Christopher Hollis
Two Nations



Chapter VII — The First Breakdown

The last sentences of the previous chapter will, I am sensible, seem strange and strained to the reader.  Just as one unfamiliar with the certain conclusions of Thorold Rogers’s research must have been tempted to dismiss the earlier chapters as perversely paradoxical, so, too, many readers will be inclined to say of Bishop Berkeley’s warnings concerning double-money that they are unreal and alarmist.  “After all,” they will object, “the system perhaps was not theoretically the best.  Perhaps it might have collapsed, but at least it did not collapse.  We muddled through.”

The system, let us clearly understand, did collapse.  It collapsed again and again and again.  There is not a single record of any considerable strain being put upon it and it being found equal to that strain.  And, when we boast that we muddled through, let us bear Thorold Rogers’s statistics in mind and ponder on the meaning of the phrase.  It means that in some way or other the succession of sovereign to sovereign and of Government to Government was indeed maintained, but it means also that every single sovereign from Henry VIII to Victoria died, leaving the poor more miserable, more degraded, more hopeless than he had found them at his accession, that in every single year of all those years between the dissolution of the monasteries and Thorold Rogers’s expulsion from Oxford University men and women and children were dying for the lack of food of which there was in truth an abundance.

Let us see the working of this double-money system, the supporters of which prided themselves on their common sense, the critics of which were dismissed as airy triflers.  The year 1797 was one of the darkest in the whole history of this country.  We were at desperate war with the resurgent French Republic.  Our allies, one after the other, were turning wearily to peace.  Between Great Britain and destruction there stood only the navy, and in the navy were heard ominous mutterings, soon to break out into open mutiny.  There were rumours about of French invasion.  In such a national crisis, on Sunday, the 18th of February, some farmers went into Newcastle to the market.  For some reason or other — nobody to this day knows what — a rumour of panic got abroad among them.  They therefore sold the cattle for knock-down prices and rushed off in a body to the local banks with the notes that they had received, demanding cash.  The banks of course were unable to satisfy the demand and on Monday, 20th February, by agreement they all stopped payment.

It was not then popularly understood, it is not even to-day universally understood, that, when banks lend their Promises to Pay, they lend promises which they know themselves unable to perform — that their promises greatly exceed their cash-holdings.  Although of course those who understood the system were well aware that a bank always, automatically and inevitably fails whenever it is asked on any serious scale to make good its promises, yet to the general public the failure of the Newcastle banks was a shock.  Other provincial bankers foresaw that holders of their paper would grow nervous and that there would be demands on them for cash.  Now these bankers themselves banked, directly or indirectly, with the Bank of England.  Therefore, to guard their position, their natural policy was to draw out all their deposits from the Bank of England.  Throughout all that next week the Bank was receiving demands for cash at the rate of about £100,000 a day.

But the Bank of England had of course in its turn made Promises to Pay far beyond its capacity to perform.  There were about £10 million of its notes in circulation; there were about £5 million deposited with it.  To meet these demands it had not even the banker’s normal tenth part.  In 1795 the French Government determined to return to the gold standard.  In order to accumulate sufficient gold to do so, it was willing to pay a price for the metal which made it more profitably useable in France than in Great Britain.  The two countries were at war and the transference of gold from one to the other was illegal, but the owners of the metal found little difficulty in circumventing such regulations.  In face of the temptation of a profitable use of gold in France the Bank of England virtually abandoned any attempt to keep a cash reserve in England, trusting to luck that it would not be found out.  In February, 1794, it had held £7 million in cash; by February, 1795, this £7 million had sunk to £6 million, by February, 1796, to £2½ million, to £2 million by August, to £1 million by February, 1797.(71) Clearly in the face of any considerable demand for cash its survival was only a matter of days.  As Sir Francis Baring put it,(72) “the Bank had been drained for foreign services” — a pleasant neutral phrase which meant not merely that loans had been made to the country’s allies but also that Sir Francis and his friends had been lending money, hand over fist, to the country’s enemies in time of war.

On 18th February, then, for reasons unknown a few farmers in Newcastle lost their heads.  By 25th February the whole country was on the verge of collapse.  On that very day news reached London that 1,200 French troops had landed on the coast of Wales.  In calmer and sillier times it was all very well to gull the public with the pretence that the double-money system worked, but it is to the credit of Pitt, City of London’s man as he was, that he understood that with an invading army on British soil the time for mere foolery had passed.  Without hesitation he suppressed the system and saved the country.  He suspended cash payments.  The Times issued a leading article, calling on the people to show the spirit of their ancestors of Queen Elizabeth’s time — and not to embarrass the bankers by asking for their money back.  A committee then issued a statement of the Bank’s financial position.  It had, it claimed, liabilities of £13,770,390 and against them assets of £17,597,280 private loans and £11,686,800 loans to the Government.

