HC Deb 08 December 1857 vol 148 cc398-409

Bill considered in Committee:—

(In the Committee.)

Clause 1 agreed to.

Clause 2. (The restriction on the amount of securities to be taken in the Issue Department suspended.)

MR. MALINS

said, the effect of the Government letter was to authorise the Bank of England to exceed the limited issue of £14,500,000 upon securities, but that letter was unlimited in its terms. It had been stated by the Chancellor of the Exchequer that that letter had been acted on only to the extent of £2,000,000. The whole of that sum, however, had not been issued to the public; but according to the accounts of the Bank of England, published in last Friday's Gazette, the amount of notes in the banking department was £2,268,000, and consequently, if the Government letter had not been issued, and things had gone on as before, the amount of reserved notes would have been reduced to £268,000. The object of the Bill was to give legal validity to that which had been done by the Government contrary to law, but most beneficially to the public. The second section would suspend the operation of the Act of 1844 until the expiration of twenty-eight days after the first meeting or sitting of Parliament in 1858, and then came a proviso which introduced a most prejudicial qualification, the removal of which was the object of the amendment he was about to propose. The proviso was to the effect that if before the expiration of the time mentioned the Bank of England reduced the minimum rate of interest below the rate of 10 per cent, the suspension of the Act of 1844 should cease. So that, although the Bank might have a sufficient reserve to justify them in reducing the rate of discount, the effect of that provision was to make it obligatory on the Bank of England to maintain the enormous rate of interest of 10 per cent, or to bring the operation of the present Bill, as far as the second section was concerned, to an end. The Chancellor of the Exchequer stated last night that this was the highest rate of interest ever known in the history of the Bank of England since its foundation in 1697. The highest rate previously known was 8 per cent. Now, was it consistent with the well-being of this great commercial country that the rate of interest should be fixed at 10 per cent? Could commerce exist or flourish under such a rate? What was the operation of this rate of interest? In the first place it created alarm, and the borrower was afraid to ask the lender for money because that rate of interest was understood, while it prevailed, to act as a prohibition to the loan of money. It operated not so much against the great trader, the holder of first-class paper, as against the bills of the smaller trader, which were not discounted for less than 15 or 20 per cent. How was the trading interest to exist under such circumstances? Mr. Chapman in his evidence said that no person could trade anew on 10 per cent—that was, no person could enter into new transactions. Did the Govern-men, then, mean to proclaim that all new transactions in this country should be stopped for the next two or three months? He had not as yet heard any reason given which could justify the raising of the rate of discount from 6 per cent in July to 10 per cent, as it stood now. The excuse assigned was that the gold was to be prevented going out of the country, and the exchanges were to be turned in our favour. But did this compensate for the ruinous depreciation in the value of our manufactures, which had taken place? He was assured, for instance, that silk within the last month or two had been diminished in value 40 per cent. In the iron districts of Wales, likewise, iron rails, which were before worth £8 per ton, were now attainable at £5 per ton. When it was considered how many thousands of men were engaged in the manufacture of these rails, it was no light matter to have the price reduced so that it would no longer answer the master's while to employ men to make them. It was supposed that if there were not this high rate of discount the result would be the withdrawal of the gold from the Bank of England. By the accounts in the Gazette of last Friday it appeared that the bullion in the Bank up to last Wednesday night was not less than £7,356,467, and that the amount of notes in the hands of the public was £21,102,430. Now, the gold was in the issue department, with the exception of a small quantity, some £300,000 or £400,000 in the banking department, and that gold, amounting to £7,000,000 in round numbers, was positively locked up, and could not be released except by the return of some portion of the notes representing those £21,000,000. Therefore it was only by the diminution of the notes that the gold could be taken away, and was it within the range of possibility that the whole £7,000,000 of notes would be returned to the Bank? From the return annexed to the Report made by the Bank Committee of last Session, it appeared that for the last eight years the notes in the hands of the public had not gone so low as £18,000,000. On the 22nd