labour, will no longer obtain for its owner the same amount of money. All such changes, it is needless to say, are bad, they inflict injustice upon individuals, and are injurious to the interests of industry, which are the bases of national progress and prosperity. Therefore, in order to prevent or minimise those changes, it is indispensable that the establishment or establishments which are empowered to issue notes-in other words, to supply the community with currency-should be in direct relation with trade and the wants of the community. A State-issue of notes, regulated by the amount of the Government expenditure, obviously does not fulfil this requirement. The issue of notes, in such a case, may be either too large or too small for the wants of the community. In short, there is no necessary connection between the amount of such issues and the requirements of the public for money.

A State Bank, it is true, might fulfil this condition. It might be in direct relation with trade and the wants of the community. But in order that it should respond to those wants satisfactorily, it would require to be constituted on very different principles from any State bank which has hitherto been established. It would require to be free from all private interests: it must have no motive to enhance the value of money and the rate of interest, with a view to making increased profits for the establishment. In short, it must have no share holders. Its capital must be supplied by the State-so also must its directors. It is doubtful, even, if it could accept any deposits, without embarrassments which would be inimical to its proper action. It would have the power of issuing notes to any amount in response to the requirements of the community; and this could only be done by the discounting of commercial bills, and making advances upon securities. This is not a kind of business which

:

any State should undertake. Moreover, there are two special objections to such an establishment. One of these is, that it would not have a proper regard for the convertibility of the note into specie on demand - which is the great safeguard against depreciations of the currency. As the community would be entirely dependent upon this State-bank for a supply of currency-as its notes would be the only ones in circulation-the temptation for it to make temporary suspensions of cash-payments would in times of difficulty be overwhelming. Such a course, it is true, might in many cases be advantageous for the public for there are circumstances in which a suspension of payments in specie is the only means of maintaining the measure of value, by preventing a temporary and abnormal rise. Nevertheless this is a dangerous prerogative-it is a great drawback upon any system of which it is a feature. Yet it must be a necessary feature of a State bank, under which the Government undertakes to secure the convertibility of the note, yet has so ready a means of evading that duty. Secondly, under all circumstances, a State bank would be more or less subject to political influence-at least it would be suspected of being so. It would be the great fountain of credit-it could make large loans, or withhold them and in this way it could exercise immense influence. It was this which proved fatal to the system of a State bank as established in the United States. The bank became a great power in the State : it exercised a vast political influence: and hence, although useful in other respects, it was abolished.

Nations differ from one another in their sentiments and circumstances; and it would be absurd to maintain that the same kind of currency-system is necessarily the best for them all. In countries like France, where the principle of cen

tralisation is predominant, the system of a State bank, as the fountain of credit and the currency, might possibly be preferable to any other although certainly not constituted upon the present basis of the Bank of France, which has an interest in keeping the rate of interest as high as possible. But in this country, we feel assured the principle of a State bank will always be repudiated. The functions of such a bank are not such as a Government can rightly discharge; and even if ably discharged, there would always be room for suspicions and complaints to which no Government in this country would willingly subject itself. Therefore, without denying that the principle of a State bank may be suitable for some communities, we may safely assert that such a system is inapplicable to this country; that some other fountain of currency must be devised, and some other means found for making the currency respond freely to the wants of the community, in order that the measure of value may remain steady, or subject merely to natural fluctuations.

This can only be effected by means of perfect freedom of issues: by a system under which every bank alike shall have the power of issuing notes, to meet the requirements of the public,-so that there may be the same freedom of competition in the supply of capital on loan, as there is in all other branches of trade. But in order that such a system may be worked safely, some means must be taken to secure the validity of the notes thus issued. As regards the deposits in banks, it is allowed on all hands that legislative interference is unjustifiable, and would be injurious. It would be as much out of place for the State to make banks find security for their deposits, as it would be for the State to make a demand upon a merchant to give public security for the solvency of his operations. The deposit of capital with a bank is as voluntary

an act as the sale of goods to a merchant upon credit. In the one case as in the other, the transaction is a purely voluntary one, as to the expediency of which individuals must judge for themselves. This was the opinion clearly expressed by Sir R. Peel in 1844, and as to the correctness of which there cannot be a doubt. No one has ever called it in question. But the issue of notes stands on another footing. Bank-notes are currency; and although de jure any man is at liberty to refuse to accept them in payment, de facto they are and must be so accepted, if trade is to be carried on in its usual course. It is true that the notes of the Bank of England have for the last thirty years been made a legal tender, so that no man is entitled to refuse to accept them in payment. As a question of principle, we hold that this is objectionable. But it was a not unnatural consequence of the monopoly which the State had for a century and a half conferred upon the Bank: and, as a matter of fact, it has worked well. But whether the notes of any bank be make a legal tender or not, the State is entitled to take means to insure the validity of bank-issues, seeing that these constitute a large portion of the currency of the country, and that any doubt as to the solvency of such issues would produce a widespread embarrassment.

