The Continental Monthly, Vol. 4, No. 4, October, 1863

CURRENCY AND THE NATIONAL FINANCES

1. History of the Bank of England, its Times and Traditions, from 1694 to 1844. By John Francis. First American Edition. With Notes, Additions, and an Appendix, including Statistics of the Bank to the close of the year 1861. By J. Smith Homans, Author of the 'Cyclopædia of Commerce and Commercial Navigation.' New York. 8vo, pp.476.

2. Letter from the Secretary of the Treasury to the Chairman of the Committee of Ways and Means, in relation to the Issue of an Additional Amount of United States Treasury Notes.

3. Report of the Secretary of the Treasury on the State of the Finances of the United States for the Year ending June 30, 1862.

4. The Tariff Question considered in regard to the Policy of England and the Interests of the United States. With Statistical and Comparative Tables. By Erastes B. Bigelow. Boston: Little, Brown & Co. 4to, pp. 103 and 242.

5. The Bankers' Magazine and Statistical Register. New York, monthly, 1861-2. Edited by J. Smith Homans, jr.

The Bank of England was created during the urgent necessities of national finance. It was a concession of a valuable privilege to a few rich men, in consideration of their loaning the capital to the treasury. 'The estimates of Government expenditure in the year 1694 were enormous,' says Macaulay, in his fourth volume. King William asked to have the army increased to ninety-four thousand, at an annual expense of about two and a half millions sterling—a small sum compared with what it costs in the year 1862 to maintain an army of equal numbers.

At the period of the charter of the bank, the minds of men were on the rack to conceive new sources of revenue with which to meet the increased expenditures of the nation. The land tax was renewed at four shillings in the pound, and yielded a revenue of two millions. A poll tax was established. Stamp duties, which had prevailed in the time of Charles II had been allowed to expire, but were now revived, and have ever since been among the most prolific sources of income, yielding to the British Government in the year 1862 no less than £8,400,000 sterling. Hackney coaches were taxed, notwithstanding the outcries of the coachmen and the resistance of their wives, who assembled around Westminster Hall and mobbed the members. A new duty on salt was imposed, and finally resort was had to the lottery, whereby one million sterling was raised. All these resources were not sufficient for the growing wants of the Government, and the plan of the Bank of England was devised to furnish immediate relief to the finances. Montague brought the measure forward in Parliament, and 'he succeeded,' as Macaulay remarks, 'not only in supplying the wants of the state for twelve months, but in creating a great institution, which, after the lapse of more than a century and a half, continues to flourish, and which he lived to see the stronghold, through all vicissitudes, of the Whig party, and the bulwark, in dangerous times, of the Protestant succession.'

The birth of the bank and the birth of the English national debt were both in King William's time. In 1691, when England was at war with France, the national debt unfunded was £3,130,000, at an annual interest of £232,000. In 1697, at the Peace of Ryswick, this debt had swollen to £14,522,000. At the Peace of Utrecht, in 1713, it had reached £34,000,000. The war with Spain in 1718 brought it up to forty millions sterling. And here it might have rested, had the advice of Shakspeare been followed:

'Still in thy right hand carry gentle peace.'

But England went to war with Spain 'on the right of search.' From 1691 to this time the debt had increased on an average about a million sterling per year. As early as 1745 the credit of the bank was so identified with that of the state, that during the invasion of the Pretender, whose forces were at Derby, only one hundred and twenty miles from London, the creditors of the bank flocked in crowds to its counter to obtain specie for its notes. The merchants intervened and signed an agreement to make the bank's notes receivable in all business transactions.

The war of the Austrian succession followed in 1742, and at the Peace of Aix-la-Chapelle, in 1748, 'forever to be maintained,' the English were saddled with a debt of £75,000,000.

 
'Peace hath her victories,
No less renowned than war.'
 