December, 1849, the amount was £17,803,000, but in the week following it had risen to £18,227,000, and since that the minimum had been £18,000,000, and that being the case, he asked on what principle could it be said to be, he would not say probable, but possible that the notes in the hands of the public should now be reduced below £18,000,000? It was impossible that the notes held by the public could be reduced so low as £18,000,000, and as the amount of gold held by the Bank could be reduced only by a contraction of the circulation, the only reason given by the Government for maintaining so high a rate of interest as 10 per cent—namely, that it was necessary to preserve the gold in the coffers of the Bank—fell entirely to the ground. Then the notion was, that it was necessary to maintain the convertibility of our notes. The Bank at this moment had only £7,000,000 in gold in their coffers. Of the twenty-one millions of notes which were out, there were fourteen millions and a half nominally convertible but in reality inconvertible. By law they were issued on the foundation of securities, and, in fact, there was not gold in the Bank to meet them were they produced. The experience, however, of the ten years before the passing of Sir Robert Peel's Act showed that the minimum average of notes in possession of the public was £16,000,000, and since then it had never been less than £18,000,000. They had thus gone on for twenty years with the notes never below £16,000,000, and why then should they abstract from the public a rate of interest so prejudicial to all the great interests of the country? Mr. Chapman had stated, and the right hon. Gentleman himself had admitted last night, that it was a great national evil, when the rate of interest was so high as 10 per cent, or even 7 per cent; for when the Bank rate of interest was even 7 per cent, the interest actually paid by the shopkeeper and the farmer was always from 3 to 5 per cent more. "What then was the effect of the present state of things upon trade? They might read it in the daily papers and in the trade reports every Monday morning; from which it appeared that there was hardly a mill in Manchester at the present moment that was working full time. He did not deny that the monetary collapse in America might have had some share in bringing about our own troubles, but that share was a trifle compared with the effects produced by a feeling being universal, that every prudent man ought to suspend his operations and not enter into any new engagements so long as the rate of interest remained so high. It had been said the other night that the profits of trade would never pay a rate of interest as high as 10 per cent—why then maintain that rate at such a point? The Chancellor of the Exchequer had stated that he was only following the precedent of 1847; but what was that precedent? The rate of interest in 1847 was 5½ per cent, and the Government authorised the Bank to infringe the law provided that they charged 8 per cent. The public would never have tolerated discounts at that price but for the relaxation of the law; but the operation of the Act had been gradually to familiarise them with 7 and even 8 per cent; although it had not enabled them to bear a high rate one whit the better. Take the case of mortgages. The land, they knew, only yielded 3 per cent, and how could they pay 10? If that rate were kept, the land must, in the course of a few years, change its proprietors. Take, again, railway property. It appeared that there were debentures secured upon railways amounting to £160,000,000, a large portion of which required to be renewed every month. Those railways could either not get their debentures renewed, or they must submit to ruinous terms. The evil effects of the present state of things upon the agricultural, the railway, the shipping, and the commercial community could hardly, therefore, be exaggerated; and in the meantime there was not the slightest necessity for it; the convertibility of the note not being in the slightest degree endangered. Twice, however, the Bank had been in danger of stoppage for want of notes, and because they had locked up so large an amount of gold in the issue department. He contended that they had exposed the interests of the community to the greatest possible danger, for no other reason whatever than the fancy of the late Sir Robert Peel for dividing the Bank of England into two departments. The only justification offered for maintaining a high rate of interest had failed them, and he trusted the Committee would agree with him—in as much as the House and the Government had expressed such unbounded confidence in the Bank of England, and concurred in praising the prudence, foresight, and judgment with which they had conducted the finances of the country—that the arbitrary restrictions imposed upon them by the proviso in the Bill should be expunged, and that, instead thereof, the Bank Directors should have a discretion vested, in them.

Amendment proposed, to leave out from the words "Provided always" to the end of the clause.

