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bankers) to withdraw their circulation, the bank have given the same amount of circulation in coin and bank notes, that they previously stated to possess in their own notes, at three per cent. per annum upon approved bills of exchange; those are the three
Mr. Horsley Palmer has stated in his recent publication, that the late increase in the branch circulation has arisen from new contracts of this kind. It is no doubt an advantage to a country bank to be able to re-discount its bills at three per cent. instead of fiveto re-discount at home, instead of sending to Londonand to re-discount without depending on the fluctuating supplies of the London money market. On the other hand, as the country bank must give up its circulation, the arrangement is not convenient for those banks that have many branches, or which are situated at a distance from a branch of the Bank of England.
Upon public grounds the arrangements made between the branches of the Bank of England and the joint stock banks, appear liable to the following objections:
First, that they tend to promote a spirit of speculation, by increasing the amount of the currency. The amount of re-discounts granted to several of these banks, is much larger than any amount of notes they could maintain in circulation. And even supposing the amount of discount were limited to the amount of the circulation, yet as the country bank is relieved from the necessity of keeping a reserve of cash to meet the notes daily presented for payment, the currency will be increased to the amount of that reserve. The issues of the Bank too being made in Bank of England notes, they are not withdrawn from circulation by the exchanges between the local banks. Secondly; they promote speculation by reducing the rate of interest. The bank that can obtain money at three per cent. can discount for its customers at a less rate than those that have to pay four or five per cent. This will attract the customers of the other banks; and these banks, unwilling to lose their
customers, will be compelled to extend their accommodation, and at a lower rate of interest. Thirdly; this reduction of the rate of interest is not confined to the country districts; but also affects the market rate of discount in London, in consequence of the demand for money being proportionably reduced. Fourthly; the evil effects of this system appear to be shown by the fact, that in the beginning of the year 1836, the chief speculations did not originate in London, but in Manchester and Liverpool, the places where the Bank of England made the largest advances at the lowest rate of interest. The subject was noticed by two witnesses examined by the Parliamentary Committee last year.
MR. VINCENT STUCKEY.
"Have you understood that the Bank of England has advanced to joint stock banks money at three per cent. to a considerable extent ?I have.
66 Do you consider that, in reference to the monetary transactions of the country, a prudent transaction?—I take the liberty of saying, I do not think it is; and as a proprietor of the bank stock, I have so stated to some of the directors.
"Is not that a measure very stimulating to imprudent speculation?—I think so, but I wish to give my opinion on this point with considerable doubt, as the directors of the Bank of England have much better opportunities of judging than I can have.
"If the money be advanced at three per cent. to render it a profitable transaction, some interest must be made of this money in their hands, which could be created only by cash speculation?-We have had nothing of this kind in the West of England; but it was stated in a public discussion by a gentleman from the North, that if there was any mischief likely to result from the joint stock banks, it might arise from those banks which had borrowed from the Bank of England, and having their cash at less than the market rate of interest, they had been induced to lend it again improperly in Lancashire.
"In your opinion is as much danger to be apprehended from such advances at three per cent. on the part of the Bank of England as from over-issues of joint stock banks?—Yes, perhaps some banks do issue bank paper improvidentially, but they are kept in check by being liable, to pay their cash notes on demand in gold."
MR. W. G. CASSELLES.
"What, in your opinion, is the effect of that accommodation afforded by the Bank of England? what effect has it upon the operations of the banks to which it is granted?-It facilitates their operations, and enables them to discount more paper than they otherwise would be enabled to do.
"Does it give them a confidence in affording accommodation to their customers, which in your opinion they would not with their own circulation of notes?-Undoubtedly it does; I should think, if a larger quantity of paper were presented to that bank which has a constant discount account with the Bank of England, they would be encouraged to discount a larger amount, because they know that by going to the Bank of England, and giving in those bills again, under their agreement with them, they will be pretty certain of their being discounted by the Bank of England; the other banks, which have not an account with the Bank of England, must make their discounts in proportion to their
"Is it, as far as your experience goes, a facility which has tended considerably to increase the amount of accommodation given in the town of Manchester?-I understand it has increased very much the business of the Manchester and Liverpool district bank, which is the only one I know of at present. Of the banks established two or three months ago, I do not know any thing; but of the four banks established previously to the commencement of this year, I think it has increased the business of that particular bank, that they have continued their intercourse with the Bank of England.