It was early in the last century that the abuse of paper money gave a lasting and unfavorable impression against such issues. The scheme of John Law and the South Sea Bubble about the same time broke and scattered their fragments over both England and France. It was in the latter scheme or folly that Pope lost a large portion of his earnings, from which we may infer that his temper was not improved. He wrote, in his Third Epistle, dedicated to Lord Bathurst:

 
'Statesman and patriot ply alike the stocks;
Peeress and butler share alike the box;
And judges job, and bishops bite the town,
And mighty dukes pack cards for half a crown.'
 

In the same 'Moral Essay' he alludes to paper money in the following lines:

 
'Blest paper credit! last and best supply!
That lends corruption lighter wings to fly!
Gold imp'd by thee, can compass hardest things,
Can pocket states, can fetch or carry kings;
A single leaf shall waft an army o'er,
Or ship off senates to a distant shore;
A leaf, like Sibyl's, scatter to and fro
Our fates and fortunes, as the winds shall blow:
Pregnant with thousands flits the scrap unseen,
And silent sells a king, or buys a queen.'
 

These are among the earliest tirades against paper money; which, like many other good things, is condemned because its power has been abused and prostituted.

England's enormous debt, which should have warned the Georges against further war, was not contracted without severe sacrifices. The legal rate of interest at the opening of the funding system was six per cent. In 1714 it was reduced to five per cent. Loans during the early wars of the eighteenth century were raised on annuities for lives on very high terms, fourteen per cent. being granted for single lives, twelve per cent. for two lives, and ten per cent. for three lives. But so far was England from being awake to the enormous debt she was creating by her expensive wars, that the seventy-five millions existing in 1748 became £132,000,000 at the close of the Seven Years' War in 1763. This volume was enlarged at the end of the American Revolution to £231,000,000. During all this time the bank was the lever with which these enormous sums were raised; but the end was not yet.

The French war with Napoleon became more exhaustive, and within twenty years from the peace with America to the Peace of Amiens, in 1802, the debt went up from £231,000,000 to £537,000,000 sterling. From this period to 1815 the debt accumulated annually, until it reached its maximum, or eight hundred and sixty-one millions sterling.

During these severe changes, reverses, extravagance, and extraordinary governmental expenditure, the bank was considered the prop of national finance. The French Revolution and its consequent war with England led to many heavy outlays by the British Government. In 1795 the bank desired the chancellor of the exchequer to make his arrangements for the year without 'any further assistance' from the bank. This was again urged in 1796, and the bank appealed again to Mr. Pitt.

'The only reply from Mr. Pitt was a request for a further accommodation, on the credit of the consolidated fund, which the court refused to sanction, until they had received satisfaction on the topic of the treasury bills, and requested Mr. Pitt to enter into a full explanation on this subject, which was not even touched upon in his letter. This resolution being communicated, Mr. Pitt wrote to the governor and deputy-governor on the 12th August, that 'they might depend upon measures being immediately taken for the payment of one million, and a further payment, to the amount of one million, being made in September, October, and November, in such proportions as might be found convenient. But, as fresh bills might arrive, he was under the necessity of requesting a latitude to an amount not exceeding one million.' About the same period the court 'desired the governor and deputy-governor would express their earnest desire that some other means might be adopted for the future payment of bills of exchange drawn on the treasury.' (Vide 'History Bank of England,' pp. 114, 115.)

The circumstances of the nation and of the bank were known to the capitalists and to the people. Hence various causes of uneasiness and distress. The bank loaned the public treasury seven and a half millions in the years 1794, 1795, 1796, and the more they loaned to the exchequer, the less they could loan to the people. Thus followed a diminution of gold in the bank, and hoarding by the people. Gold was exported more freely to the Continent, and reduced accommodation was given to the merchants. Finally, on the 26th February, 1797, the king's council passed an order for the suspension of cash payments.

The bank was on the eve of suspension in the year 1847. On the 25th of October the cabinet authorized a violation of the charter, thereby acknowledging the inability of the bank to maintain specie payments. This order of Lord John Russell inspired fresh confidence, and the bank immediately recovered strength, and reduced the rate of interest from 8 per cent. in October to 7 per cent. in November, to 6 and 5 per cent. in December, to 4 per cent. in January, and to 3-1/2 in June following. The distress and revulsion of 1847 were consequent upon the over-trading and railway mania of 1844, 1845, and 1846, and the failure of crops in Ireland and England in 1847.

