The Lender of Last Resort

Forrest Capie, Geoffrey E. Wood, Forrest Capie, Geoffrey E. Wood

• Publisher: Taylor & Francis
• Year: 2006
• Print ISBN: 9780415323338
• eBook ISBN: 9781134358922
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The capacity of national central banks to 'step in' and bail out an economy is one which has proved to be vitally important over the years. This collection from Wood and Capie brings together important literature for the first time in book form.

Section One
The classics

1 Observations on the establishment of the Bank of England
And on the paper circulation of the country

Sir Francis Baring, Bart

Observations, &c.

The sudden changes, and even convulsions, which circulation and commercial credit have experienced since the commencement of the year 1793, will serve as an apology, I trust, for an endeavour to draw the public attention to measures of foresight and precaution.

Circulation, as the word implies, must have a pivot or centre on which the whole can turn; and that centre, as far as relates to the island of Great-Britain, is the Bank of England; whose paper or notes represent that object, for every useful or beneficial purpose.

The prosperity which this country has enjoyed, the wealth and resources which it possesses, having been attributed, in a great degree, to the establishment of the Bank, (although, in truth, much more has been owing to its constitution) some individuals, for the sake of relieving their own distress, and to furnish the means for wild speculations, have made a great noise about the circulating medium; endeavouring to inculcate an idea, that if so much trade and prosperity attached to the amount of Bank Notes formerly in circulation, the issue of Bank Notes ought to be increased at present, in proportion to the actual extended trade of the country.

Their object was, not to multiply Bank Notes for the purpose of general circulation, nor for the use of the public, but solely to increase commercial discounts; under cover of which they expected their purpose would have been answered. They therefore founded an alarm as to the want of a circulating medium; and, as the term was not generally understood, whilst it held forth an expectation of relief to pecuniary distress, so many joined in the cry as to create serious apprehensions in the minds of the sober impartial part of the community. Any thing may become a circulating medium; paper is as good a representative sign as gold, and in many instances it is better, – because it is more easy to manage and to transfer; but then it must be understood, that with a correct knowledge of the basis on which such paper is founded, it enjoys the most perfect confidence: in which case, the only difference consists in such paper being the circulating medium for the country where it issues; whilst gold or silver are the circulating mediums in every part of the world – for both are no more than representative signs.

If there were more gold than was wanted, confidence in it, as a representative sign, would slacken, and it would no longer become a circulating medium: If Bank Notes were augmented, so as to be sold at a discount, confidence would vanish, and those Notes be no longer a circulating medium.

It would be desirable, for the purpose of probing this question to the bottom, to ascertain what proportion the issue of Bank Notes has borne to the gradual increase of the Commerce of the Country, although the disclosure would not be prudent in other respects: but I cannot think it possible for the one to require an augmentation of the other in an equal degree; and it remains to be proved that the amount of Bank Notes, before the war, did increase in proportion to the increased trade of the country, before the necessity can be admitted for an augmentation to the circulating medium, in consequence of the large addition to our trade during the war, although such addition is accidental and temporary.

If it shall be urged that such a discussion is become unnecessary, for that no such clamor exists at present; I must answer, that it is impossible to understand the principles upon which the Bank of England is established, the nature of its public and private interest, and more particularly to appreciate the real situation of the country in respect to the paper circulation, without entering into some details and explanations with regard to past occurrences; and I must further request, that my readers will always recollect, that the Bank never did absorb the whole of any operations or circulations: the Bank must be confidered solely as the centre or pivot, for the purpose of enabling every part of the machine to move in perfect order; sometimes by furnishing an addition to the powers necessary to enable that machine to perform its functions, and at others, by receiving back those powers which are super-fluous; and although such a position must confequently be limited, yet its importance to the general welfare evinces a necessity of preserving to the Bank a capacity of acting with effect, and without delay, in both those cases.

The operations of the Bank may be considered under three distinct heads:

The first and most important relates to the GENERAL CIRCULATION OF THE COUNTRY.

The second - ITS TRANSACTIONS WITH GOVERNMENT BY LOANS, PAYMENT OF DIVIDENDS, &c.

