THE BANKERS' MAGAZINE AND Journal of the Money Market. MAY, 1875. THE EFFECT OF SUPERSEDING THE EXISTING ENGLISH COUNTRY NOTE ISSUE WITH THE NOTES OF THE BANK OF ENGLAND.-No. IV. THE PERIODICAL FLUCTUATIONS IN THE ENGLISH COUNTRY NOTE CIRCULATION. We propose in this paper to give an account of the fluctuations which occur periodically in the English country note circulation. No banker can by himself singly, any more than a number of bankers could collectively, cause by an act of his a permanent increase in the amount of notes floating in the country, so long as those notes are freely payable in gold on demand. If any amount of convertible notes, large or small, in excess of the requirements of their customers, are issued by a bank, those notes will surely and certainly be returned to them for payment. The holders of such notes, if they do not want to employ them otherwise, will either present the notes for payment in gold themselves at the banker's counter or they will ask him to receive the notes and place them to their credit, or they will pay the notes in to some other banker, who will present them for payment. The real limits of a convertible note issue where no fixed limit, such as that marked out by the Act of 1844, exists; are bounded by the requirements of the public, and by those requirements alone. When they increase, the note issue increases; when they diminish, the circulation also dwindles. Nor can any combination of bankers do more in this way than one banker acting single-handed. If they unwisely permit an undue amount of speculative purchases among their customers, and if-what by the existing state of business in England is really impossible-such speculative purchasers kept up prices for a while by paying for the articles in notes, and an enlarged circulation of notes were, for the moment, the result, those notes would follow exactly a similar VOL. XXXV. 27 course to those we have just mentioned. They would be presented at the banker's counter for payment either by the individual holders or by bankers, into whose possession they had come through the medium of their customers, or the banker's own customers would bring them to him to be placed to the credit of their own accounts. No attempt to keep an undue amount of notes-which are convertible readily into goldin circulation, can succeed. The banker is in this a mere passive agent. He merely supplies what is needed as long as it is needed. When the need ceases, the notes remain quiet in the banker's till. The history of the English country note circulation during the last thirty years amply bears out this statement. During that time there have been countless variations in prices. Consols have fluctuated from 78 in October, 1847, to 102 in June, 1852, and from 84 in May, 1866, to 961 in June, 1867. The Bank rates have fluctuated from 10 per cent. on the 12th of May, 1866, to 2 per cent. on the 25th of July, 1867; from an average for the year of 7 per cent. in 1864 to an average of 21 per cent. in 1868. The price of wheat had fluctuated from an average of 79s. 4d. per quarter in 1855 to 40s. 2d. in 1864, but the fluctuations in the note circulation have not exceeded the fluctuations in consols, and have been less than the fluctuations in the rate of discount charged by the Bank, or in the price of wheat. The explanation of this circumstance is a very simple one. And it is this. The provincial note circulation supplies a real want throughout the country, and it represents the wants and the fluctuations of the retail trade in the country. If we examine into the amounts of commercial bills floating at any time in the country, we shall find that the small bills, up to say £50 in amount, which represent the retail trade of the country, fluctuate less in number and amount than the large bills which, besides actual business, represent commercial speculation. The provincial note circulation, therefore, is more uniform in its fluctuations than the circulation of the Bank of England as it represents the movement of the internal trade of the country. When the requirements of trade demand an expansion in the circulation, it is able to expand with the business which calls it into use; when trade slackens and these requirements no longer exist, the circulation slackens also. The notes which are no longer needed return to the bankers' tills, there to remain dormant till a fresh period of activity draws them out again. In the agricultural districts, as seed-time and harvest recur in their appointed season; in the industrial and manufacturing districts, as the periodic demands of trade awaken into activity or sink into quiet, so the country note circulation follows the requirements of provincial industry. The issuing banks in England, about 170 in number, are established in districts differing very much in character from each other, but they occupy what may be termed representative districts of general industry throughout the country, and the requirements of trade in these districts recur year by year periodically with a very great uniformity. Every person engaged in business is well aware that the amount of his transactions is rarely uniformı throughout the year. In one month he has as much or more to do than he can readily get through; at another month he is slack of work, and from year to year these fluctuations continue. The same reasons which cause his customers to employ him one year recur the next; the same motives act on them, and cause