Blackwood's Edinburgh Magazine, Volume 62, No. 386, December, 1847

OUR CURRENCY, OUR TRADE, AND OUR TARIFF

It is no matter of congratulation to us, that the remarks which we hazarded in July last, regarding the depressed and declining state of the internal trade of the country, and the miserable prospects which were in store for us in consequence of the mischievous operation of our restrictive monetary laws, have since been tested by experience, and have been fulfilled to the utmost letter. We then stated, that Great Britain was upon the very verge of a crisis more dangerous than any to which she had hitherto been exposed – that the evil was clearly traceable to the senseless machinery of the Banking Acts, introduced by Sir Robert Peel, and adopted by his Whig successors – and we warned the latter, that "if, during the recess, and before a new parliament shall meet, the present lamentable state of matters is to continue, no British ministry ever exposed themselves to such a frightful load of responsibility." Our sentiments with regard to the monetary laws were neither singular nor unsupported. They were in unison with those of an overwhelming majority of the press, of the heads of mercantile houses, and more especially of the bankers, who in vain had pointed out to Sir Robert Peel the imminent danger of his persevering with egotistic obstinacy in his foolish and pragmatical scheme. But our forebodings as to the future, and further depreciation of property down to the present miserable point, were, we are quite aware, considered by many as too gloomy to be by possibility realised. That month, however, which may hereafter be memorable in our history as the Black October, has, we hope, dispelled the delusion even of the few who still regarded Sir Robert Peel as the infallible minister of finance. His great juggle is now exposed; his currency engine has gone to pieces – but not before it has fulfilled its predestined task of crushing and annihilating credit.

It was, we are now free to acknowledge, a vain expectation to hope that any remedial measure could be carried in the last Parliament. That body was rapidly going down to its corporate grave, with little glory, and with no regret. It, too, was an engine, working, most unfortunately for us all, according to the will of one man, whose thoughts and ways were as secret and noiseless as the pestilence. It was pledged to support agriculture, which it abandoned; to foster native industry, which it gave up to foreign competition; to lighten the burdens of the people, which it augmented; to maintain the balance of power, which it permitted to be shifted and destroyed. Whether he was in office or not, that parliament was the plaything of Peel. At each successive move, he was the Mephistophiles who drew the string. He contrived to adjust parties with such infinite address, that what in reality was the weaker section became apparently the stronger one, and "government influence" was lavishly used to tempt the frailer brethren from their old profession. True, he lost office in consequence, but he did not on that account surrender one iota of power. The new ministry felt that they were in his hands, and that his fiat might determine at any moment the period of their political existence. There have been statesmen, even of the Whig school, who would not willingly have submitted to so poor and degrading a bondage. There have been those who would not have consented to hold office even for an hour, on the condition of their adopting implicitly the measures and the schemes of their antagonist; but we live in altered times, and free will is no longer a doctrine of the Whigs. Accordingly, the same lessons of financial wisdom, the same doctrines of political economy, which flowed from the lips of the converted Sir Robert Peel, were now pompously enunciated, though far worse expressed, by Sir Charles Wood, whom the malignant star of Britain has converted into a Chancellor of the Exchequer. The cries of the country, the warnings of the press, the representations of the merchants and bankers, were passed over with an assurance of general prosperity, and Parliament was dissolved at the moment when the active interference of the legislature was most imperatively required.

