Part Ii.—: Paper-money, Sect. I.—: General Principles in regard to Paper-Money.

It is easy from this table to calculate the value of any of the above coins, taking silver at 5s. 2d., 5s. 6d. an oz., or at any other price, and thence to deduce the par of exchange at such rates. The values of the coins in the Table of Coins are estimated on the hypothesis that silver is worth 5s. 2d. an ounce.

We have endeavoured to explain, in the first part of this article, the reasons why paper has been substituted for coins in the ordinary transactions of society, and the principle on which its value is maintained. Besides being a source of profit to the issuers, the employment of paper, provided it be properly secured, is a great public accommodation. The weight of 1000 sovereigns exceeds twenty-one pounds troy, so that to pay or receive a large sum in metal would be exceedingly inconvenient; while a great risk from loss, as well as a heavy expense, would be incurred in the conveyance of specie from place to place. But with paper this may be effected with extreme facility, and payments of the largest sums, and at the greatest distances, may be made with almost no inconvenience or expense. And while the interest of individuals is thus consulted by the introduction and use of paper, it is of the greatest service to the public. Its employment, and the various devices for the economising of currency to which it has led, enable the business of a commercial country like England to be carried on with a fourth part, perhaps, of the gold and silver currency that would otherwise be necessary. The cheapest instruments by which exchanges can be effected are substituted for the dearest; and, besides doing their work better, this substitution enables the various sums which must otherwise have been in use as money, to be employed as capital in industrial undertakings. Of the various means, whether by the introduction of machinery or otherwise, that have been devised for promoting the progress of wealth and civilization, it would not be easy to point out one better calculated to attain its end than the introduction of a properly organised paper-money.

To prevent misconception, it may be necessary to premise that by “paper-money” we do not mean notes which are legal tender, though not payable in coin on demand. These, no doubt, are the only description of notes which can, strictly speaking, be called paper money. But as the circumstances which determine their value have been already stated, and as they happily have no existence amongst us, it is needless farther to allude to them. Hence, in the sequel of this article, when we employ the term paper-money, it will, unless the contrary be stated, apply exclusively to the notes issued by individuals or associations for certain sums, and made payable on demand, or on being presented. Though only the representatives of money, these notes possess so many of its qualities, and are so easily converted into coin, that they may, with little impropriety, be held to be money. Being most commonly issued by bankers, they are usually called bank-notes.

This statement shows that, under the phrase paper-money or paper-currency, we do not include bills of exchange, or bills issued by bankers, merchants, and others, and payable sometime after date. Such bills perform, in some respects, the same functions as money; and have, in consequence, been frequently regarded in the same light as bank-notes. But this is quite improper; for though there are many points in which a bill of exchange and a bank-note closely resemble each other, there are others in which there is a distinct and material difference between them. A note bears to be payable on demand; it is not indorsed by a holder on his paying it away; the party receiving has no claim on the party from whom he received it, in the event of the failure of the issuers; and every one is thus encouraged, reckoning on the facility of passing it to another, to accept bank paper, “even though he should doubt the ultimate solvency of the issuers.” Bills, on the contrary, are almost all drawn payable at some distant period; and those into whose hands they come, if they be not in want of money, prefer retaining them in their possession, in order to get the interest that accrues upon them. But the principal distinction between notes and bills is, that every individual in passing a bill to another, has to indorse it, and by doing so makes himself responsible for its payment. “A bill circulates,” says Mr. Thornton, “in consequence chiefly of the confidence placed by each receiver of it in the last indorser, his own correspondent in trade; whereas the circulation of a bank-note is owing rather to the circumstance of the name of the issuer being so well known as to give it an universal credit.” Nothing, then, can be more inaccurate than to represent bills and notes in the same point of view. If A pay to B £100 in satisfaction of a debt, there is an end of the transaction; but if A pay to B a bill of exchange for £100, the transaction is not completed; and, in the event of the bill not being paid by the person on whom it is drawn, B will have recourse upon A for its value. It is clear, therefore, that a great deal more consideration is always required, and may be fairly presumed to be given, before any one accepts a bill of exchange in payment, than before he accepts a bank-note. The note is payable on the instant, without deduction—the bill not until some future period; the note may be passed to another without incurring any risk or responsibility, whereas every fresh issuer of the bill makes himself responsible for its value. Notes form the currency of all classes, not only of those who are, but also of those who are not engaged in business, as women, children, labourers, &c. who in most instances are without the power to refuse them, and without the means of forming any correct conclusion as to the solvency of the issuers. Bills, on the other hand, pass only, with very few exceptions, among persons engaged in business, who are fully aware of the risk they run in taking them. There is plainly, therefore, a wide and obvious distinction between the two species of currency; and it cannot be fairly argued, that because government interferes to regulate the issue of the one, it should also regulate the issue of the other. To use the words of Lord Mansfield, “Bank-notes are not like bills of exchange, mere securities or documents for debts, nor are so esteemed, but are treated as money in the ordinary course and transactions of business, by the general consent of mankind; and on payment of them, whenever a receipt is required, the receipts are always given as for money, not as for securities or notes.” (Chitty on Bills, 8th edition. p. 555.)

