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HUNT'S

MERCHANTS' MAGAZINE

AND

COMMERCIAL REVIEW.

FEBRUARY, 1859.

Art. I.-LORD OVERSTONE ON METALLIC AND PAPER CURRENCY.*

THE year 1857 will ever be memorable as that in which the first universal panic in the commercial world took place. Panics there had been before; but they were to a great extent local, confined to some particular country; and, although other parts of the world might suffer from their connection with the panic-stricken community, they escaped the full force of such a calamity. But, in the year 1857, the time had arrived when, owing to the great facilities of intercourse, and the vast extension of commerce, all the nations of Christendom had become so closely connected in business, and so much alike in the character of their several currencies, that the failure of a comparatively small corporation caused a general explosion. This was a strange and very suggestive fact. It told of a new era in the commercial world. It came, too, like a thunderbolt out of a clear sky. Neither war, pestilence, nor famine-the usual disturbers of the monetary system-had any essential influence in producing it. The civilized world was at peace; health generally prevailed; and crops were unusually abundant. Up to the 24th day of August, 1857, not a cloud rested upon the horizon; all was calm and still. But on that day the Ohio Life and Trust Company, in New York, stopped payment. A very trifling event, surely, one would suppose, as connected with the whole monetary affairs of Christendom, yet sufficient to explode the credit system of the world, and throw all its industry and commerce into confusion! These facts, so patent to all mankind, could not fail to make a deep impression on the minds of reflecting men.

What must be the real causes which lie at the bottom of all this mischief? How can we explain these astonishing phenomena? What kind of a currency is that which can be overturned in a moment, and without any adequate external cause? These questions were asked with an em

Tracts and other Publications on Metallic and Paper Currency. By the Right Hon. Lord OVERSTONE. London: Longman, Brown & Co. 1858.

phasis and an earnestness, too-never before witnessed. For, if there were no sufficient extraneous cause, then the natural inference was, that the cause must lie within the currency itself; and to this just conclusion the common sense of the common mind very soon arrived. Thousands, who up to this period had never questioned the propriety and utility of a mixed currency, now began to regard it with strong suspicions, or absolute aversion. Newspapers and periodicals labored with articles upon this all-absorbing subject. Everybody could write, for everybedy felt and suffered. But, what was the nature of all this financial literature, so to call it? With few exceptions it was of the most superficial character, -appertaining to results, not to causes; to the phenomena, rather than the philosophy of a mixed currency. And it is certainly remarkable, that an event which gave a shock so severe to every department of industry and commerce throughout the world, and spread ruin so terrific on every hand, should call forth so few publications worthy of the serious and important occasion.

Among the few valuable works to which the recent disturbances gave rise, is that, the title of which we have placed at the head of this article; and this is not an original work, drawn out by the events of 1857, but a collection of "tracts and other publications," issued in previous years, and on various occasions. The volume is, nevertheless, very opportune, because it comes from a distinguished and able writer, who has given many years to the consideration of the currency question; and who, as a banker of large experience in the commercial metropolis of the world, and as holding a high political and social position, is entitled to be heard with attention and respect.

About one-half of the work, which extends to more than 600 pages large octavo, is occupied by the testimony which his lordship gave, as Samuel Jones Lloyd, before Parliamentary committees, on various questions concerning currency and banking.

The first part of this evidence relates to "banks of issue," and espècially to the conduct of the Bank of England; and the principles on which, according to his lordship, it ought to regulate its "issues;" that is, its paper circulation. The answers given by him upon this subject extend through 144 pages. They are, indeed, often mere repetitions of the same ideas, carried out to a most tedious length; but they were called for by the almost endless questions and cross-questions, put by the Honorable Committee; some of whom evidently did not like the opinions advanced by his lordship, and would have been pleased to overthrow them.

The second part of the "Extracts from Evidence" consists of testimony given by the same person 'in 1848, before another Parliamentary committee on "Commercial Distress," and was called out by the severe sufferings through which England had passed in the year preceding. This distress, or "pressure," Lord Overstone considers as "caused by a deficiency of capital to maintain the mercantile engagements that were in existence. The deficiency of capital arose from the failure of the crops, both in this country [England] and throughout Europe; and also from the extraordinary diversion of capital from trading purposes to the construction of railroads." The witness was especially examined as to the influence of the act of 1844 upon the action of the Bank of England, and upon the commercial affairs of the country generally. To these his lordship gave extended replies, maintaining throughout, with great ability and, we think, correctness, that the operation of that act had been salutary.

