THE BANKERS' MAGAZINE AND Journal of the Money Market. APRIL, 1875. THE EFFECT OF SUPERSEDING THE EXISTING ENGLISH COUNTRY NOTE ISSUE WITH THE NOTES OF THE BANK OF ENGLAND.-No. III. THE two papers on this subject in the numbers of this Journal for November and December, 1874, discussed some points connected with the country note circulation, and some of the results which have followed on the gradual diminution it has undergone. Tables were given of the average yearly provincial note circulation from 1845 to 1873; and it was shown that in proportion as the restrictions imposed by the Acts of 1844-5 have gradually become more stringent, and the note issue in England has been increasingly centralized on the Bank of England, both the number and the extent of the fluctuations in the rate of discount charged by the Bank have tended to increase. Although it does not by any means follow that the whole, or even the greater part, of the increased liability to fluctuations, which the English money market has experienced of late years, is due to this cause alone, as other causes beyond question have also exerted a great influence, yet some considerable weight is beyond doubt to be ascribed to it. From the manner in which, by the Act of 1844, the note circulation of the Bank of England is immediately connected with the reserve, everything which tends to augment fluctuations in the circulation, tends also to increase fluctuations in the reserve. What occurs in the one department of the Bank is immediately reflected in the other, and an increase in the note circulation due to a greater activity in domestic trade, or to the industrial operations carried on at particular seasons of the year, has the same effect on the reserve as if it were a drain of gold for exportation abroad. The English money market is so easily disturbed by causes com VOL. XXXV. 21 paratively trivial; the reserve is, in proportion to the vast superstructure of credit which rests on it, so small; the stock of "ready money" kept in hand to meet sudden emergencies is so narrow, compared with the demands which may at any time be made on it; that influences which are in themselves really unimportant, produce effects quite out of proportion to their actual weight. It was exactly at this point that the provincial note circulation formerly performed, and still, though on a smaller scale, performs, a very useful function. It provides still, and used to provide in a greater degree, a "medium of exchange" suited to the requirements of those who needed it, without infringing on the supply of ready money at the Bank of England. It will be desirable to show an instance of this. The movements in the English provincial note circulation are influenced and governed by causes which occur every year with the same regularity as the seasons. The amount of notes in circulation rises every year, as a rule, from January onwards, till it reaches its spring maximum in April or May; it then declines till it reaches its minimum in August or September; from this point it rises till the months of October or November, when it drops again till the next spring. We do not propose at this time to trace out the whole course of all these fluctuations in the note circulation, but to draw our reader's attention on this occasion to one point in it only, and that is, the amount and the extent of the rise in the circulation which occurs every year between the months of August and October. A table stating this will be found at the end of this paper. In it, in the first column, the aggregate circulation both of private and joint-stock banks is compared in the months of August and October for every year from 1845 to 1874. The next column shows the extent of the increase in October, as compared with August. The next column, the proportion that this increase bears to the similar movement in 1845 (the first year in the table). The remaining columns of the table give the annual average circulation of provincial notes for the corresponding years. The last column shows the proportion which the total circulation of each year bore to its amount in 1845. Three points will strike the reader in examining this table. The first is the extent to which the country note circulation has been reduced by the operation of Sir R. Peel's legislation. In consequence of its influence, the average circulation, which was £7,700,000 in 1845, became reduced to £4,960,000 in 1874. The next is the fact that the circulation expands every year something like half a million between the months of August and October. And the third point is, that though this annual increase is now on an average smaller than it was thirty years ago, yet it has by no means diminished in the same proportion as the annual circulation has diminished. Even so recently as 1870, but five years ago, the increase in the month of October, as compared with that in the month of August, was absolutely larger than the similar increase in 1845; and although, as was just mentioned, the autumnal expansion tends to decline, yet the decrease in it is by no means so large as that in the annual average circulation. The reason for this curious fact is, that those provincial banks which have retained their note issues are principally situated in the agricultural districts. It is in these districts that the unused power of issue is ordinarily found, and it is in them, also, that the autumnal demand for harvest wages, and other purposes connected with agricultural pursuits, runs the sharpest. Hence the autumnal increase in the note circulation has continued to maintain nearly its original proportions, notwithstanding the diminution in the annual average which is influenced by other causes. The autumn demand for the circulating medium which has been mentioned, and the severity of which is thus in some degree mitigated by the existence of the provincial note circulation in England, is very large indeed in extent. It is a demand in great degree for domestic purposes, that is to say, to meet the requirements of wages, agricultural operations, and in some degree also of holiday makers in the autumn. The total demand has been estimated as not being by any means less than two millions in extent; and though this statement is a mere estimate, it probably errs rather on the side of being too small than of being too large. Some information on the subject is to be found in the volumes of miscellaneous statistics published by the Government. In them a statement is given of the amount of gold forwarded annually to the branches of the Bank of England. The following tables, compiled from this source, of the average amounts of gold coin sent to the branches of the Bank of England during every month of the year from 1855 to 1870, show how considerable is the demand for gold in the later months of the year on the Bank; though, as was mentioned above, the informa. tion given in this statement is far from complete, as it contains merely the amounts which were transmitted from the head office of the Bank of England to its branches, and takes no account of the, doubtless, far larger sums which are drawn from the Bank in London, for the same purpose, and transmitted through other channels, yet it is some indication of the amount of money in course of transit over the country at different periods of the year. And at least it has this value, that it is the only really authentic statement, of this description, which can be quoted. AVERAGE AMOUNT (1855-1862) of Gold Coin sent to the Branches of the Bank of England during each month of the Year. .. [This Table was compiled from the "Miscellaneous Statistics," by Professor Jevons.] 50,000 May 166,000 Aug. 219,000 Nov... 263,000 209,000 Dec... 214,000 AVERAGE AMOUNT (1863-1870) of Gold Coin sent to the Branches of the Bank of England during each month of the Year. These tables show conclusively that it is during the later months of the year that more money is transmitted from the head office of the Bank of England to its branches; and it is clear that if the existing provincial note circulation were swept away, and replaced by a note circulation issued from one central office, whether that central office were a Government department, or the issue department of the Bank of England, the regular autumnal increase in the provincial circulation of the English country note issues would of necessity be transferred to that central office. As matters stand at present, every fluctuation in the Bank of England note circulation is reflected in the reserve of the Bank. And it is impossible either to see what advantages are to be obtained in augmenting the demands on that reserve, as must of necessity follow if the whole of the note circulation proceeded from the Bank of England, or to doubt that, if the existing provincial note circulation were abolished, the demands on the Bank of England reserve and the consequent fluctuations in the rate of discount would, with existing arrangements, be distinctly increased. A secured provincial note circulation, with a reserve of its own, independent of the Bank of England, would not necessarily in its fluctuations draw on the Bank of England reserve. Such an issue would have the great advantage of providing for the purely provincial requirements of the country, without causing a purely domestic demand for the circulating medium to have the same effect on the Bank of England reserve as a demand for the purpose of exportation abroad. It cannot be doubted that from this point of view the existing provincial note circulation, which provides for the internal requirements of the country without having recourse to the reserve of the Bank of England, is a great public advantage, and that if it were superseded by the note circulation of the Bank of England, the result would be an increase in that pressure, which generally recurs in the autumn, on the English money market. |