The Rationale of Central Banking and the Free Banking Alternative

Smith, Vera C.
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First Pub. Date
Indianapolis, IN: Liberty Fund, Inc.
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Chapter VII
Discussions on the Theory of the Subject in England and America Prior to 1848


Although the discussion of free banking had its beginning in England, it never reached such large proportions there as it did on the Continent. This may have been due to the much greater degree of freedom that had always existed in England giving rise to a more rapid growth of banking there than in either France or Germany, and therefore to a less pressing need for reform. Moreover, by the time laisser-faire politics had taken up its stand against privileged monopolies, the Bank of England and the system of which it had become the pivot were far too well established to be easily remodelled, whereas on the Continent the banking systems were less firmly established and therefore more subject to discussion.


The discussion in England seems to have opened in connection with the agitation for joint stock banking, commencing with the pamphlet of Thomas Joplin,*55 of 1822, in which attention was drawn to the greater stability and freedom from failures of the Scottish banks in comparison with the English, a circumstance which he attributed to the greater financial strength and general superiority of the joint stock organisation in which the number of subscribing shareholders was unrestricted compared with private concerns in which the number of the partners was by law not allowed to rise above six. It was impossible to ignore the anomalies of a law which, as Lord Liverpool remarked, permitted "every description of banking except that which is solid and secure."*56


The partial victory of what we may already call the free-banking party, in the law of 1826, gave added impetus to the general discussion, and it was brought forward at several meetings of the Political Economy Club. This club had been founded by Tooke to support the principles of Free Trade, and it was not unnatural that reference should be made to the possibilities of extending Free Trade principles to banking. The chief adherent of such an extension was Sir Henry Parnell, who moved a discussion*57 on whether "a proper currency (might not) be secured by leaving the business of banking wholly free from all legislative interference." Much the same question was brought up on several subsequent occasions.*58 Parnell continued to hold that the issue of bank notes should be subject to free entry in London as well as in the provinces, and not subject to the monopoly of the Bank of England, although three of the leading economists of the day, Tooke, G. W. Norman and MacCulloch, argued against him.


Parnell's defence of free banking is contained in a pamphlet written in 1827.*59 The evidence of the Scotch bankers before the House of Commons Committee*60 in 1826 had drawn his attention to the practice of the Scotch banks in regularly clearing each other's notes and paying the balances. This practice, he submitted, was of primary importance in a free-banking system and acted as a very efficient check on the over-issue of bank notes. He contended that in a free system it was in the interests of each bank not only to keep its own issues within bounds, but also to exert its power in preventing every other bank from forcing too much of its paper into circulation.*61 Banks will receive every day from customers, either as deposits or in repayment of loans, notes of other banks, and no banks will re-issue the notes of other banks in preference to issuing its own. It will return the notes of the other banks to their issuers. Now if any bank A receives by such means more notes of bank B than B receives of A's notes, there will arise a clearing balance in favour of A, and A will require to be paid in gold out of B's reserve. So it is concluded that if one bank over-issued its notes the other banks would acquire positive balances against it, and the consequent drain on its reserve would pull it up in its expansion. This control by way of the clearing mechanism was one which depended not on the public's presenting notes for redemption but on the banks' reciprocally doing so, and it was a check which was likely to work much more quickly than one which waited on the external drain of bullion set in motion by the falling foreign exchange rates. In Parnell's own words: "It is this continual demand for coin, by the banks on one another, that gives the principle of convertibility full effect, and no such thing as an excess of paper or as a depreciation of its value can take place for want of a sufficiently early and active demand for gold. If in England the power of converting paper into gold has not prevented an excess of paper, because the demand does not occur until long after the excess has taken place, this is to be attributed to the system of English banking.*62