Another considerable part of the book is taken up with the letters of "Mercator" [Samuel Jones Lloyd] to the Times, on the "Bank Charter Act." These are dated at different periods from 1844 to 1856. They maintain with great force the importance and utility of that act; and for no one thing, perhaps, are the people of England more indebted to his lordship, than for these letters. They undoubtedly exerted a decisive and favorable influence in behalf of the greatest act, and, we may say, almost the only one founded on the true principle, which the Parliament of Great Britain ever passed, in regard to its mixed currency system.

Besides these, there are "Remarks on the Management of the Circulation," "Reflections on the Money Market," "Letters to the President of the Manchester Chamber of Commerce," &c.; in all, ten different tracts and publications. Although this volume is far from being adapted to popular reading, it is valuable to the patient student of the currency question. It contains many important facts, which show the nature and operation of a mixed currency; it affords the most overwhelming evidence of the evils which such a currency has inflicted on 'England within the present century; it shows how frequently, anxiously-aye! and vainly, too-Parliament has striven to regulate it.

Although it is assumed by his lordship, in every part of the work, that a mixed currency is desirable, on account of its "convenience and economy," he nowhere attempts to prove it to be so, or even makes an argument in favor of the only reason, which he gives, why such a currency should exist at all. Yet on the "convenience and economy" of a paper circulation, he bases entirely the propriety of the whole system, and says, expressly, that the British government authorizes this kind of currency only because it is economical and convenient.

With the most respectful deference to Lord Overstone, we submit that in so important and grave a matter-one, too, which has so often engaged his attention, and occupied his time-the first question really is, whether the "convenience and economy," which he assumes as necessarily resulting from the use of a mixed currency, are sufficient to counterbalance the many and great evils, which he most conclusively shows have always attended the use of it. That is the point to which, we think, his inquiries should have been first directed; and as this seems to have escaped his notice altogether, we wish to call his attention to it, and the attention of all others who feel an interest in the subject, through the pages of this Magazine; which we have selected because it has, we believe, the widest circulation in this country of any publication of the kind, and is found in most of the principal offices and libraries of Europe. We cannot, however, proceed to do this without first defining the terms we employ; for we are impressed with the conviction, that no small share of all the confusion and misapprehension, that exists in relation to monetary affairs, arises from the use of terms which are not precise and appropriate. Gold and silver, being universally known and valued, are the commodities of which the money of commerce consists. They are the true currency of trade throughout the world. On this point there can be, and, as far as we know, there is, no difference of opinion. But different nations have differing local currencies which circulate within their respective limits.

In general terms, there may be said to be four kinds of currency— Firstly. That which is composed of the precious metals, gold and silver-metallic currency-the universal money of commerce.

Secondly. That which is composed wholly of paper, not redeemable on demand, and having a forced or unnatural circulation through the power or influence of government. This is paper money, or credit currency, and its use is confined to the country in which it is issued.

Thirdly. That which consists of paper issued by banks having an amount of specie in their vaults always equal to the amount of their bills or notes in circulation. It differs, in its character and effects, in no particular from metallic currency, except in its greater convenience in use. This may be termed mercantile currency.

