Page images
PDF
EPUB

must continually produce new and more fearful varieties of disorganization. The effective remedy, therefore, can be only a moral one. It must be something which shall touch the deepest sources of moral life in the nation, which shall make high thoughts and generous aims more common, and shall subordinate the all-engrossing passion for wealth to the nobler inspirations of the soul. Whether there be such remedy, and how it can come into action, must remain for after consideration. Here it must suffice to mark the fact that the fearful social evils, of which the delineation has been attempted, may possibly be checked, but are not to be averted, by any ingenuity of legislation.

Rule for the Management of the Bank.

With respect to the power of the Bank of England, it will appear from what has been said that, without any action on its part, the whole tendency of our monetary system and industrial habits is to generate periodical fits of speculation, each of which is more demoralizing, and, therefore, more destructive of the nation's highest welfare, than its predecessor. The Bank can do nothing positively to prevent these calamities; but it has the power to aggravate them, and it is for the public interest that such power should not be exercised. My conviction therefore is, that the Bank of England should be obliged, either by law or an equivalent understanding, to observe two rules, which would avert much evil.

1. The Bank should not purchase Government or other securities, beyond the amount which it holds at present1. 2. It should return to, and in no case go below, its old minimum rate of discount, namely, four per cent.

The recurrence to a minimum rate of discount, it need scarcely be said, would be no bar whatever to an advancement of the rate, whenever the market rate showed a tendency to

'An exception, of course, should be made for the case of deficiency bills upon an accidental failure of the revenue; but with a proper balance in the exchequer, such bills would scarcely ever be required.

rise.

Under no circumstances should the Bank rate be lower than the market rate.

Here, then, I come into practical conflict with one of the reigning principles of political economy-that of universal competition, and contend that its application to the Bank of England is an error fraught with mischief, and founded upon a totally mistaken view of the working of our monetary system. The proof is contained in the reasonings of the foregoing pages. The Bank is the general depository of the disposable money capital which cannot find employment. That capital is not the property of the Bank, but of various private parties who leave it in the hands of the Bank, while they are straining every nerve to find for it some profitable investment. When the Bank, therefore, attempts, on its own account, to find a use for such capital, it only presses in to heighten and make more disastrous a competition from which the whole nation suffers.

The Bank not a Private Concern.

In this view the Bank is not regarded as if it stood in the position of a private trader; it is impossible to look at it in any such light. With its immense capital, its boundless credit, operating to any extent that has yet been tried, exactly like capital, and its influence over the whole banking and commercial class, the Bank of England is an institution as public and national as the monarchy. To me it even appears one of the many happy accidents for which England has to be thankful in her social condition. If such an institution did not now exist, it could not be created. But having grown up, and spread its roots far and wide into the soil, it would furnish, under such rules as I have suggested, a stay and centre for our whole monetary system, incomparably more secure than could be attained under any other arrangement.

It need scarcely be added, that no such injustice is here contemplated as that of enforcing those rules, at the ex

pense of the Bank Proprietors. If the view taken of the evils arising from the competition of the Bank with the discount brokers, or from the extension which it gives through the brokers to the general mass of discounts, be correct, it will not be thought strange to say, that the State would cheaply purchase the forbearance of the Bank by paying the ordinary dividends on its shares five times over. There could, however, be no difficulty in an equitable arrangement which would leave the proprietors of Bank stock in as good a position as they are at present.

After this extended survey of our monetary system, we are landed in the conclusion, that without any stimulus on the part of the Bank of England, and without any influence provocative of speculation coming to us from without, there does exist in our social constitution a deep-rooted tendency to produce a periodical recurrence of commercial convulsions.

A new and immensely powerful influence, however, is about to be brought to bear upon us, in consequence of the gold discoveries of California and Australia, which already threaten a revolution, much more momentous than that which took place in the sixteenth century. It remains, therefore, to inquire in what way we are likely to be affected by the NEw Gold.

Note on the Proposal to fix a Minimum Rate of Discount for the Bank of England.

The adoption, or rather recurrence, to a minimum rate of discount by the Bank of England has been urged by the present writer on former occasions, and especially in a letter to the editor of the Economist about two years ago. Some editorial criticisms which were made upon that letter appeared to call for a reply, which, however, the question being then thought of no pressing interest, was not inserted. I think it well to add here some extracts from an imperfect copy of that unpublished reply, and, although they are marked by a sharpness of censure characteristic of anonymous writing, of which my present judgment disapproves, I have not thought it right to soften the language then used :—

[ocr errors]

First, let me disclaim having ever contended that the Bank should establish a

' uniform rate of interest,' or that it can adjust the market rate at its pleasure, or that it can prevent that rate from settling at the point which the relation between the demand for disposable capital on loan, and the supply of it, may determine. No one who understands the mechanism of commercial operations can, for a moment, advocate any of these absurdities. What I contend for is, that the Bank should fix a minimum rate, below which it ought not to go, but above which it might and ought to raise its terms when circumstances required it; that, though it cannot prevent fluctuations in the market rate, they will become less violent if it forbears to aggravate them ; and that the mode in which it is to operate is not by disregarding the state of the relation between demand and supply, but through that relation, which it can materially alter by holding back at certain seasons its own portion of the supply.

