goods in transit is much larger with a slow conveyance than a quick one. For example, when Manchester supplies London with manufactured goods-if it takes seven days by canal for these goods to reach London, it is clear that there must always be seven days' consumption of goods on the way. If the same transit is accomplished by railway in one day, it is only necessary to have one day's consumption on the way; and the capital employed in producing the other six days' consumption is liberated, and may be employed in promoting other commercial operations. When we consider the enormous economy of capital required in the transaction of the same amount of business which was effected by the introduction of more rapid modes of communication, whether by railways or steamboats, we shall understand how greatly they increased the national resources. There can be no doubt that the economy of national capital effected by the extension of railways far exceeded the losses which occurred from unsuccessful speculation in them. Now, these operations were beginning to have their full effect in saving the national capital, simultaneously with the good harvests of 1842-3-4, and helped to swell the quantity of disposable capital to an unprecedented extent.

16. An attentive consideration of these circumstances is absolutely necessary, because they shew, if anything were necessary to shew it, the gigantic error committed by many writers, who think that the prices of goods must vary exactly with any increase or decrease of the amount of the currency, whereas there is no necessary relation between the two whatever. The particular methods of doing business have the most important influence on the quantity of capital necessary to carry it on; and a clumsy or more ingenious method of transacting business may make the most important changes in the quantity of money necessary to circulate any given amount of commodities without causing any alteration in the price of those commodities.

17. The Act of 1844 having placed an absolute limit upon the discretion of the Bank in issuing notes, Sir Robert Peel said that he thought that banking business could not be too free and unrestrained. The extraordinary accumulation of capital, arising

from the circumstances we have just detailed, lowered the market rate of discount to 1 and 2, on the best bills, and the Bank of England immediately conformed to the market rate on the passing of the Act, and reduced its rate from 4 per cent. to 2 for the best bills. The day the Act came into operation, indeed, the whole of the discounts were done at 13, and they continued at that rate for a fortnight, when some were done at 2 per cent.; and up to the 26th October a considerable portion was done at 24. From this date, however, up to October, 1845, the rate was 24. In November, 1845, the rate was suddenly raised to 3, and continued at that figure till August, 1846, when it was lowered to 3 per cent. These rates being governed by the flow of bullion, which diminished from 15 millions when the Act of 1844 passed, to 13 millions in November, 1845; after which it increased again to above 16 millions in August, 1846, and then began steadily to decline till it reached its minimum in the great crisis of October, 1847.

18. The first failure of the potato crops in Ireland in 1845, and the railway mania of that year, must be too fresh in the recollection of most persons to need repetition here; nor had they anything to do properly with the management of the Bank, whose sole proper duty was to look to its own affairs, and preserve its own stability. The calamity of 1846 was far more severe and extensive than that of the preceding year. It was absolutely certain that an immense quantity of bullion would require to be exported in payment of the grain it would be necessary to import. Accordingly, from the middle of September, 1846, a steady and continuous drain of bullion set in, but the Bank made no alteration in the rate of discount until the 16th January, 1847, when the bullion had fallen to £13,949,000 it raised the rate of discount to 3, and on the 23rd, the bullion having been further diminished by £500,000, it raised the rate to 4 per cent. Henceforth the drain continued rapidly, but the Bank still continued to make no alteration until the 10th April, when its treasure being reduced to £9,867,000, the rate of discount was raised to 5 per cent. Here we have the same inveterate blunder committed by the Bank as on so many previous occasions-an immense drain of bullion, and yet none but the most feeble, inefficient, and puerile means taken by the Bank to

raise the value of money here. But the operation of the Bank at this time is an excellent example of the self-acting nature of the Act of 1844. We need only observe, that the Banking Capital of the Bank of England is £14,000,000 of notes, based upon public securities, together with notes representing as much bullion as there is in the issue department. Consequently, the notes held in reserve must always be equal to the difference between the notes in circulation, or held by the public, and the sum of £14,000,000 added to the quantity of bullion. Now, we have seen that the intention of the framers of the Act of 1844 was, that, as the bullion diminished, the notes in the hands of the public should be diminished, in conformity with the “currency principle." Let us now see, 1st-How the Bank was inclined to act on the principle; and, 2ndly-Supposing they were disinclined to do so, how far the Act, by its self-acting principles, compelled them to do so. The following figures speak for themselves

These figures shew the utter futility of the idea that, as the bullion diminished, the Act could compel a reduction of notes in the hands of the public, for the notes in circulation were within an insignificant trifle as large in amount when the bullion was only £9,867,000, as when it was £16,366,000. Consequently,

VOL. II.

