The Bank of England and the State

by Felix Schuster

The Bank of England

and the State

A LECTURE

DELIVERED ON 14TH NOVEMBER, 1905

BY

FELIX SCHUSTER

MANCHESTER
AT THE UNIVERSITY PRESS
1906

The Bank of England and the State

Read before the University of Manchester, on November 14th, 1905.

An enquiry into the relations subsisting between the State and the Bank of England is a difficult subject for a short address, or even for a short essay. These relations can be described in a very few words; but to enter on them fully, and to treat them from their historical and economic aspects, would occupy many volumes. Indeed, the history of the Bank of England remains yet to be written. As Mr. Stephens' contribution^[1] to the bibliography of the Bank of England shows, there is already an extensive literature on the subject, but no one comprehensive work appears to exist.

Curiously enough, the most recent and most complete history of the Bank of England is by a Greek professor, M. Andréadès,^[2] published in French in 1904. Another foreign work by Dr. Phillippovich^[3] treats specially of the relations between the Government and the Bank; and both works would be well worth translating, as they are full of patient research and ample references to various authorities, so that they are extremely valuable guides to further study. But they are written from the point of view of the foreign student rather than that of the historian and economist who is a thorough master of his subject in every aspect. Their information is second-hand, as it were, and, in consequence, not invariably quite reliable. For the best available information we have now to look to a great variety of sources, and, amongst the most valuable, are the Reports issued by various Select Committees who have from time to time reported to Parliament on the Bank Acts.

A complete history of the Bank would be really a history of the nation in its commercial development. It would have to include the history of the National Debt, the scientific treatment of all questions of currency, the history of private and joint-stock banking, and their functions as regards currency; for the questions of currency and banking, especially as banking has developed in the United Kingdom, are so closely connected as to be quite inseparable. The history of foreign State Banks would also have to be considered, in order to obtain a correct view of our own system.

We know that the Bank of England is not a State Bank in the strict interpretation of that word. The State has no voice in its management; it has no share except to a quite insignificant extent in its profits. The Bank of England has the management of the National Debt, and it is the banker of the National Exchequer; that is to say, for all practical purposes, it is Revenue Collector and Paymaster for the Government on terms which are arranged from time to time; but these relations are, technically, merely those of an ordinary banker and his customer.

The Bank has also very extensive privileges; the almost exclusive privilege of note issue within a radius of 65 miles from the Metropolis, and practically the exclusive privilege of such issue in England and Wales, its notes alone being legal tender; but the conditions of that issue are laid down by the Act of 1844, and beyond strict compliance with the Act, no special duty is, by law, imposed upon the Bank; yet that such duties exist through an unwritten law, that they have been recognised and are acted upon, is beyond doubt. They affect our commercial life so closely and are so indissolubly connected with the functions and duties which are properly those of the State that to look upon the Bank of England merely as a private trading institution, and not as virtually the State or Government Bank, is an impossibility.

That such is the case is borne out by words used in the opening statement made by Sir Robert Peel, when in 1844 he introduced his Bill for the extension of the Bank Charter. "There is," he said, "no contract, public or private, no engagement, national or individual, which is unaffected by it. The enterprises of commerce, the profits of trade, the arrangements made in all the domestic relations of society, the wages of labour, pecuniary transactions of the highest amount and of the lowest, the payment of the National Debt, the provision for the national expenditure, the command which the coin of the smallest denomination has over the necessaries of life, are all affected by the decision to which we may come."

The Act of 1844 was passed, as you are aware, with only slight modifications from the original Bill as introduced by Sir Robert Peel, and that it has stood the test of time remarkably well is beyond dispute. But it also appears to me beyond doubt that one of the reasons, indeed, the main reason, for its having worked so well, has been the unfailing recognition by the authorities in charge of the Bank of those undefined duties, of that unwritten law, which in our country has, in so many cases, developed in the course of natural evolution and has taken the place of legal enactment.

The main idea of the Act was to establish once and for all the safety of the gold standard and the convertibility of the bank-note, and, with that, the safety of our currency and our banking systems. But the developments of modern banking no one could foresee. It is singular how, throughout the debates in Parliament at the time, deposit banking, which now plays so important a part of our currency system, was hardly mentioned at all, and in confining the Act almost entirely to the regulation of note-issues it was never contemplated how unimportant a part such issues were, in the future, to play in the commercial life of the nation. Whether the Act itself is sufficient for the needs of to-day, whether the duties, these undefined but universally admitted duties imposed upon the Bank, are not almost too onerous, without the co-operation of those whose transactions also have an important bearing on the currency of the country, it will be part of our object to-night to consider.

To enter upon the relations between the Bank and the State as regards its ordinary functions of Government Banker and Keeper of Accounts is not my object, for nothing useful would be gained thereby, and the information on these points is accessible to all who care to look for it. The main points I wish to place before you are the duties with regard to what is essentially the function of the State, viz. the maintenance of a sound and safe currency: but before entering on that part of the subject a brief historical review of the development of the Bank itself may not be without interest, for it will be shown that it is not as a private institution, but as a Government Bank, that it has been called into existence and grown step by step.