The opposition between the views of Parnell and MacCulloch was given more definite expression in a pamphlet of MacCulloch's*63 and a reply to that pamphlet by Parnell.*64 MacCulloch's contribution contains the first important theoretical arguments for the case against free banking. So far as the whole circulation of the Country is concerned, his view was that so long as convertibility on demand is enforced, the issue of paper money cannot depreciate its value below that of coin. An over-issue can admittedly depress the value of the whole circulation, gold as well as paper, in the country concerned, but immediately this over-issue takes place, gold starts going abroad, notes are presented to the issuers for payment, and they, in order to prevent the exhaustion of their reserves and to maintain their ability to redeem their obligations, are obliged to contract their issues, raise the value of money and stop the gold efflux. There is, therefore, in his opinion always a check on over-issues by way of the public's bringing notes to the banks for redemption. Now on the evidence of this argument alone it was open for Parnell to reply, as in fact he did, that the obligations to pay notes in gold, which MacCulloch invoked as a safeguard against the Bank's over-issuing its notes, is just as effective in a system of a number of banks as in the case of a single bank like the Bank of England, that, in fact, this Bank had often over-issued and that the principle of contraction had worked very imperfectly in these cases because the Bank had always applied it too late.


MacCulloch had, however, developed his argument further than this in an attempt to show that the free system of banking would be more liable than a restricted system to lead to the frequent appearance of the phenomena of over-issue, the reason being that competition among a number of banks would cause one bank to lower its discount rate in order to increase its business, and all banks would be forced to do the same. He anticipates that his opponents might argue that the notes of the bank, taking the initiative in the process of expansion, would be returned to it and that, therefore, its own interest and the integrity of its reserves would hold it back. In reply to this argument he denies that any such check would operate because when falling exchange rates cause merchants to demand gold in exchange for notes they will send in for redemption any notes that first come into their hands. They will not enquire which bank has been the cause of the over-issue, and consequently only the same proportion*65 of the excess issue will be returned to the over-issuing bank as to the non-over-issuing banks. Thus the non-over-issuing banks have to sustain part of the pressure, and if they wanted to maintain their reserves at the same level as before they would have to reduce their issues while the policy of the expanding bank continued to encroach on their reserves. It is exceedingly unlikely that these banks would be content to go on losing business and reserves indefinitely, because carried to extremes the process would finally result in their extinction and in the de facto monopoly of the expanding bank. They would thus be virtually forced to follow the policy of expansion in self-defence. The conclusion is that if one bank should decide on such a policy, it will become general; the tendency to a drain of gold will fail to check it in its early stages; there will be a large over-issue and finally a very acute crisis.


The essence of MacCulloch's thesis is that the expanding bank is not subservient to the control of the conservative banks, but that the latter are, on the contrary, subservient to the former. It should be noted that MacCulloch spoke only of the presentation of notes for gold directly by the public, a check that can be held in any case to come too late, since the exchanges are only affected after the over-issue has worked out its effects on the price and production structure and sown the seeds of a crisis. He ignored altogether Parnell's point about the operation of the clearing mechanism.


MacCulloch gives also a second and distinct reason for not allowing free entry into the note-issuing business. This relates not so much to the possibilities of a general over-issue, but to the evils that may result from over-issue on the part of a single bank or a number of banks. It is obvious that when a failure of any particular bank occurs, certain people, viz., the holders of the notes of that bank, will suffer loss, and it was MacCulloch's view that the Government should regulate banking in order to prevent such loss accruing to people who were possibly unable to distinguish the note of a good house from the note of a bad house, or, even if they did have sufficient knowledge to do this, might in practice not be in a position to refuse to accept payment in the notes of any form for fear of losing their claims altogether.*66 This is a particularly forceful argument in favour of the suppression of notes of small denomination, since it is the class of people who will not usually be in receipt at any one time of sums above a fairly small amount (say less than £5) who are mainly concerned. Actually the argument that MacCulloch himself stresses in favour of the prohibition of £1 notes is the greater facility with which forged notes of small denomination are likely to pass.*67


Another argument, in support of which MacCulloch gives very little evidence, is that whereas the Bank of England takes care to keep gold reserves of a size commensurable with demands liable to arise in time of a crisis, if there were a number of competitive banks, no particular bank would incur any sort of general public responsibility and each would trust to the efforts of the others. This was, as stated, an argument that was weak a priori, and for which there was, furthermore, little practical evidence.


