AN ENGLISH PAPER CURRENCY.

New Zealand Times, Volume XXXIII, Issue 5243, 12 January 1878, Page 2 (Supplement)

AN ENGLISH PAPER CURRENCY.

t- - (From the World, November 14;) i i ;,! To say that an English paper currency -■ exists would be, in the eyes of hundreds of Englishmen, enough either to render one ■ liable to be tried for high treason, or, to be a deserved recipient of lynch-law. But that an English paper currency exists on an enormous scale is one of the few unacknowledged facts of all the finance of the daily press. As neither France nor America has yet returned to. specie payments, we will say that, like Austria and Russia, we have now in England a metallic as well as a paper currency. Tho metallic currency is, of course, that of the Bank of England, where every note issued has a certain gold basis. According to the ■■last return, the Bank of England reserve amounted to 39 per cent.; that is to say, if the Bank of England had to cash all its notes in circulation, the public would get about seven shillings in tho pound. But as the country owes the Bank of England lih millions, on which the Bank Charter is framed, the accounts would balance in this way—that the holders of bank-notes would get say seven shillings in the pound cash and thirteen shillings in the pound consols. Therefore, so : far as the Bank of England is concerned, to this extent our readers know how they would standi Now the paper currency is that established by the joint-stock-banks, which have issued millions of paper payable on demand, in tho shape of a deposit-receipt, the basis of which are bills, railway shares, mortgages, various stocks, and other different paper values. . The open market rate is usually below the bank rate, though there is seldom ,so much difference as at present—namely, 2 per cent. This is because the Bank of England lends gold. The' joint-stock banks have borrowed gold, and paya good premium interest rate to retain it, but re-leud it in the shape of paper. For instance, if A had £IOO,OOO deposit-receipt, and Bhad £IOO,OOO railway stocks which he wished to sell and place the money on deposit. A, on completion of the purchase, would have the railway stock, and B the deposit-receipt—no • money would pass; simply an exchange of paper. If A, however, had his £IOO,OOO in cash in the Bank of England, B would convert . the gold into a deposit-receipt, and the gold would be re-lent by the joint-stock bank on other i leases, stocks, bills, or shares, thus' always establishing a paper base for the deposit-receipts.

1 ho joint-6 .dele banks are now working at a ruinous lot?. But when the bank rate a few •months back was 2 per cent., not more than 1 per cent., and sometimes | per cent, only, could be obtained in the open .market. For more than two years the deposits have been worked at a loss. Therefore, why do not the joint-stock banks cease borrowing, or pay off. •what they owe, or-else bring down the Bank! of England rate? The second question will answer the first—that is, as they cannot pay: what they owe, they cannot cease borrowing ; and if they only’ had a small portion •of what they profess to have so much of, they •could bring the bank rate down tu-morrow. Ail the bank asks for is money—viz., tmld or bank-notes; all the joint-Htock'bauks°can offer t-hem are blis or deposit-notes. Hence the difference in rate is produced by the different article. Many people argue that, if the Bank of England issued one pound notes as the Scotch banks do, the difficulty would be got over, and a large sum saved to the Mint through the wear and tea,r of the coinage; but this argument will not hold good. The amount of gold in the hands of the public in circulation is reckoned at one sovereign a head to the population, or say £40,000,000 .sterling. Supposing this sum in the Bank of England, and replaced by one-pound notes, we should have 40 millions’ increased reserve against 40 millions’increase of notes in circulation. This would make the percentage of the reserve between 85 and 90, per cent. We should be - here as - they are in Paris. The Bank of Prance, being the only bank of the country, has an immense metallic reserve against an immense paper currency ; but a shrinkage of the gold reserve, under these circumstances, would briug the bank-note to a. discount—so that calling in the gold and issuing one-pound notes would not answer with a country maintaining a gold standard. ° How, supposing a few depositors asked the joint-stock banks to cash say i‘5,000,000 of their deposit-notes, they wishing to lodge the same with the Bank of England. The money could only be obtained by the joint-stock banks re-discounting some of their choice acceptances with the Bank .of ! England ; this would probably advance the bank rate to 7 percent, when they would have to pay 6 per cent, to depositors. This clearly demonstrates that the stuff offered in the open market below the bank rate is not real money. The next question uppermost in one’s mind is, how do the joint-stock banks pay? An establishment with say £25,000,000 deposits must lose 1 par cent., or say £250,000 a year in interest alone between lender and borrower besides which the deposits are worked at an enormous expense. The joint-stock banks require a larger staff of clerks to keep ' the deposit-accounts’ than; they do to keep the current accounts. ,