At the elections the currency was made a prominent but not a vital question. This we regret exceedingly, for there never was a time when men of strong understanding, concentrated experience, and practical knowledge, were more needed in the House of Commons; and although there have been some accessions which we regard with hope, still we could have wished that more men of decided mercantile ability had been returned. The new Parliament has very great, important, and difficult functions to perform. It has to pronounce upon the fate of a monetary system which dear-bought and late experience has proved to be radically bad; and it must provide a substitute on which the nation may in future more confidently rely. It has further to decide, whether we are to persevere in a mercantile policy, which, so far as it has gone, appears most baneful to home production, and to the prosperity of our native artisans: and it will be forced in some measure to recast and remodel the system of our national taxation. All these are matters of infinite and pressing importance: they must be handled boldly, but not rashly, and discussed with temper and forbearance. Party strife must be forgotten when the great interests of the nation are so strangely and fearfully involved. We have arrived, through experiment-making and quackery, at such a point, that the best man, be his general politics what they may, must lead us on. But we must have no more experiments, lest a worse thing should happen to befall us. In our present position it would be madness to look for aid either from the flashy declaimer and rhetorician, or from the off-hand fabricator of systems, which are based upon no solid or intelligible foundation. What we want is solidity, prudence, and, above all, principle.

It will not do merely to extricate the nation from its immediate dilemma, for which task we observe there is already a sufficient number of volunteers; but we must absolutely see our way before us, a little more clearly than our political guides have hitherto been in the habit of permitting. We cannot suffer them to remain as solitary sentinels on the peaks of an imaginary Pisgah. The promised land, which they have discerned in the distance, has turned out, when we reached it, to be a mere mirage of the desert – a phantom which has disappeared, and left us in the arid sand. We are, as far as ever – nay, even farther – from our inheritance; and assuredly it would be a desirable thing for us if we could discover the true road by which we are to walk in future. We have deserted, unnecessarily and foolishly, as experience has shown us, the beaten track which we had hitherto pursued: if we cannot regain it, let us at least be diligent in our endeavours to find, but wary in our selection of a new one. It is in this temper that we venture to make a few observations upon our present position and prospects.

First, then, let us see how the Banking Act of 1844 has worked. All the world knows that by that preposterous measure, the free circulation of the paper money of the Bank of England was limited to £14,000,000 beyond the amount of bullion which was stored in the coffers of that establishment – that no loophole or device for expansion was given – and that the Scottish, Irish, and provincial banks were put into similar fetters, and compelled to provide and retain gold for every pound note which they might issue beyond the amount of their average circulation as taken at that period. We were told by the individual who was then kind enough to act as our Lycurgus, that this restriction was necessary for the safety of the trading community – that, in other words, it was intended to prevent the customer from being defrauded by his banker, and to keep the circulation of the country within proper bounds. Also, that it was intended to discourage undue and unwholesome speculation, which, according to the modern theory, is at the root of every evil. We believed him – that is, some of us did – and the measure was passed into a law.

Subsequent experience has shown us, that this very measure has become an engine of destruction to the trading community – that it has not defended the customer from loss by the failure of his banker – and that it has not discouraged speculation, whether that be unwholesome or not. It has certainly kept the circulation of the country within such bounds, that money is at a minimum rate of eight and a half per cent; and the measure is itself suspended and virtually abrogated by the Whig ministry, who, with an inconsistency and stupidity which appear absolutely miraculous, pin their faith, in the very document which removed it, to the soundness and integrity of its principle!

Now, it is here proper to remark, that the principle to which the ministry have so needlessly committed themselves is not, strictly speaking, that of the convertibility of paper into gold at a fixed rate, but that of permanent restriction of the issues. The bullion principle may or may not be justly assailable upon other grounds, but it does not necessarily enter as an ingredient into the question of the present difficulty, and we are anxious, therefore, to keep it separate. The great alteration which the Act of 1844 effected in the monetary system of England, was the positive limitation of the unrepresented paper issues of the government to fourteen millions, and the contraction of the currency of the provincial banks. It thus left the directors of the Bank of England no option or power to move to the assistance of the public in time of emergency, and besides restricting them, it made the provincial banks in England wholly dependent upon the leading establishment in London. The Acts of 1845 which were applicable to Scotland and Ireland, were in many respects a much greater innovation. The amount of paper circulation in these countries was calculated on the average of the preceding year, and the issue restricted accordingly. It was provided that every note which might be put out beyond that amount, should be represented by bullion, and we shall immediately show that this measure has proved in its operation most injurious to the interests of the English public, by causing a large drain of bullion to countries where it is neither asked for, nor employed as a circulating medium at all. We, therefore, drop for the present the convertibility question, and Sir Robert's reiterated disquisitions as to the nature and character of a pound; and shall apply ourselves solely to the point of restriction, which we hold to be the leading cause of the present monetary distress.