The distress of England in 1847 was scarcely over when France was more severely affected than at any period since the Continental War. Louis Philippe abdicated in February, 1848, when consols closed at 88-7/8. By the close of the week they fell to 83, upon the formation of a provisional government. The political dissensions and commercial revulsion led to a large withdrawal of gold from the Bank of France, and finally the Government authorized, in March, the suspension of the bank, which was followed by the suspension of the Bank of Belgium and by the Société Generale.

Again, in 1857, the Bank of England was on the verge of suspension. Lord Palmerston and the then cabinet issued an order, November 12, authorizing the bank, if they thought it advisable, again to violate the charter; but it was found at the last moment unnecessary.

November was the critical period of the year 1857. The Times of November 12, 1857, contained these announcements:

'One gentleman, during the heat of the excitement at Glasgow, went into the Union Bank and presented a check for £500. The teller asked him if he wished gold. 'Gold!' replied he, 'no; give me notes, and let the fools who are frightened get the gold,' Another gentleman rushed into the same bank in a great state of excitement, with a check for £1,400. On being asked if he wished gold he replied, 'Yes.' 'Well,' said the teller, 'there is £1,000 in that bag and £400 in this one.' The gentleman was so flurried by the readiness with which the demand was granted that he lifted up the bag with the £400 only, and walked off, leaving the £1,000 on the counter. The teller, on discovering the bag, laid it aside for the time. Late in the day the gentleman returned to the bank in great distress, stating he had lost the bag with the £1,000, and could not tell whether he dropped it in the crowd or left it behind him on leaving the bank. 'Oh, you left it on the counter,' said the teller, quietly, 'and if you call to-morrow you will get your £1,000.' (Vide ' History Bank of England,' p. 429.)

The facts and statistics from the year 1844 to 1860 relating to the bank are superadded to the English work by the American editor. Of the important phases of this period the editor gives a slight sketch in the following paragraphs. The prominent financial movements in England, France, and the United States are given in the subsequent pages of the volume.

'The sixteen years which followed the last charter of the bank have been pregnant with important events of a financial character; the most important, perhaps, during the whole history of the institution. The bank has twice, during this short period, been on the brink of suspension, and was relieved only by the interference of Government. The second instance occurred after new gold, to the extent of one hundred millions sterling, or more, had been poured into Western Europe from California and Australia. The Bank of France had, during the same period, suspended specie payment. Two financial revulsions have occurred in the United States, when, with few exceptions, the banks of the whole country suspended specie payments. The production of gold and silver throughout the world, which, up to 1844, was annually about ten or twelve millions sterling, had recently advanced from twenty-five to thirty millions sterling per annum, thus stimulating industry and production largely throughout Europe and America. Sir Robert Peel, the author of the new charter of the bank, has left the world's stage, after witnessing the failure of the charter to fully accomplish the end promised; Europe and America, Asia and Europe, have been knit together by a wire cord, and capital is now subscribed to

'Put a girdle round about the earth,'

whereby London may speak to San Francisco (the prospective commercial centre of the world) in less than 'forty minutes.' During the same short space of sixteen years the suspended States of this Union (five at least) have resumed payment of their obligations; two violent wars, with sundry revolutions, have occurred in Europe; the ancient city of the Cortez has been conquered by the 'hordes of the North,' and magnanimously given up by the captors to the possession of their weaker enemy, and millions were paid to the latter for portions of their territory; the northwest passage of the American continent has been discovered; steam has accomplished wonders between Europe and America, and between Europe and their distant colonies of Asia, Africa, and Australia; Ireland has been on the verge of starvation,⁶ when 600,000 of her people died from hunger alone and its effects, and her population was reduced two millions by emigration and privation; England's minister has been expelled from the capital of the United States; speculation has been rife in Europe and America, and its inevitable effects, revulsion and bankruptcy, have followed in its train; the railway and the telegraph have brought remote regions together; China, with her four hundred millions of people, has been conquered by the united forces of the English and the French.