As is always the case with bank-statements, there was room for dispute about the accuracy of the figures.  But their accuracy or inaccuracy was of little importance.  The purpose of them was to persuade the simple holder of bank-notes that, since the Bank’s assets exceeded its liabilities, he had, if only he could restrain his impatience a little, no cause for anxiety and would soon be easily able to cash his notes into gold or silver.  Its purpose was, as far as possible, to conceal from the public that the Bank had made up money.  Now, suppose that I possess £1 of gold and give authority to A to demand that £1 but A, instead of doing so, writes a cheque for £1 to B, who deposits the cheque with me.  It is clear enough that if, at the end of this, I, being in possession of £1 of gold and of A’s cheque on me to B, yet pretend that, since I have £1 in gold and £1 in deposits, I therefore possess £2, I have created the £1 of those £2 myself.  I tell C that I possess £1 in gold and that A owes me £1, which he will soon repay, and therefore I can safely afford to lend C £2 — and the books can be made to balance.  But it is all a trick.  It is clear enough also — and indeed it had at this time just been proved in practice — that, if this manufacture has gone on to any important extent, then it is simply untrue to say that any considerable number of B’s can get their paper money changed into gold or draw out their deposits in gold, even if the gold should happen to be lying in the vaults of the bank.  For suppose that the Bank of England could have collected £14 million of its £17 million of assets in gold and with them paid off £14 million of notes.  The effect would have been to have reduced the sum total of money in circulation by £14 million.  For the Bank would not have dared to put the repaid notes out again into circulation in fresh loans, because that would have created fresh claimants on its gold and all its gold was already required to satisfy the present claimants.  There would therefore have been a drastic deflation.  The mere attempt to work the double-money system would certainly have lost us the war.

It is not possible to argue that the system was elastic and was modified in the face of a crisis.  It was not modified; it was abolished.  The essence of the double-money system is that all paper-money only acquires its value by virtue of its convertibility on demand into so-called “real” money.  A suspension of cash payments is therefore no more a modification of the double-money system than traveling from Stockton to Darlington is a modified way of travelling from Darlington to Stockton.

It is quite true that, even throughout the rest of the war, the country did live in one sense under a double-money system.  The Bank of England notes were not convertible into anything, but the notes of other banks were convertible into Bank of England notes.  But between gold and silver as an ultimate medium and any form of paper there is clearly this great difference — the paper-money can be multiplied at will.  Since it is the public who in fact pay for it through the effect that it has on the price-level, what conceivable argument, you may ask, is there to be urged against the issue of that paper by public rather than by private authority ?  And echo can only answer “What?” Even the Bullion Committee, while recommending a return to gold and to what it considered an automatic currency, recognized that, if the currency was to be managed, there were no arguments for allowing it to be managed for private profit.  “The addition,” they wrote,(73) “of between four and five millions sterling to the paper circulation of this country, has doubtless been made at a very small expense to the parties issuing it, only about £100,000 having been paid thereupon in stamps to the Revenue, and probably for the reasons already stated, no corresponding deposits of gold or Bank of England notes being deemed by the country banks necessary to support their additional issues.  These parties therefore, it may be fairly stated, have been enabled under the protection of the law, which virtually secures them against such demand, to create within the last year or fifteen months at a very trifling expense and in a manner almost free from all present risk to their respective credit as dealers in paper money, issues of that article to the amount of several millions, operating in the first instance and in their hands as capital for their own benefit and, when used as such by them, falling into and in succession mixing itself with the mass of circulation of which the value in exchange for all other commodities is gradually lowered as that mass is augmented.  If your committee could be of opinion that the wisdom of Parliament would not be directed to apply a proper remedy to a state of things so prejudicial to the public welfare, they would not hesitate to declare an opinion that some mode ought to be devised of enabling the State to participate much more largely in the profits accruing from the present system.”