A vast change has taken place in our social condition since the year 1844. This alteration has been produced by both natural and artificial causes. In the first place, we have had a famine and a failure of the potato crop, which has borne very heavily upon the population of the British islands, and has caused a large export of bullion for the necessary supply of food. In the second place, we have had a multiplicity of gigantic works going on at home, which, while they have afforded high wages to an important section of the community, and so tended in a great measure to ward off and counteract the more disastrous effects of the famine, have nevertheless undeniably caused an unusual absorption of capital, which must remain unproductive until those works are completed. In the third place, we have altered altogether our relation to the foreigner, and have admitted him to competition with our own producers in the home market, without securing that reciprocity without which free trade is a phantom and a delusion. The first and the third of these causes have led to a steady drain of bullion from the country; and although the famine may now be considered as over, and that drain stopped for the present, the other still continues and must continue in full operation, and the adverse rate of exchange as against Britain can only be overcome by a general decline of prices, in consequence of which men of every class, but especially the manufacturer and the artisan, must be serious and permanent losers. But the railway system on the whole has effected the most important change upon our position, and it is now indisputably necessary to find out in what way it has acted upon the money market.

In 1844, the restriction year, the railway system was, so to speak, in its infancy. No doubt many works had been constructed and much surplus capital embarked, but the tide of enterprise or of speculation, if you so choose to term it, had not at that time set in nearly so vigorously as it did afterwards in the new channel. Still there were distinct indications of what was to come. Notice had been given of a multiplicity of works that were to be undertaken, involving in the aggregate an enormous expenditure of capital; and Parliament had pointedly constituted itself the censor and approver of these projects. It was not a period of private unguided speculation. Parties were not left as in former years to throw their capital rashly and without guarantee into American mining and canal adventures, for the purposes of foreign improvement and the employment of an alien population. Each railway bill was first considered by a ministerial body expressly constituted for that function: it then underwent the scrutiny of committees of both Houses of Parliament; and finally, when transformed into an act by receiving the royal assent, it bore within its preamble an express acknowledgment that it was a work of great advantage and benefit to the country at large. Nay more, by a notable act, authorising the government, whenever a railway should exhibit a certain amount of remunerative traffic, to purchase it at a statutory rate for the profit of the nation, the ministry were as deeply pledged as they could be to the maintenance, of the system; and if there has been in fact any excess in the number of works undertaken, the private promoters of these are far less chargeable with the blame than the ministry, who, with their eyes open, and the amount of pledged capital declared, yet suffered the system to go so far without interposing a decided and unsurmountable barrier to its progress.

Be that as it may – and we shall have a few words to say upon the point hereafter – it is impossible to suppose that Sir Robert Peel, or any other competent minister, can have failed to form the conclusion that altered circumstances must per force hereafter effect a vast change on the surface of our monetary transactions. Indeed Sir Robert now takes full credit for such prescience. He tells us that he foresaw what was about to happen, and that he framed his banking measures with a direct view to that result. A more humiliating confession, in our opinion, was never uttered by any man laying claim to the character of a statesman. It is in fact tantamount to an acknowledgment that he was then legislating for the prospective benefit of the moneyed interest exclusively, and not for that of the nation. For we hold it to be perfectly clear, upon every principle of honour and justice, that government, having allowed these railway bills to pass, and so far sanctioned their commencement, were bound to interpose no artificial impediment to their completion. Nay more – they were bound, before introducing any act for the future regulation of the currency, to take into consideration the changes which so vast an expenditure of capital at home was likely to cause in the adjustment of the different national interests, and the facilities which ought to be granted to each in the development of their several industry. But the Banking Acts of which we complain were framed upon a totally different principle.

