Written November, 1897.

IT is a received axiom that in England no statutory arrangement materially interferes with the natural course of trade and exchange.  To question whether the desirable state of freedom of trade yet exists implies heretical opinions ;  the received doctrine being that our economic universe is the best possible, therefore all economic changes, however disagreeable to individuals, are for the best.1  A certain eminent knight, recently retired from an official position, is the Dr. Pangloss of this philosophy ;  his leisure, we are given to understand, will be spent in “ knocking all the stuffing ” out of faddists.

Finance is the machinery of exchange and trade, we might say it is the life blood of Society :  at the present day the financial question is almost entirely one of credit banking.  In a circulation of credits the primary requirement is that credit instruments, failing other clearance, shall be exchangeable at par with that legal currency which it promises to pay and is the accepted measure of its value.  On this point there should be no uncertainty ;  for this purpose drawers of credit have ever found it requisite to maintain a reserve of legal currency.

In the days of the Stuarts the London merchants were in the habit of depositing their spare bullion at the Tower for safe custody ;  the receipts given against such deposits being circulated to obviate constant and costly transfers of bullion.  Such issues are manifestly warrants against bullion merchandise in bond and not credit drafts :  their possible circulation represents a circulation of coin, not a circulation of credit.  To digress, the original Italian term banco did not express what is now implied by the term, an establishment that dealt in monetary instruments of any kind whether of coin or credit ;  it meant simply an establishment or bond warehouse where bullion, the measure of value of credit instruments, could be deposited for safe custody :  receipts given against such deposits were used to save costly transfer and to restore merely temporary adverse balances in trade.  Of such a nature, says Adam Smith, were the original banks of Venice, Genoa, Nuremberg and Amsterdam, and, although subsequently their use was abused by their several State Governments borrowing from the bottom of the hoard, the original intention was to maintain each note or warrant absolutely sound and represented by bullion actually in bond.  In the same way the deposits at the Tower of London were made simply for the safe custody of the bullion, a trust which was violated on two occasions by the Crown.  Charles I borrowed from the hoard and Charles II closed the Exchequer.

The trust which had twice been betrayed by the legitimate monarchs was not likely to be accorded to the questioned usurpation of William III, who, being hard pressed for money to maintain his position, granted the foundation Charter of the Bank of England for a loan of £1,200,000.  The principal and most objectionable clause in this Charter was the one forbidding any other limited liability association from issuing notes within sixty miles of London.  This clause of course prevented any subsequent association of London bankers from founding an institution designed solely for the safe custody of bullion.  Thus, since private unprotected hoards are a source of anxiety and as it was manifest that even a Government could not declare its own creditor a defaulter, the London bankers came to deposit their reserves with the Bank of England.  Now the Bank of England not only received deposits of bullion and maintained a hoard of such treasure, it also dealt in credits ;  in fact, it originated in an advance of credit to the Government ;  evidently, therefore, there was an uncertainty as to the real base of the notes of that institution.

This original foundation had one subject matter of congratulation :  the Government, by its very Act, had cut off from itself all power of issuing a purely fiat paper legal currency, which use, however defensible in theory, experience has taught is certain to be abused :  whence it came to pass that, since Government paper was not obtainable, the public grew accustomed to the use of any good commercial paper afloat ;  thus arose our private bankers and their notes, leading ultimately to our present almost perfected system of credit clearances and banking, the chief cause of our commercial and financial predominance.  Contemporary Continental Powers, on the other hand, persuaded by theorists, used and abused the power of issuing fiat legal currency ;  in consequence their peoples, since such Government paper is the safest guard against declared insolvency in law, ignored the facilities offered by private issuers and to this day are backward in their use of banking facilities.

A long period of agricultural and commercial depression followed the close of the Napoleonic Wars—not caused by the Peace, as the pig-headed declared—coupled with recurring financial crises :  by this means popular attention was called to the foundation of our financial system.  In 1836 the late Lord Overstone first drew attention to the weak point therein.  The Government had become indebted to the shareholders of the Bank of England in a considerable sum, originating in an overdraft incurred during the closing years of the War.  This obligation was cleared in 1818 at Huskisson’s instance as a necessary prelude to the Act for the resumption of cash payments in 1819 ;  but it was incurred again in the following year in, as Huskisson termed it, a yet more objectionable form.  Lord Overstone’s pamphlet in 1836 pointed out that the Government’s obligations to the Bank of England rendered that institution responsible for performing the incompatible functions of securing the general credit of the community, to which it was indebted for its deposits, as well as its own ;  therefore whenever an unforeseen balance of payments occurred in our foreign exchanges, the Central Institution could not avoid wrecking the market in the act of saving itself.  In his letter to Mr. Smith in 1839 his lordship pointed out that the stability of a credit circulation depended on the certain basis of the notes issued against the ultimate reserve of bullion, the standard of value.  Since the banking business of the Bank of England involved credit liabilities it could not assure such a certain basis to its issues :  this necessitated the separation of the Issue Department from any form of banking business and its subjection to a strict and inviolable “ golden rule ” to give only notes for gold and gold for notes ;  this alone could assure that legal tender paper, issued against bullion actually deposited for safe custody, should be perfectly distinguishable from any other class of paper in circulation.