An interesting memorandum on the question of establishing a National or State Bank, dated, Treasury, 10th February, 1858, by Mr. G. Arbuthnot, is published as an appendix to the Report of the Select Committee on the Bank Act, 1858. "The Bank of England," says Mr. Arbuthnot, "owed its origin to the pecuniary wants of a Government whose credit was low on account of the unsettled politics of the day and the drain occasioned by a war, on the issue of which the independence of the country hung. In return for the advances made by the Corporation to the Government, it obtained its exclusive privileges. Each extension of these privileges in after times was the result of some pecuniary accommodation; and an institution so dependent on the Government of the day for the continuance of valuable rights was little able, as Mr. Ricardo observed, to withstand the cajolings of Ministers. The Bank attributed (whether correctly or not may admit of doubt) the necessity for the suspension of cash payments in 1797 to the frequent and urgent demands for an increase of advances on the part of the Government; and that body had frequently been induced to increase their advances on Exchequer Bills and Treasury Bills at the very moment when they were themselves declaring that it would be attended with the greatest risk to the stability of the establishment and to the public interest.

"All cause for such apprehensions had, in fact, been already removed by recent Acts of Parliament when these observations were written. The Act 59 George III, c. 76, precludes the Bank of England from making advances to the Government upon Exchequer Bills, Treasury Bills, or other Government Securities, or in any other manner whatever, without the express and distinct authority of Parliament: and the Act 57 George III, c. 48, regulates the mode by which quarterly advances may be made on deficiency bills. These regulations have put it out of the power of the Government to obtain pecuniary accommodation from the Bank of an irregular character, and the abrogation of the exclusive privileges of the Bank has put an end to all motive on the part of that body to make undue concessions to Government. The relations between the Government and the Bank in regard to the management of the funds at the disposal of the latter body, must now be regulated by mutual consideration of the general interests of the community, and are so amenable to public control as to render irregular, or even questionable, proceedings practically impossible."

These words describe sufficiently what the relations of the Government and the Bank were until a comparatively recent period. The foundation of the Bank itself and the causes which led up to it form an extremely attractive chapter of history, both as regards the commercial development of the nation, the foundations for the greatness of which may be said to have been laid during the seventeenth century, and as regards questions of currency and banking. The business of banking had, up to that time, as you are aware, been almost exclusively in the hands of the Goldsmiths, who had developed it to a remarkable degree, and whose liabilities at times assumed proportions which, even according to modern ideas, are very considerable: but, into that part of the question, interesting as it is, especially as regarding their relations with the Stuart Sovereigns, we must not enter to-night.

For some years before 1694 various schemes for the formation of a bank had been in the air, chiefly stimulated by the success of the Bank of Amsterdam, the operations of which had, it was assumed, largely contributed to the lower value of money obtaining in Holland, to the great advantage of Dutch commerce. Finally, in 1694, the efforts of William Paterson were successful, and the Charter for the new bank was granted. The far-sightedness of this man, it may be observed in passing, showed itself in other directions, for the closing years of his life, after the severance of his connection with the Bank, were devoted to efforts for forming a settlement on the Isthmus of Panama, the importance of which he recognised, an enterprise, the Darien Scheme as it was called, in which he lost his fortune, as happened some two centuries later to other pioneers in the same direction.

With the origin of the Bank, the origin of the Funded National Debt may also be said to have coincided: for until then advances to the Government, although frequent, had only been made for Hxed and comparatively short periods. For a considerable time the capital of the Bank seems to have been equal to, and regulated by, the amount of its advances to the Government. Thus, the original capital—£1,200,000—was the exact amount advanced, (at the rate of 8 per cent. plus £4,000 per annum for management, or, a round sum of £100,000 per annum). No exclusive banking privileges were at that time granted to the Bank. The Act enabled the Company to deal in bullion and bills, to issue notes, and to make advances on merchandise, but it was forbidden to trade in its own securities, nor was it allowed to borrow above £1,200,000 except upon Parliament Funds; and it was expressly stipulated that if the Company should borrow more, every member was to be personally liable; a stipulation which does not appear to have prevented the Bank from immediately exceeding the fixed limit, for in an account delivered to the House of Commons in 1696 their liabilites are stated^[4] as follows:—

To sealed bills outstanding	£893,800	0	0
To notes for running cash	764,196	10	0
To money borrowed in Holland	300,000	0	0
To interest due on bank bills outstanding	17,876	0	0
Total⁠	£1,975,872	10	0

Troubled indeed were the early days of the Bank, for competition was threatened by another bank, the Land Bank, for which a Charter was granted, but which failed to obtain subscriptions when its stock was offered to the public. Great monetary difficulties also arose through the operation of recoinage which took place at that time, and which withdrew large amounts of circulating medium from commerce. Great pressure was, moreover, exercised by the Government for further advances. This led to the Act of 1697, authorising the increase of the capital, new subscriptions for which amounted to £1,00l,171 10s., which sum, by the way, was repaid by a bonus year by year until 1707, when the stock was considered extinguished, so that in 1707 the capital of the Bank was again reduced to £1,200,000. But the Act of 1697 is of particular importance in that it enacted that, during the continuance of the Bank of England, no other Corporation, company, etc., in the nature of a bank should be allowed by Act of Parliament in the United Kingdom. This privilege was extended as regards private partnerships in 1709, when the Bank advanced a further £400,000 to the Government, and it was provided "that during the continuance of the Bank of England it shall not be lawful for any body politic whatsoever to be created, other than the Bank, or for any other persons to be united in partnership, exceeding six persons, in England, to borrow, owe or take up any sum or sums of money, on their bills or notes payable at demand, at any less time than six months." The chief source of profits and the chief function of the Bank, beyond its advances to the Government, were supposed to consist in issuing notes payable on demand; and for the next 120 years the above-mentioned clause, renewed as it was from time to time, effectually prevented any rival corporation being formed.

