Banking and Currency Studies

During the extended period from 1860 to 1913, banking and currency s pecialists were mainly interested in proposals related to bimetallism put forward in certain countries; the use of central bank discount rate as a means to achieve some monetary goals; and the most appropriate way of dealing with panics and crises. All these diverse aspects of banking analysis related, in direct or indirect form, to the convenience of the country possessing an elastic currency to avert a liquidity crisis and to attend as well the needs of business in general (see Mints 1945: 178-197).

Foxwell too had well-defined positions regarding the proper role of the banks in the economy. The subject is examined in his 1917 article ‘The Financing of Industry and Trade’, where he remarks that the chief challenge of modern times is to provide sufficient means to facilitate the consolidation of large corporations. Although he understood that the primary task of banking was the provision of finance to productive firms, he also mentions that British banking institutions had historically specialized in a very particular type of operation. As distinct from Continental banks, which had less strict regulations on the use of their reserves and were, therefore, more prone to embark on industrial enterprises, British banks had a peculiar preference either for short-term loans, in close connection with the bill market and the Stock Exchange, or else for operations related to foreign lending. The unfortunate consequence of this state of affairs, warned Foxwell, was that domestic industries and trade had to go without the necessary long-term funding from British banks. Considering that foreign banks had a more active interaction with their national industry, this situation meant that Britain was losing position in the international competition for new markets and the introduction of new technologies, while her domestic industry languished for lack of proper liquid capital:

The loss to our home industry is only too obvious. It cannot obtain from the banks the means of making adequate original installations, or the extensions and reconstructions made necessary by the progress of industrial technique, or by the developments of rival firms in other countries; nor, again, the large loans which are often, in practice, essential to the securing of big foreign contracts (Foxwell 1917 [1919a]: 128).

With respect to the workings of the British banking system under the pre-war gold standard, many voices advocated reforming the Bank Act of 1844, which had set very limited scope for discretionary action by the Bank of England. The main concern of bankers, and others, was the reduced size of the Bank’s gold reserves and the relative frequency and intensity of changes in its discount rate (Hume 1970: 127-133). Foxwell, in his 1909 article ‘The Bank Reserve’, was particularly alarmed by the fact that, while Continental central banks were increasing their gold holdings, Britain had remained in the same situation, with just a modest amount of gold held at the Bank of England. One of the drawbacks of such a situation was the high sensitivity of the Bank’s discount rate to small movements in its reserves. Moreover, given the substantial volume of foreign deposits in London banking houses, Britain was very much exposed to sudden and violent monetary turbulence which, through its effects on the cost of money, had been taking a heavy toll on domestic business and employment: ‘There are scores of people today who could move a million or many millions of gold if they chose to do so. Is it right that our trade should be exposed to a tax of this kind by reason of such casual operations?’ (Foxwell 1909 [1919]: 155).^[1]

As already noted, Foxwell’s 1909 Preface to History of the Bank of England praises that institution for giving priority to domestic stability over gold convertibility during the Napoleonic Wars. It is on this particular issue that Foxwell’s concerns re-emerge with Ricardo who, in his 1809 pamphlet ‘The High Price of Bullion’, had criticized the Bank for its excessive fiduciary issue in the restriction years. Ricardo characterized the behaviour of the Bank as the root cause of the depreciation of the pound in foreign exchanges and the increased price of gold, a process which had created an inflationary process that he condemned, in the most strenuous terms, for its hurting public and private creditors alike.^[2] Foxwell, after censuring Ricardo and his followers on this matter, congratulated the Bank and its directors for having steered the nation through a most challenging period without sacrificing the British economy in order to correct the premium on gold:

No doubt the Bank had the defects of its qualities; it may have laid rather too much stress upon the urgency of accommodating the trade and commerce of the country: but if so, its vices leaned to virtue’s side. Its principal difficulties were due to its unwavering loyalty to the State; and to its endeavour, so far as lay in its power, to avert undue pressure on the commercial community. These are

the ends for which a National Bank exists (Foxwell 1909: xxii).

A series of measures to provide the banking system with a large gold reserve and a more elastic currency, capable of better managing panic episodes and making the business world less vulnerable to financial crisis, was conceived by Foxwell in his 1909 article ‘The Banking Reserve’. First, he advocated greater transparency and publicity of banking statistics, including the Bank of England’s gold holdings, for he understood that such practice would not only curb speculation but would also allow the public to keep strict control over the financial institutions. Second, there might be a second large reserve held privately, made out of contributions by the joint-stock banks, to be used in times of stringency by the Bank of England under the condition of it paying some progressive interest rate on every ?5 million withdrawn. Lastly, the government should build a considerable reserve to help the savings banks in case of a war-emergency run on deposits (Foxwell 1909 [1919]: 160-170).

In an earlier article on Goschen’s monetary proposals, Foxwell had also i ndicated that the introduction of ?1 banknotes was another practical measure to reduce the transactions demand for gold coin and would thereby allow greater use of sovereigns as Bank of England reserves. These notes would have the additional benefit of a lesser likelihood of being presented to the Bank for conversion to gold (Foxwell 1892: 145-146). In his 1895 article, published in the same year as the pamphlet, ‘A Criticism of Lord Farrer on the Monetary Standard’, Foxwell pressed the case for the restoration of bimetallism on an international scale in order to avoid the deflationary tendency of the gold standard, since the supply of silver had been growing uninterruptedly while its price had remained steadier than the wildly fluctuating price of gold (Foxwell 1895: 4-6; for an insightful discussion of the Great Recoinage of 1696, see Foxwell 1896). At the end of the First World War, during which Britain suspended its commitment to the gold standard, Foxwell also appeared before the Cunliffe Committee (Moggridge 1972: 18), whose recommendations paved the way for the eventual reintroduction of the gold standard in Britain in 1925.

• [1] Or still, when commenting on Mr George Goschens proposals to increase the Bank of England’s goldholdings: ‘The most conclusive proof that our present reserve is inadequate is to be found in the nervousstate of the money market in ordinary times, and in the fact that comparatively small withdrawals of gold,of a kind to which the London market is constantly liable, will produce unforeseen and mischievousadvances in the current rate of discount’ (Foxwell 1892: 142).
• [2] As expressed by Ricardo: ‘What security has the public creditor that the interest on the public debt,which is now paid in a medium depreciated fifteen per cent, may not hereafter be paid in one degradedfifty per cent?’ (Ricardo 1809 [2005]: 96). The same position, of stressing the need for restraint by theBank in order to keep the exchanges stable, would be reinforced in 1810 by the report of the Bullion Committee (Fetter 1965: 39—43, 49—54).