The Bank Charter Act of 1844 was the attempt made to carry out the above suggestion :  the Banking Department was separated from the Issue Department, the former being left to the direction of its own elected board as an ordinary joint stock bank, whilst the Issue Department was placed under statutory limitations, subject to the discretionary control of the Chancellor of the Exchequer, and from this department emanates the legal tender note, commonly known as the Bank of England note.2  Although this Issue Department is situated on the Bank of England premises, and the Bank authorities perform the clerical duties, the statutory limitations make the note perform all the functions of a bullion warrant and are practically a return to the system when the spare bullion was deposited for safe custody at the Tower under the Stuarts—and, as we shall observe, like the Stuarts, our Government, in this enlightened age of progress, cannot refrain from borrowing from the bottom of the hoard, which popular ignorance and lack of subtlety in analysis enable it to do undiscovered.  This Issue Department is bound by law to give notes for gold and gold for notes ;  therefore the Government is morally responsible to the public that the notes are what they profess to be.  In addition, however, the Government allows the Banking Department the use of a further issue, known as the fiduciary issue, amounting now to over eighteen millions.  This fiduciary issue is for the greater part (£11,015,000) supported by the Government’s “overdraft” referred to, and for the remainder by other securities deposited in the Issue Department.

Now it is evident that the above arrangement makes the real basis of the legal tender note as uncertain under the Act of 1844 as previously, and thereby the very object for which the Act of 1844 was passed is stultified—no one can tell, not even the Bank authorities, which portion of the issue is supported by bullion and which portion by merely credit securities.  True, the Banking Department is constrained by law to cash the notes when presented ;  but this it can only assure as long as it can sufficiently dominate the market to arrest a drain.  The requirements of the internal circulation keep sufficient notes out under almost any conditions to lull popular apprehension ;  but it must be evident that unless most careful methods are adopted, whereby arises that peculiar sensitiveness of our money market, a panic might be precipitated.  That the Act of 1844 made no practical change in the situation has been proved by subsequent history ;  in the light of three suspensions of the Act even the late Mr. Gladstone acknowledged this.  The basis of the note is still uncertain, and, the Banking Department being constrained by the Act to maintain its convertibility, that Department has, as formerly, to perform the incompatible functions of maintaining the general credit by controlling the movements of bullion as well as its own.  This was the very complaint of Lord Overstone, and on three occasions (1847, 1857, 1866) the limitations placed on the Issue Department have been suspended to enable the Banking Department to maintain the general credit by an issue of its notes to the fullest extent.  The Bank authorities have certainly objected to the doctrine that on them devolved the duty of sustaining the general credit ;  but in 1866 the Governor had to confess that the Bank had, in such situations and under present arrangements, to act on this principle, objectionable though it be.  In fact our currency is fundamentally still a managed one.

Under the above arrangement has our banking system had to develop ;  it is therefore not surprising that our banking methods display those anomalies which the late Walter Bagehot rightly considered so dangerous.  In a natural system of banking, remarks Bagehot, bankers would not have to be apprehensive of the policy of any particular establishment, the rate of interest would not be fixed by arbitrary control, but the free action of the market and the state of the general credit would fix the rates of interest ;  bankers would only have to take care that they did not discount too many bills, did not discount bad bills, and each would have, and be responsible for the maintenance of, an adequate reserve of coin and bullion :  it would then be known what the bankers’ cash reserve really was.  The actual result at the present time, however, is that what bankers term their cash reserves are represented in part by deposits in the Banking Department of the Bank of England, the basis of its notes being uncertain ;  whilst the remainder and larger portion are deposited with the brokers entirely on credit securities.  This method, anomalous and dangerous though it be, is rendered necessary to secure to the market the support of the Bank of England under any circumstances.  The Central Institution is fairly cornered by the arrangement :  it is thereby kept out of the market as a competitor, and, whatever the occasion, the Bank authorities dare not let the brokers go, since these brokers hold the greater part of the bankers’ cash (sic) ;  if they were wrecked their ruin would involve the bankers, who in turn would draw on their deposits at the Central Institution and that Institution could not cash up.  The Bank can no longer “save herself by the ruin of all about her,” as she boasted sixty years ago.  Nowadays the electric telegraph has intervened and rendered possible immediate orders for bullion remittances from distant parts, the markets of which London, as the World’s Creditor, controls.

We observe that the Central Institution has lost that absolute control of the market it formerly enjoyed and which alone could assure its own safety.  Business is done at sight, and in their tills, or these immediate claims on the floating gold, the bankers begin to see their real reserves and their deposits at the Central Institution are rendered less necessary.  Therefore every fresh strain that turns the sterling exchange against this country drains the Banking Department of the Bank of England of its reserve, whilst the old power of arresting the drain at the expense of the market is lost.  Thus by the recent demand from New York it lost thirteen millions in thirteen months (1896-1897).

