that the Bank Act really carries out the "Currency Principle," must maintain this proposition Twice 15 millions + an indefi nite number of millions } = 15 millions. It has been shewn that 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 with the Bank of England? Let us test this principle by any one of its published returns taken 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 26 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 manifest that the Bank Act completely fails to carry out the "Principle" it was intended to enforce. In fact, the framers of the Bank 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. 11. Now, we say nothing here as to the correctness, or the contrary, of the "Currency Principle," or as to the expediency of carrying it out; but to suppose that the Bank Act does really carry it out is simply one of the most astonishing delusions that ever deceived the public mind. Truly, says Bastiat "Etre dupe d'autrui n'est pas déjà très plaisant; mais employer le vaste appareil représentatif à se duper soi-même, à se duper doublement, et, dans une affaire de numération, voilà qui est bien propre à rabattre une peu l'orgueil du siècle des lumières." Every "banker" whatever who discounts a bill of exchange violates the "Currency Principle." There is no mode whatever of carrying out the Currency Principle but by abolishing discount banking altogether; as we have already observed, the banks constructed on this principle did no discount business. 12. Lord Overstone, in his evidence before the Committee of the House of Commons, said 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: and we have seen that this assertion was completely verified in 1839. It was, therefore expressly declared that it was the purpose of the Act that, if any drain should arise after it came into operation, an exact amount of notes should be withdrawn from the hands of the public, or from circulation. Having secured that object, as they imagined, they left the directors free and uncontrolled in their banking business. For the first two years after the Act was passed no occasion occurred to test its merits; it was a period of unusual prosperity and accumulation of capital. But when the first season of real trial came in the beginning of 1847, we have seen that the Act wholly failed in its intended effect of causing a withdrawal of notes in circulation, in proportion to the outflow of bullion. The directors pursued exactly the same fatal course as they had done on so many former occasions, and the result was the pressure of April. It was manifestly proved, therefore, that the Act provided no effectual check against mismanagement on the part of the Bank. And whence did this failure arise? From this very simple circumstance. The framers of the Act supposed that there is only ONE way of extracting gold from the Bank: namely, by means of its Notes: and that if people want gold they must bring in Notes; and, consequently, as the Gold comes out the Notes must go in. But as a matter of simple banking business there are Two methods of extracting gold from the Bank—namely, by Notes and by CHEQUES. Whoever has a Credit in its books may go and present a CHEQUE, and thus draw out gold from the banking department without a single Bank Note being withdrawn from the public. In fact, instead of withdrawing the Notes from the public, as the framers of the Act intended, the Directors threw the whole effect of the drain of gold on their own reserves. And that happened in this way. The public has Two methods of drawing gold from the banking department, namely, by NOTES and CHEQUES; but the banking department has only ONE method of drawing gold from the issue department, namely, its Notes in And when the Bank felt a drain on its banking de reserve. partment for gold, it had to replenish it by obtaining a fresh supply from the issue department; at the same time giving up an exactly equal amount of Notes. And thus the whole drain fell on its own reserves. No legislation can prevent this power of extracting gold from the Bank by means of Cheques, except prohibiting Cheques altogether. And thus is explained the complete failure of the "Mechanical" action of the Act to compel the Directors to carry out the "Currency Principle." The Directors were able to commit, and actually did commit, the very same error, as they had done before the Act-which Lord Overstone had truly said was the fundamental vice of the Bank principle of 1832-and it was powerless to prevent them. And this simple fact completely upsets the whole theory of the Act. There are in reality two leaks to the ship. The framers of the Act could only perceive one; and they only provided against one: and they were utterly astonished to find the ship rapidly sinking from the other leak which they had forgotten. 