Influenced no doubt by the experiences of 1825 he was led also to remark on the advantages of an institution like the Bank of England, which could render aid during a crisis by expanding its issues and lending freely to reputable firms in distress. With the alternative system of a number of firms, no bank would be able to inspire the same confidence and to get its notes accepted; in time of general distrust they would all have to contract their operations instead of expanding them.


Parnell's reply to MacCulloch was directed mainly towards a criticism of the policy in the previous half century of the Bank of England, and no attempt was made to answer MacCulloch's main grounds of objection to a diffusion of the rights of note issue.


Events in America at about this time were also calling forth comments from writers in that country on the problems raised by the issue of bank-notes. An influential contribution was made by Albert Gallatin at the beginning of the 'thirties.*68 In reviewing American banking history he was inevitably most impressed by the frequency of suspensions of cash payments and was chiefly interested to discover effective methods of controlling note issues within their proper limits. To this end he recommended the placing of much narrower limitations, both on the amount of the note issue and on other obligations that any bank might legally incur.*69 He believed that the best method of giving complete security against the danger of insolvency was for the bank capital to be invested in Government securities,*70 but he doubted whether this would be practicable in the United States because there was not a large volume of Government stocks in existence. He was, however, very favourably impressed by the Scottish system,*71 and refers to the extensive deposit business and the system of cash credits*72 developed by the Scottish banks. The most efficacious method of preventing excessive issues was, he believed, the frequent exchange of each other's notes by the banks as practised successfully by the Scottish banks, the allied banks of Boston and the Bank of the United States.*73


In spite of his praise of the Scottish system, Gallatin was not in favour of extending free competition to note issue as opposed to discount and deposit business. He did not explain the distinction by reasoning as did so many of his contemporaries that deposits, unlike bank-notes, had no effect on the total circulation and therefore on prices. On the contrary, he specifically states that "The credits in current account or deposits of our banks are also in their origin and effect perfectly assimilated to bank-notes—and we cannot therefore but consider the aggregate amount of credits payable on demand standing on the books of the several banks as being part of the currency of the United States."*74 There is no doubt that he saw clearly not only the part played by checks drawn on current account on the total amount of circulating media, but also the exact similarity between creating additional loans by placing credits to current account as by issuing notes over the counter. Presumably the reason he had in mind for distinguishing between notes and deposits was the difference in generality of acceptability.*75


Among Gallatin's readers was G. W. Norman, a Director of the Bank of England.*76 Norman rejected the thesis of Gallatin and Parnell that the clearing mechanism can act as an efficient control over note issues; he reasons that if the will to expand is common to all or to a majority of the banks the frequent exchange of notes will be powerless as a check on over-issues, because so long as the banks expand in step with one another, no debits will arise in the clearings.


It was his own view that while what he calls "the true and legitimate objects of banking" could and ought to be left to free competition,*77 note issue was the one case in a hundred where monopoly should be maintained,*78 and he favoured to this end the complete abolition of all the country note issues.*79


The first writer to give an explicit explanation of why competition in note issue cannot be assimilated to competition in other trades seems to be have been S. J. Loyd (later Lord Overstone). "The ordinary advantages to the community arising from competition are," he says, "that it tends to excite the ingenuity and exertion of the producers, and thus to secure to the public the best supply, due regard being had to the quality and quantity of the commodity, at the lowest price, while all the evils arising from errors or miscalculations on the part of the producers will fall on themselves and not on the public. With respect to a paper currency, however, the interest of the public is of a very different kind; a steady and equable regulation of its amount by fixed law is the end to be sought and the evil consequence of any error or miscalculation upon this point falls in a much greater pro-portion upon the public than upon the issuers."*80