It may be said that this is purely a bankers’ question ;  that as long as undue stringency in rates or panic is avoided the general public are no sufferers.  This is a fatal delusion !  There is not a single sufferer in the country, from the large masses of the population living in or on the verge of poverty to the distressed landowner and farmer, the manufacturer harassed by cutting competition, or the investor who fails to find a good security offering an adequate rate of interest, who is not affected, whose distresses are not traceable ultimately to the virtual breach of faith complained of.

During the eighteenth century the faulty financial system inaugurated by the original Bank Charter caused trouble enough—further tinkering with the standard of value, fixing ratios between gold and silver, making at times confusion worse confounded—yet, as the foreign balances were almost entirely due to mutual trade transactions, there was always a tendency to return to an equal balance of payments, which assured a period of ease and prosperity.

Since the close of the Napoleonic Wars a fresh factor has intervened, and this factor must be borne in mind to insure a complete understanding of the present situation.  The enormous loans of English capital abroad is this factor.  Some part of these loans might be a real national saving ;  but, as Huskisson pointed out in 1829, the periodical gluts of this so-called loanable money capital rather arose from disappointment in home or private ventures or by the unexpected fortunes of individuals arising from the undue fluctuations in prices, so that the process may be looked on as a national loss, purchased by the ruin and poverty of many ;  since capital that could have perfected our state was sent away.

Previous to 1854 the amount of these investments of our capital in foreign parts largely exceeded the tribute payments for interest thereon.  The periodical glut of this loanable money produced a corresponding period of ease whilst it was being disposed of ;  ease that snared the market.  These investments, though causing an excess of produce exports, yet acted on the monetary exchanges as imports, which, though appearing paradoxical, is a truth Lord Goschen cleverly demonstrates in his Foreign Exchanges.  These balances caused drains of gold from the reserve and forced the Bank of England to periodically act on the market to cause artificial stringency in order to protect its reserve, a policy that insured those disastrous periodic financial crises.  Thus under our financial system each period of prosperity dug its own grave.

From 1854 to 1874 the turning of the tide caused a period of comparative ease.  Since 1874 the interest on these foreign investments has caused a constant balance of payments in favour of London, now approaching two hundred millions annually, causing a great excess of produce imports.  This balance would be in itself no detriment, provided always that the price of these imports is not invidiously affected by any fault in our financial system.

This enormous favourable balance of claims makes the London Money Market the master of all other money markets, especially of those tributary markets which have such a balance to remit over and above the mutual trade returns.  This fact could prove the greatest blessing both to ourselves and the world at large, if the dominant market is free from all artificial embarrassments ;  otherwise it is a curse.

It is curious to note the lopsided view of things often taken in the money articles of the daily press.  For instance it may be stated that “ in sympathy with silver the Chinese exchange has improved,” or “the gold premium in Buenos Ayres has risen.”  In view of such frequent variations it never seems to strike the writers that the relative indebtedness to London was causing the fluctuations :  that the proper statement would be :  “That owing to the improvement in the Chinese exchange (or some other dominant silver exchange) silver has risen,” or that “ the premium for English paper in Buenos Ayres has induced a rise there in the gold premium.”  Such implies an embarrassment in the English market, and this belief is unorthodox.

Another change, however, has taken place, which has been already noticed, and that is the rapidly increasing loss of control of the market by the Bank of England.  The London bankers, instinctively conscious of some underlying danger, and proceeding by that method of trial and error by which our wonderful system of credit has been evolved, have used every expedient to insure a more ready command over the floating gold, and are now able to meet requirements without need of frequent applications to the Bank of England :  transactions are done at sight, at rates which may turn the sterling exchange against this country, and the Bank of England loses its power to arrest the drain, except temporarily by the costly expedient of borrowing on stock in an unprincipled attempt to create an artificial scarcity of market money.  This condition of partial freedom has already been productive of results.  Two years in succession (18961897) prices of agricultural produce have “ boomed ” immediately after harvest, contrary to usual experience.  The explanation is to be found in the present position of the London market.  Tributary gold exchanges, even so heavily an indebted one as New York, where the recent association of banks keeping reserves independent of the Treasury at Washington has immensely strengthened the position there, have been enabled to turn the sterling exchanges in their favour if necessary.  This has insured more freedom to their internal circulation the extra accommodation has enabled the American farmers to move their produce at prices advantageous to themselves.

When, however, the London Money Market has been apprehensive and uncertain of the extent of the Bank of England’s power of control, stringency in such tributary gold exchanges is the immediate answer this checking of the freedom of the tributary country’s internal circulation provokes a fall in prices of produce.  A few years ago, when the Bank of England had more power and was making great efforts to increase its treasure, this stringency had most disastrous results in some tributary countries, and the Australian, American and Newfoundland bank failures are still remembered.  At the present moment (1897) a momentary apprehension and renewed caution in London serve to show the London bankers the increasing strength of their position, and, as no profit is to be got in supporting the Central Institution, rates rapidly ease again.

