The FINANCIAL SECRETARY to the TREASURY (Mr. Arthur Michael Samuel) leads the commons debate.
“The Gold standard Act relieved the Bank from any obligation to pay in gold coin but required it to sell gold bullion at the coinage price. In order that that arrangement may continue in force, the Bank must have the same right to pay its depositors and creditors in its own notes as it now has to pay them in currency notes.
Clause 2, which is probably the most difficult Clause in the Bill to explain, defines the future fiduciary note issue and fixes it at £260,000,000. This £260,000,000 is arrived at in this way: following the recommendations of the Cunliffe Report, the Treasury has fixed the actual maximum of 1927 to be the permitted maximum fiduciary issue of currency notes for 1928. The maximum of 1927 was £244.94 millions. To that should be added the Bank of England fiduciary note issue of £19.75 millions. The total is thus £264.69 millions. The amount of our currency notes in use in the Irish Free State is estimated, 701 roughly, at £6,000,000. The Free State is about to replace our notes by an issue of Free State notes; therefore, £6,000,000 should be deducted from our total. That reduces our total to £258.69 millions, which has been rounded up to £260,000,000, the figure in the Bill. The Clause proceeds to give power to the Treasury, at the request of the Bank, to reduce the fiduciary issue. In Clause 8, power is given to increase the fiduciary issue.
Clause 3 deals with the cover for the fiduciary issue. It requires the Bank to hold securities in the Issue Department sufficient to cover the fiduciary issue. Up to a limit of £5,500,000 it allows silver coin, which has for some years been held in the Currency Note Account, to be held as a security. The limit is fixed with reference to the amount of silver now held by the Currency Note Redemption Account. The figure has come down from £7,000,000 to £5,500,000 and is in course of constant reduction, which will continue. Clause 4 provides for the transfer to the Bank of the responsibility for the currency notes outstanding on the appointed day. Clause 5 provides for the transfer of the securities held against the outstanding notes. As the securities held in the Currency Note Redemption Account exceed by a good margin the value of notes outstanding, provision is made for the disposal of the balance. The Clause directs that they be realised and the proceeds, estimated at £13,200,000, paid into the Exchequer, in conformity with the announcement made by my right hon. Friend in his Budget speech.
Clause 6 provides that the whole profits of the issue, both the profits on the new £1 and 10s. notes and the profits on the notes for £5 and upwards issued by the Bank of England shall accrue to the State. In Clause 8 power is given to increase the fiduciary note issue. Clause 8 (3) provides that: “Any minute of the Treasury authorising an increase of the fiduciary note issue … shall be laid forthwith before both Houses of Parliament.” The remaining Clauses, except Clause 11, deal with subsidiary matters. Clause 11 has been framed for the purpose of ensuring the concentration of the gold reserves of the country in the hands of the Bank of England. The Clause enables the Bank to buy any holding of gold coin 702 or bullion in excess of £10,000 compulsorily, with the important exception of gold “which is bona-fide held for immediate export or which is bona-fide required for industrial purposes.” This exception is devised to leave the activities of the London bullion market entirely untouched. Such are the provisions of the Bill. It returns to the principles of the Bank Act of 1844, but by the use of methods more adjustable to the needs of change and development. The whole essence of the Bill is recognition of the vital importance of providing the nation with an adequate volume of currency, and of maintaining its value stable. No State can exist and remain solvent, and least of all a State like ours which depends for its livelihood upon overseas trade, without a safe, stable currency. The measuring rod of commerce must be stable. In our case the measuring rod is the pound sterling, which has already been linked to gold by the Gold Standard Act of 1925. It has, however, been proved that the internal circulation of gold coins is in these times both unnecessary and wasteful. This Bill, therefore, will lay down for the Bank of England limits and safeguards subject to which it may issue notes to replace and represent gold coins for internal circulation. The return to gold has been a potent factor in the restoration of British international credit— “
Twice Chancellor of the Exchequer in the 1920’s, Phillip Snowden, delivers an illuminating response to the proposed bill:
“Our objection to the fixing of the fiduciary limit of £260,000,000 is one that is 710 snared by bankers, financiers and traders. I want to be quite uncontroversial. Not in the least do I wish to be offensive. But I may perhaps be allowed to say that the Government have had a particularly bad financial press for this Measure. I have not seen in the comments that a single financial writer has given whole-hearted support to this Bill. Most writers have been very severely critical. There is common agreement upon this—that currency should be sufficient to meet legitimate demand. It should be sufficient to prevent both inflation and deflation. I believe the Prime Minister on one occasion said he was neither an inflationist nor a deflationist; he was a non-flationist. That is exactly what we ought to strive for—neither deflation nor inflation. The expansion of currency or credit, ought not to precede but ought to accompany the legitimate expansion of trade. How far does the Bill give that elasticity? I have taken the trouble to work it out, from the figures of the bank return of last Friday, and this is the result at which I have arrived:—Bank notes £180,000,000; currency, £294,442,000, making a total of £474,442,000. The banknote security against this is £56,200,000; gold holding, £160,326,000. Therefore already the fiduciary issue, last Friday was £258,000,000. The issue not covered by gold allowed by this Bill is thus only £2,000,000 more than the present figure. At present there is no seasonal call for any increase in currency but last Christmas the figure rose as high as £263,000,000. The Treasury limit this year is over £264,000,000, and last year it fluctuated between £243.7 millions and £264.7 millions.
It will be seen from these figures that, if the fiduciary limit laid down by the Bill is sufficient for the present, it certainly is not sufficient to meet a legitimate expansion of trade, or any exceptional but perfectly legitimate call for an increase in currency notes…
The Bill provides that this maximum of £260,000,000 may be reduced or increased 711 by consultation between the Bank of England and the Treasury, but the initiative is to come from the Bank of England. There is a most important point to which the hon. Gentleman did not call attention—that if, after consultation between the Bank of England and the Treasury, permission is given to increase the fiduciary issue for not more than six months, any increase allowed must be in the form of bank notes covered by gold. That may create a very difficult position. The gold position is very strong at present. I believe it has never been so strong in the history of the bank; but, if the need should arise to increase currency, and the gold position requires to be strengthened, then there would be an increased scramble for gold and a heavy increase in the bank rate, and that would defeat the very purpose for which the increased currency was required. The result would be further depression in trade.
It seems to me that this provision is intended to deal only with temporary emergencies, and is not to be permanent. Under the Bank Charter Act, the Bank of England may, with the permission of the Chancellor of the Exchequer, increase the note issue, but the Chancellor of the Exchequer has to go to Parliament to get an indemnity and it seems to me this proposal leaves things very much as they are under the Bank Charter, except slightly modifying the procedure and getting rid of the necessity of going to Parliament for an indemnity. This part of the Bill will make the currency static within very rigid and narrow limits. It may be said that it provides for an increase for six months, and that that increase may be permitted for two years, and then, if circumstances demand it, Parliament may be asked to continue it. But that is not a satisfactory way of dealing with it at all. Once, however, you have fixed these things down by law it is very difficult to alter them, and there should, therefore, be given to the controlling authority—the central bank—very large powers to meet a demand for an increase of currency within wide but, of course, quite reasonable limits. Otherwise, what we are doing by this Bill is to make currency not the servant but the master of trade and industry.”