SIR JOHN TRELAWNY

said, that, as he understood the hon. and learned Member, he wished that the Bank should discount in such a manner as should be advantageous to the interests of merchants, railway directors, and others engaged in trade, and that if the funds of the Bank fell short and it sustained any loss, the British public should make up the difference. He could not imagine that the hon. and learned Gentleman seriously expected the Government to support such a view. As one very much interested in the state of our finances and very anxious to keep down the Estimates, he could not assent to such a proposal. In 1844, being but imperfectly informed upon this subject, he read with much admiration the articles published by the hon. Member for Devonport (Mr. Wilson) in the Economist, which he then thought conclusively proved that as long as convertibility existed no notes which were needed could remain out in the market. It now appeared to him that some hon. Members wished to argue that what was true of a convertible was also true of an inconvertible currency. He himself was in favour of a convertible currency, and thought that the best course to pursue would be to leave gold as free as corn. In these matters we seemed to be performing the evolutions of a political quadrille. At one time we had a most ingenious sliding scale to keep corn in the country, and now we seemed to be adopting a similar machinery to preserve ourselves from a dearth of gold. If there was to be a Committee on banking, it was desirable that there should be upon it some person who on these subjects was a pure sceptic, who was not convinced, who was not pretentious, and who did not profess to be informed. That was his case. He professed to be ignorant and wished to be informed. The onus of convincing him lay upon the Government. At present he believed that they had no diagnosis—they were quite at sea, It had been well said that "fools rush in where angels fear to tread," and he was afraid that they had given an example of that, not only on questions of currency, but with regard to all matters of social and political economy. As, however, the Act of 1844 had broken down in the only instances in which it had been tried, he for one was not prepared to endorse it.

THE CHANCELLOR OF THE EXCHEQUER

I must be excused for not subscribing to all the doctrines contained in the speech of the hon. Baronet, but so far I agree with him that it would not be advisable for the Committee to expunge the proviso to which the hon. and learned Gentleman opposite (Mr. Malins) objects, and I hope in a very few words to be able to satisfy the Committee that no sufficient reason exists for altering the Bill as it is now printed. The ground upon which that proviso was introduced was this:—When the letter of 1847 was addressed to the Bank the Government inserted, and in my opinion judiciously inserted, the condition that so long as the Bank continued to exercise the extraordinary powers conferred upon it the rate of discount should not be below 8 per cent. The rate of interest then prevailing was, according to my impression, 6 per cent, but according to the statement of the hon. and learned Member for Wallingford 5½ per cent, and the Government required that it should be raised to 8 per cent. At that rate it continued for about three weeks. All that the Government did when they issued their letter in the present year was to say— In order to prevent this temporary relaxation of the law being extended beyond the actual necessities of the occasion, Her Majesty's Government are of opinion that the Bank terms of discount should not be reduced below their present rate. It was with that understanding that the licence was granted to the Bank. In drawing the bill we thought that it was our duty to preserve the condition upon which the Bank was allowed to issue the £2,000,000 of notes, and that no reason could exist for our taking some arbitrary rate of 6 or 8 per cent, or any other below the rate of 10 per cent, which was spontaneously fixed by the Bank as determined by the then rate of discount in the market, and without any reference to the Government letter. That is the point to which I desire to call the attention of the Committee—that the rate of 10 per cent was not arbitrarily fixed by the Government. It was merely assumed as being the existing rate of discount at the Bank. The hon. and learned Gentleman seems to think that we are fixing this rate for some considerable time, whereas we only propose to establish it for the period during which the infraction of the law shall continue. The moment the Bank of England find their affairs so far re-established as to consider it unnecessary to overstep the law they will be able to fix the rate of discount at whatever point they think convenient; but so long as the breach of the law is continued it does seem desirable that they should not reduce that rate below the point which it had reached before the suspension of the Act. I understand that the reserve of the Bank is gradually increasing, and it is no very sanguine expectation to hope that before very long they may have so re-established themselves as to render further transgression of the law unnecessary. On Saturday night last the reserve in the banking department, including gold and silver, amounted to £3,200,000; on Monday night it was about £3,590,000. Therefore they had then a reserve of about £1,500,000 beyond the excess of notes issued under the authority of the Government letter. It is to be hoped that this state of things will be progressive, and that ere long the state of the reserve will enable the Bank to reduce the rate of interest. But it is a fallacy to suppose that the Bank regulates the universal rate of interest. If the condition of things be such that it is profitable to money lenders to lend at less than 10 per cent, they will no doubt lower their rate of interest without asking the permission of the Bank. The very circumstance that the prevailing rate of interest is 10 per cent is a sufficient proof that the rate fixed by the Bank is not an arbitrary one, but that they are following the common rate of the market. The hon. and learned Gentleman says we shall injure the landed and railway interests of the country by fixing this rate of interest; but let me remind him that the mercantile rate of interest is not one that necessarily fixes all the other rates of interest in the kingdom. Can we have a better proof of this than the present price of Consols? If any one invests at present in Consols he cannot expect to realize anything like 10 per cent for his money, and I might refer to the practice of moneylenders on mortgages to prove that the rate of interest on real security is independent of the Bank rate, and not in any way affected by it. The hon. and learned Gentleman wishes us to believe that the whole trade of the country is dependent on this clause, but I trust that after the explanation I have given the Committee will not agree to the proposal which he has made.