When we come to consider the question as between the London Money Market and the market of tributary countries whose paper is not convertible into gold on demand, so that the relative states of credit cannot govern the gold sterling exchange, we find that our financial houses have to be more guarded in accommodating the commercial paper of such countries, and to insure safety to themselves must ascertain the price by the state of the relative indebtedness of the several markets to our own.  This causes the fluctuations and depreciation in price here of such paper, of its standard of value, and of the produce such paper commands.  If the London Money Market were free from the embarrassment the uncertain basis of our currency entails, our bankers would have their reserves in hard cash, money with the brokers would not be part of such reserve, as it is, but would be an investment venture entirely.  Thus secured, the bill discounter in the competition for profit would soon drive up this paper of such tributary countries to a price in our monetary computation equivalent to its real par value.

Another fact tends to confusion in the popular mind and conceals the real source of the ill wind.  Many countries situated as above have a monopoly of rare produce, such as tea, coffee, spices, silks, etc., etc.  As other countries are equally eager to obtain such produce as cheap as ourselves, and as there is no cheaper course to obtain a power of demand in such countries than by securing a power of purchase in London, so as to be able to buy this paper on equal terms with ourselves, Continental countries and others will ship us farm produce and manufactures and such will be sold at prices which, however unremunerative to the English competitor, more than compensate the importer by the value of the rare produce obtained, which could not otherwise be obtained at so low a price.  Thus the price of tea in Denmark, America or Belgium may very much more affect the price of butter, corn and iron in England than the cost of producing these latter commodities.  Hence arises our agricultural depression, and as any premium on English paper makes our manufactures dearer in such tributary markets their customers fail them ;  unless our manufacturers lower their prices, which they will do rather than lose custom ;  but as their returns decline they must be more stringent with their employees.  This is the root of the trade competition of the present age, and the results to large masses are deplorable and tragical.

Such is the embarrassment arising from a currency on a mixed basis, and if, in a blind attempt to extricate us from increasing difficulties, the Government create further troubles by enactments we may expect more crushing disasters.  In 1893, under the impression that the fluctuations and depreciation of the Indian exchange had something to do with the production of silver, the Government closed the Indian Mint to silver ;  but as the Indian Treasury held no gold to meet the return of its issues, and the relative indebtedness of England and India was such that the price of Indian commercial paper still kept below the prize offered for gold by the Indian Treasury, the loss on exchange still continued.  Recently (1896) the Indian authorities have endeavoured to improve the Indian exchange by the suicidal method, once attempted by Russia until famine supervened, of creating an artificial scarcity of Indian currency.  The loss to India is of course enormous, the Indian Government losing the value of twenty millions or so annually.  No wonder the poverty of India is attributed to the exactions of the Sirkar !

All this has brought the question into the region of practical politics, subject to all the dangers of blind party leadership, lying and bribing for votes.  The London Bankers’ Clearing House memorialized the Government, on Sir M. Hicks Beach’s alarming project, that the present Mint regulations for the coinage freed the market from embarrassment on this point.  If the basis of the currency, the Bank of England note, were equally certain, or if that note were left as a currency bill and exchange merchants and bankers could keep their bullion accounts and deposits earmarked at the Bullion Department, our last source of embarrassment would disappear ;  but before this is possible the Government must repay its debt to the Bank.

Written Christmas, 1897

IN Sir Robert Giffen’s article under the above title in the Nineteenth Century there is much to agree with ;  but the omissions are serious.  That the Gold Standard is now the only one possible for this country we agree :  the position of the London Money Market as the World’s Creditor assures our financial houses the control of the floating gold, and guarantees that our stock will not have to be parted with to any other money market without the rendering of an equivalent value.  This position, however, is not assured to a money market heavily indebted to our own unless the basis of our own financial system is unimpeachable.  It cannot be so when there is a mixed basis to our home circulation.  Sir Robert Giffen, however, always writes as if the action of our Government ended with coining the standard metal and enforcing payment of debts in standard coin :  he persistently ignores the relation of the Government to our ultimate bullion reserve, the method in which it deals with its debt to the shareholders of the Bank of England, and the want of distinction between the privileged note issues against the securities of the shareholders of the Bank of England and those against actual bullion in the Issue Department.  This confusion of the basis of the note issues, the basis of our whole internal circulation, was just what the late Lord Overstone pointed out as the cause of our anomalous methods of banking, which under the influence of balances in our foreign monetary exchanges reacted so disastrously on the price of produce and confounded the calculations of industry.

Referring to the occasional rapid fluctuations in the depreciated exchanges, Sir Robert remarks :—“ Such fluctuations are essential even to the existence of great merchants and exchange dealers who are most competent to look after themselves, and the business of the ordinary trader is hardly concerned.”  We are glad the second assertion is somewhat qualified ;  the first assertion we deny.  The exchange dealer’s commission is his legitimate profit ;  fluctuations beyond the limits of bullion points reduce legitimate trade to a speculation on the turn of the exchanges, and the risk checks trade.  Successful speculations in exchanges may occasion great fortunes to the lucky money dealer and keep the business in powerful hands ;  but you cannot get something out of nothing and such gains are made at the expense of the trader the paralysis arising from such checked and disappointed industry reacts as a hundredfold loss to the community.  We do not suppose Sir Robert opposes reform in order that Shylock may profit at the cost of Antonio ;  but his words lead us to suppose he would do so.

