"The efficacy of that corrective of an unfavourable state of the Exchanges, on which we have been dilating (i.e. raising the Rate of Discount) has been most thoroughly tested by late events. Every advance in the Bank Rate of Discount has been followed by a turn of the Exchanges in favour of England, and vice versa, as soon as the Rate of Interest was lowered, the Exchanges became less favourable."

It is quite needless to quote any more evidence in favour of this principle: its truth is now as universally admitted by all competent persons as the Newtonian Law of Gravity. It is the acknowledged principle upon which the Bank of England is now managed after our work was published in 1856, the Usury Laws in France were modified in order to enable the Bank of France to adopt it: and in fact it is now adopted by every Bank in the world.

In former times when the only communication between different countries was by means of sailing ships and common roads, and therefore very slow, expensive, and uncertain, this principle, though actually true, could seldom be called into action, because the cost and delay in the transport of gold would far exceed any profit to be made out of the difference in the Rates of Discount, in quiet times. It was like some mechanical force, which actually exists, but which is overpowered and prevented from producing any visible effect, in consequence of friction. But it did act in times of commercial crisis, when the Rate of Discount became extreme. In 1799 enormous failures took place at Hamburg: discount rose to 15 per cent., and this rate immediately drew gold away from England.

But in modern times, since communications have been so much accelerated and cheapened, even since the Act of 1844, by means of railroads and steamers, this friction, as we may call it, has been immensely diminished: and this great principle is called into action with a much less difference between the Rates

of Discount than at any former period. Bullion would probably have taken ten days to go from London to Paris: it can now go in ten hours, and at probably the tenth part of the expense. A difference of 2 per cent. between the Rates of Discount in London and Paris will now draw bullion from one place to the other.

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On the Causes which compelled the Suspension of the Bank Act in 1847, 1857, and 1866.

12. The monetary pressure which we mentioned above passed away at the time, but another much more severe came on in the Autumn, which ended in a monetary panic; aud on the 25th November 1847, the Government authorised the Bank to exceed the limits allowed by the Act of 1844, if they considered it necessary to do so to restore commercial confidence. This suspension of the Act was perfectly successful: and on two similar occasions in 1857 and 1866 a similar course was followed with similar results. We have given a full narrative of the course of events preceding these panics in our Theory and Practice of Banking, to which we must refer those who desire full information on the subject. We must now only examine the reasons which made this course necessary, and why it was successful.

Ever since the enormous development of the Credit system of commerce in modern times, great commercial failures have periodically recurred, producing the most widespread distress; and there have been two conflicting Theories as to what the action of the Bank ought to be in a Monetary Crisis.

1. One Theory maintains that in such a Crisis, the Bank should liberally expand its issues, to support Commercial Credit. This Theory may be called the EXPANSIVE Theory.

2. The other Theory maintains that in such a Crisis the Bank should rigorously restrict its issues to their usual amount, or even contract them. This Theory may be called the RESTRICTIVE Theory.

Both these Theories have been tried in practice, and discussed by the most eminent authorities, and we may succinctly examine the results.

The first great monetary Crisis in modern times took place in 1763, after the termination of the seven years' war. This great disaster occurred at Hamburg and Amsterdam, where the Currency Principle" was in full operation, and where there was no Banking Credit whatever, except what represented specie. The failures began at Amsterdam among the principal merchants.

The Bank had no power to assist them: and the resources of the private bankers were exhausted. Hearing that the Amsterdam bankers had determined to allow the merchants to fail, the Hamburg bankers wrote to them in the greatest alarm to say that if they did not support the merchants, they would instantly suspend their own payments. By the time the letter reached Amsterdam, the merchants had already stopped. General failure followed at Hamburg, where no business was transacted for some time, but for ready money. The failures were equally general throughout Germany. The Crisis extended to England, and Smith says

that the Bank made advances to merchants to the amount of a million.

Thus we see that the "Currency Principle" was no protection whatever against a Monetary Crisis: and on this occasion the Bank acted on the EXPANSIVE Theory.

In 1772 the severest Monetary Crisis since the South Sea scheme took place. On this occasion again the Bank came forward to support Commercial Credit.

