editating any unusual extension of their own operations, cers and dealers do not need more than the usual accomtion from bankers and other money lenders; and as it is only extending their loans that bankers increase their issues, none a momentary augmentation of issues is in these circumstances ssible. If at a certain time of the year a portion of the public ave larger payments to make than at other times, or if an indiidual, under some peculiar exigency, requires an extra advance, they may apply for more bank notes, and obtain them; but the notes will no more remain in circulation than the extra quantity of Bank of England notes which are issued once in every three months in payment of the dividends. The person to whom, after being borrowed, the notes are paid away, has no extra payments to make, and no peculiar exigency, and he keeps them by him unused, or sends them into deposit, or repays with them a previous advance made to him by some banker: in any case he does not buy commodities with them, since by the supposition there is nothing to induce him to lay in a larger stock of commodities than before. Even if we suppose, as we may do, that bankers create an artificial increase of the demand for loans by offering them below the market rate of interest, the notes they issue will not remain in circulation; for when the borrower, having completed the transaction for which he availed himself of them, has paid them away, the creditor or dealer who receives them, having no demand for the immediate use of an extra quantity of notes, sends them into deposit. In this case, therefore, there can be no addition, at the discretion of bankers, to the general circulating medium any increase of their issues either comes back to them, or remains idle in the hands of the public, and no rise takes place in prices.

But there is another state of the markets, strikingly contrasted with the preceding, and to this state it is not so obvious that the theory of Mr. Tooke and Mr. Fullarton is applicable; namely, when an impression prevails, whether well founded or groundless, that the supply of one or more great articles of commerce is likely to fall short of the ordinary consumption. In such circumstances all persons connected with those commodities desire to extend their operations. The producers or importers desire to produce or import a larger quantity, speculators desire to lay in a stock in order to profit by the expected rise of price, and holders of the commodity desire

1 [Sentence inserted in 5th ed. (1862).]

additional advances to enable them to continue holding. All these classes are disposed to make a more than ordinary use of their credit, and to this desire it is not denied that bankers very often unduly administer. Effects of the same kind may be produced by anything which, exciting more than usual hopes of profit, gives increased briskness to business: for example, a sudden foreign demand for commodities on a large scale, or the expectation of it; such as occurred on the opening of Spanish America to English trade, and has occurred on various occasions in the trade with the United States. Such occurrences produce a tendency to a rise of price in exportable articles, and generate speculations, sometimes of a reasonable, and (as long as a large proportion of men in business prefer excitement to safety) frequently of an irrational or immoderate character. In such cases there is a desire in the mercantile classes, or in some portion of them, to employ their credit, in a more than usual degree, as a power of purchasing. This is a state of business which, when pushed to an extreme length, brings on the revulsion called a commercial crisis; and it is a known fact that such periods of speculation hardly ever pass off without having been attended, during some part of their progress, by a considerable increase of

bank notes.

To this, however, it is replied by Mr. Tooke and Mr. Fullarton, that the increase of the circulation always follows instead of preceding the rise of prices, and is not its cause, but its effect. That in the first place, the speculative purchases by which prices are raised, are not effected by bank notes but by cheques, or still more commonly on a simple book credit: and secondly, even if they were made with bank notes borrowed for that express purpose from bankers, the notes, after being used for that purpose, would, if not wanted for current transactions, be returned into deposit by the persons receiving them. In this I fully concur, and I regard it as proved, both scientifically and historically, that during the ascending period of speculation, and as long as it is confined to transactions between dealers, the issues of bank notes are seldom materially increased, nor contribute anything to the speculative rise of prices. It seems to me, however, that this can no longer be affirmed when speculation has proceeded so far as to reach the producers. Speculative orders given by merchants to manufacturers induce them to extend their operations, and to become applicants to bankers for increased advances, which, if made in notes, are not paid away to persons who return them into deposit, but are partially

!

expended in paying wages, and pass into the various channels of retail trade, where they become directly effective in producing a further rise of prices. I cannot but think that this employment of bank notes must have been powerfully operative on prices at the time when notes of one and two pounds' value were permitted by law. Admitting, however, that the prohibition of notes below five pounds has now rendered this part of their operation comparatively insignificant by greatly limiting their applicability to the payment of wages, there is another form of their instrumentality which comes into play in the latter stages of speculation, and which forms the principal argument of the more moderate supporters of the currency theory. Though advances by bankers are seldom demanded for the purpose of buying on speculation, they are largely demanded by unsuccessful speculators for the purpose of holding on; and the competition of these speculators for a share of the loanable capital makes even those who have not speculated more dependent than before on bankers for the advances they require. Between the ascending period of speculation and the revulsion, there is an interval extending to weeks and sometimes months, of struggling against a fall. The tide having shown signs of turning, the speculative holders are unwilling to sell in a falling market, and in the meantime they require funds to enable them to fulfil even their ordinary engagements. It is this stage that is ordinarily marked by a considerable increase in the amount of the bank-note circulation. That such an increase does usually take place is denied by no one. And I think it must be admitted that this increase tends to prolong the duration of the speculations; that it enables the speculative prices to be kept up for some time after they would otherwise have collapsed; and therefore prolongs and increases the drain of the precious metals for exportation, which is the leading feature of this stage in the progress of a commercial crisis: the continuance of which drain at last endangering the power of the banks to fulfil their engagement of paying their notes on demand, they are compelled to contract their credit more suddenly and severely than would have been necessary if they had been prevented from propping up speculation by increased advances, after the time when the recoil had become inevitable.