Sir Robert’s conception of money appears crude.  As Lord Farrer remarks, “ the functions of a medium of exchange and a standard of value are essentially different ”;  whereas Sir Robert Giffen’s articles always appear to presuppose that gold or silver is money, instead of being the measure of the value of money instruments in those respective countries in which they are the standards.  The monetary unit is not “ a certain weight of metal chosen for the standard,” but should be stated as of the value of a certain weight of metal chosen for the standard.  The importance of the niceness of this distinction to arrive at a proper analysis of the present situation cannot be overestimated.  Lord Farrer remarks in his address as President of the Statistical Society that “ the narrow premises, the a priori reasonings and absolute conclusions of what used to be termed the orthodox school of political economy have proved rather a stumbling-block than a guidance.”  Sir Robert often appears not to have avoided the stumbling-block.

To return, however, to practical politics we entirely concur, with Sir Robert that it was a mistake to have closed the Indian Mint to the free coinage of silver, not in the interests of silver, but in the interests of the Indian financial system, which is now exposed to all the evils of a managed currency.  Sir David Barbour appears to have arrived at the conclusion that the Indian Exchange fluctuates according to the relative indebtedness of India and this country, and that the present improvement (1897) is merely due to an accidental alteration in that relative indebtedness ;  whilst the stringency in monetary accommodation, which the Indian Treasury is artificially and arbitrarily creating, is merely paralysing the sources of Indian prosperity by checking her internal circulation and all the productive energy and the equitable distribution of wealth which depends upon the freedom of that circulation from arbitrary restraint.

The above view of Sir David Barbour is without doubt correct.  A return to a silver standard in India is doubtless beset with difficulties as long as there is a mixed basis to the currency of her great creditor, England ;  but the traditions, situation and present stage of development of Indian civilization will only allow a circulation to any great extent of silver coin, and the English very properly prefer seeing an extensive circulation of standard coin as a very visible guarantee that the credit circulation alongside—or, to be correct, the unclearable balance thereof—is readily convertible.  Silver, like gold, owing to its little practical use save for purposes of ornament, possesses a practically permanent value which consumable merchandise cannot possess for obvious reasons.  The great value in small bulk of these two metals, the care taken in the custody, the slight wear and loss, ensure the presence of a vast hoard above ground, the produce of years, perhaps centuries, of labour ;  thus any temporary improvement in the methods of mining cannot shift their relative value to other commodities, and it cannot be asserted that the improvements in the methods of their production have increased relatively to the improvements in the methods of producing other commodities.  It is this quality of practically permanent value that occasions the great use of one or other of the metals as a standard of value :  that there have been great fluctuations of the price of one in terms of the other has been due to their use as currency whilst the dominant money market had a mixed basis to its own circulation.  The premium of English commercial paper in tributary markets, whose paper is not convertible into gold on demand—and where does one exist or could exist as matters are ?—is the cause of what Sir Robert Giffen vaguely terms “ the appreciation of gold,” and the consequent depreciation of the price of the paper of such tributary countries in our market.  Even Paris and Berlin have to use artificial expedients to prevent a withdrawal of their gold :  this is what the “scramble for gold” really is—it is the scramble for English currency in foreign markets to clear the ever present balance of tribute payments due to London.  This result could not occur if English currency were based upon its standard alone and not on its present mixed statutory basis.  Was the world ever confronted with such a mischief ?  What a wrecker is pharisaical England, preaching all the time to other countries !  What an illustration of the “Beam and the Mote in the Eye ! ”  All that has arisen brings home to ourselves the primary cause of the present monetary disturbances.  Whatever the present price may be, the relative value of silver to gold in a free market will be found to be very different.

The Indian financial experiment is, however, most interesting and confounding to the accepted teaching.  In 1893 the Indian Mint was closed to the free minting of silver, and Indian paper became rated to gold at the price of 1s.  4d. per rupee ;  but as, the Indian Treasury had no reserve of gold, and as the relative indebtedness of India to this country still kept her paper in our markets below the price offered by the Indian Treasury, no gold was sent in and Indian legal tender paper remained inconvertible into gold at par at the place of its issue.3

Hitherto the “ unctuous rectitude ” that guided us had taught that the depreciation of other countries in terms of ours was entirely owing to their own faulty systems that the unimpeachable (sic) system in force in England alone allowed of equitable clearances of debt ;  but here was the case of a country governed by our unerring selves, with a currency circulation entirely managed by our officials, so contracted that the interest for money had all along ruled higher in India than in London, and at times it had been screwed up to panic rates.  Here then was no case of an artificially inflated circulation (allowing for the sake of the argument that such a thing is possible) :  the question of the standard could not, as Sir Robert remarks, occasion such a phenomenon, and therefore we are forcibly brought to consider the statutory conditions affecting the base of our home circulation in England.