Lastly. That which consists of paper issued by banks having in their vaults an amount of specie less than the amount of notes issued, but sufficient to redeem their circulation as fast as it is likely, under ordinary circumstances, to be demanded. This is a mixed currency; and the mixture consists in the fact that so much of this currency as is actually the representative of specie in the vaults, is virtually metallic, or value money; while so much of it as does not rest on specie in the banks is merely credit money, based on general property. This currency may be one part value money to two parts credit, or one to ten, or fifty, according to the pleasure of those who issue it, so that its precise character can never be determined except by statistics derived from the banks themselves. Of course, the quality of it is commonly a matter of uncertainty to those who use it. It is a fluctuating currency, because expansion must be followed by contraction; and the extent of its fluctuations depends upon the proportion which exists between the two elements of which it is composed. As, for example, a bank that has in circulation ten dollars in bills for one of specie, must, if called on for $5,000 in specie, take in $50,000 of its circulation. Otherwise, if further demands should be made upon it, the bank would fail. As a case in point, a highly respectable bank in Massachusetts, managed by gentlemen of distinction and character, had in circulation (as we find by official returns) on the 4th of July, 1857, $420,717, and only $9,229 of specie in its vaults. Now, it is evident that, in case of any demand for specie, such a bank must take in its circulation as fast as possible; and hence we find that this bank took in $265,964, that is, 63 per cent of its circulation, in less than four months; and most of it in less than six weeks! Other banks that were extended only one-fourth or one tenth as much, we find, by the same returns, contracted their circulation only in a corresponding degree. These facts, which are merely characteristic of a mixed currency, are given to illustrate its nature. As a general fact, mixed-currency banks are established, at the present day, in most of the countries of Christendom, with power to issue as much paper as they think they can redeem on demand. In some cases, as in England, and in most, if not all, of the States of the American Union, a limitation is fixed by law, beyond which the banks may not go; but we know of only two or three cases where any proportion is established by law between the bills which a bank may issue, and the amount of specie it shall have on hand with which to redeem them.

Premising thus much in regard to the different kinds of currency, we proceed to examine Lord Overstone's claim that a mixed currency is a desideratum on account of its "convenience and economy." We do not perceive, in any of the quotations from the expressed opinions of bankers and financiers contained in the work before us, that any of them advance any other reason in favor of such a currency. The idle fallacy, once so

commonly entertained in this country, and perhaps to some extent in Europe, that there "is not enough of the precious metals in existence to meet the wants of commerce," is not maintained by Lord Overstone, or, so far as we know, by any other English writer. The idea, indeed, is simply absurd.

The question, then, is narrowed down to one point. Is a mixed currency so convenient and economical as to counterbalance all the evils which everybody admits arise from it?

We readily grant that a paper circulation is a great convenience to the business world; but we say that, in order to have the full benefits of such a circulation, it is by no means indispensable to have a mixed currency. A paper circulation has no more necessary connection with a mixed currency than with a metallic one. If it were otherwise, we should be compelled to have the former, or forego the convenience of paper money. But it is not. A system of banking which should require each institution to keep on hand as large an amount of specie as it had of bills in circulation, would furnish a currency having all the advantages of "convenience," which Lord Overstone claims for a credit currency, and, at the same time, be self-regulating and reliable. Indeed, his lordship refers to a similar currency in his answer to question 2,761, put by Sir Robert Peel, when he speaks of the Bank of Hamburg, one of the oldest and best managed institutions in Europe, which has furnished a convenient currency which has been in circulation since 1619, has never been dishonored, or needed any regulating This fact is well known to all Europe. A mercantile currency like this, which shall secure all the advantages of a paper circulation, and yet have a full specie basis, giving to the public all the advantages of both, is therefore no abstraction, or untried, visionary experiment. It has been a practical reality for nearly two centuries and a half. The correctness of this statement, the noble lord would, doubtless, fully admit; and if so, what is the necessity for a mixed currency, in order to secure the convenience of a paper circulation! Very evidently there is no such necessity whatever, and the whole argument in favor of a mixed currency, as necessary in order to secure the convenience of paper money, falls to the ground. We think we may, therefore, dismiss the argument in favor of a mixed currency, derived from its " convenience," as fallacious. But the second point, and one not so readily disposed of, is, that such a currency is desirable on account of its "economy."

And now we must go somewhat into facts and figures. The Bank of England, and certain other banks in the United Kingdom, are allowed, by the act of 1844, to issue their notes to a specified amount, without having any specie whatever in their vaults wherewith to redeem them; but, for all they issue above that amount, they must hold an equal sum in specie. By the report of the Parliamentary Committee of 1858, on "the causes of the recent commercial distress," as quoted in the last November number of this Magazine, it appears that the several amounts which the banks of the United Kingdom are "authorized to issue without any specie basis" are as follows:

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