13. Now, as the Act notoriously and manifestly failed on this most important point, which was fully and candidly admitted by Sir Robert Peel, it becomes a natural inquiry to ask why it failed on this point, which it was supposed had been rendered so secure. We reply to this that the Act failed because it aimed at the wrong mark altogether. It wholly missed the true point in the case. In former times it was a mercantile dogma that the Exchanges could only be against the country in consequence of its being indebted to other countries. Nothing can be more striking than the vicious circle in which the Commercial witnesses argued before the Bullion Committee of 1810. They maintained with unflinching perseverance that the Exchanges could only be adverse, because the country was indebted and as the exchanges were adverse, they maintained that the country must be indebted (without the slightest inquiry into the fact) because the Exchanges were adverse. : However, the Bullion Committee completely disproved this Commercial dogma; and they demonstrated beyond dispute, that the depreciated paper currency was the cause of the Exchanges being apparently adverse; but that when this depreciated paper currency was reduced to its true value in gold, the Exchanges were in reality in favour of the country. The Commercial witnesses maintained that when the indebtedness was paid off, the drain of bullion would cease of itself. But the Bullion Committee proved that with a paper currency so depreciated as Bank Notes then were, the drain would not cease until all the specie in circulation had left the country, which was amply verified. The Bullion Committee thus shewed that there are two causes of a drain of bullion-1st, the indebtedness of the country; 2nd, a depreciated paper currency. But in the first edition of this Work published in 1856 we shewed that there is a THIRD cause of a drain of bullion, and an adverse exchange, which, however it might be known among commercial men, had never yet, that we have seen, found its way into any commercial book whatever, and most certainly had never been brought forward prominently before the public in Currency discussions, as a cause of an adverse Exchange, wholly irrespective of any indebtedness of the country, or of the state of the Paper Currency. The Principle is this That when the Rate of Discount between any two places differs by more than sufficient to pay the cost of transmitting bullion from one place to the other, bullion will flow from where discount is lower to where it is higher. The old mercantile dogma was that Bills of Exchange can only be created to represent debts arising from the sale of merchandise and if there are no debts, there will be no bills created: and that when all the bills are paid, no more bullion will go. : But, suppose (the state of Credit at both places being assumed to be equally secure) that the Rate of Discount at London was 2 per cent., while the Rate at Paris was 8 per cent., we shewed that bullion dealers would fabricate bills-not based upon any previous debts, or any mercantile transactions whatever-but simply for the sake of being discounted; that is, for the purpose of buying gold in London at 2 per cent., and selling it in Paris at 8 per cent., and this operation will infallibly go on, and the drain of bullion will not cease, until the Rates of Discount are so nearly equalised as to destroy the profits to be made by fabricating bills. Hence, if such a state of things, as is just supposed, arises, the Bank must, as an indispensable measure to preserve its own security, raise its Rate of Discount so as to destroy these profits, and so arrest the drain which is exclusively caused by the difference of the Rates in the two places. Now, this practice causes no increase of Bank Notes in circulation; on the contrary, they are not wanted: it is gold that is demanded and taken for export, and it steals out of the country noiselessly and unobserved. Also, if bankers in this country will perversely maintain the rate of discount lower here than in neighbouring countries, and, therefore, lower than the natural rate, persons in foreign countries send their debts and securities over here for sale, and the proceeds are remitted abroad. Consequently this practice causes an export of gold without diminishing the notes in circulation. Of all species of property, debts are the most easily transportable. The charges even on the transmission of gold are heavy compared to those on the transmission of debts. Debts to any amount can be transmitted from one country to another at the mere expense of the postage. Consequently, if the Americans can only get £85 per cent. for their debts in their own country, and they can get £96 per cent. in England, of course, they will send them here in vast quantities for realisation. This was eminently and notoriously the case in 1839, when the Bank of England kept its rate so perversely below the natural rate, and it was the cause that aggravated the drain of bullion to so alarming an extent. Hence we have shewn that beyond the causes universally known for an export of specie, namely, payments of genuine debts, there is another and most potent cause, whose importance has only recently been sufficiently recognisednamely, an unnatural depression of the rate of discount, below that of neighbouring countries. Now, this principle was certainly not generally understood at the time the Bank Act of 1844 was passed; and in the first edition of this Work (1856) we stated this as a fundamental principle of the Currency "AN IMPROPERLY LOW RATE OF DISCOUNT IS, IN ITS PRACTICAL EFFECTS, A DEPRECIATION OF THE CURRENCY." We therefore shewed that the only true method of striking at this demand for gold is by raising the RATE of DISCOUNT, and |