Crisis of 1825, and Abolition of Small Notes.

In the year 1824 the interest on the government five per cent, stock was reduced to 4 per cent the Bank engaging to pay off the dissentients. One result of this was to lead to large investments in foreign loans. The prosperity of manufactures led to large importations of cotton and other raw materials. Joint stock companies were organized to engage in all sorts of enterprises, some of them fanciful and absurd, and a great speculation in South American mines began. The state of the Bank was:

In 1823–4 the Bank, being strong in bullion extended its discounts, thus sustaining the advancing movement by the usual mode under the convertible system. But at the end of 1824 the exchanges became adverse, and an outflow of bullion began. The Bank, nevertheless, continued to extend its issues. In May, 1825, prices suddenly fell. The speculation came to a crisis; country banks failed in large numbers; one of the large London banking houses failed, and all had to undergo severe runs. It was not until some months later that the mercantile community sustained the shock, but it fell upon them with terrible force. The bank-note now came in to fulfil its office at such a period. During the rise of the speculation, the issues had been only gradually and slowly increased, but, in the breakdown of credit, notes were required in large numbers. The question was whether the Bank should extend its issues, and run the risk of ruining itself, or contract, and ruin the public. It adopted the former course, discounting freely at 5 per cent, for all solvent borrowers. The lucky discovery of a box of £1 notes which had been withdrawn, stored away, and forgotten, enabled them to pursue this policy to the utmost. It appeared, however, that very few of these last notes were needed. There are two elements in every commercial crisis, one the crisis of a false or exaggerated mercantile movement of some sort, and second, the panic of those who fear everything, but they do not know what. The plan here described is a specific remedy for the panic element. It was prescribed by the Bullion Report, and thus another of its doctrines was ratified.

The Bank found itself with only £2,459,510 in bullion in February, 1826. To the parliamentary Committee appointed to investigate the crisis, Mr. Horsley Palmer testified that the drain of gold was chiefly due to the £1 notes, these being in the hands of holders most liable to panic. Small notes were at this time subject to a stamp, and the government took the step of prohibiting any more stamps to be issued.

When Parliament met this step was blamed as unconstitutional, but the ministers declared that they had taken the step because, if any day had been fixed beyond which no stamps should be issued, or if the subject of small notes had come up for discussion, there would have been a rush for stamps. They proposed to allow the small notes already stamped to run until April 5, 1829, and then to allow no more notes under £5 in England. The debate on this proposition was long, and on the part of the opposition unclear and not to the point.

The proposition was advocated by Mr. Huskisson, who said that “a permanent state of cash payments and a circulation of one and two pound notes could not co-exist.” He urged that specie was the poor man's currency, and that, while there were no small notes, commercial crises might sweep over the mercantile community, but could not affect the laboring classes.

Mr. Grant said, that “in every wise system of currency it was a primary element that paper should be convertible at pleasure into a metallic currency, and that all small payments and the great bulk of the circulation should be in gold.”

Alderman Heygate said, that the country bankers would be forced to withdraw their small notes within three years, which would bring ruin. He said that the act of 1819 was intended to bring back the old standard, but that it had raised that standard. The proof was that the coins were exported on account of their “fineness and beauty.”

Mr, Attwood propounded a new law of the distribution of the precious metals: “The share of the precious metals which any country, rich or poor, could maintain, if there was any truth in experience, would be in the proportion of about half an ounce of gold against a quarter [8 bushels] of wheat, which gave 403. or 503. a quarter of this money, and no more.”

Thus the opposition ran over the whole history of the Restriction and the whole theory of money, but the question was, whether, having a convertible currency, they should have in it notes under £5.

Mr. Canning said: “If on the present occasion I am for withdrawing, within a limited time, the one-pound note from circulation, it is not from the mere love of theory, but because I have seen it practically proved in the experience of years which have elapsed since the Bullion Committee sat, that the circulation of the small notes cannot co-exist with a metallic currency.”

“It is vain to think of introducing gold amidst the overwhelming spread of small paper circulation. The small paper chokes up all the ordinary channels of circulation, so that the gold, though issued from the Bank, cannot flow into them, but is returned to the source from which it came.”

A test-vote, not directly on the question, showed two hundred and twenty-two in favor, and thirty-nine against. The small notes were withdrawn in 1829.

There have been fluctuations enough since then, and events which have illustrated and proved some weighty principles of currency, but they lie beyond the scope of the present under taking.

Specie payments could not be regarded as fixed on a solid basis until the small notes were withdrawn. In the year 1827, the Bank of England directors gave in their adhesion to the doctrines of the Bullion Report, and those doctrines, together with the exclusion of the small notes have been the foundation of the English convertible currency ever since.

The question how to regulate a convertible currency is still hotly disputed, and is far from a solution. It seems that art can help nature here as well as elsewhere, but we may be very sure that it can so help here only as it does elsewhere, —by following and assisting, not by supplanting and coercing.

A convertible currency is, like steel, not a natural product, but an artificial development, and in many respects superior, but it is as if we had not yet discovered the law by which to make the artificial product so that it should be neither too brittle nor too elastic, too hard nor too soft. One thing is very certain—that our blundering experiments have hitherto cost us far more than we have gained or saved.

So much, however, in regard to the laws which govern paper issues, as was laid down in the Bullion Report, is established beyond dispute. Its doctrines are the alphabet of modern finance.

The assertion has been many times made, in the United States, within the last year, that the period of the Restriction, in England, was a period of prosperity and financial success. A diligent reading of the appropriate documents, historical and legislative, has failed to bring to light any evidence at all to support this notion, or to lead to acquaintance with any English authority, contemporaneous or subsequent, who looks upon this period as anything else than a time of distress and humiliation.