Owing to the mixed basis of our currency bankers are forced into those anomalous methods of keeping their reserves so ably explained by Bagehot in his Lombard Street.  Foreign paper of tributary countries not convertible into our standard is thereby debarred from getting that support in our own market, which it would otherwise obtain, to raise it to a price representing its real par value in exchange :  these exchanges tend4 to vary with their indebtedness unless various expedients are adopted, all of course shackles to trade.  In fact a protective tariff is one of the expedients for correcting a falsified exchange ;  but it can only be temporarily effective.  A new loan will certainly correct the exchanges for a time ;  but as soon as the actual capital in goods has been transferred, the interest on the borrowed capital helps still more to depreciate its exchanges and checks further purchases from ourselves.5

The justification of the fiduciary issue of the Bank of England note is that it is quite possible for a Government to issue a fiat note within the limits of its circulation and reap the profits without causing depreciation of our commercial paper in foreign markets.  This depreciation would occur if a fiat note were issued beyond the limits required by the internal circulation—such an over-issue arbitrarily interferes with the natural rate of interest for market money, the freedom in fixing which is the safety-valve of credit and commerce.  Fiat issues were a great expedient of the arbitrary Continental Governments of the eighteenth century :  crazy enthusiasts, who endeavour to achieve the millennium by revolutionary methods and Acts of Parliament, generally resort to this expedient in the last hour of bankruptcy created by their policy.

The Bank of England note might very well be left where it is if only English bankers and merchants could keep an earmarked account for bullion deposited for safe custody at the Bullion Department ;  but before this could be done the Government must repay its debt to the Bank.  The new gold reserve thus created, which would then be the sole basis of the currency, would undoubtedly be largely formed from the bankers’ balances at the Bank of England, and unless the Bank had its resources at command it could not cash up.  The crux of the whole question rests with the Chancellor of the Exchequer :  he is responsible personally for its continuance and the innumerable private tragedies arising therefrom, as his predecessors were that it ever arose.

Written May, 1898

ANOTHER Royal Commission of Inquiry is upon us, and it may be safely prophesied that, as is the rule with Commissions of Inquiry, it will not ascertain anything, and will therefore not be able to recommend anything :  therefore a suffering community in India will have, like the British agriculturist two sessions ago, to rest satisfied with the impotence of these “ Chinese ” farces.  If, indeed, the Commission gets on to right lines it will resolve itself into an inquiry on the workings of the foreign exchanges and the principles that control them.

The foreign exchanges of this country are of two sorts the one with countries whose paper is convertible on demand in gold without let, hindrance or premium payable on its withdrawal ;  the other with those countries where this is not the case.  The latter is the case of India, and that it should belong to the former is the laudable intention of Sir J. Westland ;  but our own contention is that this result cannot be effected by powers working at Calcutta without occasioning terrible and avoidable distresses, and that in London is the only hope and power of effecting this result without the attendance of individual losses and distress.

Since the closing of the Indian Mint in 1898 no question can be raised that the production of silver is affecting the value of Indian commercial paper ;  yet the fluctuations continue, and as hitherto its price in London has been below even the very low price offered for gold by the Indian Treasury no gold has been sent there.  Recent methods, which many very truly consider suicidal, adopted by the authorities to alter the relative indebtedness of the two countries in the Money Market, have raised the price of Indian commercial paper to within a fraction of that at which it would pay to withdraw gold from our ultimate reserve for export to India.

The above experience is teaching people to perceive that the fluctuations in the foreign exchanges of two countries are in many cases due to their relative indebtedness, and there is no other limit to the fluctuations when the indebted country cannot maintain such an open gold market as London or cannot pursue some artificial method to steady the exchange.

Now London is the World’s Creditor; there is scarcely a country which during a year has not an adverse balance, which has not to remit more to London than it receives.  In such a position London may easily maintain an open market for gold, and apparently at the present moment it is the only free market for gold.  Now, if any policy of our own is occasioning this situation, and we venture to assert that such is the case, the position of this country is most baneful to all human society.

Turning to the case of India during the past two years, our orthodox advisers cannot assert that the state of the internal circulation of India was the cause of the depreciation of her paper in other markets, for throughout that period Sir J. Westland’s policy has screwed the rates for market money, even on the best security, up to ten or twelve per cent.—more than three times the rate in the creditor market of London—whilst ordinary trade securities have at times not been able to get any accommodation at all, so stringent has been the control.  Be it remembered that India is now subject to all the dangers of a “ managed currency,” and the management at present has only in view a particular interest, viz., its own.  A similar policy in Russia—numerous other instances might be cited—had to be abandoned twelve years ago (1886) in the face of ruin and famine, of which we believe it was the cause.  We also venture with all due humility to agree with Sir Robert Giffen that the authorities are busily engaged in digging the grave of the English Raj.

