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Bank Of England,
February 7, 1878.

MY DEAR PRICE,—I think I may sum up our long correspondence of the last three months in the following way:

You are now satisfied that you were in error in supposing that the Directors of the Bank of England in regulating their rate of Discount were guided merely and solely by the fluctuations of the amount of Bullion in the Issue Department.

Gold may, and does frequently, leave their bank, and that in considerable quantities, without its occurring to them that an advance of the rate is necessary. It frequently flows into their vaults without bringing with it as a necessary consequence a fall in the rate.

The sole principle which actuates us in fixing the rate of Discount—that is to say, the price of our loans—is the state of our Reserve, the amount which we have in our coffers wherewith to pay our debts and to meet demands upon us.

And in judging of the amount so disposable we have of course to take into account the probability of these demands, and the character of our deposits, and many other circumstances present or foreseen, that is to say, the mood of our depositors, the condition of our borrowers, their strength or weakness, the state of trade, of the harvest, of home and foreign politics, of the markets for produce, of the exchanges, everything, in short, which can affect the case.

Thus the amount of the Reserve, and its ratio to our liabilities, cannot be fixed by any hard and fast rule, but are capable of very wide variations in perfect consistency with the laws of good and safe banking.

But it is to be observed that that which in normal times has the most direct, immediate, and important action on the Reserve is the movement of bullion.

It does not, as I have told you, of necessity affect the rate of Discount, but as the efflux necessarily diminishes, and the influx necessarily increases, pro tanta, our Reserve, those movements must be most carefully watched by those who have the management of the Bank of England.—I remain, sincerely yours,

Henry H. Gibbs.

2 Norham Gardens, Oxford, February 13, 1878.

My Dear Gibbs,—Your letter of the ;th gives me great satisfaction and pleasure.

We are entirely agreed as to the nature of the forces which ought to, and, as you testify, do govern the rate of discount of the Bank of England. They are those which you enumerate, taken 'in conjunction with the amount of your Reserve. I sum them up in the expression, the state of the banking market, and the character, at the time, of its supply and demand.

Your statement that "the movement of the bullion must be closely watched," combined with the declaration that "it does not necessarily affect the rate of discount," I most readily adopt.

It is a very agreeable fact to me to learn that the Bank of England's action in determining the rate of discount is founded on so accurate and so rational a principle. It conforms to the state of the banking market of which its Reserve forms a part.

I regret that I fell into the error of supposing that the Bank of England held the views of the Reserve and of the rate of discount which prevail in city articles and in commercial literature generally. My gratification is all the greater now in learning that it acts on the principle for which I have so long contended.—Yours very sincerely, B. Price.




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