'The Bank of England, instead of pursuing one even course, with a view to permanent commercial interests, has unfortunately, and, we fear, from selfish and individual views, fostered speculation by reducing her rate of discount to 2 per cent., and soon after, but too late, discovered the error, and forced her borrowers to pay from 6 to 10 per cent.

'We propose to give the leading events of each year, from 1844 to 1861, referring the reader to authorities where more copious information can be gained by those who wish to study the invariable connection between commerce and money.

'The bank shares in the depressed period of 1847-8 fell to 180, after having reached, in the flattering times of 1844-'5, 215 per share, or 115 per cent. advance. Consols, at the same depressed period, fell to 78-3/4, when starvation stared Ireland in its face, and the bank simultaneously sought protection from the Cabinet.'

Attention has been recently directed in this country to the premium on gold, or to the alleged fall in the value of bank paper and Government notes. Although the premium on gold as an article of merchandise has reached a high rate during the present year, it will be seen, on reference to the reliable tables in the History of the Bank of England, that a great difference occurred during the suspension of the bank in 1797 to 1819. Gold at one time (1812) reached £5 8s., a difference of 30 per cent. The annexed table shows the changes from 1809 to 1821.

The increased volume of Government and bank paper afloat in the United States since the 1st January, 1862, is conceded to be only temporary. The Government is engaged in crushing the greatest rebellion known to history; in doing this, the national expenditures are six or seven fold what they ever were before, in a time of peace. During the four years 1813 to 1816, when war raged with England, the whole expenses of the Government were $108,537,000. During the Mexican war, when the disbursements of the treasury were much heavier, the average annual expenses of the Government were about 35 to 48 millions. It will be well to recur to these tabular details for future history. They are presented as follows, for the whole period of the General Government.

EXPENDITURES of the United States, exclusive of Payments on account of the Public Debt.

During the past fiscal year, 1862-3 and the year 1863-4, the Government expenditures are estimated at ten hundred millions of dollars. These heavy disbursements cannot be carried on merely by the ordinary bank paper and the gold and silver of the country. Instead of sixty-five millions of dollars, the average annual expenditures of the Government during the last administration, these now involve the sum of five hundred millions annually. Hence the obvious obligation on the part of the Government of putting in circulation the most reliable currency, and of avoiding those of local banks, which do not possess the confidence of the people at a distance. This can be done only by maintaining a currency of Government paper which every holder will have full confidence in, and in which no loss can be sustained.

There is here no conflict or competition between the Government and the State banks. The latter have the benefit of their legitimate circulation in their own respective localities; while the national treasury furnishes to the troops and to the creditors of the nation a circulation of treasury notes which must possess confidence as long as the Government lasts.

The policy of the English Government in this respect was a wise one. At the adoption of the last charter of the bank (1844) the Government allowed the country banks to maintain from that time forward the circulation then outstanding, which was not to be increased; and as fast as the banks failed or were wound up voluntarily, their circulation was retired and the vacuum became filled by the notes of the Bank of England. The latter was forbidden by its new charter to exceed certain prescribed limits in its issues. They could issue to the amount of their capital, £14,000,000, and beyond that to the extent of gold in the vaults. Thus the bank circulation of England, Scotland, and Ireland is less now than in 1844, when the new principle was established, viz.:

BANK CIRCULATION

Had this principle been adopted in the United States at the same period, the excesses and extravagance of 1856-'7 might have been obviated, as well as the revulsion of the latter year, and the distress which followed.

Let us recur to the eventful history of the bank. Although a private institution, owned and controlled by private capital, its large profits accruing for the benefit of its own share-holders, yet it became so closely inter-woven with the commerce, manufactures, trade, and the public finances of the nation, that it may be considered as in reality a national institution. At its inception its whole capital was swallowed by the treasury. This was a part of the contract of charter. Its subsequent accumulations of capital, from £1,200,000, have likewise been absorbed by the Government, until now the bank reports the Government debt to them to be £11,015,100, and the Government securities held, to be £11,064,000. Without the aid of the bank, the national treasury could not, probably, have made the enormous disbursements which were actually made between the commencement of the American Revolution in 1776, and the termination of the continental war of 1815. The bank here furnished, almost alone, 'the sinews of war.'

