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IN consequence of the
severe financial crisis which darkened the close of the year 1825, the
Government resolved on radical alterations in the banking legislation of
the United Kingdom. In the King's Speech on the meeting of Parliament on
2nd February 1826, the principal place was occupied by references to the
embarrassments which had occurred in the pecuniary transactions of the
country since the close of the last session. His Majesty also advised
the devising of "such measures as may tend to protect both public and
private interests against the like sudden and violent fluctuations, by
placing on a more firm foundation the currency and circulating credit of
the country." The crisis was almost entirely confined to England; but
the Government contemplated a movement towards the assimilation of the
paper currency of the three kingdoms. Their first task was to introduce
changes in the banking system of England. An almost insuperable
obstacle, however, presented itself in the shape of the special
privileges of the Bank of England. As far as the public were concerned,
the worst of these privileges was the prohibition of any other company
or partnership consisting of more than six persons carrying on the
business of banking in England. This provision was enacted by a clause
in an Act passed in the reign of Queen Anne, 1708. As then understood,
the business of banking involved the issue of notes; and this was always
considered, until 1844, as a distinctive characteristic of bankers.
Technically, the prohibition was directed only against the issue of
notes payable on demand, or for any time less than six months; but in
the then existing circumstances of banking, it effectually precluded the
establishment of joint-stock banks other than the Bank of England. The
effect of this had been most pernicious, as it checked the growth of
strong banks, and encouraged the formation of a multiplicity of weak
ones.
The Government entered
into negotiations with the Bank of England for a relaxation of this
prohibition, and eventually obtained their reluctant consent to an
arrangement whereby joint-stock banks, consisting of any number of
partners, might be formed, with power to issue notes as bankers outside
a radius of sixty-five miles from London. This provision was availed of
to some extent; but it was not until the re-enacting and explanatory Act
of 1833 that full advantage was taken of the power granted. The branch
system of the Bank of England was also an outcome of the proceedings of
this time, special powers having been conferred by Parliament on the
bank directors to delegate their powers of management to agents. Another
important change effected was the suppression of bank-notes under the
value of £5. The Government appear to have been convinced that
note-issuing was essentially connected with the late crisis. As we have
already shown, there was not sufficient reason for this belief. We do
not mean to assert that the provincial note issuers were sufficiently
trustworthy; but it appears from the state of the paper currency at the
time, that there had been no overissue of notes. The Earl of Liverpool,
indeed, on behalf of the Government, stated that, as estimated by the
returns of stamps used, the issues had been increasing to a great
extent; but the statistics compiled of the actual notes in circulation
showed a considerable decrease in all the years to which he referred,
with the exception of 1825. In that year, however, the amount was but
little above the point at which it stood several years before. It was
the weakness of the banks, as prescribed by Parliament in favour of the
Bank of England, combined with injudicious banking advances, that led to
the numerous failures of provincial bankers in England. The enlargement
of the powers of banking, without the suppression of small notes, would
have been not only sufficient in itself, but would have been more
effectual in building up the shattered fabric of the deformed system of
banking with which Parliament had afflicted the English nation; for
banks would have been enabled to extend their operations into quarters
where, without the use of small notes, banking would be unprofitable.
The Government, however,
decreed the abolition of bank-notes under £5. Before the English Act -
limiting, and, after a certain time, prohibiting, such issues—was
actually passed, Lord Liverpool announced that it was intended to
introduce a similar measure with regard to Scotland and Ireland. In
this, however, the Government were reckoning without their host. When
the intelligence reached Scotland, the Nemo me impune lacessit
spirit was at once aroused. The proposal was almost universally
denounced as an infringement of the rights of the nation, and as
injurious to its interests. Sir Walter Scott's magic pen was enlisted in
the cause. His celebrated letters, under the nom de plume of "Malachi
Malagrowther," although taking too roseate a view of Scottish banking
experience, gave point to the national excitement, and undoubtedly
tended greatly to focus the opposition. At the same time, they excited
the most extraordinary criticism in Parliament and elsewhere, as
calculated to foster rebellion. The agitation was carried on warmly at
county meetings, where speeches in favour of the bank-note issues were
made, and resolutions unanimously passed disapproving of the proposed
change.
