definition of circulation?"—"To answer that question I believe I must be allowed to revert to first principles. The precious metals are distributed to the different countries of the world by the operation of particular laws, which have been investigated, and are now well recognized. The laws allot to each country a certain portion of the precious, metals, which, whilst other things remain unchanged, remains itself unchanged. The precious metals, converted into coin, constitute the money of each country. That coin circulates somewhat in kind; but in highly-advanced countries it is represented, to a certain extent, by paper notes promising to pay the coin to bearer on demand, these notes being of such a nature, in principle, that the increase of them supplants coin to an equal amount. Where these notes are in use, the metallic coin, together with these notes, constitutes the money or currency of that country. Now, this money is marked by certain distinguishing characteristics: first of all, that its amount is determined by the laws which apportion the precious metals to the different countries of the world; secondly, that it is in every country the common measure of the value of all other commodities, -the standard by reference to which the value of every other commodity is ascertained, and every contract fulfilled; and, thirdly, it becomes the common medium of exchange for the adjustment of all transactions, equally at all times, between all persons, and in all places. It has, further, the quality of discharging those functions in endless succession. Now, I conceive, that neither deposits nor bills of exchange in any way whatever possess those qualities. In the first place, the amount of them is not determined by the laws which determine the amount of the precious metals in each country; in the second place, they will in no respect serve as a common measure of value, or a standard by reference to which we can measure the relative values of all other things; and, in the next place, they do not possess that power of universal exchangeability which belongs to the money of the country. If the Com-, mittee will allow me to refer to it, there is a passage in the Report of the French Chamber, which has recently been appointed to inquire into a subject very similar to that which this Committee is now investigating, which seems to put the point of the universal exchangeability of money in a very striking way:— "If we reflect upon the innumerable commercial transactions which daily take place, from those which furnish the most inconsiderable results to those which express the boldest speculations of international commerce, we may readily perceive that they could not be accomplished without the assistance of an intermediate value, which can successively be brought into comparison with all others, and serve among them as a standard and a medium of exchange.'" Question 2667. "What are the elements which constitute money in the sense in which you use the expression quantity of money? What is the exact meaning you attach to the words quantity of money, quantity of metallic currency'?" — "When I use the words quantity of money,' I mean the quantity of metallic coin, and of paper notes promising to pay the coin on demand, which are in circulation in the country.' "Yes." Question 2668. "Paper notes payable by coin?"-"Yes." Question 3101. "Are not the Bank of England notes, deposited by you in the Bank of England, as much at your disposal as if they were in your own banking-house?"-"No."' Question 3102. "What is the difference?"-"In the one case I am sure I can have them when I like, and in the other case I have only a general belief that I can have them when I like." Question 3106. "Are you aware that, in the official return of the Bank of England, the notes deposited by you appear as deposits?" -"Yes." Question 3107. "Are you aware that the notes that are kept in your own banking-house appear, in that official return, as circulation?" "Yes." Question 3108. "Does the circumstance of a certain amount of bank-notes belonging to you being returned by the Bank of England, as deposits, alter their nature or change their value?' —“It does." Question 3109. "Why?"-"Deposit business is a mode of economizing the use of the circulation. By means of resorting to that process, a greater amount of obligations or of transactions can be adjusted with a smaller amount of circulating medium than could otherwise take place. The amount of deposits which the Bank of England, or any other Bank, holds, is worked by that concern with a certain reserve of bank-notes, which reserve is measured in its extent by what that concern considers to be the average quantity of demand that will be made upon it. By that means, that reserve is enabled to perform an amount of business, which, without the process of banking deposit business, it would have required an amount of circulation equal to the whole deposits to have performed. By that means, undoubtedly, an economic use of the circulation is effected; but an economic use of the circulation is not itself circulation. When you put the question, Are not the bank-notes in my till, and the bank-notes deposited by me in the hands of the Bank of England, equally at my disposal? it is undoubtedly true that they are; but it is true only with respect to the bank-notes which I have in the Bank of England, upon the supposition that all other persons similarly circumstanced with myself do not act simultaneously. The Bank of England, or any other banker, can clearly pay his deposits only to the extent of the banking reserve in his till. The banking reserve in his till is the money with which that business is worked, and constitutes the amount of circulation. It is to mistake the amount of business done for the instrument with which it is done, to call deposits circulation. Deposits are the business worked; the reserve in the banking-till is the instrument with which they are worked; and the business by which your instrument is worked is the circulation or money of the country." Question 3121. "What difference, then, is there between the bank-note you hold in your hand, and the money you deposit in the Bank?"—"The difference is this: in one case, the debt has assumed that form which makes it the representative of metallic coin for all purposes; in the other case, it has not assumed a form which gives it those properties." Question 3182. "Are there any circumstances you can suppose which would prevent a deposit in the Bank of England, belonging to you, as a banker, being applied to discharge, if you think proper to give an order on the Bank, any debt to the amount you may have in deposit?" 66 Yes, there are. Question 3184. "Is there any thing, then, to prevent your going to the Bank, and receiving bank-notes or sovereigns for that amount, and then paying the notes or sovereigns over to that person who you suppose may refuse the check?"