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CHAPTER VIII.

THE BANK OF ENGLAND.

"And round about him lay on every side
Great heaps of gold that never could be spent,
Of which some were rude owre not purifide
Of Mulciber's devouring element."-SPENCER.

Bank Restriction Act.

THE history of the Bank of England, if it could be truly written 1, would be more instructive than the history of most nations. Even a series of its weekly balance-sheets, as far back as they exist, with the contemporaneous price of consols, and short illustrative notes, showing any important events in the money market, would be a contribution to the statistics of this subject of very great value. This, however, is not the place to attempt any history of the Bank, even if the requisite ability existed; nor even to notice the many interesting facts which occurred under the Bank Restriction Act, more or less connected with the present subject; but this much may be remarked-that whenever the light of a complete monetary science shall be cast back upon the transactions of that period, it will do more than even Mr. Tooke has already done to change the whole complexion of the bullion controversy. I am persuaded it will be found that in the whole of that matter,

1 I should be sorry to seem to cast any slight on the interesting work of Mr. Francis, which I have read with pleasure. But that work is literary, rather than scientific. The kind of history which, as it seems to me, would be so valuable, would be that of the monetary action of the Bank, including and expanding the matter contained in the chapters on the Circulation, in Mr. Tooke's "History of Prices."

the Bank Directors and the merchants were right, and the philosophers completely in the wrong.

The former were right because they were governed by certain practical instincts, which in any habitual sphere of action are usually better guides than nice or elaborate reasoning. As soon as men take to reasoning in such cases, the matters being very complex, there ensues a long period of blundering, before all the various threads of deduction, which should be concurrent, are fairly gathered up and carried out to a correct result. Mr. Horner, sensible as he was, obstinately resisted the most evident facts. He could not admit the notion that peculiar causes might act upon the value of gold, so as to carry it away from the paper, without in the least degree disturbing the relation between the paper and the general mass of commodities. Yet this was unquestionably the fact, and the proof of it became absolute demonstration (at least to a mind like that of Mr. Blake, in which no theory could stand against a fact) in 1815, upon the return of Buonaparte from Elba, when the exchanges fell suddenly, and gold rose from 47. 98. to 57. 78. per ounce, without any increase in the bank-note circulation'.

The superstition of the economists of that day, however, clung to gold, as the earlier astronomers did to the earth, as to something central and immovable, around which all other bodies could not but revolve. The foundation of this ancient belief was not effectually shaken until the appearance of Mr. Bailey's "Dissertation on Value," a work which would have been faultless if it contained a better appreciation of that tacit reference to equal amounts of sacrifice which is made in contracts, and in all comparison of values at distant points of time. Under the Restriction Act, the gold in the market, being a mere article of commerce, and being no longer held steady by an adjoining mass of currency, was tossed to and fro, by the most violent alternations of demand acting upon a supply which could not suddenly be either increased or diminished.

1 Tooke, vol. ii. p. 33.

The gold was drawn away to meet demands which, as Mr. Tooke has so clearly shown, nothing but that precise article itself could satisfy. The Bank paper held its accustomed place, spanning the stream like an arch when the scaffolding is gone.

Habitual Standard of Value.

The conviction that this was the real state of matters, that the variation was in the gold and not in the paper, existed in the minds of the most intelligent merchants, and is to be accounted for by a fact originally noticed by Turgot, and afterwards by Malthus, that when exchanges have gone on for any length of time, a certain current value of all commodities in frequent use gets established. In other words, a currency once settled begets a number of habitual associations of comparison, which paint, as it were, a standard of value in the air-an image sometimes more steady than the reality itself, and which may remain distinct to the mind when the reality has vanished. When the currency of Western America was struck down by the sudden failure of the banks in 1836-7, there was a momentary gasping, as of men under an exhausted receiver. The circumambient atmosphere was gone, but instantly the old circulation was renewed, and exchanges went circling on, by means of barter and pure credit, with prices still estimated in dollars, and the ideal dollar continued to do its work, long after every piece of coin and every rag of bank paper had disappeared. This may explain to us the cause of that general persuasion that there was an ideal pound sterling, although the notion seemed to vanish under every attempt to define it. Logic could not seize it, but the practical sense of the merchants did, and was satisfied. Lord Castlereagh's famous definition seemed only folly to Sir Robert Peel, looking back upon it from a time when all the explanatory facts had disappeared; but Lord Castlereagh was no fool', and

This nobleman has had more than usual justice done him by an able and popular writer in a recent work, “Wynville; or, Clubs and Coteries."

knew that an ideal measure did exist in the popular mind. The real reply of the men of that day to the logic of the bullionists was that of the old schoolman when challenged for a definition of time-si non rogas intelligo. Mr. Carlyle, if he looked into the matter, would not be at all surprised to find that their silence was wiser than the speech of their oppo

nents.

Conduct of the Bank under the Restriction.

The Bank Directors, in truth, pursued a very steady course. They lent money to the Government, because they could not help it, but it went much against their will. Whatever harm those loans did is due to the Government, and not to the Bank. In other respects they acted upon one simple rule, which was to discount all good bills of exchange that were offered to them; a rule which would have been perfect but for one circumstance pointed out by Mr. Tooke; namely, that their uniform rate being five per cent., and the market rate being frequently higher, they were, in all such cases, artificially keeping down the lending value of disposable capital. But they went on in the grooves of the old traditional system, taking very patiently a great deal of abuse, and doing their work with the most diligent regularity. The great profits which were then made, and the increased paper circulation drawn into play, were the result of the action of the public upon the Bank under the prodigious stimulus of the Government expenditure. If the principles explained in the present work be sound, there was not at that period, and could not have been, properly speaking, any depreciation of the currency at all, except in so far as the name may be applied to that general alteration in the level of prices, which, allowing the force of Mr. Tooke's explanations, may, or rather must, still have taken place, from the addition which the Government outlay caused to the sum total of annual income. But with the same expenditure and no foreign remittances, this rise in the level of prices would have taken place quite as cer

tainly with a metallic currency as with one of inconvertible paper. Upon the whole, my conviction after some years' study of the question is, that the exercise of a power so vast as that entrusted to the Bank of England in 1797, by a body of private merchants, with so little abuse, is a phenomenon perfectly unparalleled in history, and is in the highest degree honourable to the mercantile character of the last generation. The errors committed by the Directors since the restoration of cash payments, and even since 1844, have been far more serious, in my view, than any that occurred during the twenty-five years of the restriction.

Present Monetary Position of the Bank.

Under the system which now exists, the Bank of England is the great residuary reservoir of capital for the whole kingdom. Streams flowing from the most distant extremities, after trying in vain to force their way into every possible channel of employment, are at length brought to precipitate themselves into the mass of deposits which the Bank is compelled to hold in a state of complete inactivity. Whatever doubt might have been entertained of the true nature of the position of the Bank before the separation of its departments, now there can be none. The surplus waters are quite visibly poured in, and the only question is, whether when this happens through the action of such a monetary system as has been described, it is wise or unwise to make efforts for forcibly returning to the general circulation of capital and income, what has been so determinedly thrown out of it as superfluous.

The aggregate money income, as we have seen, at any one time requires a certain proportion of gold and notes to effect the distribution of those useful commodities of which real or specific income consists. New capital applied to production may enlarge that income, and therefore call out a greater amount of gold and notes than what previously existed, the addition to the currency, however, being still only in a small

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