Sir Robert Peel, in 1844, was, as it were, standing upon an elevation from which he could look backward upon the past condition of the country, and forward to the new state of things which was now certain to occur, and which he did not intend to prevent. On the one hand, he saw that, for a certain average of years, not distinguished by any great enterprise, nor shaken by any great convulsion, a certain quantity of currency had sufficed for the wants of the nation. This currency consisted of two things, gold and paper, for we drop the smaller change. The gold was principally, if not altogether, confined to England, where it circulated from hand to hand; and, issuing from the fountain of the Mint at a fixed rate of price, it was accessible to all parties, and always exchangeable for paper. Being exportable at fluctuating values abroad, the amount of gold at any time in the country could not be accurately ascertained, but it was acknowledged as the nominal basis of the circulation.

In Scotland and Ireland the system was different. Both of these were poorer countries than England, and had been unable either to dispense with the smaller one-pound note circulation, or to provide gold, the most expensive and cumbrous representative of property. The currency of these countries, therefore, was paper, based directly upon property; and, in Scotland at least, secured by an admirably-devised system of interchange amongst the native banks, which effectually prevented the possibility of any over-issue. In consequence the circulation was extremely regular and steady, save at the two great terms of the year, being settling days, when a large expansion of the currency was required, to be, however, again withdrawn on the succeeding week.

On the other hand lay the more dubious prospect for the future. Parliament had already recognised the railway system, and numerous projects were waiting for the imperial sanction. These necessarily and avowedly involved an enormous expenditure of capital, and the active and lucrative employment for several years to come of a large class of persons throughout the three kingdoms. The railway system might indeed be said to have created a new class, whose necessary share in the currency would fall to be calculated in any future monetary measure. Add to this, that the population of the empire was rapidly and steadily increasing.

It was in this position, and with these prospects, that Sir Robert Peel fabricated his restrictive acts, which have since wrought a total change on the financial dispositions of the country. We do not think, and nothing has been brought forward to prove, that there was any call whatever for a change at that particular juncture. Certain it is, that the change was generally unpalatable, but was yet peremptorily forced on and effected in spite of the ominous looks of those whose experience entitled them to a hearing. And no wonder that the veterans of commerce should have received these measures with disapprobation. For, according to all rules of reasoning, an increased trade, an increased demand, a new population, and a new channel of industry, were so many additions to our former state which required additional facilities. The same amount of currency which had sufficed in former years to carry on our domestic arrangements, could not surely be expected to exercise a double function, and to meet the demand occasioned by the novel element of accretion. The money that, in prosperous times, barely answered the calls of manufacture and commerce, could not be converted from those streams to flow into another, without occasioning, at the same time, the greatest pinching and inconvenience. Yet, strange to say, Sir Robert Peel, instead of basing his calculations upon the future imperative demand, legislated as if no new element at all had appeared in our social position. And he further committed, what we maintain to be a great and inexcusable error, even had the railways not then been in actual progress, by utterly destroying all possible expansion of the currency, so as to bar us from the power of obviating any temporary difficulty or accident to which commerce is constantly exposed.

Thirty-two millions, therefore, of paper, whereof fourteen was apportioned to the Bank of England, was the bountiful allowance counted out for the daily augmenting wants of the first commercial nation of the world. All paper issue beyond that had to be represented by unfructifying bullion, stored up in bank vaults and cellars, as far away from profitable employment as if it had been buried beneath the ruins of Nineveh, with some tutelary demon as its guard. And it is a fact, which we do not remember to have seen stated elsewhere, but which, nevertheless, is notorious to all commercial people, that a vast deal of gold is constantly forced into the Bank to represent and occupy the place of paper which is absent from the country. In the Continent and in America, Bank of England notes are an extremely common tender, and are often actually at a premium; and each of these so circulating withdraws, under Peel's system, an equivalent amount of gold from the national use.