The capital of the Bank grew rapidly by way of calls and subscriptions; by 1710 it had increased to upwards of £5,500,000. In 1713 a further advance to the Government was made, and the Bank undertook to circulate 181,200,000 in Exchequer Bills, in consideration of which it obtained the extension of its Charter till 1742. In 1718 we see for the first time subscriptions for Government Loans received at the Bank, and from this period onward the Bank was employed as the agent of the Government for all operations of this nature, hitherto carried on at the Treasury. The year 1721 was memorable on account of the failure of the South Sea Company, and the Bank had to buy annuities from that Company to the value of £200,000 per annum at twenty years' purchase, and £3,400,000 had, in 1722, to be added to the Bank's capital. In 1727 one and three-quarter million pounds was advanced to the Government, in 1728 one and a quarter million, both at 4 per cent. On the expiration of the Charter in 1742, the privilege of renewal till 1764 was purchased by an advance to the Government of £1,600,000 free of interest: to raise this sum the Bank made a call of £840,000.

The rebellion of 1745 naturally brought fresh demands, and the proprietors authorised the Directors to cancel Exchequer Bills to the amount of £986,000 (in consideration of an annuity of £39,472, being 3 per cent. per annum), and to create new stock for the purpose, the capital thus being raised to £10,780,000. In 1764 the extension of the Charter till 1786 was obtained, in consideration of an advance of £1,000,000 on Exchequer Bills and the payment of £110,000 into the Exchequer; for the extension to 1812 an advance had to be made in 1781 of £2,000,000 for three years at 3 per cent. A call of 8 per cent., made in 1782, brought the capital to £11,642,400, and this is the last occasion on which either a call or a public subscription took place, for the final addition to the stock of 25 per cent. was made in 1816, out of surplus profit, and not by a call on the proprietors; thus the capital was raised to its present amount, £14,553,000. In the same year the sum of £3,000,000 was advanced to the Government, raising the total of such advances to £14,686,800, an amount practically identical with that of the capital of the Bank.

1 have dwelt at some length, I am afraid, on these successive additions to its capital, but they are of importance, for they show that they were brought about, not by the demands of trade and commerce, but by those of the Government; and the whole attitude of the Bank towards trade and commerce in the eighteenth century, and necessarily in its later development, is really explained thereby, for other institutions, private in the first place, and joint stock later on, were bound in a process of natural evolution to come into being, and in their growth to fulfil the functions which one would have expected a bank with such immense resources and such privileges to perform. At first the Bank of England allowed interest on deposits, and even the goldsmiths appeared to have availed themselves of these facilities; but for how long this system prevailed I am not in a position to say. The chief sources of profit were advances to the Government and the raising of money on Bank-notes.

How great was the pressure exerted by the Government is apparent from the Act of 1792, declaring that the Bank should not be subject to any penalties for advancing money to the Government for the payment of bills of exchange, accepted by the Commissioners of His Majesty's Treasury, and made payable at the Bank. (The amount of the sums so advanced was required to be annually laid before Parliament.) According to their original Charter, the Bank had been prohibited from lending money to the Government without the consent of Parliament under a penalty of three times the sum lent, one-fifth part of which was to go to the informer.

Then came the memorable year 1797, when Parliament not only authorised, but ordered the Bank not to pay its notes in gold, a. restriction which was not removed until 1819, when Sir Robert Peel's Bill was passed, authorising the resumption of cash payments.

We can but briefly indicate the banking legislation which took place in subsequent years, information on which is very easily accessible. In 1826 it was decided that the Bank of England should establish branches in different parts of the country, but to what limited extent this has been carried out we all know: the main object of establishing such branches appears to have been to promote the circulation of the notes of the Bank. A further Act, passed in that year, authorised the establishment of joint stock banks with unlimited liability at a greater distance than 65 miles from London, provided they had no establishment in London, and they were prohibited from issuing notes within the 65-mile limit. It appears that the 65 miles are to be measured from the steps of the Royal Exchange.

Of far greater importance to bankers is the Act of 1833, by which the Bank Charter was extended till 1844. Gradually we perceive not an extension, but a limitation of the privileges of the Bank; and the Act of 1833 is but the prelude of 1844, which resulted in the creation of the two departments, the Issue and the Banking Departments of the Bank, and thus separated the Bank's various functions. In 1833 authority was given to any company or partnership to carry on the business of banking in London, or within the 65 miles radius, provided they did not owe or take up in England any sums of money on their bills or notes payable on demand or at any less time than six months.

It was further enacted that the Bank of England notes were to be legal tender, except at the place of issue, and thus with the establishment of joint stock banks in London, and the principle of the legal tender of the Bank of England note, the foundations were laid for our present currency system, although at the time, and even in 1844, no one could have contemplated the development joint stock banking was to take.

