INQUIRY INTO THE CURRENCY PRINCIPLE

Excerpt:

It was held by most writers of any authority on the subject of the Currency, till within the last few years, that the purposes of a mixed circulation of coin and paper were sufficiently answered, as long as the coin was perfect, and the paper constantly convertible into coin; and that the only evils to be guarded against by regulation, were those attending suspension of payment and insolvency of the banks, a large proportion of which blend an issue of promissory notes with their other business. This, in point of fact, is what is understood in general terms as the banking principle, and is that upon which our system of currency is constructed and conducted.

But a new canon of currency has of late been promulgated by persons of no mean authority. According to these authorities, it is not sufficient that the bank notes should be at all times strictly convertible into coin, and that the banks, whether issuing or not issuing, should be solvent; they consider that a purely metallic circulation (excepting only as regards the convenience and economy of paper), is the type of a perfect currency, and contend that the only sound principle of a mixed currency is that by which the bank notes in circulation should be made to conform to the gold, into which they are convertible, not only in value, but in amount; that is to say, that the bank notes being supposed to be a substitute, and the only substitute, for so much coin, should vary exactly in amount as the coin would have done if the Currency had been purely metallic; and that the test of good or bad management is not, as is considered under the mere banking principle, in the extent or proportion of reserve in treasure and in immediately convertible securities held by the banks; but in the degree of correspondence between variations in the amount of bullion, and variations in the amount of bank notes in circulation. A regulation of the issue of bank notes, in conformity with this doctrine, is now understood to be designated as the Currency principle.

With a view to the application of this principle to practice, it has been suggested that either a national bank should be established under commissioners, whose duty and functions should be confined to the exchange of paper against gold, and of gold against paper, for all beyond a fixed amount of paper issued against securities; or that the Bank of England should be the sole source of issue, under the strictest rule of separation of the functions of issue from the merely banking department.

The arguments urged in favour of such separation have, as it should seem, made considerable impression on the public mind, and schemes founded upon this principle have been strongly pressed on the attention of government, on the ground not only of guarding against the danger of suspension and insolvencies, but of imparting more confidence and stability to credit and trade, and of securing greater steadiness in prices, and thus obviating or abating the alternations of feverish excitement, and the extreme of depression, which have prevailed under the existing system, and which are imputed to a neglect of the Currency principle.

Historical Reprint - From 1844