In 1782 our unhappy war with America was ended, and the usual results of the termination of a great contest took place. The Bank had greatly extended its issues: and a very alarming drain of specie took place, which at one time threatened to oblige them to stop payment. The Directors, however, considered that if they could only restrain their issues for a short period, the returns in specie in payment of the exports would soon set in in a more rapid manner than they went out. They determined, therefore, to make no communication to Government, but for the present to contract their issues UNTIL THE EXCHANGES TURNED IN THEIR FAVOUR. The Bank felt the greatest alarm in May, 1783. They then refused to make any advances to Government on the loan of that year: but they did not make any demand for payment of their own advances, which were between 9 and 10 millions. They continued this policy up to October, when at length the drain had ceased from the country, and money had begun to flow in from abroad. At length in the Autumn when the favourable signs began to appear, they advanced freely to Government on the loan, although at that time the cash in the Bank was

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actually lower than at the time they felt the greatest alarm. It was then reduced to £473,000.

The doctrine then stated by Mr. Bosanquet that guided the Directors was this. That while a drain of specie was going on their issues should be contracted as much as possible: but that as soon as the tide had begun to give signs of ceasing, and turning the other way, it was then safe to extend their issues freely. This policy had been entirely successful, and the Credit of the Bank was saved.

After the peace of 1782 the commercial energies of the country were greatly developed to carry on this increased commerce a greatly enlarged Currency was necessary and as the monopoly of the Bank prevented solid Banks being founded innumerable tradesmen started up in every part of the country issuing notes. Burke says that when he came to England in 1750, there were not 12 bankers out of London: in 1792 there were about 400: the great majority being grocers, tailors, drapers, and petty shopkeepers. In the autumn of 1792 very numerous failures took place in Europe and America. In January, 1793, the general alarm was greatly increased by the rapid progress of the French Revolution. Some great failures occurred in London in February; and soon the panic spread to the banks. Of these 100 stopped payment, and 200 were much shaken. The pressure in London was intense : and this naturally produced a demand on the Bank for support and discounts. But the Bank being thoroughly alarmed, resolved to contract its issues: bankruptcies multiplied with frightful rapidity. The Government urged the Bank to come forward to support Credit, but they resolutely declined.

In the meantime the most alarming news came from Scotland. The public Banks were quite unable, with due regard to their own safety, to support the private bankers and commerce. Unless they received immediate assistance from Government, general failure would ensue. When universal failure seemed imminent, Sir John Sinclair remembered the precedent of 1697, when the public distress was allayed by an issue of Exchequer Bills. A Committee of the House of Commons was appointed, who reported that the sudden discredit of so large an amount of

bankers' notes had produced a most inconvenient deficiency in the Circulating Medium: and that unless a Circulating Medium was provided, a general stoppage must take place. They recommended that Exchequer Bills to the amount of £5,000,000 should be issued under the directions of a board of Commissioners appointed for the purpose, in sums of £100, £50, and £20.

No sooner was the Act passed than the Committee set to work. A large sum, £70,000, was at once set down to Manchester and Glasgow on the strength of the Exchequer bills, which were not yet issued. This unexpected supply, coming so much earlier than was expected, operated like magic, and had a greater effect in restoring Credit than ten times the sum would have had at a later period.

When the whole business was concluded, a report was presented to the Treasury. It stated that the knowledge that loans might be had, operated in many instances to prevent them being required. The applications granted were 238, and the sum advanced was £3,855,624. The whole sum advanced was repaid two only of the parties assisted became bankrupt: all the others were ultimately solvent, and in many instances possessed of great property. A considerable part of the sum was repaid before it was due, and all the rest with the utmost punctuality. After all expenses were paid, the transaction left a clear profit to the Government of £4,348.

Contemporary writers all bear witness to the extraordinary effects produced. Macpherson says that the very intimation of the intention of the Legislature to support the merchants operated like a charm over the whole country, and in a great degree superseded the necessity of relief by an almost instantaneous restoration of confidence. Sir Francis Baring concurs in this view, and adduces the remarkable success of the measure as an argument to show the mistaken policy of the Bank. After careful deliberation, the Bullion Report warmly approved of it: censured the proceedings of the Bank and especially cite it as an illustration of the principle they laid down, that an enlarged accommodation is the true remedy for that occasional failure of confidence to which our system of Paper Credit is unavoidably exposed.