greatly depressed beyond their range in this country? Have wages fallen, or have merchants been extensively ruined by the universal depreciation of their stock? There has occurred nothing of the kind. The tenor of commercial and monetary affairs has been everywhere even and tranquil; and in France more particularly, an improving revenue and extended commerce bear testimony to the continued progress of internal prosperity. It may be doubted, indeed, if this great efflux of gold has withdrawn, from that portion of the metallic wealth of the nation which really circulates, a single napoleon. And it has been equally obvious, from the undisturbed state of credit, that not only has the supply of specie indispensable for the conduct of business in the retail market been all the while uninterrupted, but that the hoards have continued to furnish every facility requisite for the regularity of mercantile payments. It is of the very essence of the metallic system, that the hoards, in all cases of probable occurrence, should be equal to both objects; that they should, in the first place, supply the bullion demanded for exportation, and in the next place, should keep up the home circulation to its legitimate complement. Every man trading under that system, who, in the course of his business, may have frequent occasion to remit large sums in specie to foreign countries, must either keep by him a sufficient treasure of his own or must have the means of borrowing enough from his neighbours, not only to make up when wanted the amount of his remittances, but to enable him, moreover, to carry on his ordinary transactions at home without interruption."

In a country in which credit is carried to so great an extent as in England, one great reserve, in a single establishment, the Bank of England, supplies the place, as far as the precious metals are concerned, of the multitudinous reserves of other countries. The theoretical principle, therefore, of the currency doctrine would require, that all those drains of the metal which, if the currency were purely metallic, would be taken from the hoards, should be allowed to operate freely upon the reserve in the coffers of the Bank of England, without any attempt to stop it either by a diminution of the currency or by a contraction of credit. Nor to this would there be any well-grounded objection, unless the drain were so great as to threaten the exhaustion of the reserve, and a consequent stoppage of payments; a danger against which it is possible to take adequate precautions, because in the cases which we are considering, the drain is for foreign payments of definite amount, and stops of

itself as soon as these are effected. And in all systems it is admitted that the habitual reserve of the Bank should exceed the utmost amount to which experience warrants the belief that such a drain may extend; which extreme limit Mr. Fullarton affirms to be seven millions, but Mr. Tooke recommends an average reserve of ten, and in his last publication, of twelve millions. 1 Under these circumstances, the habitual reserve, which would never be employed in discounts, but kept to be paid out exclusively in exchange for cheques or bank notes, would be sufficient for a crisis of this description; which therefore would pass off without having its difficulties increased by a contraction either of credit or of the circulation. But this, the most advantageous dénouement that the case admits of, and not only consistent with but required by the professed principle of the system, the panegyrists of the system claim for it as a great merit that it prevents. They boast, that on the first appearance of a drain for exportation-whatever may be its cause, and whether, under a metallic currency, it would involve a contraction of credit or not—the Bank is at once obliged to curtail its advances. And this, be it remembered, when there has been no speculative rise of prices which it is indispensable to correct, no unusual extension of credit requiring contraction; but the demand for gold is solely occasioned by foreign payments on account of government, or large corn importations consequent on a bad harvest.

2 Even supposing that the reserve is insufficient to meet the foreign payments, and that the means wherewith to make them have to be taken from the loanable capital of the country, the consequence of which is a rise of the rate of interest; in such circumstances some pressure on the money market is unavoidable, but that pressure is much increased in severity by the separation of the Banking from the Issue Department. The case is generally stated as if the Act only operated in one way, namely, by preventing the Bank, when it has

1 [The rest of this paragraph replaced in the 6th ed. (1865) the following passage of the original text:

"The machinery, however, of the new system insists upon bringing about by force, what its principle not only does not require, but positively condemns. Every drain for exportation, whatever may be its cause, and whether under a metallic currency it would affect the circulation or not, is now compulsorily drawn from that source alone. The bank-note circulation, and the discounts or other advances of the Bank, must be diminished by an amount equal to that of the metal exported, though it be to the full extent of seven or ten millions. And this, be it remembered," &c.]

2 [From this point to the end of the section the text was largely rewritten in the 4th ed. (1857), and the note added in the 5th (1862).]

parted with (say) three millions of bullion in exchange for three millions of its notes, from again lending those notes, in discounts or other advances. But the Act really does much more than this. It is well known, that the first operation of a drain is always on the Banking Department. The bank deposits constitute the bulk of the unemployed and disposable capital of the country; and capital wanted for foreign payments is almost always obtained mainly by drawing out deposits. Supposing three millions to be the amount wanted, three millions of notes are drawn from the Banking Department (either directly or through the private bankers, who keep the bulk of their reserves with the Bank of England), and the three millions of notes, thus obtained, are presented at the Issue Department, and exchanged against gold for exportation. Thus a drain upon the country at large of only three millions is a drain upon the Bank virtually of six millions. The deposits have lost three millions, and the reserve of the Issue Department has lost an equal amount. As the two departments, so long as the Act remains in operation, cannot even in the utmost extremity help one another, each must take its separate precautions for its own safety. Whatever measures, therefore, on the part of the Bank, would have been required under the old system by a drain of six millions, are now rendered necessary by a drain only of three. The Issue Department protects itself in the manner prescribed by the Act, by not re-issuing the three millions of notes which have been returned to it. But the Banking Department must take measures to replenish its reserve, which has been reduced by three millions. Its liabilities having also decreased three millions, by the loss of that amount of deposits, the reserve, on the ordinary banking principle of a third of the liabilities, will bear a reduction of one million. But the other two millions it must procure by letting that amount of advances run out, and not renewing them. Not only must it raise its rate of interest, but it must effect, by whatever means, a diminution of two millions in the total amount of its discounts: or it must sell securities to an equal amount. This violent action on the money market for the purpose of replenishing the Banking reserve, is wholly occasioned by the Act of 1844. If the restrictions of that Act did not exist, the Bank, instead of contracting its discounts, would simply transfer two millions, either in gold or in notes, from the Issue to the Banking Department; not in order to lend them to the public, but to secure the solvency of the Banking Department in the event of further unexpected demands by the depositors. And unless the drain continued, and reached