Loyd, Norman and MacCulloch were all in later years to become prominent members of the currency school and adherents of Peel's Act. It is therefore less surprising to find them among the opponents of free entry into the banking trade than it is to find Tooke in the same camp, for he, besides being one of the leaders of the Free Trade movement, was the foremost representative of that school of thought on currency and credit which came to be known as the banking school. This group was opposed to the imposition of legal restrictions on the amount of the note issue, and thought it should be left to the discretion of the note-issuing authorities under the force of the demand of the public, to determine the amount. In spite of the support he gave to these views*81 Tooke was violently opposed to leaving banking open to free trade. "As to free trade in banking in the sense in which it is sometimes contended for," he said, "I agree with a writer in one of the American papers, who observes that free trade in banking is synonymous with free trade in swindling." Such claims "do not rest in any manner on grounds analogous to the claims of freedom of competition in production—. It is a matter for regulation by the State and comes within the province of police."*82 This dictum of Tooke's was quoted times out of number by opponents of free banking on the Continent and became for them something in the nature of a motto.


The 1837 cash suspensions in America again led to renewed discussion on that side of the Atlantic, and these discussions exercised considerable influence on later Continental thought. Two writers, Richard Hildreth and H. C. Carey, made out a strong case for free banking. Hildreth*83 denounced the protectionist spirit prevailing in American banking and contended that if free competition were allowed to replace the existing system of political interference and monopoly, there would be far fewer excesses. Carey*84 defended the American banking system on the whole, pointing out that even if not satisfactory in all respects it provided more facilities than the banks of any other country, and he maintained that failures had in fact been less frequent than in England.*85 In a comparative study of the various systems applied by different States within America he found that where entry into the banking trade was most free, failures were least frequent, and he submitted that the whole principle behind the restrictive system was bound to lead to over-expansions, for, he says, "the system of privilege in banking arises from the erroneous idea that banking is different from all other trades; that it affords the means of making large profits, and that the right to bank should be held as a privilege to be sold to a few individuals. Communities acting under this false impression demand large bonuses for its use, thus imposing upon the parties a necessity for trading much beyond their capital.*86 The Scotch system, although superior to the English, he regarded as still not entirely satisfactory, because it did not allow banks to form with limited liability.*87


The weakest part of Carey's work was the theoretical explanation he invoked in support of the thesis that a restricted banking system is more likely to cause economic crises.*88 The argument he gives is one that gained some considerable following later in France and which is generally, though erroneously, believed to have been started by Coquelin. It begins by assuming that if there are only one or a few privileged banks, there will be a scarcity of long-term investments. Part of those available will have been bought by the banks themselves and the public will possess in the form of savings a quantity of spare funds for which at the moment there is no very profitable outlet in investment. These funds will consequently be left on deposit at the banks. On the basis of this the banks will be in a position to extend their issues, and they will, in doing so, make liquid capital still further superabundant and deposits will again increase. The process will repeat itself until at last the depositors find an outlet for their funds, let us say abroad, and therefore withdraw their deposits from the banks, thus causing an embarrassment to the latter, who are forced to call in their loans, and a scarcity of capital ensues. All this arises because as a result of the first impediment to investments a great deal of capital has been only temporarily lent to the banks but has been invested by them in forms that cannot be immediately liquidated.*89 The theory contends that if more banks were allowed to set up, the bank stocks themselves would provide the public with opportunities for direct investment, and instead of these funds being lent to the banks only on short term they would be lent on long term and there would be less tendency to disturbance.*90