To obviate the endless inconveniences that would arise from the circulation of coins of every weight and degree of purity, were there no restrictions on their issue, all governments have forbidden the circulation of coins not of a certain specified or standard weight and fineness. And the recurrence of similar inconveniences from the issue of notes for varying sums, and payable under varying conditions, have led, in most countries in which paper-money is made use of, to the enacting of regulations forbidding the issue of notes below a certain amount, and laying down rules for their payment. In England at this moment no note payable to bearer on demand can be issued for less than five pounds, and they must all be paid the moment they are presented. In Scotland and Ireland the minimum value of bank-notes is fixed at one pound, the regulations as to payment being the same as in England. In order to preserve the monopoly of the London circulation to the Bank of England, no notes payable to bearer on demand are allowed to be issued by individuals or associations, other than the Bank of England, within sixty-five miles of St. Paul’s. But beyond these limits they may be issued by certain banks, under the provisions of the Act 7 and 8 Vic. c. 32, &c.

The propriety of taking measures to insure the convertibility of bank-notes into coin has been previously explained. This is a matter which cannot safely be left to the discretion or judgment of individuals, but which must be settled by government. No bank-notes should be permitted to circulate, about the equivalency of which to the coins they profess to represent there can be the smallest room for doubt. It is alleged, indeed, that in this, as in most other things, we may safely trust to the prudence and sagacity of those who deal with banks; and that, if left to themselves, the public will very rarely be deceived. But the widest experience shows that but little, if any, dependence can be placed on this doctrine. The public is very apt to be misled, in the first instance, in giving confidence to or taking the paper of individuals or associations, and though that were not the case, the condition of an individual or company may change from bad or expensive management, improvident speculation, unavoidable losses, and fifty other things of which the public know nothing, or nothing certain. The fact that any particular banker who issues paper enjoys the public confidence, is, at best, a presumption merely, and no proof that he really deserves it. The public may believe him to be rich and discreet; but this is mere hypothesis; the circumstances which excite confidence at the outset, and which preserve it, are often very deceptive; and in the vast majority of instances the public has no certain knowledge, nor the means of obtaining any, as to the real state of the case. But it is unnecessary to argue this point speculatively. There have, unfortunately, been innumerable instances in which it has turned out that bankers who had long been in the highest credit, and whose notes had been unhesitatingly accepted by the public, have been found to be, on the occurrence of anything to excite suspicion, quite unable to meet their engagements.

