which they were allowed to resume cash payments on the 1st May 1821.

5. In 1824 a rapid drain began from the Bank, which took no measures to stop it; this went on all through 1824 and 1825, when the bullion which was above 13 millions in January 1824 was reduced to little over one million in December 1825. A great monetary crisis took place in this month, which was only arrested by the Bank making very liberal issues of notes to support solvent houses.

6. In 1827 the Bank was at last convinced of the truth of the principles of the Bullion Report and endeavoured to adopt them. The plan it devised was this-To keep their "securities" as nearly equal as possible: their cash and bullion at one-half of their securities: and consequently equal to one-third of their "liabilities." But on several occasions the bullion had fallen to about one-fifth instead of one-third. There were very severe monetary pressures in 1836 and 1837, but in the spring of 1838 the Bank was again got into its normal position. But about the

end of 1838 another period of disorganisation commenced as shewn by the following figures

The Bank was thus rapidly drifting into bankruptcy; and was only saved from stopping payment by negotiating foreign loans at Paris and Hamburg to the amount of £3,500,000.

There being shewn to be something radically defective in the management of the Bank led to the appointment of a Committee of the House of Commons in 1840, which condemned the principle upon which the Directors professed to act, but nothing could be done, as the Charter of the Bank did not expire till 1844.

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7. In the meantime an influential sect of Currency writers had arisen, the most prominent of whom were Colonel Torrens, Lord Overstone, Mr. Norman, and others. They maintained the following principles

1. That Bank Notes, i.e. the Promises of bankers to pay money on demand, alone are "Currency," and that no other forms of Paper Credit are Currency.

2. That if Banks are permitted to issue Notes they ought to be only exactly equal in amount to what the specie would have been if there were no Notes.

3. That any excess of Notes above the specie they displace is a Depreciation of the Currency.

Lord Overstone observed in his evidence before the Committee of the House of Commons in 1840 that it was a fundamental vice of the principle devised by the Directors in 1832 to carry out the doctrines of the Bullion Report, that the gold might all leave the country without causing any diminution of the amount of Notes in the hands of the public: we have seen that this assertion was completely verified in 1839.

8. The above-named writers being of great influence, converted Sir Robert Peel to their views, and his Bank Act of 1844 was expressly devised for the purpose of carrying these principles into effect: and the machinery adopted was as follows—

The Bank was divided into two Departments: the Issue Department, and the Banking Department.

The Directors were to transfer to the Issue Department Securities to the value of £14,000,000, of which the debt due by the public to the Bank was to be a part: and also so much of the gold coin and gold and silver bullion as should not be required for the banking department. The Issue Department was then to deliver over to the Banking Department an amount of Notes exactly equal to the Securities, Coin, and Bullion so deposited with them. The Banking Department was forbidden to issue Notes to any person whatever, except in exchange for other Notes, or such as they received from the Issue Department in terms of the Act.

No Banks or private bankers were allowed to commence issuing bank notes after the 6th May 1844: and if any ceased to

P

issue Notes after that date, the Bank might be authorised by the Crown in Council to increase the amount of Securities in the Issue Department to two-thirds of the Notes so withdrawn from circulation. Since 1844 several private bankers have ceased from business; and in terms of the Act the Bank's power of issuing Notes on securities has been increased to £15,000,000. Consequently its total power of issuing Notes is now limited to £15,000,000 plus the amount of bullion held by the Issue Department.

It was supposed that these provisions ensured that the Quantity of Notes in circulation, i.e. in the hands of the public, would be exactly equal to what a metallic Currency would have been, and that the outflow of bullion would by its own natural operation, have the mechanical effect of withdrawing Notes from the public to an equal amount. Having made these provisions, the framers of the Act supposed that they had taken out of the hands of the Bank all power of mismanaging the Currency, and that they might manage the banking department at their own discretion.

To say that the amount of Notes should only be equal to what a Metallic Currency would have been, is a very intelligible proposition; and as we have observed, several Banks have been constructed on that principle. But no banks constructed on this principle ever did, or by any possibility could do, banking business for profit. Every time that a Bank discounts a bill it is a violation of the "Currency Principle." The Banks constructed on the Currency Principle were pure Banks of Deposit: they never did any discount business: they did nothing but exchange Credit for specie and specie for Credit: and if the Bank of England were forbidden to discount, there is no reason why it should not be reconstructed on this principle.

But to suppose that the Bank Act really does carry out this principle is a most manifest error. In the first place it is evident that the £15,000,000 of Notes issued against the Public Debt and Securities are a direct violation of the "Currency Principle." How did the Bank obtain these securities? By purchase. Now the purchase money of these securities is in circulation, and the Notes created on their security as well. Is it not clear that these 15 millions of Notes are an augmentation of Currency to that

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amount? If it be true that these 15 millions of Notes are not a violation of the "Currency Principle" then the very same argument would show that the whole National Debt might be coined into Notes, and then there would be no more Paper in circulation than under a purely Metallic Currency! Certainly it is an excellent plan for every one to buy the Funds with their cash, and then to be allowed to have it too in the form of Notes ! This was exactly John Law's principle, and if we may coin the Funds into money we may just as well coin the land into money.

But this does not show the full extent of the error of those who think that the Bank Act enforces the "Currency Principle." The Banking Department does business like any other bank. It purchases or discounts Bills of Exchange by creating Credit in its books; that it increases its liabilities in another form besides Notes. This Credit is equally in excess of the Metallic Currency.

Therefore it is quite clear that those who seriously maintain that the Bank Act really carries out the Currency Principle must maintain this proposition

Twice 15 millions + an indefinite number of millions=15 millions.

In Banks constructed on the "Currency Principle" the Credit created is always exactly equal in quantity to the money deposited and kept in the bank. But how does this matter stand in regard to the Bank? To test this we need only take any one of its published returns at random. On the 27th March 1873, it appears that the Credit created by the Bank amounted to £61,021,187, and the specie held by the Bank amounted to £23,886,372 or about 2.6 to 1. If therefore it be maintained that the Bank is constructed on the "Currency Principle" it must also be maintained that 2.6 are equal to 1.

As a matter of pure arithmetic, therefore, it is perfectly clear that the Bank Act completely fails to carry out the "Principle" it was intended to enforce. In fact the framers of the Act had a THEORY, and they passed an Act: but they never took the slightest pains to ascertain whether the Act corresponds with the Theory.

9. The expressed purpose of the Act was to cause a with

drawal of Notes from circulation, i.e. from the public, exactly equal in quantity to the gold withdrawn from the Bank-in strict accordance with the " Currency Principle; " and it was supposed that if the Directors neglected this duty, the “ mechanical" action of the Act would compel them to fulfil it. It is now to be seen how this expectation was fulfilled.

No occasion arose for testing the powers of the Act till April 1847. The well-known disasters of 1846 caused a steady drain of bullion from the Bank to commence in 1846. But the Bank made no alteration in the Rate of Discount till 1847, when the Nullion was below 14 millions, and the bank raised its discount to 3. Having lost another million in a fortnight it raised discount to 4 per cent. But it made no further alteration till it had lost three millions more, and then it raised its discount to 5 per cent. Here we have the same inveterate error committed by the Bank as on so many previous occasions-an immense drain of bullion, and none but the most feeble and inefficient means taken to stop it. But this pressure is an excellent example to test the alleged "mechanical" action of the Act. We shall now see-1st: How the Bank was inclined to act on the principle. 2nd: Supposing they were disinclined to do so, how far the Act, by its self-acting principles, could compel them to do so The following figures speak for themselves