In contrast a very unfavourable attitude towards American banking was taken up by Condy Raguet.*91 His book was of a more general and theoretical nature than Carey's and tried to sketch the whole of the theory of money and credit relevant to the suspensions of specie payments. He pointed out that the principle of the balance of trade and specie flow adjustments which was already familiar in the theory of international exchange was equally applicable to the balance of claims arising out of the issues of different banks in the same town or groups of banks in different towns, and if allowed to function, this principle would keep the issues of individual banks in check. This emphasised the importance of enforcing immediate redemption of notes on demand, and of the frequent exchange of notes and payment of balances between banks. Unlike Carey, he thought the best system would be to establish individual responsibility (unlimited liability) of the shareholders, but doubted whether such a system could ever be put into practice in the United States where the limited liability form of company organisation was far too deeply rooted. He was strongly opposed to freedom to issue notes in the wide sense but was very favourably disposed towards the New York bond deposit system. His explanation of how an over-supply of credit leads first to an industrial boom and then to a crisis contains points which anticipate modern trade cycle theory. The end of the boom comes when there is a demand for coin for exportation; the banks are called upon to pay their notes and must in turn call upon their debtors; so money becomes scarce and the prices of property and commodities fall. "At the winding up of the catastrophe, it is discovered that during the whole of this operation consumption has been increasing faster than production—that the community is poorer in the end than when it began—that instead of food and clothing it has railroads and canals adequate for the transportation of double the quantity of produce and merchandise that there is to be transported—and that the whole of the appearance of prosperity which was exhibited while the currency was gradually increasing in quantity was like the appearance of wealth and affluence which the spendthrift exhibits while running through his estate, and like it, destined to be followed by a period of distress and inactivity."*92


A fourth contribution was another essay by Gallatin.*93 This is in the main a plea for the rapid resumption of specie payments. He had by this time adopted an attitude that was unfavourable to paper issues in general. He consequently takes up the point of view that there should be a shift of emphasis away from the issue of notes to other banking facilities such as exchange operations, the remittance of money, the collection of debts, the investment of idle balances, all of which could be carried on without the issue of paper money, and he looks forward to the time when banks will set up for these purposes without possessing rights of note issue. He distinguished two senses of the term "free banking"*94—"First, that all persons or associations should be permitted to issue paper money on the same terms; secondly, that paper money may be issued by all persons or associations, without any legislative restrictions. The first sense in which, after the New York legislation of 1838, the term came almost exclusively to be used by English-speaking writers, Gallatin was prepared to uphold, but competition in general was not applicable to banking*95 because the objects that it attained in the case of the production of a commodity, viz., a reduction in the cost or an improvement in the quality were not relevant to banking.


We have referred already on several occasions to the contention of the free-banking school that there exists in the competitive system an automatic mechanism which operates to check expansions of the note issue. The mechanism consists in the return of notes for gold to the bank or banks that over-issue. It has been already rejected (by MacCulloch) in so far as it depends on the presentation of notes by the public for gold. But it was held also to work through the reciprocal claims of the banks themselves upon each other's reserves. We have mentioned, too, the objection (of Norman) that this also would be ineffective if all or most of the banks decided to expand, and each kept in step with the others. We come next to an argument introduced by Mountifort Longfield,*96 denying the force of the mechanism, even in the case of an expansion by only one bank. He illustrates the argument by an arithmetical example. Let us suppose that there are two banks, A and B,*97 who both carry on the same kind of business, all of which consists in lending by way of the issue of notes. Suppose also that in the initial period of time A and B did the same amount of business and held equal gold reserves, so that in each case—