The third - COMMERCIAL DISCOUNTS.

If it shall ever become a question to sacrifice a part to save the rest, I can have no doubt but that the general circulation of the country ought to have a decided preference; and if ever the Bank shall be reduced to that dilemma, and that the administration of their affairs shall then be correct and pure, their solidity will rest on a rock beyond the possibility of being shaken. We have already experienced the facility with which Government can liquidate a part of their loans; and they could discharge the whole, if necessary, without producing any convulsion in the country. I do not know the amount of the bills discounted by the Bank for commercial purposes nominally; but when the state of their affairs was laid before Parliament, the amount could not have been large; at least it must have borne a small proportion to the commerce and solid circulation of the country; but if the amount of paper discounted for fictitious and stock-jobbing purposes shall be deducted there-from, the remainder will bear a very small proportion indeed to the whole; – and therefore the commerce of the country would not receive a fatal blow if the Bank should decline discounts altogether, unless it was done abruptly; especially, as it would not be difficult to provide resources for the solid part of the commerce of the country in the case of such an event: – but, as we have experienced a capacity on the part of the public to discharge their loans without much difficulty, if the Bank could be liberated from their commercial discounts in case of need, with equal facility, their notes would then become really and bona fide the representation of coin or bullion.

These subjects are no doubt gloomy, and I may be blamed for having mentioned them; but whilst we are disposed to adopt half measures, every thing may be apprehended; and therefore it is right to look forward, to point out the consequences, and at the same time to suggest such means as occur to prevent, or alleviate, those which are pregnant with danger. In this respect it is proper to consider what would be the result if the Bank were annihilated, in consequence of confidence in their paper being destroyed.

The convulsion would no doubt be great, the difficulty and distress incalculable, but the country would not be ruined. The existence of the Bank depends no doubt on that of the country, but the reverse is by no means the cafe. If the fall of the Bank should be owing to the misconduct of its Directors, the calamity would be great; however, in a short space of time, a remedy or substitute might be found, to answer many very substantial purposes. But if its miscarriage should arise from the operations or interference of Government, confidence must vanish, and its restoration in any shape or form become impracticable.

Very few foreigners have understood the principles on which the Bank is established; they have always considered their Notes as Government paper, and the experience they have had of the practice of Governments in every country, induced them to suppose that when gold was refused on the presentation of the Notes, the Bank and the country were equally ruined. They could not distinguish between paper issued for the sole purpose of circulation, limited in its amount, and under the authority and responsibility of a corporate body, absolutely independent, – and that paper which Government could issue ad libitum, bearing an interest, which rendered it an object for persons to purchase as a productive investment of their capitals; – they were very much astonished to find the total amount of Notes in circulation to be so small, compared with the commerce and wealth of the country; and equally so, that after all, Bank Notes continued to circulate at par. Those opinions, however, did not prevail at home, for the knowledge of the sources from whence those Notes issued, namely, deposits of bullion, loans to Government, and commercial discounts, together with the confidence reposed in the Directors, from the manner in which they represented the consequences of those pernicious measures which were then pursuing, – and the resistance they finally made to the expectations of the Minister, when the case absolutely required it, – induced the public to place sufficient reliance in them, under such conduct, and with such responsibility; the more so, as the personal attachment of a very large majority of the Court of Directors to the present Administration was well known, and for whom the powers of the Bank had been stretched in a certain degree.

From long experience, the Directors of the Bank must understand correctly the amount to which their Notes can circulate without depreciation or discount; and although they acted very wisely at the awful moment to issue a larger sum than usual, yet the event has proved, that they have conducted themselves with equal judgment, by not extending their issues beyond what the currency of the country requires, and can support.

It was from a combination of these, and some other circumstances, not necessary to be mentioned at present, but more particularly from a confidence in the conduct of the Directors, as a corporate body, that they would maintain and preserve the independence of the Bank in their transactions with Government, notwithstanding the partial influence which now and then prevailed, – that their Notes continued to circulate at par, with the same facility and convenience to the public as before, and that confidence was restored to a degree much beyond what could have been expected; whilst, however, the slur must remain, and never can be effaced.