I must assume that you are acquainted with the principles and the provisions of the Act of 1844. In order to fully understand the causes which led up to it, the various monetary crises which had occurred during the century, the drains of bullion and the fears engendered thereby, must be studied. Subsequent crises deserve equal attention in order to arrive at a conclusion as to whether the Act accomplished the desired end. The debates in the House of Commons at the time, and especially the Report of 1858, which I have already mentioned, of a Select Committee appointed to enquire into the operation of the Bank Act, should be carefully read, as they throw the best possible light on the aims the framers of the Act had in view, and what they understood the duties of the Bank of England to be.

A new principle of importance was introduced in this Act of 1844, inasmuch as the Charter was continued with all its powers and privileges, not for a definite period, as heretofore, but subject to twelve months' notice, which could be given after August, 1855, and conditional on the repayment of the loan of $311,015,100 to the Bank; and thus the absence of any specified term has prevented the automatic periodical revision of the Act itself; though, of course, the terms of the management of the National Debt, the rate of interest of the various advances to the Government, and the conditions of carrying on the banking accounts of the Government, have been revised from time to time, as a matter of private arrangement between the Treasury and the Bank.

The end Sir Robert Peel had in view was, as I have mentioned before, to establish the currency safely and absolutely on a gold basis. The fiduciary issue, that is the only part of the note issue not covered by bullion, was fixed at an amount which was, from experience, considered to be the possible minimum circulation: everything above this amount was to be, and must be, covered by gold. "According to the ancient monetary policy of this country," he says, "that which is implied by the word 'pound' is a certain definite quantity of gold, with a mark upon it to determine its weight and fineness, and that the engagement to pay a pound means nothing, and can mean nothing else, than the promise to pay the holder, when he demands it, that definite quantity of gold. There is no doubt some expense in the maintenance of a metallic circulation, but none, in my opinion, sufficient to countervail the advantage of having gold coin generally distributed throughout the country, accessible to all, and the foundation of paper credit and currency."

The result of his policy, he anticipated, would be that, as commerce increased, the circulation of bank notes would also increase. Only one speaker during the debates considered that the restrictions on the issue of notes were too stringent, and foreshadowed the possibility that some other form of paper credit would be substituted for the notes, but what form was not indicated, and no one could have anticipated the extent to which joint stock banks were to grow, and how deposit banking was to take the place of bank note circulation.

Sir Robert Peel does indeed mention the word "deposits." "I will," he says, not weary the House with a discussion as to the precise nature of deposits, and whether they constitute a part of the currency of the country. There is a material distinction, in my opinion, between the character of a promissory note payable to bearer on demand and other forms of paper credit, and between the effects which they respectively produce upon the prices of commodities and upon the exchanges. The one answers all the purposes of money, passes from hand to hand without endorsement, without examination, if there be no suspicion of forgery: and it is, in fact, what its designations imply it to be, currency or circulating medium. I do not deny that other forms of paper credit have some effects in common with bank notes, that they all have a tendency to economise the use of metallic money, and have a common influence on the value of gold to the extent to which they dispense with the use of it, and thus leave a larger quantity available for the general purposes of the world than there would otherwise be. But I think experience shows that the paper currency, that is the promissory notes payable to bearer on demand, stands in a certain relation to the gold coin and the foreign exchange in which other forms of paper credit do not stand."

It cannot, however, I think, be denied that subsequent experience shows that the other forms of paper credit alluded to do stand in relation to the gold coin and foreign exchange almost in a more. direct degree than the bank note at the present time. But that the business of banking generally affects the currency, and did so in 1844, is already admitted by Sir Robert Peel. Certain restrictions were introduced which were to be applied to all existing banks; and it was thought desirable to make compulsory the periodical publication of the names of all partners and directors, and of such matters as the transfer of shares, as well as the amount of the issue of notes, and to decide how long the responsibility for the possession of shares would attach to a party. "The privilege of issue," he says, "is one which may be fairly and justly controlled by the State, but the banking business as distinguished from issue, is a matter to Which there cannot be too unlimited competition." Yet he recommends that, "no new joint stock bank of deposit shall be constituted except upon application to a department of the Government for this purpose; there shall be a registration of the prospectus, a certain amount of paid-up capital, and a limitation as to the nominal amount of each share; the deed of settlement to be drawn up according to the prescribed form. Existing banks may adapt these regulations to their own concerns;" and he lays down distinctly that, both with respect to the frequent failures of banks and the loss and suffering entailed on their creditors, the conclusion is in favour of legislative interference, and he proposes, not merely a check on the privilege of issue, but also an amendment of the law under which banks, not being banks of issue, are constituted.

In our time an ex-Chancellor of the Exchequer, happily still with us, has again declared that the operations of banks generally are of such a nature as to give the public a locus standi in reviewing them and insisting that they shall be conducted in a manner which shall be considered safe by the community at large.

I must at this point guard myself against the inference that might be drawn from these remarks that I advocate legislative interference with regard to banking generally, but it is obvious that the operations of banks, inasmuch as they affect the currency of the country, as undoubtedly they do, are quite distinct from those of ordinary commercial undertakings.