M

nothing could be a more total and complete failure of the Act of 1844, on the very first occasion its services were required.

19. Now, let us recall our readers' attention to what Mr. S. J. Loyd had pointed out as the fatal defect of the Bank rule of 1832, which we have given in § 77 of the preceding chapter. He said that under it the whole bullion in the Bank might be drained out without any contraction in the circulation, and it was supposed that the Act of 1844 had especially provided against this defect. In fact, the whole theory of the framers of the Act was that for every five sovereigns which left the country a £5 note should be withdrawn from circulation: and that if the Directors failed to do so of their own accord, the "mechanical" action of the Act would compel them to do so. But what was the actual result? The Bank had lost £7,000,000 of treasure, and its Notes in circulation were only reduced by £200,000; the whole of the reduction had been thrown upon its own reserves. Hence the Bank Act was open to exactly the same charge as the Bank rule of 1832 !

Mr. F. T. Baring, ex-Chancellor of the Exchequer, who maintained that the Act had been successful on several points, allowed that it had completely failed on this point 1-"I find that the amount of bullion in the Bank on September 12, 1846, was £16,354,000, and on April 17, 1847, it was reduced to £9,330,000, being a diminution of £7,024,000. Now, I take the same dates with respect to the circulation of notes, and I find that on September 12, 1846, the amount was £20,982,000, and on April 17, 1847, it was £21,228,000, being an increase of £246,000.

I must say that I never entertained the idea that it would have been possible under the operation of this bill to have shewn such a set of figures. I believe, if we look back we shall find that the operation of the deposits and the question of the reserve was not sufficiently considered either by those who were favourable or those who were opposed to the bill. I cannot find in the evidence before the Committee of 1840 more than a few sentences leading me to suppose that danger arising from such a cause was contemplated or referred to: yet this was a most important consideration, for it was by the reserve the Bank was enabled to do what was contrary to the spirit of the bill-when gold was running out, not to reduce their circulation by a single pound.

Hansard. Parl. Debates, Vol. 95, p. 615.

I do not think that the system works satisfactorily in this respect: and, in fact, the point did not receive anything like a sufficient consideration. Perhaps it was impossible before the bill was in practical operation to see how the reserve of notes would operate: but it certainly never entered into the contemplation of any one then considering the subject that £7,000,000 in gold should run off, and yet that the notes in the hands of the public would rather increase than diminish."

20. The number of notes held in reserve in the Banking department, under the new system of 1844, corresponded in effect, very much to the amount of the bullion held by the Bank before its division. When, therefore, the public saw that the whole banking resources of the Bank were reduced to £2,558,000, a complete panic seized both the public and the directors. The latter adopted measures of the most unprecedented severity to check the demand for notes. The rate was not only raised to 5 per cent., but this was only applicable to bills having only a few days to run, and a limit was placed upon the amount of bills discounted, however good they might be. Merchants who had received loans were called upon to repay them without being permitted to renew them. During some days it was impossible to get bills discounted at all. These measures were effectual in stopping the efflux of bullion, and a sum of £100,000 in sovereigns, which had been actually shipped for America, was re-landed. During this period, the rate of discount for the best bills rose to 9, 10, and 12 per cent. During all this time, the price of wheat continued steadily to rise, notwithstanding the monetary pressure; and at the close of May, the price on one occasion reached 131s. in Windsor Market. The foreign exchanges, which had been adverse to the country during the latter part of 1846 and the beginning of 1847, from the immense quantity of foreign corn which was imported, became favourable in the middle of April, partly owing to the great monetary pressure.

21. The pressure passed off after the first week in May, having lasted about three weeks, and bullion began to flow in after the 24th of April, until, at the end of June, it amounted to £10,526,000, the notes in circulation being £18,051,000, and the notes in reserve £5,625,000.