During this eventful period there were large numbers of provincial banks of issue created in England and Ireland. These were managed mainly with a view to private profit, while the public interests have suffered severely from the frequent expansions and contractions of the volume of the currency through such private management, and from the numerous failures of these concerns. The evils of this system were for many years the subject of discussion in Parliament and among prominent journals. In 1826 the Edinburgh Review expressed the opinion that

'So long, therefore, as any individual, or association of individuals, may issue notes of a low value, to be used in the common transactions of life, without lodging any security for their ultimate payment, so long is it certain that those panics which must necessarily occur every now and then, and against which no effectual precaution can be devised, must occasion the destruction of a greater or smaller number of banking establishments, and by consequence a ruinous fluctuation in the supply and value of money.' (Edinburgh Review, February, 1826.)

 

This was a period of great speculation in England. In the year 1823 no less than 532 companies were chartered, with a nominal capital of 441 millions sterling. These speculations were fostered by the increasing volume of bank paper. The evil increased, and was allowed to exist until the year 1844, when a stop was put to the further increase of the volume of bank circulation, and to the further incorporation of joint stock banks.

We learn one lesson here, which may have a good effect upon us if we will bear it in mind in our future legislation, and take warning from the experiences of our contemporaries. We allude to the obvious necessity in a country like ours, and, indeed, in any country, of maintaining a national moneyed institution as a check upon the vacillation, expansions, and contractions which mark the policy of small banks of issue. This national institution, while free from individual profit, and without power to grant individual favors, should create and perform the functions of a national currency, and execute all the details required by or for the national treasury. Its chief utility would be as a check upon the excess to which all joint stock banks are liable—a sort of controlling and conservative power to prevent that mischief which our past experience shows has been the result of paper money when issued merely for private gain.

The advantage, the convenience, we may say the necessity, of a national circulation of paper money, are fully demonstrated by our own past history, and by the history of European nations. This circulation should be dictated by the wants of the National Government, and convertible, at the will of the holder, into specie. With these obvious restraints it would accomplish its ends and aims.

The Bank of England, in its early stages, was endangered by various and extraordinary circumstances. Within three years of its establishment it was compelled to suspend payment to its depositors in cash, and issued certificates therefor payable ten per cent. every fortnight. In 1709 the Sacheverell riots occurred in London, and fears were felt that the bank would be sacked; but this violence was obviated by well-trained troops. In 1718 John Law's bank was established in France, and for two years kept the people in a ferment. This was followed by the South Sea scheme in England, in 1720, 'a year (the historian Anderson says) remarkable beyond any other which can be pitched upon for extraordinary and romantic projects.' The bank, of course, suffered by these speculative measures, and was repeatedly exposed to a run upon its specie resources.

In 1722 the rest (or reserve fund) was established by the bank, as a measure to cover extraordinary losses in the future, and to inspire more confidence among the public as to the ability of the bank to meet reverses. This fund, in July, 1862, had accumulated to £3,132,500 sterling, or about twenty-one and a half per cent. of the capital.

The first forged note of the Bank of England was presented in the year 1758, or sixty-four years after the bank was established. In 1780 these forgeries became more numerous, and were so well executed as to deceive the officers of the bank.

Let us now recur to some of the incidents connected with the bank in early ages. Of these, the author, Mr. Francis, furnishes numerous instances.

Among other frauds upon the bank was that of clipping the guineas, by one of the clerks employed in the bullion office. This occurred in 1767.

The forgery of its notes having been made a capital offence, the waste of life in consequence was severe. During the eight years, 1795 to 1803, there were one hundred and forty executions for this crime; and two hundred and nine between 1795 and 1809; and from 1797 to 1811 the executions were 469. 'The visible connection between the issue of small notes and the effusion of blood, is one of the most frightful parts of this case.'