As showing the thoroughly
convertible nature of the notes, Mr. Gibson-Craig stated, at a meeting
of the county of Edinburgh, that "It was only the other day that Mr.
Maberly's house here had collected £30,000 of Edinburgh bank-notes, and
presented them for payment, when gold was tendered in exchange. He said
this was not what he wanted, but bills on London; but he was told that
the promise on the face of their notes was to pay gold, which they would
pay, and nothing else." [Edinburgh Magazine, March 1826.] He also
referred to the bank failures which had occurred, and showed that the
note issues were in no way connected therewith, and that the country had
suffered no loss. The position of the Scottish banks was also warmly
defended in a number of pamphlets which appeared at the time of this
attack on one of their most vital characteristics. Indeed, the
excitement produced by the well-meant but misdirected attentions of the
Government was the means of producing in Scotland, for the first time,
anything which could be called financial literature. The Scottish
newspaper press, with a few exceptions, strongly advocated the retention
of the small-note issues. The Scotch and Irish members strenuously
opposed the intended legislation, and successfully insisted on the
appointment of a committee of each House of Parliament to inquire into
the utility of small notes in Scotland and Ireland. The committees
examined a number of witnesses, and reported against the proposed
change. On the 8th of May, the Government confessed that they had been
convinced of the advisability of leaving the note issues of Scotland and
Ireland on their present footing.
In looking back on this
episode, while one may smile at the intensity of the excitement, and
especially at its peculiarly Scottish national character, as seeing, in
an honest endeavour of the Government to improve the currency system, an
instance of Southern treachery, one cannot but recognise the fact that
the people were right, and that it was well for Scotland that the
intended change was prevented. The paper currency of Scotland had been
of the greatest service in furthering the industries of the country. The
total amount of loss by the note issues of defaulting banks had been
surprisingly small. In point of fact, the banking system of Scotland had
worked remarkably well, and there was positively no occasion to make any
legislative alteration in it, as far as the nation itself was concerned.
At least, any changes which might have been advantageously introduced
had no connection with the system pursued, or with the state of the
paper currency. The object of the proposed measure was to secure
uniformity in the currency of the three kingdoms. This was a desirable
enough object, if it could have been attained without undue sacrifice.
The price the Scotch and Irish people were asked to pay was, however,
too much, seeing they were called on to sacrifice an essential portion
of their existing system without obtaining any benefit in return.
At the present day the
circumstances of the case are somewhat altered. Even as late as 1826,
the use of a paper currency, which had been originally the great
instrument in vitalising the industrial energies of Scotland in its
poverty-stricken condition, still conferred some of its old benefits,
although the nation had become comparatively wealthy. With still further
increase in wealth, and with the restrictions imposed on note-issuing by
the Acts of 1844 and 1845, the direct benefits of a bank-note currency
have well nigh vanished. Statesmen appear to be very ignorant on this
point; for, even at the present time, they speak as if the mere fact of
retaining an issue of £1 notes would satisfy the necessities of
Scotland. It is not the fact that Scotland possesses a paper currency of
the denominations of £1 and upward that confers a special benefit on the
nation. It is the fact that the banks are permitted to issue such a
currency that forms the advantage. Without this right, the character of
banking in Scotland would be greatly altered; —the banks would be forced
to contract the extent of their operations; banking facilities would be
withdrawn from a great number of localities presently in the enjoyment
of them; and the customers of banks would probably have to pay increased
charges. The reason of this is that, by means of their right to issue,
the banks can profitably conduct business at a much cheaper rate than if
they had to use coin of the realm, or—what would be substantially the
same, as far as the present argument is concerned—Government or Bank of
England notes, for which they would have to - give full value. This is
the great point involved at the present time in the question of Scottish
bank-note issues, and it deserves very full consideration by members of
Parliament. But, in 1826, this indirect advantage was not alone in
operation; the direct benefits conferred on a comparatively poor country
by an efficient paper currency were also active. So popular were the
notes of the Scottish banks—not only in Scotland, but also in the
northern counties of England—that, during the height of the crisis,
large quantities of them were forwarded to these districts, where, it is
said, "they are equally as valuable as the paper of the Bank of
England." As to Scotland, the writer adds, "So general is the feeling of
security in this country, that even the most ignorant people have
scarcely ventured to consider it possible that the distress at present
existing in the English capital could extend to this side of the Tweed."