As regards the Bank of England, while the duties of the Issue Department were by the Act of 1844 clearly and distinctly laid down, nothing is said of what were conceived to be the duties of the Banking Department. We must refer for anything like an authoritative opinion to the Report of 1858.

In the memorandum by Mr. Arbuthnot, which I have already mentioned, the advantages to the community are insisted on, which are afforded by the management of the Public Debt and the employment of public moneys being entrusted to the Bank of England, which advantages could not be afforded by a State bank. "There can be little doubt," he says, "of the advantage which accrues to commerce from the employment of these funds, either directly or indirectly, in the discount of bills. Under ordinary circumstances it may perhaps matter little in effect whether the funds put out are employed immediately by the body which dispenses them in the operation of discount or in investments of public securities. In either case they would find their way into the money market and be applied to the purposes of trade; but when the demands for money are great, and the rate of interest consequently high, great advantages are afforded by the resource the Bank of England affords under the system of management now pursued; such houses are assured that the funds at the disposal of the Bank will always be available for the legitimate objects of trade at the current rate of interest. Whence ensues that confidence which is derived from uniformity of system. The Bank of England has then come to be regarded as the centre and mainstay of mercantile credit."

That the Bank was so regarded is clear from the tendency of the whole of the enquiry. Witnesses were specially asked whether every house which applied, and deserved assistance, received it. From the evidence it appears that the Directors of the Bank of England went into the country to examine the accounts of banks in difficulties, in order to render assistance if they appeared to be sound.

The Governor of the Bank of England was asked: "You did not refuse accommodation to any person, even up to the time when the Act was suspended, who brought you good securities." The answer was "No."

"I think you have admitted that you did not act during that time upon purely banking considerations, but that you had public considerations in view?" "Yes."

"You admit that the course which the relative position the Bank took during that period is not one strictly in accordance with general banking rules?" "Yes."

"Was it entirely upon your own responsibility as directors of the Bank of England that you pursued that course of business?" I think it was with our view of the nature of the functions of the Bank of England as contrasted with that of ordinary bankers."

Here we have distinct declarations what the duties of the Bank of England, those undefined duties of which I spoke at the outset, were then conceived to be: and the final words of the Report are as follows:—

"Your Committee have stated the reasons by which it is established, to their satisfaction, that the recent commercial crisis in this country, as well as in America and in the North of Europe, was mainly owing to excessive speculation and abuse of credit; and also, that in the time of pressure, the houses which deserved assistance received it from the Bank of England in a manner in which that establishment would not have been able to give it, except for the bullion retained in their coffers; and your Committee are satisfied to have in the discretion of the Executive Government, the time and prudent opportunity of giving further effect to those principles by which the convertibility of the Bank of England note has been kept above suspicion."

It can well be conceived what the impression must have been on the public mind of a Report such as this, and the idea was confirmed that it was the duty of the Bank, in return for the special and valuable privileges enjoyed by it, in time of trouble to afford assistance to houses and institutions that might require it, provided that these could prove that they were solvent and had good security to offer. Under this impression, it is evident how the Bank came to be looked upon as the centre of all banking, and as such continued to be the bankers' bank, and consequently the keeper of the central cash reserve of the nation. I presume you have all read your Bagehot^[5] and your Palgrave,^[6] so that I need not enlarge on the later developments of the money market, and the advantages and drawbacks of the one reserve system.

In the report of 1858, the growing importance of joint stock banks and of the London Clearing House were already noticed. Their subsequent development was undreamt of, and our object is to enquire whether the duties of the Bank of England, both as regards the convertibility of the note and its position as the centre and mainstay of mercantile credit, would or could have been imposed upon that institution without additional safeguards, had such development been foreseen, and whether the time has not arrived for a reconsideration of the whole position.

For this purpose it will be necessary to compare certain figures at the time of the passing of the Bank Charter Act and the present time, a comparison which will, I think, compel us to ask whether legislation, which, adequate 60 years ago, can possibly apply to present conditions. The Report of 1858 states that while the £5 and £10 notes of the Bank of England had since 1844 shown a tendency to rise, a great diminution had been observable in notes of £200 and upwards; and this diminution is attributed to the growth of joint stock banking and of the Clearing House. The circulation of notes in the hands of the public immediately after the passing of the Act, appears to have been about £20,000,000, and is now under £30,000,000; and this increase is more apparent than real, as so many private issues have lapsed and the fiduciary issue has been increased by about £4,450,000. The balance of the increase, and probably more, will in all likelihood be accounted for by larger holding of notes by bankers; and it may safely be assumed that the actual circulation in the hands of the public is, if anything, smaller now than in 1844.

The average amount of bullion held in the Issue Department for the ten years after the passing of the Act, was about £14,600,000, at the present time it is £32,000,000. Thus while the circulation, though nominally increased by 10 millions, has not done so actually, the stock of bullion has increased by about 17½ millions. The average total liabilities of the Bank of England were, for the 10 years beginning 1845, £17,700,000, and for the ten years beginning 1895 £50,900,000, and this increase of £33,200,000 is to a considerable extent accounted for by the increase in the bankers' balances with the Bank of England which are included in these figures.