Fortunately for the people of India, their backward state and want of trust in any Government owing to bitter experience have not induced them to make much use of credit facilities.  The common people, being thus unaffected by an arbitrary action on credit, held sufficient subsidiary silver coin to carry on their peddling retail trade.  Any further requirement could be met by the dumpy rupee (silver chips) or the coin of the Native States.

The merchants, however, were not so fortunate ;  they had large transactions, both at home and abroad, and they made much use of commercial paper.  An artificial action on credit by the “strong arm” placed their own credit in a precarious condition ;  besides this, their exchanges with the Far East were thus broken, and the withdrawal of this partial support occasioned a further fall of the price of Indian paper in London, and consequently caused a heavier loss to any who had remittances to make hither.  The export of produce to the Far East was checked, but to England was increased, which one wiseacre declared showed no disturbance, only a diversion of trade, since India’s total amount of exports remained the same.

In a settlement like Singapore, which is merely a commercial depôt, a Venice of the East, every interest was threatened with ruin, to avoid which the Singapore Mint had to be opened shortly afterwards.

We thus observe an Empire, the Government of which institutes a mixed basis to its home circulation, declaring it to be a single standard, and which also maintains an inconvertible paper rated to gold in another Empire, whilst in Singapore the silver standard is maintained after a ruinous experiment.  We make no further comment for fear of too strongly expressing an opinion.

Curiously the Indian Exchange was corrected a few points with the imposition of the Cotton duties.  We apprehend a connection :—An Indian importer of English cottons has, on their arrival and previous to their retail sale, to pay the duty.  This entails a draft on London.  The amount of drafts on London thus created cancels a similar amount of drafts on India.  By this the balance of payments due from India is reduced in amount and the monetary exchange is to this extent corrected.  The consequent rise in the price of rupee paper in our markets means a decline in the premium on English paper in India ;  so that English goods, except cottons which have a more than countervailing duty, are cheaper to the Hindoo and the trade increases, as was borne out by the Board of Trade returns.

Now in face of these experiences a thoughtful person would turn his attention to the conditions under which the Creditor Market works ;  but then this branch of the inquiry would be opposed by the official politicians, for it might lead to the discovery that the remedy had lain dormant these many years, and as such an oversight in such divine guides is blameable their exposure would never do.  One peculiarly English cast of mind imagines that a change of name changes the, nature of a thing.  For instance it is asserted that Governments should not do banking business :  the reply is that the English Government does not do anything of the sort.  That a private agent, the Bank of England, is bound by statute to certain conditions is lost sight of :  that thereby the banking community cannot keep a separate bullion reserve and are forced into anomalous methods in maintaining their so-called cash reserves, together with the effect this may have on the working of the foreign exchanges, is entirely ignored.

In India we shall yet see another Ireland !  Whilst the English connexion is beneficial, politically, our financial system, confessedly never understood by our divine leaders, has always rendered that connexion a doubtful benefit as soon as ever there was a balance of remittances against the dependency.  The remedy is easy, almost by a stroke of the pen.  Why is it not adopted ?  It is because the divine guides do not understand the question, and prefer the cheaper empty victories in debate, the easily won applause of a mob for a predatory policy, to the mental labour involved in solving this most subtle of all mathematical problems in which figures and statistics can give but little aid.

Written in 1898 during the Fashoda Crisis.

DURING the recent crisis in our foreign relations a contemporary paper, the Pall Mall Gazette, had a comment in its money article to the effect that the market was withholding its accommodation and allowing the Central Institution, i.e., the Bank of England, to do the business and take the risk.  “The latter, as usual in times of trouble, was making immense profits.”  This should speak volumes to the statesman, for if the whisper of war has this effect, what would be the effect of war ?  So far only the speculating classes were affected, but had the process continued and affected legitimate trading transactions our “sinews of war” would have been diminished or destroyed ;  a paralysis of our social and trading arrangements might have arisen that would have beaten us before a shot was fired ;  whilst if we had taken refuge in “ Pitt’s trashy paper” (vide Cobbett) the country, though thus enabled to carry on its work, would have been exposed to all the dangers of a managed currency and have had its prosperity subjected to the whims of some faddist appointed to regulate the circulation, the money market business of the world inevitably shifting from London to New York, Berlin, or some other more certain centre where immediate convertibility of paper into bullion could be assured.

Without theorising on possibilities, it may be profitable to consider historical cases of similar situations.  A century ago we had a precisely identical experience in this country on its declaration of war with France.  The Bank of England was obliged to suspend cash payments, and it appeared as if the energies of the country would be completely paralysed at the very moment when they were most required.  Then came Pitt’s famous mandate, followed in 1797 by the Bank Restriction Act.  Pitt did not even allow the Bank to cash its notes in gold if it liked ;  he forbade the Bank to cash its notes in gold, and these notes became, therefore, merely available for currency purposes, and their previous use to obviate the costly temporary transfers of bullion in the foreign exchanges was destroyed.  We will not criticize this policy, or suggest any better course which Pitt might have adopted ;  this was the course that was adopted, and, the whole circulation of the realm became thereby subjected to the management of the Bank.