Note issue = £40,000
Gold reserve = £15,000

and every week each bank discounts £10,000 in bills and receives the same amount in repayment of previous discounts. We may assume the repayments to each bank to be made partly in its own notes and partly in the notes of the other bank, the proportions being roughly the same as the proportions the separate note issues of the two banks bear to the total circulation. In this situation bank A will receive each week 5,000 of its own notes and 5,000 of B's, and B will receive the same, so that the daily or weekly exchanges of notes will just balance with no transfer of gold from the reserve of one bank to the reserve of the other. Now suppose that bank A decides to lend £20,000 more and increases its issues for this purpose by the same amount while B maintains the old position. Then, in the new situation, the proportion between the note issues of the two banks has changed from 1:1 to 3:2, and B will receive 6,000 of A's notes and 4,000 of its own notes, and it will return in the week 6,000 of A's notes to A. But since A's business now exceeds B's business in the proportion of 3:2 also, A will discount weekly, and therefore have falling due for payment in any week, bills to the extent of £15,000, of which £9,000 will be paid in its own notes and £6,000 in B's notes, so that it also has to return to B 6,000 notes. Thus the clearing account still gives no debit or credit on either side and no gold will be transferred. Consequently, B has no automatic check on A's expansion.


At a later stage the public starts demanding gold, however, and this demand will fall on the two banks in proportion to their shares of the total circulation. Suppose that the total demand is £20,000,*98 then in the final position A will have

Note issue = £48,000,
Gold reserve = £3,000,

and B will have

Note issue = £32,000,
Gold reserve = £7,000.

Thus the gold reserve of the bank which did not increase its circulation has been diminished in greater ratio than its circulation, and if the managers wish to keep the same reserve proportion as before (viz., 15:40) they must reduce their discounts "from £40,000 to about £30,000." "Hence a bank of issue may have its gold drained off by a rival which, if it has capital enough, may even ruin its competitor. If to avoid this calamity it contracts its issues, it thereby enables its rival to extend its business still more, until at last the more moderate bank is obliged to give up business altogether. Thus a bank may be driven in self-defence to take up the system of over-trading adopted by its competitors, and where there are several joint stock banks of issue, the country will suffer under alterations of high and low prices, of confidence and panic, of great excitement and general depression of trade. That bank will gain most which does most business during the period of excitement and is quickest and most resolute in contracting its issues and refusing to discount when the panic is coming. A system can scarcely be devised more injurious to the prosperity of a great commercial nation than this of permitting everybody who wishes it to make and issue that which is to be its circulating medium at the same time that it is their interest to issue as much as possible when the spirit of overtrading is prevalent and to reduce their issues when trade begins to stagnate and wants a stimulus to revive it.


Longfield's general conclusion is therefore the same as MacCulloch's, that far from the expanding bank being at the mercy of the conservative bank the latter is at the mercy of the former; there exists no automatic check on over-issues; on the contrary, rivalry among the banks leads to general expansion.


The point raised by the Longfield argument is by far the most important controversial point in the theory of free banking. No attempt was made in subsequent literature to reply to it, and we shall postpone the detailed examination of its validity until our final chapter.


We have tried in what precedes to connect together a series of rather disconnected remarks. There had been no organised discussion of the free-banking question by itself. There was all along a tendency in this country to accept the Bank of England's position and to concentrate attention on the banking and currency controversy and the general problem of central bank organisation. Probably the first discussion of the advantages of free competition that was anything like systematic was that given by James Wilson, first editor of The Economist, in a series of articles he published in that journal between 1845 and 1847.*99 When these articles were written the final decision against free entry into the note-issuing business had already been made in the Bank Act of 1844, and they are, as a not unnatural consequence, more an attempt to point out the nature and the origin of the system that had by this time become established, rather than to make recommendations for the adoption of an alternative system, and their main object was to denounce the theories of the currency school.