In 1803 a fraud on the bank to the extent of £320,000 was perpetrated by Mr. Robert Astlett, a cashier of the bank. This was in the re-issue of exchequer bills that had been previously redeemed, but which were not cancelled. This fraud amounted to about 2-1/2 per cent. of the capital, and although it did not prevent a dividend, it prevented the distribution of a bonus which would otherwise have been paid to the shareholders.

In the year 1822 another fraud on the bank came to light. This was perpetrated by a bookkeeper, and amounted to £10,000. In 1824 the fraud of Mr. Fauntleroy on the bank was discovered, amounting to £360,000. This was done by forged powers of attorney for the transfer of Government consols.

The bank was brought near suspension again in 1825 by the imprudent expansion of its notes. After the resumption of specie payments in 1820-'21, the true policy of the bank would have been to maintain an even tenor of its way; instead of which it increased its circulation twenty-five per cent. in the year 1825 (or from £18,292,000 to £25,709,000), while the issues of the country banks were equally enlarged, giving encouragement to violent speculation among the people. The specie reserve of the Bank of England fell from £14,200,000 in January 1824 to £1,024,000 in December, 1825. This difficulty of the bank was relieved by the issue of a few thousand bills of £1 and £2.

Speculation had been rife in 1824; no less than 624 companies were started with a nominal capital of £372,000,000, including mining, gas, insurance, railroad, steam, building, trading, provision, and other companies. At the same time foreign loans were contracted in England to the extent of £32,000,000, of which over three fourths were advanced in cash.

The country banks of England had increased their circulation from £9,920,000 in 1823 to £14,980,000 in 1825, or over fifty per cent., thus stimulating prices, and promoting speculation widely throughout the country.

Immediately following the revulsion at the close of the year 1825, Mr. Huskisson's free trade policy was advocated in the House of Commons by a vote of 223 to 40. In the same year lotteries were suppressed in England. In 1828 branches of the Bank of England were established—a measure, of course, unpopular among the provincial joint stock banks.

In the year 1832-'3 were brought forward three important measures in Parliament. One was the abolishment of the death penalty for forgery; another was the modification of the usury laws; the third was the re-charter of the bank.

The last criminal executed for forgery was a man by the name of Maynard, in December, 1829. Public sentiment had long been opposed to the infliction of this punishment for the offence of forgery, and transportation was now substituted in the prominent cases. England, at the same time, opened the way for a gradual abolishment of the usury laws. At first the relief was extended to short commercial paper, afterward to all paper having not over twelve months to run, 1837; and finally, in 1854, the usury laws were removed from all negotiable paper, as well as from bonds and mortgages.

By the new charter of 1833, Bank of England notes were, for the first time, made a legal tender, except at the bank itself. Joint stock banks were authorized in the metropolis, but were prohibited from issuing notes.

The English work of Mr. Francis is anecdotical in its character. The American edition conveys to the reader, for the first time, a resumé of the leading movements in Parliament on the subject of the bank, and its close connection with the Government finances. The part which Mr. Pitt, Mr. Canning, Sir Robert Peel, and other distinguished statesmen took in the relations between the bank and the exchequer, is in the supplementary portion of the new edition shown, as well as the views of Lord Althorpe, Lord Ashburton, Lord Geo. Bentinck, Mr. Thomas Baring, Lord Brougham, Mr. Gilbart, Sir James Graham, Lord King, Earl of Liverpool, Jones Loyd, Lord Lyndhurst, Mr. Rothschild, and others who exercised a large influence over the monetary interests of their day.

In the consideration of the banking and currency questions of the day and of the last and present century, it is desirable to have thus brought together in a single work, a continuous history of the institution which has had so large an influence upon the public interests of Europe, and a review of the important circumstances which marked the progress of the bank in its successful efforts to sustain England against foreign enemies and domestic revulsions, an index to the speculative movements of the eighteenth and nineteenth centuries, when commerce, trade, and the vast monetary interests of Europe and America have been unnecessarily and cruelly involved.