§ 3. To prevent this retardation of the recoil, and ultimate aggravation of its severity, is the object of the scheme for regulating the currency, of which Lord Overstone, Mr. Norman, and Colonel

Torrens, were the first promulgators, and which has, in a slightly modified form, been enacted into law.*

According to the scheme in its original purity, the issue of promissory notes for circulation was to be confined to one body. In the form adopted by Parliament, all existing issuers were permitted to retain this privilege, but none were to be hereafter admitted to it, even in the place of those who might discontinue their issues: and, for all except the Bank of England, a maximum of issues was prescribed, on a scale intentionally low. To the Bank of England no maximum was fixed for the aggregate amount of its notes, but only for the portion issued on securities, or, in other words, on loan. These were never to exceed a certain limit, fixed in the first instance at fourteen millions.† All issues beyond that amount must be in exchange for bullion; of which the Bank is bound to purchase, at a trifle below the Mint valuation, any quantity which is offered to it, giving its notes in exchange. In regard, therefore, to any issue of notes beyond the limit of fourteen millions, the Bank is purely passive, having no function but the compulsory one of giving its notes for gold at 31. 17s. 9d., and gold for its notes at

* [1857] I think myself justified in affirming that the mitigation of commercial revulsions is the real, and only serious, purpose of the Act of 1844. I am quite aware that its supporters insist (especially since 1847) on its supreme efficacy in "maintaining the convertibility of the Bank note." But I must be excused for not attaching any serious importance to this one among its alleged merits. The convertibility of the Bank note was maintained, and would have continued to be maintained, at whatever cost, under the old system. As was well said by Lord Overstone in his evidence, the Bank can always, by a sufficiently violent action on credit, save itself at the expense of the mercantile public. That the Act of 1844 mitigates the violence of that process, is a sufficient claim to prefer in its behalf. Besides, if we suppose such a degree of mismanagement on the part of the Bank, as, were it not for the Act, would endanger the continuance or convertibility, the same (or a less) degree of mismanagement, practised under the Act, would suffice to produce a suspension of payments by the Banking Department; an event which the compulsory separation of the two departments brings much nearer to possibility than it was before, and which, involving as it would the probable stoppage of every private banking establishment in London, and perhaps also the non-payment of the dividends to the national creditor, would be a far greater immediate calamity than a brief interruption of the convertibility of the note; insomuch that, to enable the Bank to resume payment of its deposits, no Government would hesitate a moment to suspend payment of the notes, if suspension of the Act of 1844 proved insufficient.

† A conditional increase of this maximum is permitted, but only when by arrangement with any country bank the issues of that bank are discontinued, and Bank of England notes substituted; and even then the increase is limited to two-thirds of the amount of the country notes to be thereby superseded. Under this provision the amount of notes which the Bank of England is now [1871] at liberty to issue against securities, is about fifteen millions.

3l. 17s. 101d., whenever and by whomsoever it is called upon to do so.

The object for which this mechanism is intended is that the bank-note currency may vary in its amount at the exact times, and in the exact degree, in which a purely metallic currency would vary. And the precious metals being the commodity that has hitherto approached nearest to that invariability, in all the circumstances influencing value, which fits a commodity for being adopted as a medium of exchange, it seems to be thought that the excellence of the Act of 1844 is fully made out, if under its operation the issues conform in all their variations of quantity, and therefore, as is inferred, of value, to the variations which would take place in a currency wholly metallic.

1 Now, all reasonable opponents of the Act, in common with its supporters, acknowledge as an essential requisite of any substitute for the precious metals, that it should conform exactly in its permanent value to a metallic standard. And they say, that so long as it is convertible into specie on demand, it does and must so conform. But when the value of a metallic or of any other currency is spoken of, there are two points to be considered; the permanent or average value, and the fluctuations. It is to the permanent value of a metallic currency that the value of a paper currency ought to conform. But there is no obvious reason why it should be required to conform to the fluctuations too. The only object of its conforming at all is steadiness of value; and with respect to fluctuations the sole thing desirable is that they should be the smallest possible. Now the fluctuations in the value of the currency are determined, not by its quantity, whether it consist of gold or of paper, but by the expansions and contractions of credit. To discover, therefore, what currency will conform the most nearly to the permanent value of the precious metals, we must find under what currency the variations in credit are least frequent and least extreme. Now, whether this object is best attained by a metallic currency (and therefore by a paper currency exactly conforming in quantity to it) is precisely the question to be decided. If it should prove that a paper currency which follows all the fluctuations in quantity of a metallic, leads to more violent revulsions of credit than one which is not held to this rigid conformity, it will follow that the currency which agrees most exactly in quantity with a metallic currency is not that which adheres closest to its value; that is

1 [Paragraph inserted in 4th ed. (1857).]