-"No." Question 3185. "Then, have not the deposits in that case all the characteristics of money which the notes have?"—"No, they have not." Question 3186. "Have they not discharged the debt that you owed?"-"No: the notes have, but not the deposit." Question 3187. "Did you not obtain notes to the amount of the deposit you had in the Bank?"-"I obtained a discharge of my credit in bank-notes." Question 3190. "Did you not obtain the notes by means of the credit?" "I did." Question 3196. "Is it your opinion that the Bank of England should increase or diminish its circulation, according to the increase or decrease of the influx of bullion, without regard to the amount of deposits?"-" Certainly." Question 3222. "Have you not stated that, when the Bank wishes to increase the quantity of currency, they will purchase securities?" -"I certainly think that to purchase securities, and issue money against that purchase, is the mode by which the Bank should increase the circulation." Question 3226. "Is it not your opinion that the Bank should sell securities, to effect that decrease of currency?"-"No: I think that the proper course is for the Bank to cancel their notes as they are paid in for gold." The preceding extracts from the arguments of Mr. Palmer and Lord Overstone fully present the method of the management of the Bank from its recovery from the panic of 1826 down to the famous Act of 1844; while those from that of the latter, and from his evidence before the Committee of 1840, fully set forth the grounds for that Act. It turned wholly on the distinction in kind between notes, and deposits growing out of such notes. The former, whether issued by the Bank or by country Banks, were money; the latter, not. "The Bank," said Lord Overstone, "acts in two capacities, -as a manager of the circulation, and as a body performing the ordinary functions of a banking concern. The duties of these two characters, though very often united in the same party, are in themselves perfectly distinct." The rule by which, at the time, the Bank claimed to be managed, was to hold a certain quantity of securities, invariable in amount, and allow the circulation. over and above such amount to fluctuate as gold was drawn from, or was returned to the Bank. This rule, he said, was perfectly correct when applied to the Bank as issuer and manager of the circulation, for the reason that the latter was uniform, or very nearly uniform in amount; but was wholly inapplicable to the Bank doing a general banking business, as, from their nature, its deposits, which were to be paid in coin equally with notes, fluctuated constantly and excessively in amount. The withdrawal of such deposits in specie might wholly exhaust its resources, leaving its notes the circulation - entirely unprovided for. The remedy was the division of the Bank into two distinct Departments; one of Issue, the other of Banking. The rule then professed to be followed would be perfectly correct as applied to the circulation. "All fluctuations in its amount," said Lord Overstone, "would then be met by a corresponding fluctuation in the amount of specie on deposit: thus the public, not the Bank, would be made the regulators of the amount of the circulation; and that amount, by this principle, would be made to fluctuate precisely as it would have done had it been purely metallic. . . . By this means, and by this means only, can we obtain a paper circulation varying in amount exactly as it would have had it been metallic." To repeat his summary:— "A Bank of Issue is entrusted with the creation of the circulating medium. "A Bank of Deposit and Discount is concerned only with the use, distribution, or application of that circulating medium. "The sole duty of the former is to take efficient means for issuing its paper upon good security, and regulating the amount of it by one fixed rule. "The principal object and business of the latter is to obtain the command of as large a proportion as possible of the existing circulating medium, and to distribute it in such a manner as shall combine security for repayment with the highest rate of profit." The two functions of issue and banking, being wholly distinct and antagonistic, should never be exercised by the same institution or party, for the reason, that, if it possessed the power, it could never resist, in periods of great monetary stringency, the importunities of its customers for an excessive issue of notes, as means of re-enforcing its banking resources. The latter were to arise wholly from notes; their distribution and use, in a manner to combine security with the highest rate of profit, being the sole function of a Banking Establishment or Department. The complete separation of issue and banking was the condition upon which a circulation, always the equivalent in quantity and value of coin, and consequent exemption from commercial and financial disasters, could alone be secured. To accomplish such results, all future legislation in reference to the Bank should be directed: "1. To the strengthening, and, if possible, the extending, the monopoly, as regards currency, of the central issuer, with a view of rendering the indirect control which it can exercise over subordinate issuers more powerful and effectual. "2. The propriety of making some gradual approach toward the separation of the banking functions from the management of the currency. ... "3. Of subjecting the superintendence of the issue department to a separate Committee of currency, and of associating with this Committee a representative of the government, whose presence should always be requisite to constitute this Committee efficient for business. . . . The presence of a member of the government in all the deliberations of this Committee would prevent the Bank in any tendency to abuse its power over the currency, for the promotion of her banking purposes, and the Bank would exercise a similar restraint over the government." Here we have foreshadowed, seven years before its final adoption, all the material provisions of the Act of 1844. It was simply an attempt to secure a legislative sanction for the dogma of Adam Smith, "that the whole amount of paper money of every kind that can easily circulate in any country can never exceed the value of the gold and silver of which it supplies the place, or which would circulate if there were no paper money;"1 and to limit its amount to that of the coin which otherwise would have been in circulation. The nature of a symbolic currency wholly escaped Lord Overstone. It could not be otherwise so long as he held to the dogma that money was not necessarily capital, only the wheel of commerce, the 1 See ante, p. 127. |