The issue of notes is of all businesses that which seems to hold out the greatest prospect of success to the schemes of those who attempt to get rich by preying on the public. The cost of engraving and issuing is nothing compared with the sums for which they are issued: and provided they be got into any thing like extensive circulation, they become at once considerably productive. They are not issued, except, as previously explained, on the deposit of bills or other securities, yielding a considerable rate of interest; so that if an individual, or set of individuals, with little or no capital, should contrive by fair appearances, promises, and similar devices, to insinuate himself or themselves into the public confidence, and succeed in getting £20,000, £50,000, or £100,000 into circulation, he or they would secure a good income in the meantime; and on the bubble bursting, and the imposture being detected, they would be no worse off than when they set up their bank. On the contrary, the presumption is, that they would be a great deal better off; and that they would take care to provide, at the cost of the credulous and deceived public, a reserve stock for their future maintenance. Hence, seeing that the facilities for committing fraud are so very great, the propriety or rather necessity of providing against them.

It is sometimes, no doubt, contended that the grand principle of the freedom of industry should be universally respected; that it can in no case be departed from with impunity; and that it is not only injurious but unjust to lay any restrictions upon the business of banking. But we are not to be led astray by a cuckoo-cry of this description. The business of banking—that is, of keeping and dealing in money—is one thing, while the manufacture and issue of notes intended to be substituted for and to serve as money, is another and a totally different thing. And though everybody may perhaps be allowed to undertake the former, it by no means follows that the same license is to be extended to those who make and issue notes. It is to be recollected that in matters of this sort, neither freedom nor restriction is, abstractly considered, just or unjust, good or bad, expedient or inexpedient. It is by their respective influence upon society that they are to be judged; and though a free and liberal course of policy be in general most for the public advantage, there are very many cases in which it is necessary to impose restrictions. It is admitted on all hands that governments are bound to suppress or regulate every business or pursuit which is likely otherwise to become publicly injurious. And does any one doubt that the issue of notes payable on demand is in the foremost class of these businesses? The experience of all ages and nations is conclusive as to this point. It has been everywhere regulated, in the most democratical as well as in the most despotical states, in England and Russia, Holland and France, the United States and Austria. The reasonableness of the practice accords with its uniformity.—Le droit d’emetre des billets est très avantageuse; mais aussi il est si dangereuse, que l’Etat doit ou s’en reservir l’exercice, ou le regler de manière à en prevenir les abus.

It may perhaps be said that bank-notes are essentially private paper; that the accepting of them in payment is optional; and that as they may be rejected by every one who either suspects or dislike them, there is no room or ground for interfering with their issue! But vague generalities of this sort are entitled to very little attention. Every body knows that, whatever notes may be in law, they are, in most parts of the country, practically and in fact legal tender. The bulk of the people are without power to refuse them. The currency of many extensive districts consists in great part of country notes, and such small farmers or tradesmen as should decline taking them would be exposed to the greatest inconveniences. Every one makes use of, or is a dealer in, money. It is not employed by men of business only, but by persons living on fixed incomes, women, labourers, minors, and in short by every class of individuals; very many of whom being necessarily, from their situation in life, quite unable to form any estimate of the solidity of the different banks whose paper may be in circulation, are uniformly severe sufferers by their failure. And as the notes which come into their hands make a part of the currency or money of the country, it is evidently quite as much the duty of government, in the view of preventing these losses and the ruin they occasion, to take such steps as may be required to make bank notes truly and substantially what they profess to be, as that it should take measures to prevent the issue of spurious coins, or the use of false or deficient weights and measures.

It would be easy to extend these remarks, but those now stated are sufficient to show that wherever notes payable on demand are allowed to circulate, their equivalency to, and immediate conversion into coin should be insured. Much diversity of opinion may exist in regard to the description of measures that should be adopted in that view; but that, whether of one sort or other, they should be made effectual to their object is indispensable to hinder the power to issue notes from being perverted to the worst purposes.