MR. SPOONER

said, that, notwithstanding what had fallen from the right hon. Gentleman, he still thought that the discounts charged by the Bank of England regulated the rate of private bankers. He would put a case which he thought was likely to arise. They all knew that the rate of discount was raised to prevent gold going out of the country. That had been accomplished, but in the operation they broke up the general confidence of the country; and in order to restore that general confidence and to revive trade it might be necessary to continue in circulation an amount of notes larger than the Bank limit permitted, because, when there was a want of confidence, the same amount of notes did not perform the same duty that a much smaller amount did in a time of confidence. If it turned out that the demand for commerce required the continuation of a larger amount of notes than the limit permitted, it might safely be granted, so far as the exchanges went, because they were turned. But if that happened, what would be the result? The Bank would say this:—"We must keep up the rate of 10 per cent, however injurious to the public, or unnecessary it may be as far as the trade in gold is concerned, because, if we do not, the privilege of continuing that increased quantity of notes in circulation which is necessary for the restoration of confidence will be taken out of our hands." If the Bank found no danger in the export of gold, but that public confidence required a large issue of notes to remain out some time longer, the matter might be left in their hands. He objected to any arbitrary rule being laid down in this House with regard to the rate of discount which the Bank ought to charge, or the amount of notes they ought to have in their possession; and he believed that the more the matter was left to their discretion the sounder would be their practice, and the better would it be for the country at large. If his hon. and learned Friend divided the Committee, he should give him his support.

MR. GREER

said, that, notwithstanding the statement of the right hon. Gentleman the Chancellor of the Exchequer, he also was of opinion that with an increasing reserve at the Bank amounting now, as he understood it, to a million and a half and upwards, beyond the £2,000,000 in excess of their legitimate issue, the question of interest might be safely left to the discretion of the Directors; and he was perfectly willing to trust to their discretion and prudence that they would not make an injudicious reduction. Indeed it was not to be supposed that they would be over-hasty in making any reduction, for they had a pecuniary interest in keeping up the rate. He thought the country had been to a very unnecessary extent put under contribution to the banks and money-lenders, and the result was, as stated by the hon. Member for Glasgow, that trade was now staggering under an incubus of 10 per cent discounts. He thought, therefore, that the sooner this state of affairs was brought to an end the better. The Chancellor of the Exchequer seemed to think that because the Government of 1847, when authorizing a similar violation of the law, had stipulated for an advance of the rate of interest to 8 per cent, being, as he alleges, 2 per cent beyond the existing rate, the present Government was acting very graciously in permitting the Bank to retain their existing rate in 1857 on obtaining an indemnity for breaking the law. But it appeared to him that, supposing the Bank had acted with the same degree of prudence on both occasions the Government had only proved that they were too late in interfering when they did so in November last, the rate of interest having then risen to the unprecedented height of 10 per cent, and that they would have been justified, if not bound, by the precedent of 1847, in applying the relaxing principle when the rate of interest had been raised to 8 per cent. Besides, it must be recollected that at present 10 per cent was only the minimum rate of interest, and he was informed that the maximum rate was 12, 15, and even 20 per cent, a state of things that operated most injuriously upon all the mercantile transactions of the country. There might, no doubt, be an exception, as had been stated, in the case of loans upon real estate, which were of a permanent character, or investments in the funds; but there could be no doubt that the transactions affected by the present exorbitant rate of interest were immense, and made a difference of millions to the country. He, therefore, entreated the Government to consider whether it was abso- lutely necessary that 10 per cent should be fixed as the minimum rate. Let it be reducible to 8 per cent without the Bank forfeiting the right of falling buck upon the £2,000,000 which they had issued in excess in case of a recurrence of the panic. He thought the hon. and learned Member for Wallingford (Mr. Malins) would not object to that proposal, and if he adopted it in his Amendment he (Mr. Greer) would give him his support.