Whatever may have been the cause of the commercial stress and consequent increase of poverty that marked the closing five years of this great struggle—and we are even more convinced than Mr. Tooke, in his History of Prices, that the Bank, and still more the Government of the day in the use it made of the Bank by its drawing powers on it, were the fundamental causes of all that distress—certain it was that during the first ten years of the war the conduct of the Bank was so moderate and able, that not only did bullion in the open market not rise above the price fixed by the Bank, but the internal energies of the country advanced by leaps and bounds, and throughout this period the country enjoyed a greater prosperity than it had enjoyed for a century previous.

A century previous, in 1696, the country had a very different experience under the Whiggish direction of Lord Somers :  so complete was the financial catastrophe that trade came to a full stop ;  means could not be obtained to remit the pay to our troops abroad, and William III had to be secretly informed at the seat of war, and was constrained to make a hasty peace with the French King before that Prince should have obtained knowledge of our situation.

The dangers that afflicted our country’s financial system then are imminent now, and would be intensified a hundredfold.  This is not said in a spirit of alarm, but in that of caution ;  a timely policy, in the case of war, may avoid these dangers entirely.

In other instances, the French Government suspended cash payments in 1870 and maintained the war ;6 both sides did the same in the American Civil War ;  the Spaniards did the same just recently.  Whatever happens, no country can allow its internal monetary circulation to be checked and maintain a war ;  but that refuge should be had in a system of inconvertible paper is itself evidence of a rotten monetary system in the previous time of peace.

What a different state do we find in Prussia, under Frederick the Great, in the Seven Years War.  Prussia was essentially a poor country ;  she drew no riches from an ocean-borne commerce ;  she had no mineral developments ;  her soil lacked all that inherent fertility that is the fount of prosperity in other countries.  Frederick saw his enemies constantly in possession of his towns and his capital ;  at times he could only be said to hold a corner of his realm yet at no time were his people plunged into financial disasters in addition to the burdens of the war, nor did the reproachful glance of paralysed energy arise to damp his exertions ;  he ever had his people’s support and the after-reward has been tremendous.

This treatise does not pretend to be exhaustive of the subject, and to those who desire an accurate account of our experiences in the great struggle of a hundred years ago we would recommend an intelligent meditation of Tooke’s History of Prices ;  but it is given as a timely warning, lest history repeat itself to our disadvantage.  This country could not maintain a great struggle close to our shores unless at the same time the prosperity of manufacture, agriculture and labour were assured, and this cannot be the case if apprehension occasions bankers to withhold or recall their accommodation ;  that these latter should have to follow this course can only arise, however pressing the danger of the war, through restrictions imposed by our own Government.

Now let us look at the foundation of our financial system :—The Government imposes a legal tender paper, yet who can tell if that paper, with over seventeen millions unsupported by bullion, is a currency note or a bullion warrant ?  As long as peace lasts and the Central Institution can assure the convertibility of possibly presented notes, these can be used as bullion warrants, and the exchanges of the world be made on London ;  but when danger impends, and the uncertainty as to the true basis of the Bank of England note exists, no wonder that bankers and money-dealers exhibit apprehension.  A century ago, in 1795, a precisely similar condition of the Bank of Amsterdam destroyed the position of Amsterdam for ever as the mart of Europe.

If our Government wishes to reap the profits on a circulation of currency notes, within the limits of any natural demand for the same, let it do so ;  but by all means let such notes be absolutely distinct from any issues against bullion in the ultimate reserve.  Grant this certainty at the basis of our monetary circulation, and not only should we have no commercial competition, agricultural depression, or such like evils in time of peace, but no enemy or combinations of enemies need make us apprehensive of the risk of war.

“ Come the three corners of the world in arms
And we shall shock them :  naught shall make
     us rue,
If England to itself do rest but true.”

1 The optimists of the Victorian era were in the ascendant at this period.

2 In 1902 Mr. J. Herbert Tritton pointed out that the Bank of England note had to perform all the functions of a bullion warrant.  A warrant with some eighteen millions out with no gold behind them !!!  Some will hastily declare that the Bank of England note does not pretend to be a warrant :  but a little consideration will convince that it has to perform all the functions of one.  At the place of its issue it is not legal tender.

3 The rupee fell below 1s. 2d. during this period.

4 Since the writing of this article many expedients have been adopted to steady the exchanges.  India and Egypt have earmarked gold at the Bank ;  other countries keep balances here ;  and even English banks, besides keeping gold reserves in their own chests, keep balances abroad.  During the Japanese War the Government of Japan raised an immense loan in London, which was kept here to keep the exchange in favour of Japan and prevent a fall of Japanese paper while making war purchases, which shows the astuteness of this intelligent race.

5 The Barings experienced this in their developments of the Argentine ;  the exchange with Buenos Ayres fell to such an extent that no previous bargain could be fulfilled.

6 The Market Interest for money was lower in France, engaged in war, than in London at the time.