so great an amount as to seem likely to exceed the whole of the gold in the reserves of both departments, the Bank would be under no necessity, while the pressure lasted, of withholding from commerce its accustomed amount of accommodation, at a rate of interest corresponding to the increased demand.*

I am aware it will be said that by allowing drains of this character to operate freely upon the Bank reserve until they cease of themselves, a contraction of the currency and of credit would not be prevented, but only postponed; since if a limitation of issues were not resorted to for the purpose of checking the drain in its commencement, the same or a still greater limitation must take place afterwards, in order, by acting on prices, to bring back this large quantity of gold, for the indispensable purpose of replenishing the Bank reserve. But in this argument several things are overlooked. In the first place, the gold might be brought back, not by a fall of prices, but by the much more rapid and convenient medium of a rise of the rate of interest, involving no fall of any prices except the price of securities. Either English securities would be bought on account of foreigners, or foreign securities held in England would be sent abroad for sale, both which operations took place largely during the mercantile difficulties of 1847, and not only checked the efflux of gold, but turned the tide and brought the metal back. It was not, therefore, brought back by a contraction of the currency, though

* [1862] This, which I have called "the double action of drains," has been strangely understood as if I had asserted that the Bank is compelled to part with six millions' worth of property by a drain of three millions. Such an assertion would be too absurd to require any refutation. Drains have a double action, not upon the pecuniary position of the Bank itself, but upon the measures it is forced to take in order to stop the drain. Though the Bank itself is no poorer, its two reserves, the reserve in the banking department and the reserve in the issue department, have each been reduced three millions by a drain of only three. And as the separation of the departments renders it necessary that each of them separately should be kept as strong as the two together need be if they could help one another, the Bank's action on the money market must be as violent on a drain of three millions, as would have been required on the old system for one of six. The reserve in the banking department being less than it otherwise would be by the entire amount of the bullion in the issue department, and the whole amount of the drain falling in the first instance on that diminished reserve, the pressure of the whole drain on the half reserve is as much felt, and requires as strong measures to stop it, as a pressure of twice the amount on the entire reserve. As I have said elsewhere,*" it is as if a man having to lift a weight were restricted from using both hands to do it, and were only allowed to use one hand at a time: in which case it would be necessary that each of his hands should be as strong as the two together.

* Evidence before the Committee of the House of Commous on the Bank Acts, in 1857.

in this case it certainly was so by a contraction of loans. But even this is not always indispensable. For in the second place, it is not necessary that the gold should return with the same suddenness with which it went out. A great portion would probably return in the ordinary way of commerce, in payment for exported commodities. The extra gains made by dealers and producers in foreign countries through the extra payments they receive from this country, are very likely to be partly expended in increased purchases of English commodities, either for consumption or on speculation, though the effect may not manifest itself with sufficient rapidity to enable the transmission of gold to be dispensed with in the first instance. These extra purchases would turn the balance of payments in favour of the country, and gradually restore a portion of the exported gold; and the remainder would probably be brought back, without any considerable rise of the rate of interest in England, by the fall of it in foreign countries, occasioned by the addition of some millions of gold to the loanable capital of those countries. Indeed, in the state of things consequent on the gold discoveries, when the enormous quantity of gold annually produced in Australia, and much of that from California, is distributed to other countries through England, and a month seldom passes without a large arrival, the Bank reserves can replenish themselves without any re-importation of the gold previously carried off by a drain. All that is needful is an intermission, and a very brief intermission is sufficient, of the exportation.

For these reasons it appears to me, that notwithstanding the beneficial operation of the Act of 1844 in the first stages of one kind of commercial crisis (that produced by over-speculation), it on the whole materially aggravates the severity of commercial revulsions. And not only are contractions of credit made more severe by the Act, they are also made greatly more frequent. Suppose," says Mr. George Walker, in a clear, impartial, and conclusive series of papers in the Aberdeen Herald, forming one of the best existing discussions of the present question-" suppose that, of eighteen millions of gold, ten are in the Issue Department and eight are in the Banking Department. The result is the same as under a metallic currency with only eight millions in reserve, instead of eighteen. . . . . . The effect of the Bank Act is, that the proceedings of the Bank under a drain are not determined by the amount of gold within its vaults, but are, or ought to be, determined by the portion of it belonging to the Banking Department. With the whole of the gold at its disposal, it may find it unnecessary to interfere with credit, or force down prices,

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