In former times-notably between 1790 and 1830-great embarrassment was ever and anon occasioned by the imperfect validity of this portion of the English currency. The real embarrassment, however, was produced not so much from the note-issues, as from the deposits. Banking in England was then carried on (with the exception of the Bank of England) in the very worst form which it is possible to conceive. It was carried on not by corporations, or companies, but by individuals. And this, not as a matter of choice, but of necessity. The State had conferred a mono

poly upon the Bank of England; and in order to prevent any serious competition with it, the State, at the instance of the Bank, passed an Act forbidding the establishment of any joint-stock bank-of any banking firm consisting of more than six members. This Act was passed expressly for the purpose of restricting the credit, by diminishing the security, of the other English banks. And it was very successful in this respect, at what cost to the country is now well known. The public were compelled to make their deposits with, and accept the notes of, private individuals-simply because they could not do otherwise. And in times of monetary difficulty, these individuals, having no large capital of their own to fall back upon (as joint-stock banks have), could not meet the demands then made upon them, and failed in great numbers,-their note-issues, of course, becoming mere waste paper. Whenever they could not meet a run upon their deposits, the notes which they had issued became of no value. It is true-and we repeat this, because it is an important point-it was not their note-issues which brought them down it was the run for deposits, which, by compelling them. to close their doors, at once destroyed the validity of their notes. It was the loss of faith, not so much in the note-issues (which were but a small part of their liabilities), but in the general solvency of these private banks, which proved their ruin, and occasioned at times widespread distress. In Scotland, to which country the injurious monopoly of the Bank of England was not allowed to extend, the opposite or joint-stock system of banking prevailed, and with remarkable success,-showing that it was not the freedom of note-issues which occasioned the repeated banking disasters in England, but the crude and weak form in which alone English banks were permitted to exist.

In

Nevertheless, although the noteissues of any bank in this country (except the Bank of England) are a mere bagatelle compared with its total liabilities, although any bank, however insolvent, could easily meet all its note-issues by payments in gold,-it is expedient that the value of such issues should be guaranteed by an adequate security. The reason for this is obvious to any one who is conversant with the features of a banking crisis. When a bank loses the confidence of the public, it is its depositors who commence the run upon it. A note-holder of such a bank seldom has more than £5 or £10 in his hands,-his interest in its solvency is comparatively small; but the depositors have their whole reserve of capital at stake, and therefore it is they who, on the first breath of suspicion, make a run upon the bank for payment in gold. And under the pressure of this run, the bank's, amount of specie is paid away to depositors, so that little or nothing is left for the payment of its notes. The note-holders have to rank simply as ordinary creditors upon the bank. This is not expedient. However solvent are our banks of issue as a body, the fact that there is no special security for their note-issues, tends to weaken the validity of the currency in which the greater part of our retail business is carried on, and the value of which, under a perfect monetary system, ought to be unimpeachable.

Accordingly some adequate means must be taken to secure the validity of the notes of all banks of issue. While adopting a system of perfect freedom of issue, as the only means of maintaining the measure of value and the rate of interest in their normal condition, we must take measures to secure the value of these note-issues by an adequate guarantee. In order to establish a perfect monetary system, the great point is, to combine a maximum of validity as regards the note-issues,

with a maximum of steadiness in the value of the currency and of capital on loan. This can be most fully attained by the issue of notes upon State securities, combined with perfect freedom of competition in the employment of those

notes.

It is needless at present to propose in full detail a system by which this principle may be carried into effect. But the general principle of such a system might be as follows:-That the Exchequer be empowered to issue notes to any bank which purchases and deposits in the Exchequer an equal amount of consols valued at 10 per cent above the current price of the day. These consols, or any portion of them, to be returned to the bank on its giving back the notes issued upon the security of these consols; but returned in such a way that, whatever be the difference in value of the consols when bought and when returned, the bank shall neither gain nor lose by the temporary investment.

Under such a system, the State would be perfectly passive in the issue of notes. It could only issue them when required by the banks: so that Government interference with the currency would be as entirely nil as at present. This would nullify the defect of a State-system of currency-namely, the tendency to issue more notes than were required by the community; while it attains the special advantage of such a system in basing the noteissues upon Government security.