Assuming that the balance of all the current accounts does not much exceed the balance of the joint-stock banks kept by them at the Bank of England, we may fairly argue that no reserve is kept by joint-stock banks against their deposit notes ; and as these notes amount to near £100,000,000, issued by the four leading joint-stock banks, and over £400,000,000' deposit -.notes issued by the united joint-stock banks and monetary .institutions and discount bouses in the "United Kingdom, the natural question is, where is the money, or what have they to represent it ? Now history repeats itself, and financial history especially—we have a financial panic with the regularity of clockwork. The only business of the joint-stock bank is working the depositors’ balances. These being borrowed at a loss, perhaps some one will enlighten us how they pay 15,'per cent, dividend and bonus, add to their reserve fund, and wipe off all bad debts. Unless this can be clearly proved, there must-be)something very rotten in the State of Denmark. During the most flourishing time of Qverend, Gurney,,and Co. —when they held millions of deposits belonging to the public—they wore financing the firm of Davidson, Gordon, and Co., who borrowed these deposits, replacing them with forged warrants and forged bills of lading. When Overend-Gurney closed their doors, against their millions of deposits they held forged warrants, rotten bills, and shares in every company that had been syndicated in the Stock Exchange. These “other securities,” which figured bn the credit side of their balance-sheet, were not worth carting away in a dust-cart; hence the liquidation still going on between depositor, and shareholder. When. Alexander Collio and Co. failed, the Loudon and Westminster Bank acknowledged to hav-. ing lost all, their reserve—viz., £750,000 ; report said they lost alb their, capital, .viz.. £2,000,000 ; bnt as Alexander Collie and Co. have disappeared, and no public inquiry ever took place, we of course take the bank’s word.. But the question again crops up, if the deposits are worked at a loss, how .did the reserve ever accumulate?; There is not.a financial editor of any daily-paper published that does not know really what is the matter ; and although; they all in some kind of way ise seen pointing at and jumping’-round this hydra-headed monster, not one dare attack it. ■ The real truth is this : ever since the establishment of the joint-stock banks, the savings of the public, amounting to some millions a year, instead of being invested in a. bank-note, having a, gold basis, have been invested in a deposit-note, having,a basis that no one knows anything about., Wei therefore thick that the farce of one rate at the'Bank of England and another rate in the market should. ceaSo.; : The borrowing powers , o( : the joint-stock banks must bo limited, and a Government auditor appointed to examine their “other Security’’ item. The Bank of England, have a large number of clients who discount their acceptances with ‘them now at 5 per cent.—men who, from the very fact of their being able to negotiate their bills with the bank must necessarily bo A 1, 18-carat hall-marked in financial circles. As these inon have the open market offering them money at 3 per cent,, why do they pay 5 -per cent, to the bank?

The reason is, because what they get at the bank they cannot get in the market: they want gold, not paper.' ; A depositor in a joint-stock bank occupies a far bbtterpositiou than a preference shareholder could in a joint-stock bank, for he takes all the profit, does not pay any losses, and is supposed to have his capital guaranteed intact, and at all times ready when wanted. We therefore think it desirable that the jointstock banks should free themselves from this unprofitable and burdensome partner. The only way that we can see to effect this purpose would bo for the joint-stock banks to have a fresh issue ef shares, doubling their capital all round; then, calling up 60 percent, of the share capital, they could pay off a large amount of deposits. Let them have a fixed rate of interest for their deposits, never to exceed 2 per cent., only accepting deposits to the extent of their uncalled-up capital. The banks could take over their other securities as security for their own' shareholders, instead of holding them as security for the depositor ; and as they would be employing their own capital, their business would be more legitimate. A violent disease requires a violent remedy; and although this would assume something of a voluntary liquidation, it would prevent what must arrive in many cases—a legal one. .