We do not mean to assert, for the point is immaterial to our argument, that this thirty-two millions, plus the gold, might not at one time have sufficed for the country, and it may be that it shall again suffice. When we speak of expansion, we also give credit to the counter-state of contraction; and our experience of Scottish banking has gone far to prove, that a low rate of circulation is by no means incompatible with a healthy state of trade. But then, experience equally teaches us, that the low rate must be left to adjust itself. Expansion is not, as is commonly supposed, an inevitable sign of prosperity. On the contrary, it is too commonly a token of want of commercial confidence, and all indisposition to receive that far larger but uncalculated species of currency, by means of which the great transactions of the country are carried on, and to which the whole coinage and bank paper of the realm bears a mere fractional proportion – we mean the commercial bills of exchange. The ordinary currency of the country, the bank paper and all the gold which could possibly be imported, even were it all thrown into circulation, would be utterly insufficient to supply the place of that commercial paper which has for its basis nothing more than mutual confidence and credit; but then that paper must be realisable as it becomes due, and it is for that purpose that a large proportion of the ordinary currency is required.

Whenever a want of confidence is generated in the country, the merchant and manufacturer are immediately compelled to have recourse to the bank in order to have their bills discounted. The facility of these discounts, of course, depends upon the amount of money in circulation, and also very much upon the rapidity of its return in the shape of deposits or otherwise. A banker cannot, any more than a private person, discount without having money, and where no money is procurable, the ultimate result must be a stoppage. And so it is, as we know full well from the experience of the last two months, during which we have witnessed the unparalleled spectacle of houses suspending payment, and exhibiting at the same time a large excess of assets beyond all their liabilities. Want of confidence, therefore, however brought about, is the great evil against which, in this country, we ought especially to guard, since it seems almost apparent that, when it occurs, human ingenuity is not equal to provide a remedy.

Let us, however, look a little more closely into the present posture of affairs, and endeavour to ascertain whether the want of confidence which at present undoubtedly exists is the result of external and uncontrollable causes, or whether it is not in some way connected with, and occasioned by these restriction acts, which are just now affording so plentiful a harvest to the cautious and wary capitalist.

The monetary embarrassment may be said to have commenced with the famine of last year. That event not only caused an extra expenditure of public money at home, in the shape of subsidies to Ireland, but it occasioned a considerable drain of bullion to America. It so happened, that at that time America was in need of coin for her expenses in the Mexican war, and required less manufactures than we were usually in the habit of exporting. At least such was the statement commonly current in the commercial circles at the time; but we cannot, whilst calmly and dispassionately reviewing events, conceal our conviction, that the Americans were playing a deeper and more profitable game. A drain of gold from England must always, under our present laws, prove an enormous advantage to the foreigner, because, by retaining bullion for a time, and refusing manufactures in exchange, he can bring down prices in Britain in proportion to the scarcity of money. It was therefore clearly not the interest of the Transatlantic dealer to take commodities in exchange for his corn, until the depression had reached its lowest point. Be that as it may, the balance being decidedly against us, was liquidated in gold, – a mode of payment which this country can never refuse, since it has recognised the bullion principle, and laid down a fixed or inflexible standard. As the result of this, ten millions disappeared from the general circulation – that is, the bank, in order to maintain its full issues, was compelled to find gold from some other source, and the exchanges being palpably against us, by reason of the famine, and from another cause to which we shall afterwards allude, this could only be done by an increase of the rates of interest, in other words, by turning the screw, which had this immediate effect of causing a fall or depreciation of property. Consequently the funds began to decline, but after a little, some temporary relief was afforded by the appearance of a new and unexpected customer in the stock-exchange.