The privilege and monopoly of the Bank of England is, in Wilson's opinion, the cause of England's lag behind Scotland, especially in the development of deposit business.*100 The more secure basis of, and the greater confidence of the public in, the Scottish banks was the outcome of the eminently satisfactory working of free competition. There had never been any restriction in Scotland on the number of partners allowed to combine to form a banking firm, and even before the advent of the joint stock company the firms had always consisted of a large number of known and wealthy men. "There can be no doubt," he says, "that were it not for the legal restrictions as to the formation of banks for the purpose of protecting the monopoly of the Bank of England, numerous large and wealthy joint stock banks would have been called into existence in the metropolis as well as in the provinces years ago, and would thus have prevented the establishment of those inferior banks, the failure of which from time to time has caused so much distress and ruin."*101


He asks the question why it is that whereas the public and the legislature are content to allow free trade in deposit banking, they did not consider it a safe practice to give permission to issue notes payable on demand. The reason the currency school usually gave for this distinction was that bank notes increased the circulation and deposits did not. Such an argument was not, of course, acceptable to Wilson as a member of the banking school of thought which both denied that the issue of notes could be increased to any undesirable extent so long as convertibility was strictly maintained, and pointed out that the difference claimed between notes and deposit liabilities was invalid. But it was still denied in many quarters that demand deposits formed part of the circulation, and it was probably by no means generally admitted right up to the time of MacLeod.*102


The events of 1847 led Wilson to an analysis of causes of commercial crises. He was clear that the nature of capital implied a choice between applying labour to produce implements which could be used for production in the future, and applying it to the production of goods immediately consumable in the present. His theory of the trade cycle is bound up with the distinction he draws between fixed and floating capital.*103 He was somewhat confused about the way in which fixed and floating capital were replaced from the income of the community and about the relation of all these variables to the fund for employing labour; he was under the impression that fixed capital is never returned.


It is rather remarkable that it should be the banking school who should first give support to the theory that it is the over-production of fixed capital which leads to booms and depressions.*104 A similar theory was held also by Bonamy Price, and we shall notice it yet again when we come to the contributions made by Horn, in France. But the banking school did not, of course, connect up their theory with inflation as the root cause: this was left for a much later member of the currency school to do.*105


From Wilson's time onwards for more than a decade the free-banking question was dropped in England, while on the Continent it was just beginning to gather force. So we turn now to France.