But the sad truth is that whoever had managed the currency at that date would have mismanaged it.  For between that world and an understanding of Berkeley’s theories or of medieval practice stood the gigantic barrier of Townshend’s education.  Neither among our bankers nor among our politicians was there any understanding of the importance of the price-level.  The metallic monetary system before 1797 was a foolish one and brought the country to the verge of a catastrophe.  Less foolish, but only less foolish, was the unregulated paper system after 1797.  According to that system every banker was free to issue all the notes that he cared to and to take his chance on it whether he went bankrupt.  Now the story of 1797 had made clear one brutal and not very edifying truth.  It was this.  If you were a forger and forged a £1 note, you got hanged.  But to make a Promise to Pay which you know to be mathematically impossible of fulfilment and to take advantage of the fact that the public has not got that knowledge is, ethically, forgery.  Yet, if you in this way in time of war forged ten million £1 notes, not only did you not get hanged, but, owing to the effect that discovery would have on prices and consequently on productivity, the Government could not afford to let the public discover that you had forged.  So far from prosecuting you they would co-operate with you in preventing public comprehension of your conduct.  Therefore throughout the rest of the war all banks issued notes freely, understanding well that, if they only issued them on a moderate scale, the Government might allow them to fail; if they issued them immoderately they were safe.  If only they were sufficiently largely in debt they would never have to pay.

It was a grand time for bankers, and, as a result, the number of country banks between 1797 and 1810 increased from 80 to over 700.  The money in circulation naturally increased too and prices rose.  By 1799 they were up to 114 to 1797’s 100.  There they stayed for about ten years until in the boom of 1809 they took a further jump up to about 140.(74) It was this second rise which so aroused public opinion that the famous Bullion Committee, of which Huskisson was the most important member, was appointed to inquire into the cause of the instability and to suggest a remedy.  Historians have indulged in most extravagant language about the expert nature of this Committee’s judgments.  “With the exception of Sir Francis Baring,” we are told by Mr. Feavearyear(75) who has given his study to it in recent years, “the Bullion Committee called no witnesses who had made any particular study of currency theory.... It is not too much to say that the leading members of the Bullion Committee had made up their minds before upon the theoretical question.”  Like most of the essays of British Government at that date, it was a very amateur affair.

The Committee reported — as was indeed plainly the truth — that prices had risen owing to the excessive issue of notes by the Bank of England and the country banks.  The remedy that they proposed was that of a return to cash payments.  It is always the most recent grievance that bulks largest in the mind, and it was therefore natural that people were conscious of the grievance of a rise in prices, which to us of the twentieth century seems comparatively trifling.  They had forgotten that black day in 1797 with the French in Wales, the awful calamity to the brink of which the folly of double-money had brought the country and in which the immediate return to cash payments would certainly once more involve it.  In June, 1810, when the recommendations of the Committee came before the House, there were in circulation £32 million’s worth of Bank of England notes.  Against them the Bank had cash holdings of £3,200,000.  It was clear then that a return to a metallic coinage would only be possible either by a large devaluation of the pound — which the Committee did not recommend — or by a deflation so drastic that it would certainly lose the country the war.  The Committee had had little difficulty in exposing the ignorance of many of those, such as the directors of the Bank of England, whom they had examined.  Canning had as little difficulty in showing the folly of resumption during the continuance of the war, and the motion for resumption was lost by 45 votes to 180.  Indeed so strongly convinced were the Government that deflation could not be risked in face of the enemy, that, when in 1811 some bankers in Glasgow and Lancashire failed, the Government instead of allowing the failure of those banks’ notes to have its normal and automatic deflationary effect, stopped the gap themselves with Exchequer bills of their own so as to prevent a fall in prices.  As a result not only was the fall prevented, but prices rose, to reach in 1814 their peak-level of 143 to 1797’s 100.

Once the war was over there was no longer any pressing necessity — as the governing classes saw it — to keep production at a maximum.  There was no longer any objection to deflation, provided only that it was so tempered as to preserve society from complete collapse into anarchy.  Now it is clear enough that, from any except a monetary point of view, the standard of living of a country in peace ought to be higher than its standard in war-time.  In war-time, clearly enough, a large proportion of its labour is engaged on the unproductive work of fighting.  A further large proportion is engaged upon the production of munitions of war, to which again a large proportion of its goods are diverted.  Yet for all that it has generally happened that a return to peace brings not a rise but a fall in the standard of living.  In any particular case — as indeed in this case of the years after 1815 — there may of course be particular complicating causes, such as failures of harvests and so on.  But there are also certain general causes by which this almost general phenomenon is explained.

We are told that the cessation of war causes a sudden drop in Government expenditure, and that the demobilization of the troops throws an unassimilable horde on to the labour market.  It is the obvious comment that neither of these causes in any way lessons the country’s productive capacity.  On the contrary they both increase it.  The man who has been shooting Frenchmen or Germans can, at any rate ideally, be turned to producing goods instead.  The money that has been used for producing munitions, can, at any rate ideally, be used for the purchasing of these goods.  All that these causes lessen is the country’s effective demand.  Men no longer have the purchasing power to buy goods.