MR. CAYLEY

said, one reason why the relief experienced in 1847 was not felt now was, that the commercial public had been so alarmed at the high rate of interest that they did not know yet what might follow, and therefore the Government, by delaying the adoption of measures of relaxation, had protracted the pressure to which the country was subjected. It was to be supposed that, in consequence of the reduction in the number and amount of commercial transactions consequent upon the present crisis, a much less amount of currency than usual was required to conduct them. He believed, for instance, that not more than £19,000,000 of currency was now required. If confidence were restored, it was most likely that the immediate effect would be to withdraw some £2,000,000 from the hoards where it was now deposited. Nor did he know that there was any measure more likely to have this effect of restoring confidence—withdrawing, say, £2,000,000 from the hoards where it was deposited, and increasing the reserve of the Bank of England to the same amount—than a reduction of the rate of discount by 2 per cent. Under these circumstances, he thought it would be wise to leave a little more discretion to the Bank than was done by the present Bill.

SIR CHARLES WOOD

observed, that he did not rise to address the Committee upon the general question, but only to set the hon. and learned Member right on a matter of fact. The hon. and learned Gentleman (Mr. Malins) had stated that in 1847 the rate of discount was 5½ per cent, and that it was afterwards raised to 8 per cent. The fact was, that the minimum rate of discount was 5½ per cent, which was not charged upon any considerable portion of the paper that the Bank discounted. The average rate of discount in 1847 was 7½ per cent, so that the real amount of the rise in the rate of discount was not much more than a half per cent. [Mr. MALINS: I spoke of the minimum.] The minimum rate was 5½ per cent upon bills having only a short time to run, but the average rate was 7½ per cent, and the rise was only a half per cent on the average rate.

MR. MALINS

said, he had distinctly stated that the minimum rate of interest of the Bank of England in 1847 was 5½ per cent. If that were the minimum rate of interest in 1847, and 7½ per cent was the ordinary charge, now that the interest was at 10 per cent the ordinary charge would probably be 12 per cent. He did not require to be told by the Chancellor of the Exchequer that the present rate of interest did not affect all the ordinary relations of life, and did not proportionally increase the interest upon mortgages; but if a small freeholder went to the country bank with his deeds under his arm for a loan of money he would not get it at present for less than 10 percent. He would challenge the First Lord of the Admiralty to show that there was any danger of gold being taken out of the country if the present enormous rate of interest were reduced. He had been appealed to not to divide the Committee, but he had so strong a sense of the evils from which the commerce of the country was at present suffering that if he could find any hon. Member who would go out with him as a teller he would go to a division.

Question put, That the words 'Provided always, that, if before the expiration of the time' stand part of the Clause.

The Committee divided:—Ayes 18; Noes 100: Majority 82.

Bill reported without Amendment; to be read 3° To-morrow.

Adjourned at Ten o'clock.