them to want the articles which he can supply. He sets his labourers to work; they in their turn diffuse a greater activity among the shopkeepers to whom they bring their custom. Thus the ramifications of business tend to extend themselves through countless channels. The table which is given at the end of this paper contains the average circulation, month by month, of the English issuing banks for the thirty years from 1844 to 1874. It is constructed with a view of tracing out what the fluctuations in the country note circulation are as exactly and closely as possible. For this purpose we have not followed the monthly returns as given in the London Gazette, since, as they are for periods of four weeks they do not really coincide exactly with the calendar months, and therefore, as the dates to which the returns are made do not themselves coincide, they cannot form so complete a basis of comparison from year to year as the table which we have constructed. In arranging it, the circulation has been taken, week by week, during the period since the passing of the Act of 1844, and the table thus formed shows the amount in circulation during each calendar month. It will be obvious that this is the only plan on which an exact examination into the periodical fluctuations can be made. At the end of the table showing, as has been mentioned, the fluctuations of the total circulation (inlading both private and joint-stock banks) for each month for the last thirty years, a summary table is given, to which we specially desire our reader's attention. In this table the averages of the ten years from 1845 to 1854; from 1855 to 1864; and from 1865 to 1874, are brought together: likewise the average for the whole thirty years. A column, stating the proportion which each month in the period under consideration bears to the total average of that period, will be found added throughout all the tables. By examining this column the reader will be able to observe the almost exact regularity with which these fluctuations occur from month to month and from year to year. One other point-it is a very remarkable one-must be especially noted, and it is this. The average actual country note circulation has experienced a very great alteration in its amount during the thirty years over which our tables extend; from an That is to say of 35 per cent.; but notwithstanding this, the periodic fluctuations have recurred year by year, and still recur, with precisely the same proportionate differences in the latter as in the earlier years. One instance of these periodic fluctuations-the regular increase which takes place between the months of August and October in each year-was referred to in our last number. On examining that table it will be seen that this rise regularly recurs year by year. Remarks have not unfrequently been made as to the drop in the country note circulation between the months of April and August in the year 1866, but in looking at that table, and the column of proportionate figures which forms part of it, we shall see that the rise which took place between the month of August and the month of October in that year was very considerably larger than the average rise which usually takes place between those months in every year, and that in fact it was only exceeded in ten years out of the thirty which are embraced in that table. Though no doubt the drop in the circulation in the year 1866 was larger than usual, yet it forms part of a movement in the circulation which recurs with great regularity, and it was followed in that very year by an unusual rise in the month of October. The examination of these tables will assist in explaining to our readers the useful part which the country note circulation plays in the internal trade of the country. If the provincial note circulation were transferred, either to the Government or to the Bank of England, it would cease to be of the service which it now is. At present it supplies the wants of the country without interference with the central banking reserve. But if its place were filled with the notes of the Bank of England, every movement in local trade would affect the reserve of the Bank, and greater fluctuations even than those which aiready exist in the rate of discount would inevitably ensue. ANNUAL AVERAGES of Total English Country Note Circulation for the years 1845-74; showing that the fluctuations in it from month to month recur periodically in cach year. 1847. Average of Year. £ January 7,690,000 99 February 7,550,000 98 April. March 7,560,000 98 7,990,000 103 May 7,850,000 102 7,530,000 97 August Jon..... 7,850,000 102 Jan... Feb.. 7,580,000 98 Feb... March 7,710,000 100 March April 8,040,000 104 May.... 7,860,000 102 7,520,000 97 June 7,530,000 97 June 7,640,000 99 July. 7,890,000 107 Jan..... 6,220,000 Jan. 7,750,000 105 Feb... 6,150,000 Feb... . 6,160,000 99 7,790,000 106 March 6,170,000 March April 8,020,000 109 April 6,640,000 106 April 6,100,000 98 6,560,000 105 May 7,810,000 106 May.... 6,520,000 May. 6,460,000 104 6,180,000 96 August 6,350,000 99 6,430,000 104 Oct. 6,890,000 108 6,310,000 102 Nov. 6.760,000 105 6,560,000 102 6,050.000 97 Dec.. .... 6,220,000 100 6,130,000 99 June 6,250,000 97 June 6,700,000 98 June 6,620,000 97 July 6,310,000 98 July. 6,750,000 99 July. 6,510,000 95 94 August 6,620,000 97 August 6,340,000 93 5,890,000 95 Sept. Sept. 6,780,000 99 Sept. 6,530,000 96 Oct. .7,160,000 105 7,100,000 104 Nov. Dec..... 6,880,000 ΙΟΙ 7,080,000 104 |