We now come to the banking deposits outside the Bank of England. What the deposits of private banks were in 1844 it is very difficult to ascertain now, and this would be an interesting subject for a separate enquiry; but as the private bankers did not allow interest on Deposits, and country bankers looked on their note issues as their main source of profit, the amount cannot have been of vast magnitude. In 1847^[7] the deposits of the public with the joint stock banks in London are stated to have been £8,850,000. The Return of September 7th, 1844, shows that London bankers kept at the Bank of England balances amounting altogether to £960,000. In 1876 the annual average of bankers' balances with the Bank of England was £11,850,000; in 1877, unfortunately, the practice of making a separate return of the London bankers' balances was discontinued by the Bank of England, a step much to be regretted and never explained, perhaps accounted for by the fact that, as pointed out by Mr. Palgrave, in October, 1877, the amount of the London bankers' balances actually exceeded the total reserve of the Bank of England, as it had done on two previous occasions. Precise information is therefore lacking on that important point, but the inference seems justified that the amount must now be considerably larger than in 1876.

Owing to the number of amalgamations and country banks coming into London, and London bankers going into the country, no exact comparison of their figures can be made, nor is it necessary for the purposes of our argument, which is that while the deposits of the joint stock and private banks of the United Kingdom have, during the 60 years, grown in a gigantic fashion, the figures of the Bank of England (if we deduct the bankers' balances) and the central stock of bullion, show only a comparatively slight increase. We all know how enormous the aggregate banking deposits of the United Kingdom now are, but it is important to keep the figures before us, and according to the last Economist returns they amounted to £768,000,000, exclusive of those of the Bank of England itself.

Then take the figures of the Budget. In 1844 the Revenue amounted to about £58,000,000 and the expenditure to about £55,000,000, compared with £143,370,000 and £141,956,000 last year; and, most important of all, take our Trade Returns, which, in 1845, showed Imports £88,000,000 and Exports of £68,000,000; in 1904, Imports of £551,000,000, and Exports of £371,000,000. The figures of the London Clearing House in 1904 attained the sum of £10,564,197,000, which sum has already been reached in the first ten months of this year. Is it not obvious that so vast a commerce could not be carried on with such an insignificant amount of circulating medium as represented by the Bank of England circulation, had not the function, which in 1844 this circulation was intended to perform and believed to perform, been supplanted by the banking facilities modern developments have provided, without, however, any appreciable increase of that stock of bullion on which our currency is based? Moreover it has to be remembered, particularly with regard to our foreign trade, that in 1844 we were the only country in the world whose currency was on a gold basis, and that since that time nearly every civilised country in the world now has a currency so based, that the possible demands on our reserves are thereby intensified, and that rapidity of communications and intercourse by telegraph and cable have brought sudden demands much more within the range of possibilities.

The fact must also be remembered that, until comparatively recently, we were the only great nation having large investments abroad, a condition which placed it in our power to obtain, and, having obtained, to retain, the gold supply from all available sources much more easily in 1844 than is now the case. On the other hand, the production of gold has also increased very considerably and, as we have been recently reminded by an American banker, amounts to about $1,000,000, or, say, £200,000 a day.

But compare the stock of bullion held here with those of foreign nations. In October, 1905, they were as follows:

England	Gold	£34,629,000
France	Gold	118,483,000
	Silver	44,105,000
Germany	Gold and Silver	36,611,000
Austria-Hungary	Gold	45,543,000
	Silver	12,238,000
Russia	Gold	91,103,000
	Silver	5,166,000
United States Treasury	Gold	147,000,000

It is hardly surprising that, considering the enormous transactions of daily commercial life and the ever increasing financial transactions taking place between nation and nation, our Money Market is subject to sudden and large fluctuations, and that movements of gold, in themselves insignificant when compared with the total turnover, affect monetary conditions to a degree which must be injurious to the commerce and credit of the nation.

What is a matter of surprise is how smoothly, on the whole, the system has worked. Yet it has been shown by Mr. Palgrave how sensitive our market is; the number of variations in the rate of discount in the decade ending 1900 was 55 in the case of the Bank of England; 9 in the case of the Bank of France; 36, Bank of Germany; 23, Bank of Holland; and 13, Bank of Belgium: the total amount of variations from 1844-1900 was 400 in the case of the Bank of England, compared with 111 in the Bank of France. From 1901 onwards there has been absolutely no change in the rate of the Bank of France, whereas we have had 17 changes during that time; a state of affairs hardly consistent with our position as the financial centre of the world: and only caused by the necessity of taking immediate steps to raise the rate of discount whenever even a comparatively small amount of gold is exported.

I have remarked before that commercial crises must be studied in order to obtain a proper insight into the working of our system: but it must be remembered that during the period under review such crises as we have had have been purely internal ones, and the question of large exports of gold did not arise. It is commonly supposed that on the three occasions when the Bank Charter Act was suspended and the Bank authorised to increase its issue beyond the bullion limit, that authorisation alone was sufficient to stop the crisis, but this is not the case; in 1857 the crisis did not come to an end until £2,000,000 of notes had been so issued. Were a crisis to arise owing to an external drain, the consequences might be of the most serious nature. In the event of war with a great Continental nation, this would at the very commencement be one of our most vulnerable points. The danger is not an imaginary one, considering the vastness of our international obligations, all payable in gold, and the suddenness with which such obligations might at a time of disturbance be enforced. I prefer not to dwell on the consequences that might arise. It cannot be a matter of surprise, then, that during the last few years the question of the necessity of increasing our gold reserves has been frequently discussed and can never be left out of sight.