As the circulation of the Bank of England, although the most important, doth not form the largest part of that of the country in general, it becomes necessary to take a more comprehensive view of the subject, in order to entertain a correct opinion of the whole. The establishment of Country Banks is of modern date, and within my recollection; but I believe there was no material convulsion, with regard to circulation, from the Rebellion, until that which happened by the failure of the Air Bank, in the year 1772. This failure was accompanied with others of great extent at the same time in Holland; – but as it was evidently a partial, and not a general convulsion, the Bank of England acted very wisely, by affording even a liberal support to those houses whose solidity was unquestionable, leaving others which were rotten, to fall; and as they were swept away, confidence was gradually restored. The next check to commercial credit arose from the failure of a circulation established between Lancashire and London, well known in the courts of law by the case of Gibson v. Johnson, which has been so often tried; but, although the amount was large, it moved in so narrow a line, that it produced no general effect on the country. What happened in the beginning of 1793 was, however, very different: far beyond any thing which preceded, or has followed it, in magnitude, it pervaded, more or less, every part or place in both islands, and affected every description of property. The last, and most important event, in one respect, is that which compelled the Bank of England to suspend their payments.

During the interval between the failure of the Air Bank, and the distress of 1793, a very material change had taken place in regard to the general circulation: Banks had been established in almost every town, and even in villages, throughout the country; and in the larger towns rival establishments were formed. These produced a most important, and whilst it was secure, a bene-ficial change to the country, by increasing its circulation: but unfortunately the principles on which those Banks were usually established, were insecure, in their being compelled at all times to invest or employ the deposit left in their hands, and thereby rendering themselves incapable of facing a sudden storm, or, as it is called, answering a run upon them, which, from natural events, must, in a course of time, arise. A Banker in London never allows interest to his customers, and can afford to reserve a proportion of his deposits, to enable him to answer sudden demands, or a run on his house; as he thereby sustains no real loss, but only diminishes the amount of his profit. The country Banker is in a very different situation, for he allows interest on deposits, and therefore he cannot afford to suffer even a small sum to remain dormant and unproductive; for every 100l. which he suffers to remain in that predicament, is a loss of the interest which he pays to his customer, and which interest he must get reimbursed (by investing the money) before he can realise any profit for himself. Thus it will appear, that whilst the circulation was greatly increased, and its beneficial effects enjoyed, by the commerce, manufactures, agriculture, &c. of the country, it was founded on the most insecure principle, and liable to almost instantaneous convulsion, by unforeseen, and even trifling circumstances. This might be promoted, more or less, by the practice of particular establishments; for if Country Banks, whose principals are men of large unquestionable property, should fail, the contagion will immediately spread, and the consequences are incalculable. Thus, for instance, in the beginning of the year 1793, and of the present year, the Banks of Newcastle stopt payment, whilst those of Exeter and the West of England stood their ground. The partners in the Banks of Newcastle were far more opulent, but their private fortunes being invested, could not be realised in time to answer a run on their Banks. Their Notes allowed interest to commence some months after date, and were then payable on demand; by which means they had not an hour to prepare for their discharge. The Banks at Exeter issued notes payable twenty days after sight, with interest to commence from the date of the Note, and to cease on the day of acceptance. There can be no doubt but the practice of the Banks at Newcastle is more lucrative, whilst it must for ever be liable to a return of what has happened. The twenty days received at Exeter furnishes ample time to communicate with London, and receive every degree of assistance which may be required. It is therefore most earnestly to be wished, that a law should pass, to prevent Country Banks from issuing Notes payable on demand, as they never can be in a situation to pay without some notice; and the country ought to be protected against those convulsions which have arisen, and will continue to arise from such a practice.

Another circumstance contributed very materially to produce the distress of 1793, which was the sudden, unexpected declaration of war. That dreadful calamity is usually preceded by some indication which enable...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Acknowledgements
• Introduction
• Section One: The Classics
• Section Two: Modern Articles With a Domestic Focus
• Section Three: International