Among the schemes devised to secure the convertibility of notes into coin, the following are, perhaps, the most prominent, viz.—

I. To confine the issue of notes to joint-stock banks, or associations with large numbers of partners, each of which should be indefinitely liable for the debts of the association. At the time when this description of banks was established by the 7 Geo. IV., c. 46, it was supposed that they would prove to be of the greatest advantage, and afford that complete security to the holders of their notes, and those who entrusted them with money, that is so desirable. But everybody knows that these anticipations have been entirely disappointed, and that the history of the joint-stock banks founded under the above statute discloses some of the most flagrant instances to be met with of recklessness, imposture, and fraud. And this, after all, is only what might have been expected. The shares in many joint-stock banks are small, few being above £100, the greater number not exceeding £50, whilst many are only £25, and some not more than £10, if so much. Generally, too, it is understood, or rather it is distinctly set forth in the conditions of partnership, that not more than ten, twenty, or fifty per cent. of these shares is to be called for; so that an individual with a few pounds to spare may become a shareholder in a bank. And owing to a practice, or rather a flagrant abuse, introduced into the management of various banks, of making large advances or discounts on the credit of the stock held by shareholders, not a few individuals in doubtful or even desperate circumstances take shares in them, in the view of obtaining loans, and bolstering up their credit! The great danger arising from such banks is obvious, and when one of them stops payment, the claims on it, if ultimately made good, can be so only at the cost, and perhaps ruin, of such of its proprietors as have abstained from the abusive practices resorted to by others.

At the same time, however, it is quite plain that a joint-stock bank, provided it possess adequate capital, and is discreetly managed, may afford ample security to its shareholders and the public. And it is farther plain, in the event of its shareholders being a numerous body, comprising, as is sometimes the case, hundreds of individuals, many of whom have large fortunes, that its creditors, though exposed to immediate injury, may in the end have little or nothing to fear, even from gross mismanagement. But it is very difficult to discriminate between one variety of joint-stock banks and another. A bank may have a considerable body of proprietors; but, though the contrary opinion may prevail, few of them may be wealthy, and many mere men of straw, so that the security afforded by such a bank may be worth little or nothing. Neither is there any foundation for the notion, that because a bank has fifty or a hundred partners, it will be either richer or better managed than if it had only five or ten. In truth, the presumption seems to be quite the other way. The petty subscriptions of many may amount in the aggregate to a considerable sum, which, however, may be greatly inferior to the fortunes of a few wealthy individuals. And when the latter engage in banking, or any other sort of business, they must, if they would protect themselves from ruin, pay unremitting attention to their concerns, and act in a discreet and cautious manner. But the partners and managers of a great joint-stock company act under no such direct and pressing responsibility. “I think,” said the highest authority on such subjects, “that joint-stock banks are deficient in every thing requisite for the conduct of banking business, except extended responsibility; the banking business requires peculiarly persons attentive to all its details, constantly, daily, and hourly watchful of every transaction, much more than mercantile or trading businesses. It also requires immediate, prompt decisions, upon circumstances when they arise—in many cases a decision that does not admit of delay for consultation; it also requires a discretion to be exercised with reference to the special circumstances of each case. Joint-stock banks being, of course, obliged to act through agents, and not by a principal, and therefore under the restraint of general rules, cannot be guided by so nice a reference to degrees of difference in the character or responsibility of parties; nor can they undertake to regulate the assistance to be granted to concerns under temporary embarrassment by so accurate a reference to the circumstances, favourable or unfavourable, of each case.”—(Evidence of Lord Overstone, before Committee on Bank Charter in 1840.)

In fact, more than nine-tenths of the partners in joint-stock banks are wholly ignorant of banking business, and have nothing better to trust to than the supposed honesty and intelligence of the directors; and, even if they were acquainted with the business, the result would be nearly the same, as it would not be possible for any one, by a cursory inspection of the books of a bank (if such were permitted), to form an accurate estimate of its condition, or of the mode in which it transacted business. And hence the directors in these establishments are practically all but absolute. If they be carefully selected, and be worthy of the confidence placed in them, all goes on smoothly; and this also is the case when they are most unworthy, till they have involved the concern in inextricable difficulties! The history of the Norwich Bank, of the Northern and Central Bank, the Marylebone Bank, the Manchester Bank, the London and Eastern Bank, the Royal British Bank, the Borough Bank of Liverpool, the Western Bank of Glasgow, and a host of others, sufficiently attests the truth of what has now been stated. The responsibility of the directors to the shareholders has not been found, in any of these instances, to have been any check whatever over their frauds and improvidence. The whole paid-up capital of the Manchester Bank, amounting to about £750,000, had been wasted in the most improvident speculations; while that of the Royal British Bank and of the London and Eastern Bank had been seized upon by the directors or their dependents, and additional debts incurred, before the great body of the shareholders had the least suspicion that the companies were otherwise than prosperous!