Nor, less there be a deflation in process, do they lessen even that effective demand as drastically as at first sight appears.  The demobilized soldiers, it is true, have, if no provision be made for them, less money in their pockets; so have those who formerly sold munitions.  But the taxpayers have more.  It is clearly then the business of society to transfer the labour that had previously been used for war to productive purposes of peace and, during the interval of transference, to see to it that the would-be labourers do not suffer from want.  Such a problem has doubtless always presented difficulties of detail.  But such difficulties in no way justify the statesmen through the ages who have indulged in talk about the inevitability of post-war slumps.  Yet it is just this invocation of an inevitable fate in which they always have indulged.  “The war had ceased,” said Hudson Gurney [18th May, 1818] at this period in the House of Commons, “leaving England, glutted with merchandise, with abundance of all things.”  From this strange calamity there was but one conclusion for the practical politician to draw.  “Managed as best it might be, there must have been a great revulsion.”  The troubles of the country, bluntly said Lord Liverpool, the Prime Minister, were due to “over-production.”

The truth is that such talk has been permitted and has been indulged in because language of inevitability has been very convenient for disguising the real cause of post-war slumps.  “Met with a farmer,” as he rode away from Weyhill fair on 11th October, 1822, records Cobbett,(76) “who said he must be ruined unless another good war should come.”  To the masters of the machine nothing is more convenient than this false ascription of cause to effect.  For these slumps have been caused not by the comparatively trivial problems of the transfer of labour but by the deliberate action of deflation.

Clearly a fall in prices is to the advantage of anyone who has money on loan, for debts are repayable in money.  Therefore, if he lent when prices were high and can so manage it that he can be repaid when they are low, he is clearly repaid (quite apart from interest) more in terms of goods than he originally lent.  Naturally this would not be so if debts were scaled down in proportion as prices fell, and for such a scaling down Cobbett at this time persistently clamoured in the Political Register and the Paper Against Gold, but, needless to say, he was not attended to.  Clearly also, immediately after a war, many people, who do not think very deeply, will easily be persuaded that the price-level that existed before the war, just like everything else that existed before the war, was a “normal,” as it were God-ordained, price-level, that the higher prices of the war were “abnormal” and that a natural consequence of peace should be a return to the pre-war price-level.  Therefore it is not very difficult for creditors to represent their demand for deflation as a mere demand for a return to sanity and thus to obtain the support of those who do not understand that falling prices will inevitably drag down with them their own wages or salaries or profits.

Thus it was that the years after Waterloo were years of steady deflation, of falling prices, of consequent distress.  From 1814’s 143 index prices came down until in 1816 they were a trifle below the 1797 level.  As its total decreased, the country’s monetary supply approached that figure at which it would be once more possible to reinstate metallic money.  In 1817, the banks tried to put out some gold coins, but the people would not have them, preferring the paper with which they were familiar.  With the issue of the new paper prices rose again.  In 1819 a Committee was appointed under the Chairmanship of Peel and including Castlereagh, Canning, Tierney, Huskisson, and Vansittart, to advise on the possibility of the resumption of cash payments.  It issued its report on 6th May, 1819, advising a gradual resumption over the course of the next few years.  Peel, not then a member of the Government, submitted the recommendation of the Committee to the House of Commons in a series of resolutions.  The note-issue, he argued, must be contracted until it could be safely covered by gold pounds in the possession of the issuing authority.  And to the question, what is a pound ?  he answered, “It is a piece of gold of a certain weight and fineness” — to wit, 123.274 troy grains of 22 ct. fineness — 123.274, because the pre-1797 guinea weighed 129.4 and 123.274 is 20/21 of 129.4.  If £1 is 123.274 grains troy, then 1 oz. troy (480 grains) is £480/123.274, which is as near as may be £3 17s. 10½d.  Therefore the Bank of England was put under obligation to buy for £3 17s. 10½d. an ounce any gold that was presented to it.

The resolutions were passed without a division.  Prices were driven drastically down to well below the 1797 level, and it proved possible to return to convertibility in two years instead of the stipulated four.


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71. Pound Sterling, Feaveryear.

72. Observations on the Establishment of the Bank of England.

73. Section iv, quoted by Canaan, Paper Pound.

74. Figures from R. G. Hawtrey’s Currency and Credit.

75. Pound Sterling. Feaveryear, p. 204.

76. Rural Rides.