Notes for this chapter

"The General Principles and Present Practice of Banking in England and Scotland: with Observations on the Justice and Policy of an Immediate Alteration in the Character of the Bank of England, and the Measures to be pursued in order to effect it."
See J. Horsley Palmer, "Causes and Consequences of the Pressure on the Money Market," 1837.
See "Political Economy Club: Minutes of Proceedings," Vol.Vl., February 6th 1826 (p. 28).
Ibid., May 4th, 1829 (p. 33); January 13th, 1831 (pp. 220-1); March 1st, 1832 (p. 38 and pp. 231-2); May 3rd, 1832 (p. 39).
"Observations on Paper Money, Banking and Overtrading including those parts of the evidence taken before the Committee of the House of Commons which explained the Scotch System of Banking."
Committee of the House of Commons on Scotch Banking.
Op. cit., pp. 86-87.
Op cit, p. 88.
"Historical Sketch of the Bank of England with an Examination of the Question as to the prolongation of the exclusive privileges of that Establishment," 1831.
"A Plain Statement of the Power of the Bank of England and the Use it has made of it; with a Refutation of the objections made to the Scotch System of Banking, and a Reply to the Historical Sketch of the Bank of England," 1832.
It would be more practical to assume that the proportions in which notes are returned to each bank are the same as the proportions existing between the circulations outstanding of the different banks.
0p. cit., pp. 8-9. "It is said by those who are hostile to interference that coins are legal tenders whereas notes being destitute of that privilege, those who suspect them are at liberty to refuse them; but whatever notes may be in law, they are in many districts practically and in fact legal tenders, and could not be rejected without exposing the parties to much inconvenience. It should also be observed, that labourers, women, minors and every sort of person, however incapable of judging the stability of banking establishments, are dealers in money and are consequently liable to be imposed upon."
Presumably notes for smaller sums are likely to be subjected to less careful scrutiny than notes involving larger sums.
"Considerations on the Currency and Banking System of the United States," 1831.
The figure he suggested was that loans should not extend beyond twice the amount of bank capital. This would in itself act as a check on issues, but he recommended that in addition there should be a specific restriction of the note issue to two-thirds of the bank's capital.
The bond deposit system proved, in fact, later, that it was far from adequate.
0p cit, p. 94.
This corresponded more or less to what we should now call the method of loan by overdraft.
Op. cit, p. 95.
Op cit., p. 31.
"Checks differ from bank issues in that the bank-note is taken in payment solely from the general confidence reposed in the banks, the check from the special confidence placed in the drawer." See Gallatin, "Suggestions on the Banks and Currency of the Several United States, etc.," 1841, p. 13.
"Remarks on Currency and Banking," 1833.
Op cit., pp. 27 and 42.
Op cit., pp. 25-26.
Op.cit., p. 58.
From his pamphlet entitled "Further Reflections on the State of the Currency and the Action of the Bank of England," 1837, p. 49.
At least by 1840.
"History of Prices," 1838, Vol. III., p. 206.
"The History of Banks to which is added a Demonstration of the Advantages and Necessity of Free Competition in the Business of Banking,'' 1837.
"The Credit System in France, Great Britain, and the United States," 1838.
He says that from the first institution of banks in America until 1837 the failures had been less than those of England in the three years 1814, 1815 and 1816.
Op. cit, p. 89. Italics ours.
Op. cit, pp. 80-82.
Op. cit, pp. 57 ff.
P. 57 n.: "The loans of banks to individuals are temporary, but as regards the Community at large they may be deemed permanent."
P. 59.
Treatise on Money and Banking, 1839.
Op. cit., p. 137. Italics in the original.
"Suggestions on the Banks and Currency of the Several United States in Reference principally to the Suspension of Specie Payments," 1841.
Op. cit., p. 69.
Op cit., p. 70.
He wrote a series of four articles on "Banking and Currency" in the Dublin University Magazine in 1840. The argument referred to comes in the second of these articles (February, 1840).
A and B may be equally well taken to denote two groups of banks, one of which is conservative and the other expansive.
Longfield assumes that the circulation must fall back to the previous level; but this makes no difference to the main argument.
Published also in book form, "Capital, Currency and Banking," 1847.
See Article Ill.
"Capital, Currency and Banking," p. 282.
"Theory and Practice of Banking," 1855.
"It is... not difficult to see that it becomes a most essential thing to the continued prosperity of a country that its floating capital, on which the continued reproduction of commodities of everyday use depends, as well as the continuous employment of labour, should not be withdrawn from those necessary purposes and converted into fixed capital in a greater degree than the surplus accumulation of the country, after replacing the whole fund needful to continue the production of such commodities... will admit. If the floating capital of the country is thus misdirected into fixed capital, it is quite plain that the ultimate result must be, that as the labour employed in the works representing the fixed capital does not reproduce the commodities which are consumed in supporting it, or any commodity which can be exchanged either with the home or foreign producers of such commodities, they must become scarce and dear, and ultimately the fund for the employment of labour must be diminished.

"It is quite true that for a time, while the process of the conversion of floating into fixed capital was proceeding, there would be a momentary appearance of great prosperity.... The production of commodities required for daily use would be unequal to the consumption; they would continue to rise in price... The ultimate effect of such a disturbance or misdirection of the floating capital of the country would be to create a great scarcity of it which will be evinced by the high rate of interest." (Op. cit., pp. 127-8.)

Speaking of the railway development and the conversion of floating capital into fixed which this entailed, Wilson says that it is clear that "the first effect of this process would be to render capital scarce and in proportion to raise the rate of interest; and that the next effect would be by rendering commodities of consumption scarce, to increase their demand, and to afford thus a stronger inducement to continue capital in its existing channel than to divert it into a new one. The inevitable result would be that a great majority of the railway schemes must be abandoned (op. cit., p. 148).
Viz., Geyer. See Chapter IX.

End of Notes

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