"You meet me at once by denying the power which I attribute to the Bank, and here issue must be joined.

"I will make no appeal, though I think I might do so, to the almost unanimous opinion of mercantile men as to the fact of the Bank's great power. Mistaking an effect for a cause, they have erred in attaching importance to variations in the amount of the bank-note circulation; but I believe they were frequently right in attributing monetary fluctuations to the Bank, even when they misapprehended the mode of its action. In many of the old pamphlets on the state of the money market, it is enough to strike out the phrases 'increased issues' and 'contractions of the circulation,' and to substitute 'increased loans' and 'diminished discounts or contractions of credit,' in order to render the reasonings, which at first sight seem neither cogent nor clear, perfectly logical and intelligible. But every one of those productions shows the most intense conviction of the fact that the power of the Bank was enormous. However, I will not rest my argument at all on an appeal to such authority.

"To estimate the positive power of the Bank, before comparing its resources with those of other dealers, look at the facts. Its reserve is £13,000,000. The most exaggerated caution would consider £8,000,000 sufficient. Practically, £5,000,000 are now lying idle, because the Bank has not yet lowered its rate enough to make that sum tell as fully as it might upon the market. But sanction unlimited competition, let the Bank use that surplus reserve as Mr. Gurney would use it, and I think it would be sufficient to reduce the current rate to one per cent. I need not urge upon you the effect of even a small addition to a fully-supplied market."

After a calculation already referred to (page 21) as to the amount of capital available for discounts in London, the letter proceeded :-"I proceed to show that, whatever be the supply in the hands of private bankers and brokers, the addition which the Bank of England, with its spare capital and its perfect credit operating like capital, could make to it, would be sufficient to lower the rate of interest to almost any assignable point.

"My first proof is one of which I have your own admission. The Bank, by using its spare funds to buy stock, might raise consols ten or twenty per cent.' Unquestionably it might; but can that be an insignificant addition to the capital in

the market, which would add a value of at least eighty millions to the whole mass of the Government debt? How is it possible to deny the power of the Bank over the rate of interest, if it could operate with such prodigious effect upon the public funds? It would be as reasonable to contend that additional fire will not increase the warmth of a room, although it sends up the mercury in the thermometer.

"As a second proof, I will use another fact which has also your sanction. There is only a certain amount of good bills to be had at any time, and a reduction of the rate of discount will not materially increase that amount.' Precisely, and for that very reason, a little additional competition for those good bills is sufficient to reduce the terms of discounts. You have suggested reasons why the Bank should not or would not press that competition; that is an after question with which I am ready to deal. But the first point to be settled is the power of the Bank, and I submit that the limited amount of bills to be had is a decisive reason why the competition of the Bank, instead of being unfelt, should be sufficient to press down the rate in a falling market to any point it pleases.

"But if the principle of unlimited competition with the brokers, which is now only creeping into the practice of the Bank, is to be encouraged and established, what is there in the mere pecuniary interest of the proprietors of Bank stock that should prevent such a violent reduction of the rate of discount as would drive weaker rivals from the market, and thus leave a clearer field for the operations of the more wealthy dealer? This is the way in which strict competition elsewhere adjusts matters when the business to be done is not enough for all who are ready to do it. Coach proprietors and steam companies occasionally gain their ends by carrying their passengers for nothing. Why, I say, upon the principle of unlimited competition, should not the Bank of England break the backs of some dozen of its rivals, and, by forcing the surplus capital out of the money market, enhance the value of what it has to dispose of? At present it shows itself

[ocr errors]

Willing to wound, but yet afraid to strike.'

It competes timidly, and the less hesitating brokers secure the prize. But it may be said to be against the interest of the Bank to provoke an actual crisis. Looking simply to its profits, I am not so sure of this. It has, indeed, some reason to fear that another crisis may be fatal to its charter; but, upon the whole, I apprehend that the crash of 1847, and every similar disaster, had no unfavourable effect upon the profit and loss balance of the year's transactions. As to its safety, the experience of that year tends to show that at the worst it can always protect itself. It has only to dash resolutely through the universal wreck of mercantile credit, and mercilessly thrust every clinging victim back into the water, in order to secure its own safety.

"The Bank does not act thus injuriously to the public interest, simply because it does not yet carry out the principle of unlimited competition. In its case, as in that of every old mercantile establishment, competition is largely qualified by custom. It loves to stand upon its ancient ways. Its usages and traditions still exercise a great power; but the whole tendency of the system, of which you are one of the most distinguished supporters, is to break down those restraining usages, and to promote

« PreviousContinue »