We may observe, by the way, that the mischie occasioned by an establishment of this sort, when perverted from its proper objects and mismanaged, is not to be estimated by the ruin it entails on its partners, and probably also on its customers. It becomes in fact, a public nuisance, and entails privations on many who might be supposed to be beyond the sphere of its influence. Within the ten years ending with 1842 it was estimated that about £1,500,000 of banking capital was wholly dissipated in Manchester and its immediate vicinity. And as nine-tenths of this enormous loss was occasioned by advances made to manufacturers who had little or no capital of their own, it is not easy to imagine what a ruinous stimulus it must have given to reckless competition, and how very injurious it must have been to parties trading on their own capital.

It is clear, therefore, that the institution of joint-stock banks affords no security that their affairs will be properly administered, and their notes uniformly paid on their being presented.

II. To insure the convertibility of bank-notes into coin, it has been proposed that they should not be issued except upon security being previously given for their payment. That, for example, an individual or company intending to issue £100,000, £200,000, or other sum of notes, should be obliged previously to deposit in the hands of a functionary appointed for the purpose, approved securities over lands, houses, stocks, or other available property for an equal amount. And it is plain that this would be in many respects an efficient measure. Under a system of this sort, adventurers without capital, and sharpers anxious to become indebted to the public, would find that the issue of notes was not a business by which they could expect to profit, and that it must be exclusively reserved for parties possessed of adequate capital.

But though a plan of this sort would effect to a considerable extent the objects in view, it has, notwithstanding, two cardinal defects, viz.—

1. In the first place, though it were fitted to secure the ultimate payment of notes, it would not secure their immediate payment, which is essential to their advantageous employment as money. The stoppage of a bank which had deposited securities would have to be officially ascertained before any steps could be taken for their sale; and after this had been done, some considerable time would have to elapse before they could be disposed of, and their produce made available for the liquidation of the notes. Most securities, too, are of fluctuating and uncertain value, and might not, even under the most favourable circumstances, realise the sums for which they were pledged. And in the event of the occurrence of a panic, or disturbed state of credit, it might be impossible immediately to convert the securities into cash, or possible only at a heavy loss. This plan is, therefore, very far from giving that effectual security for the conversion of notes into coin, which, on the first blush of the matter, it appears to afford. Latterly, it has been extensively acted upon in some parts of the United States; and there, when a bank stops payment, its notes are always sold at a discount, which, of course, varies according to the peculiar circumstances affecting each case.—(See post.)

2. But supposing that this plan were effectual, which it is not, to ensure the immediate convertibility of notes into coin, it is defective from its not preventing their over-issue. A paper currency is not in a sound or wholesome state, unless—1st, Each particular note or parcel of such currency be paid immediately on demand; and 2d, Unless the whole currency vary in amount and value exactly as a metallic currency would do were the paper currency withdrawn and coins substituted in its stead. The last condition is quite as indispensable to the existence of a well established currency as the former; and it is one that cannot be realised otherwise than by confining the supply of paper to a single source.

The issues of paper money should always be determined by the exchange, or rather by the influx and efflux of bullion, increasing when the latter is flowing into a country, and decreasing when it is being exported. And when the issue of paper is in the hands of a single body, a regard to its interests will make it regulate its amount with reference to this principle. But when the power to issue notes is vested in different bodies, some of which may be little, if at all, affected by variations of the exchange, this is no longer the case. And instances have repeatedly occurred, as will afterwards be seen, of the country banks having increased their issues when the exchange was unfavourable and the currency redundant. Hence the plan of exacting securities is doubly defective, inasmuch as it neither insures the immediate conversion of notes into coin, nor prevents their over-issue.