"By enabling them to discount freely, does it force upon other banks, not having the same engagement with the Bank of England, the necessity of more freely supplying their customers?—I think it does in this way, that where customers are liberally supplied at one bank, those in the same line of business with them, and possessing equal means, and whose business could be done with equal safety, say, "Why, cannot we have our business done in the same way? it is very strange that you should pinch us." And I think it is their interest to increase as far as they safely can; therefore it has an effect upon the whole.
"Therefore that must tend to foster speculation to the extent to which such accommodation is increased?-I should be sorry to say it fostered speculation. I consider a circulation, founded on the trade of that part of the country, to be a circulation perfectly safe, and I do not think they have gone further than prudence justified.
"In whatever degree the accommodation may tend to extend the disposition to trade to that extent, the accommodation afforded by the Bank of England has had its effect?-It has rendered it more easy. "In your opinion, has it any effect on the London market for interest? I think it has a little effect upon it.
"In what way has it that effect?If all the four banks of Manchester, for instance, had no account whatever with the Bank of England, for any thing that they rediscount, they must depend upon the floating capital of the country, which generally centres in London; any thing done in the country bears a small proportion to that done in London. I think there is generally a large amount of floating capital required to be vested for a temporary purpose, or for a certain period. Banks in the country send their bills to their broker and agent in London to rediscount; if four of them were bringing all their bills to bear upon the floating capital, that would make a very great demand upon it; if that was confined to three-fourths of that demand, the floating capital will not be affected to so great an extent as it otherwise would
be. In that way, perhaps, if a fourth part of the whole demand for rediscount be transacted by the Bank of England, that takes away from the demand upon the floating capital, and I think those other three banks will obtain their discounts at a cheaper rate than if all four were competitors for it.
"Do you know the extent to which the Manchester and Liverpool district bank has the power of discounting with the Bank of England?I have heard it is to the extent of £400,000 or £500,000, constantly running; I do not give that as a matter of fact I am acquainted with, but I have no reason to believe it is incorrectly given.
"Supposing it be, for illustration, £500,000, the effect is, it gives greater accommodation to the business of the bank having that accommodation?-Certainly.
"It has a tendency to compel other banks also more freely to accommodate their customers? They would not do it except they complain of it, but it is an inducement.
"It also, by the assistance it affords to the bank having that account with the Bank of England, has a tendency to lower the general rate of interest?-I think so; that must follow.
"Do you mean that it lowers the market rate of interest in London or Manchester?-In London.
66 Do you mean that many bills being sent from Manchester to London for discount, will lower the rate of interest in London ?—Bills being sent from Manchester to London for discount, will increase the rate of interest; but the Bank of England giving a greater facility, and preventing one-fourth part of the bills coming to London, prevents the interest on money being so high in London."
If it be desirable to increase the efficiency of the "measures adopted by the Bank of England, with a view to the state of foreign exchanges, and of the consequent demand for bullion," the bank should, first, discontinue their branches; and secondly, cease to act as a bank of private deposit in London. If the branches were replaced by independent chartered banks, their circulation would be controlled by the daily exchanges with the neighbouring banks. The Bank of England would be more watchful of the country circulation, and be better able to judge when it was excessive; whereas now she feels no alarm at the extent to which the country circulation is increased, provided that increase consists of her own notes: and if the bank ceased to act as a bank of private deposit in London, she would have a more effective command of the exchanges. At present, if she makes money scarce, merchants and others who have accounts at the bank draw out their
deposits; scme to employ them in their business, others to lend them at interest; thus more notes are put into circulation, and the bank must make a farther contraction to counteract this operation. If the bank did not act as a bank of private deposit, a demand for gold would necessarily contract her circulation to the extent of the gold withdrawn. If these deposits were in the hands of the London bankers, they would be more effectively employed in assisting trade and commerce in seasons of pressure. It may be said that the bank employs these deposits-so she may, but it is not in small advances to individual traders, but in large masses on the money market. As to their influence in fertilizing commerce there is as much difference between these two ways of employing money, as there is between a shower of rain and a water-spout.
AN INQUIRY INTO THE CAUSES OF THE RECENT PRESSURE ON THE MONEY MARKET.
As the recent pressure for money has extended to America, an inquiry into the causes to which it may be ascribed, is not unsuitable to an essay on American Banking.
In the beginning of last year there was no appearance of distress; but on the contrary, every symptom of prosperity, attended by its usual concomitant-a readiness to engage in speculative undertakings.
The following description of this period is taken from the speech of Mr. Clay, on introducing his motion respecting Joint Stock Banks, May 12, 1836.
"To what extent the operations of the joint stock banks may have contributed to create the present state of excitement in the commercial world, must, of course, be mere matter of conjecture. That they have