All banks alike to have an equal right to a supply of notes upon these terms. And each bank to be bound to maintain the convertibility of its issues,-in other words, to pay its notes in specie when required to do so. But the State to fix no rules for the amount of specie to be held by any bank. In point of fact, a fixed rule would be inapplicable, and wholly mischievous. The circumstances of each bank are so different that a rule which might

VOL. XCVIII.—NO. DXCVII.

be proper for some banks would be quite inapplicable to others. The case would differ, partly from the different nature of the business carried on by each bank, some banks, owing to the class of customers who dealt with them, being more liable to a demand for gold in payment of discounted bills and other advances than others. Moreover, there is this great point to be kept in view. The proportion of specie requisite to support a notecirculation is not a fixed quantity, but varies with the circumstances, and especially with the extent of each bank's circulation. Experience alone can show the proper proportion of specie which a bank must keep on hand to insure the convertibility of its notes. And all experience shows that the larger the amount of a bank's note-issues, the smaller is the proportion of specie requisite to insure convertibility. One-fifth of specie may be needed to support a note-circulation of half a million sterling; but a much smaller proportion is requisite to cover a note-circulation, like that of the Banks of England and France, amounting to twenty or thirty millions. And the reason is obvious. Notes are only needed for home use; and, as long as a bank is known to be thoroughly solvent-or, as under the new system, it is known that the value of the notes is amply secured,-the public never loses faith in the notes; never demands payment of them in specie, except as a means of obtaining "change"-and this only in the case of England, where the lowest denomination of notes is £5. Hence, one-tenth of specie, or even one-twentieth, would insure the convertibility of the note-issues of the Banks of England and France as perfectly as one-fifth of specie would do for a bank whose circulation amounts only to half a million.

As a matter of fact, the Bank of England keeps less than threefourths of a million in specie

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It

in its Banking department. finds that this proportion is enough to meet the demands for specie on the part of depositors; and a lesser amount is needed in its Issue department to meet the cashing of notes by the public in order to get "small change." If the notes of the Bank of England were of smaller denomination-if, like the Scotch notes, they went down to £1-the proportion of specie needed for cashing them would be much smaller than it is. The demand for specie upon the Issue department arises mainly, if not entirely, from the necessity on the part of the public to obtain currency of a smaller denomination than £5. We do not say that it would on the whole be advantageous for the Bank of England to issue £1 notes; but, if such a change were made, the demand upon the Bank for specie would thereby be considerably lessened. Hence no rule can be laid down as to the proportion of specie which a bank should keep in order to insure the convertibility of its note-issues. The proportion naturally varies with the circumstances of each bank. And for the Legislature to fix the proportion of specie to be kept by banks would not only be objectionable as a matter of principle, but productive of serious injustice and injury. Let the substantial value of every bank's issue be secured by an adequate guarantee; but let each bank look after the convertibility of its notes on its own responsibility, and in the manner which by experience it finds to be best.

Under such a system the validity of the note would be amply insured. The notes would be secured by a more than equal amount of Government stock-the steadiest and most readily convertible of all kinds of property-kept " marked" (so to speak) in the hands of the State for the note-holders, whoever they might be. At the same time the convertibility of

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these notes would be as perfect as now, the banks being bound to pay specie for them on demand, under a penalty of bankruptcy.

The other great requisite of a monetary system—namely, the steadiness of the measure of value-would also be secured to a greater degree than under any other system. The only way to attain stability in the measure of value is to let the amount of the currency accommodate itself to the requirements of the community-ebbing and flowing, increasing or diminishing, according to the natural law of supply and demand. A currency which is fixed in amount, or which varies from any other cause than the requirements of the community, can never remain stable in value. If the currency be fixed in amount, every increase in the monetary requirements of the community will produce an enhancement of the value of the currency-in other words, a fall in prices; and every ebb or diminution in the monetary requirements of the public will produce a fall in the measure of value-in other words, a rise in prices. Consequently, no currency-system can be perfect unless under it the amount of the currency correspond exactly with the requirements of the public. And this end can only be attained by allowing the amount of the currency to be regulated by the wants of the community-by the natural requirements of the public responded to by the banks under a system of freedom and competition.

This would be the case under the system which we propose. The State would have no power of itself to increase or diminish the papermoney of the country. And the banks would have no motive for getting notes from the State except in response to the requirements of the public. In this way we should escape the defects of a purely Statecurrency, which is always liable to an excess of note-issues-owing to the inducement which a State has to meet any extraordinary expendi