III. The only other plan for insuring the conversion of notes into coin, or rather for keeping them on a level therewith, to which it is at present necessary to allude—consists in providing for the publicity of the affairs of the banks by which they are issued. The issues of banks, under this system, are usually made to bear some fixed proportion to their capital; the whole, or some considerable share, of which is to be paid up before the bank begins business; and monthly, quarterly, half-yearly, or annual returns are thereafter to be published, exhibiting the state of the bank, and enabling, as it is said, the public to judge whether it be safe to deal with it. But it is almost needless to say that such regulations are no protection against fraudulent dealings; and that, in reality, they are good for little, unless it be to deceive and mislead the public. It is impossible, if the managers of a bank or other association wish to make a deceptive or unintelligible return, to hinder them. And even, when they wish to make a really accurate return, they must frequently make one that is false, from their inability to estimate their bonds, bills, and other assets at their just value. But it is useless to insist on what is so very obvious. The “cooking of returns,” as it has been called, is an art that is well understood and extensively practised. Long after the capital of the British Bank had been wholly lost, and it had been precipitated into the abyss of bankruptcy, its directors did not hesitate to put forth statements, in which it was represented to be in a prosperous condition, and a division of profits recommended! And this, unhappily, is not a solitary instance. It is only one example, and that not the worst, of a very large class of cases. But such as it is, it is more than sufficient to show that it would be childish to place any confidence in the returns referred to.

It may, however, be supposed that the late Act, the 20 and 21 Vict. c. 54 (1857), for the punishment of frauds committed by trustees, bankers, and others, will put an end to the practices hitherto complained of. But though it were much to be wished that such should be the case, and though, no doubt, it will have considerable influence, it will not suffice to repress the evil. Besides making bankers and others who embezzle, appropriate, or make away with property intrusted to their care, guilty of a misdemeanour, the statute goes on to enact, “That if any director, manager, or public officer of any body corporate, or public company, shall make, circulate, or publish, or concur in making, circulating, or publishing, any written statement or account which he shall know to be false in any material particular, with intent to deceive or defraud any member, shareholder, or creditor of such body corporate or public company, or with intent to induce any person to become a shareholder or partner therein, or to intrust or advance any money or property to such body corporate, or public company, or to enter into any security for the benefit thereof, he shall be guilty of a misdemeanour.” § 8.

And it is further enacted, “That every person found guilty of a misdemeanour under this Act shall be liable, at the discretion of the Court, to be kept in penal servitude for the term of three years, or to suffer such other punishment, by imprisonment, for not more than two years, with or without hard labour, or by fine, as the Court shall award.” § 10.

It is difficult to see how, under a law of this sort, such flagrantly false statements as those put forth by the Royal British and other banks, after they were in a state of utter bankruptcy, should not subject their authors to the full penalties of the statute. But villany is fertile in resources; and no severity of punishment has ever been found to be effectual for the suppression of crime. Though it may be fairly presumed that the “cooking of returns” will be less frequent, and less glaring in time to come than formerly, it would be idle to expect that it should ever be wholly put down. And, as already seen, even when the directors of a bank are so disposed, it will frequently be out of their power to lay before the public a really true statement of their affairs. It is plain, then, that this so-called publicity affords nothing approaching to that undoubted and unquestionable guarantee which should be required from all parties and associations empowered to issue notes.

But the difficulties in the way of insuring the conversion of the latter into coins, though great, are not insuperable. A plan, originally suggested by Lord Overstone, and adopted and carried into effect by Sir Robert Peel, has been found to be quite effectual to secure this grand object. And it has the additional and important recommendation, of having done this without subjecting the public to any sensible inconvenience.

But before entering into an exposition of the plan referred to, it will be necessary to premise some details with regard to the constitution and action of the existing banks.