from granting assistance to other banks, she may, from the extent of her transactions, be more in need of assistance herself. We must, therefore, conduct our banks, individually, on a principle of self-dependence; we shall have to limit our overdrawn accounts, to avoid all advances on inconvertible securities, and to call up such an amount of capital as shall secure to us the means at all times of giving reasonable accommodation to our customers. On the recurrence of a pressure similar to that of 1839, the cry will be, Sauve qui pent - "Every one must take care of himself."