Page:Encyclopædia Britannica, Ninth Edition, v. 3.djvu/341

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BANKING
325

So far we have dealt with the legislation of 1844 in its bearing on the Bank of England. The desire of Sir Robert Peel reached beyond this, but he was unable to complete his policy. He rightly held that experience had shown that the balance of advantages lay on the side of the sup pression of all note issues except that of the Bank of England, as reformed by him, or of some similar supple mentary establishments regulated in the same manner. But it was obviously impossible to prohibit, without com pensation, the future exercise by country bankers of the rights they had legitimately acquired ; and as it was not easy to buy up the existing privileges of the private and joint-stock banks, Sir Robert Peel allowed them to remain under conditions prohibiting their extension, and he appar ently hoped that country isues would gradually disappear before the rivalry of Bank of England notes. The Act of 1844, accordingly, enacted that no new bank for the issue of notes should be established in any part of the United Kingdom ; and that the maximum issue of notes by the existing country banks of England should in future be limited to the average amount which they had respectively in circulation during the twelve weeks preceding the 27th April 1844. It was also ordered that the names of the partners in joint-stock and other banks should be periodi cally published. A provision was also enacted under which an issuing bank could resign its privilege by composition with the Bank of England. The existing law was main tained preventing the issue of any notes other than the Bank of England in London, and the establishment, within sixty-five miles of London of any branch of an English joint-stock bank having the privilege of issue.[1]

The convertibility of the Bank of England notes has been perfectly maintained since 1844, and the management of English banks, whether private or joint-stock, has been sound and judicious, the cases of failure among them being few and contrasting strongly with the recurrent epidemics of insolvency of earlier experience. It must, however, be admitted that the variations in the rate of discount charged by the bank have been much more numerous and violent since 1844 than they were before, and on three occasions in 1847, 1857 1866 it has been judged necessary to authorize a suspension of the Act so far as to allow the bank directors the power to strengthen the banking department by recourse to the reserves of the issue depart ment. In each case the suspension of the Act arrested and allayed the panic prevailing up to the moment of suspension, and in I860 it was not, in fact, found necessary to exercise the power to borrow from the issue department which had been conceded to the directors. We must proceed to inquire whether the Act of 1844 is to be blamed for the increase in the number of changes of the rate of discount which has since been experienced, and whether this increase and the suspension of the Act in time of trial constitute a reason for its abrogation or for a modification of its provisions.

In the first place, the increased number of changes in the rate of discount is more apparent than real. The manage ment of the Bank of England has become responsive to the movement in the value of money in the open market in a degree unknown before this generation. The rate of dis count outside the bank changed rapid iy and often before 1844, but its fluctuations were to a large extent prevented from affecting the Bank of England. Previously to the modification of the Usury Laws in 1839, the bank could not charge more for loans than 5 per cent., and for some considerable period after the restriction had been removed the directors, influenced, in part at least, by their accustomed habit on several occasions, permitted the bank to be involred in difficulties which might have been averted by their sooner raising the rate of discount. Strict limitation in the number and class of customers with -whom the bank would do business, and a refusal to rediscount bills that had been already discounted by money-dealers, made it possible to keep the bank rate below the rates of the open market without exposing the resources of the establishment to an exhausting demand.

Next, it is to be observed that the methods of economizing

the use of money by the development of banking have been extraordinarily multiplied since 1844. The Bank Act, as we have shown, in no way operates to diminish the supply of money in the country; on the contrary, it tends to increase it, since it forbids any extension of the use of notes issued on credit as a substitute for money. The effect of the Act has therefore been to neutralize rather than to stimulate the process of economy in the use of money to which we have called attention. But the transactions of bankers the issue of cheques, the negotiation of bills, &c., &c. have multiplied out of all proportion to the stock of ready money on which they rest, and the mass of transitory credits being constantly increasing while the reserves of cash suffers little change, there naturally and necessarily follows an increased sensibility in the equilibrium of the money market, with constant oscillations in the rate of interest. But although the increase in the number of changes of discount since 1844 has not been as great as may at first seem apparent, and so far as the increase has been real it must be chiefly attributed to the growing disproportion between the magnitude of transitory credits at any time existing and the reserve of cash kept on hand, yet it may be freely admitted that it is not improbable that changes have from time to time happened that might not have occurred supposing the separation of the banking and issue departments had not been established. It is evident that if the cash in the two departments had been equally accessible to the bank directors, a withdrawal of money which is now thrown upon one department would not have caused so great a change in the proportion between liabilities and reserve as is now exhibited ; and if the directors had reason to believe that the withdrawal was no more than a temporary efflux to the provinces or elsewhere, to be followed by a speedy reflux, they might have been bolder in abstaining from raising the rate of discount. But this action or rather inaction would have been indulged in at the price of a certain risk to the convertibility of the note, which is now avoided, and if it should appear in the end that the directors had erred in supposing the move ment of money to be but temporary, they would see reason to regret that they had not been forced to stringent action at the beginning of it. The oscillations experienced in the rate of discount, oscillations which after all indicate nothing more than the natural movement in the value of a medium which is the first to be agitated by changes in value of every other commodity, are cheaply purchased as the price of the permanent and perfect equality of the bank-note and the money it represents. The repeated suspensions of the Act of 1844 in time of trial do, prima facie, present a much stronger argument for the repeal of the statute. Legisla tion which breaks down upon critical occasions discredits the Legislature that decreed it ; and it is not to be denied that the mere suspension of the Act has more than once operated as a charm to allay feelings of panic among bankers, money-dealers, and merchants. It must also be admitted that Sir Robert Peel, in common with the earlier advocates of the policy of the Act, believed that it would prevent the recurrence of commercial crises. It is strange that such an anticipation should have been entertained. Whoever will reflect on the nature of the organization of

credit in the commercial world, and on the timid and self-

  1. The provisions regulating the issues of Scotch and Irish banks will be found below, p. 332 sqq.