[Scots Times (Glasgow), 24th December 1825. See also Maberly Phillip's
Banks, Bankers, and Banking, London, 1894, pp. 100-1, and Boase.] It was
well, therefore, that the banks in Scotland were allowed to continue
their long-established and well-appreciated custom of issuing £1 notes.
So conspicuously was the
superiority of the constitution of the Scottish banking system over that
of England shown to be by the experience of this crisis, that, as we
have seen, the Government tried, as far as possible, to extend its
principles to the sister kingdom, by encouraging the formation of large
joint-stock banks. The attempt proved highly successful, despite the
difficulties presented by the consequences of previous banking
legislation. Several banks, which have since become very powerful
institutions, were soon afterwards formed. In this connection, a writer,
[Principles and Practice of Banking, T. Joplin, London, 1826. The author
founded, and was the first secretary of, the Provincial. Bank of
Ireland.] who was himself a practical and successful banker, and took an
active part in the projection of joint-stock banks in London, very
clearly showed the advantages which were derivable from adopting
Scottish principles, by contrasting the experience of the systems of
banking pursued in Scotland and England respectively. He further showed,
what has never been fully appreciated by English statesmen, that paper
currency, payable in gold on demand, cannot be issued at pleasure; and
that the freedom of Scottish banking, by permitting the growth of a
system of large joint-stock banks, had preserved the northern kingdom
from the disastrous experience which had attended banking in England. On
the other hand, he made the curious statement, that privacy was the
cause of the success of the Edinburgh banks. By this he means that they
were enabled to amass large profits by speculation in the public funds.
This was undoubtedly the case; but the success of the system cannot, of
course, be used as an argument against the publicity which is now
rightly desiderated.
Another English banker,
[The Scotch Banker, Thomas Attwood, London, 1828. Mr. Attwood was a
banker in Birmingham. He writes fiercely against the Scottish banks,
styling them "monopolising and engrossing," and ascribes their
comparative immunity from disaster to their not being pressed. But why
were they not pressed?] who, however, is by no means so complimentary to
the Scottish bankers, denounced the past course of banking legislation
with much vehemence, but with, perhaps, less discretion. The following
quotation, from a more pleasing writer, [Credit Currency, G. Poulett
Scrope, London, 1830.] is interesting as an appreciative contemporary
statement of the advantages of a paper currency:—"It has been proved
that all the parties who make use of money for purposes of interchange,
buyers as well as sellers, share in the great advantages derived from
the substitution of paper for metallic money. Consequently, there can be
no doubt that, by universal consent, the former will be used in
preference to the latter, whenever the security offered for the
convertibility of notes on demand is such as to ensure the public
confidence. Thus it has been ascertained from experience, that gold and
paper money of the same denominations will not circulate together. 'The
paper drives out the gold.' This has been, somewhat absurdly, made a
matter of regret by those who fail in perceiving that it only takes
place in consequence of the vast benefit which a paper currency confers
on all producers, by enabling them to retain and employ that part of
their capital which would otherwise be locked up in a metallic currency.
So far from being a defect, it is the great merit of a paper currency,
without which, indeed, it could neither be introduced into circulation,
nor of any service were it introduced."
As the bogey of
over-issuing is still raised against the Scottish banks from time to
time, it may be well to point out that, under a system in which the
notes are payable in legal tender on demand, with regular and frequent
exchanges among a plurality of banks, widespread over the country, such
as exists in Scotland, over-issuing is practically impossible. Any bank
attempting to issue beyond the natural demand of the public, would find
its notes coming back on it so rapidly that it would be forced at once
to cease such action. The notes would not stay out; and the other banks
would soon bring their erring brother to book. |