"When under the existing system," says Lord Goschen, "a suspension of the Bank Charter Act takes place, it authorises a simple issue of notes unsupported by gold: a course which may add to the dangers of the situation by increasing paper money at a time when gold is leaving the country. It seems to me that it would be infinitely better to have command over a reserve of gold, a separate stock of gold."

His memorable speech made at Leeds after the Baring crisis has fortunately just been republished^[8] and I may refrain from quoting it at length, and can only refer you to the speech itself, as the utterance of the one Chancellor of the Exchequer who had the closest knowledge of, and most intimate acquaintance with, the City: but I call your special attention to the paragraph admitting the change that had taken place in the position of the Bank of England. "It has still the duty," he says, "of endeavouring to meet all the necessities of a crisis: it still fills such a position that the whole of the country looks to it to extricate it from a difficulty, but it does not command any longer the same proportionate resources it commanded in the old times. It is unable at this moment, in the face of the 600 millions of deposits entrusted to other banks, to take up the same position as in times past." And he goes on to tell us that he, at that time Chancellor of the Exchequer, was engaged, with the assistance of the authorities of the Bank of England, in devising some actual scheme to strengthen the permanent reserves of the country. It was a second reserve to be managed by the Bank of England that he was contemplating, and he calls upon the great banking institutions to take their share in endeavouring to bring about the desired result.

Here you have the method described which, in my opinion, is the only one by which the reforms, which bankers are unanimous in advocating, can be obtained: the initiative of the Government in consultation with the Bank of England and with the co-operation of the great banking institutions. What Lord Goschen had in his mind at that time was the issue of £1 notes, and the gold which was to be the basis for this issue was to form a second central reserve. In addition to this he desired the strengthening of the general cash reserves of the banks. The issue of £1 notes did not commend itself to the public: I do not think Lord Goschen is quite right in stating that the banking world alone hung back. General objections were taken to the idea, and he himself now admits that he was not an enthusiast for such notes. Personally, I think the amount of gold in actual circulation is so small that I should prefer not to deplete it further, but to create a separate and quite independent, gold reserve.

Lord Goschen impressed upon bankers the necessity of keeping larger cash reserves, and to a great extent I believe this appeal has been loyally responded to. Banking amalgamations must also have contributed to larger reserves being generally held. Whether the burden has been shared equally by all is another question. The monthly publication of accounts which was the immediate result of Lord Goschen's recommendation is made by twelve only out of seventeen banks in the London Clearing House, and country banks generally have refrained from such publication. Unfortunately, the period of excessively cheap money following after the Baring crisis, and the natural increase of the stock of gold in the Bank of England consequent thereon, diverted attention from the importance of the subject. It is at times when money is abundant, when the available stock of gold is large, that the necessary steps should be taken, and I ventured in 1896, when such conditions prevailed, to suggest that then was the time to take the matter in hand; but, I regret to say, without avail. Bankers, however, did not lose sight of the subject, and Committees have been appointed to consider it. If the South African war had not intervened, further progress would no doubt have been made.

Although I myself have taken a somewhat active part in these discussions, and placed a tentative scheme of my own before a committee, I am not confident that the action of bankers alone can produce any effective result. It is difficult to procure combined action amongst them, for, as Sir Robert Peel pointed out in another connection, "It is vain for one bank individually to make a sacrifice when others will not do the same; no effect is produced on the aggregate, and competitors take advantage of the burdens others have taken upon themselves." Moreover, it would be inadvisable, in my opinion, for bankers in any way to assume a position which might be interpreted to imply that on them rested the responsibility of maintaining a gold reserve sufficient for the needs of the nation. That is the duty of the State, a duty acknowledged by Sir Robert Peel when in winding up the debates he said "he hoped the House would recollect the embarrassments which had been entailed on this country by the fluctuations of our monetary concerns, and he hoped that they would assist the Government in requiring, in order to support the issues of the Bank, a stock of gold, the expense of providing which should fall on the country at large."

The duty of the banker is to keep such reserves of cash or legal tender as prudence dictates to be necessary for the safe conduct of his business. To endeavour to provide for the safety of the legal tender itself would be going beyond his legitimate functions: but he should, as his business is a special one, and intimately connected with the currency of the country, co-operate with those in authority, and, if necessary, not shrink from recognising his responsibilities, even if such responsibilities should involve some sacrifice. But let those sacrifices be evenly and fairly distributed amongst all bankers and in proportion to their liabilities to the public; and if Chancellors of the Exchequer call upon banks, as they rightly and justly do, to co-operate with them in the public interest, bankers may at least fairly claim this, that no one shall be allowed to act as a banker or use the title " Bank," without submitting to certain prescribed conditions, such as periodical publication of accounts, perhaps in a specified form, registration of partnerships, etc.

If, during these last ten years, it was the bankers and not either the Government or the authorities of the Bank of England, who kept this question before the public, it is no doubt owing to the insight into the vastness of internal and international trade and finance, that their peculiar position, and especially that of the London bankers gives them. It is their duty, then, in the public interest, to insist that the necessary steps are taken, and taken before it is too late; and it is their duty to co-operate in such steps as, after mature consideration, may be deemed necessary; but beyond that their duty does not go. The initiative and the responsibility must be in other hands.

Of the various schemes that have been brought forward, it is not my intention to speak to-night; they might well form the subject of a separate paper. The necessity for some scheme seems abundantly clear.

It has been suggested in certain quarters that the case would be fully met by a general increase of bankers' balances in the hands of the Bank of England; but apart from the difficulty of enforcing such a recommendation, and applying it fairly not only to London Clearing Banks, but to all the banks, there is this objection, that according to the system now prevailing, the Bank of England would employ about 60 per cent. of such increase in the market, and only about 40 per cent. would represent the actual increase in the reserve; the advantage to the community, therefore, would not be proportionate to the sacrifice made.

A second reserve of gold would not be created: far better would it be if banks decided on increasing their own cash reserves, to keep them in their own vaults in gold or notes. It is very probable that a movement in this direction has taken place in many quarters, and that the cash reserves of many bankers are not now represented entirely by their balances in the Bank of England, or by what is generally described as their till money; but that they do hold actual cash reserves not used in their daily business; and that is, after all, the real meaning of a reserve. Individual action, such as this, useful as it is, doe not, however, fully meet the case either; and what we should, in my opinion, aim at, is the creation of a second central gold reserve to be held by, and managed under the supervision of, the Bank of England. Towards the solution of the question in such a way my own efforts have been directed.

One more incident that occurred during the last few years appears to be worthy of mention in considering the relation between the State and the Bank of England, an incident which shows that there are still considerable and important powers affecting the currency which the Act of 1844 has left to the discretion of the authorities of the Bank. According to the provisions of the Act of 1844, the Issue Department of the Bank was authorised to issue notes against an amount of silver bullion not exceeding one-fourth part of the gold coin or bullion held; but this power was acted upon only to a very slight extent until 1850, and again in 1860 and 1861, otherwise all issues have been made against gold. In 1897 considerable excitement was caused when it appeared that certain proposals had been laid before our Government by the Governments of the United States and France, with reference to which the Governor of the Bank wrote to the Chancellor of the Exchequer that the Bank was prepared to hold one-fifth of the bullion held against the note issue in silver, provided that the French Mint was again opened to the free coinage of silver, and the prices at which silver is procurable and saleable were satisfactory.

On this correspondence becoming known, the Committee of London Clearing Bankers immediately met and passed a resolution: "That this meeting entirely disapproves of the Bank of England agreeing to exercise the option permitted by the Act of 1844, of holding one-fifth or any other proportion whatever of silver, as reserve against the circulation of Bank of England notes. That a copy of this resolution be sent to the Bank of England, to the Prime Minister, the First Lord of the Treasury, and to the Chancellor of the Exchequer." Nothing more was heard of the suggestion; but it shows that the gold basis of our currency is not so absolutely assured as is generally supposed.

In many other respects the relations between the State and the Bank must, of course, be of an intimate and a. close character, especially as regards the management of the national finances; but these it is hardly our province to discuss. The object of my remarks has been to set before you, however imperfectly, my conception of the duties appertaining to the State and delegated to the Bank, of the inseparable connection between the two, and of the gravity of the issues involved. I have not approached the subject in any alarmist spirit; if I had considered it a subject for alarm, I should not have ventured to speak so freely, I should not have ventured to call attention to it publicly; but, above all, I hope that no expressions I have used may be held to imply anything like criticism, either on the framers of the Act of 1844, or on those who have so ably and loyally administered it.

The wonderful way in which so far the Act has fulfilled its object is sufficient proof of the genius of its author, and its principles remain unassailable. It is clear that it is the duty of those who have the interests of the country at heart to enquire into the new conditions and circumstances which have arisen during the last 60 years, the marvellous development of our resources and responsibilities, the vastness of the transactions that now enter into daily commercial life, that it is our duty to enquire whether it is not necessary to make further provision for that which we conceive the object of all recent legislation respecting the Bank of England to have been, viz., the unquestioned safety of our currency so necessary for our world-wide commerce, and the maintenance of our position as the one free market for gold, and as the recognised banking centre of all civilised nations.

This is one of the greatest problems of our time, and one which will have to be faced. Questions are again coming to the front which are making the study of Political Economy more imperative than ever: a science which in its variety, in its influence in regulating the development of nations, in its close relationship to human nature, appears to me to be one of the most interesting, and amongst its many intricate chapters that of currency is surely not the least important.

1. T. A. Stephens. "A contribution to the Bibliography of the Bank of England."
2. A. Andréadès. "Histoire de la Banque d’Angleterre."
3. E. Phillippovich. "Die Bank von England."
4. Fairman’s Account of the Public Funds, 1824.
5. W. Bagehot. "Lombard Street."
6. R. H. Inglis Palgrave. "The Bank Rate and the Money Market."
7. This is the nearest date for which I have been able to obtain the figures.
8. "Essays and Addresses on Economic Questions, 1905."