let us consider whether the Act effects the practical object chiefly relied on in its defence by the more sober of its advocates, that of arresting speculative extensions of credit at an earlier period, with a less drain of gold, and consequently by a milder and more gradual process. I think it must be admitted that to a certain degree it is successful in this object.

I am aware of what may be urged, and reasonably urged, in opposition to this opinion. It may be said, that when the time arrives at which the banks are pressed for increased advances to enable speculators to fulfil their engagements, a limitation of the issue of notes will not prevent the banks, if otherwise willing, from making these advances; that they have still their deposits as a source from which loans may be made beyond the point which is consistent with prudence as bankers; and that even if they refused to do so, the only effect would be, that the deposits themselves would be drawn out to supply the wants of the depositors; which would be just as much an addition to the bank notes and coin in the hands of the public, as if the notes themselves were increased. This is true, and is a sufficient answer to those who think that the advances of banks to prop up failing speculations are objectionable chiefly as an increase of the currency. But the mode in which they are really objectionable, is as an extension of credit. If, instead of increasing their discounts, the banks allow their deposits to be drawn out, there is the same increase of currency (for a short time at least) but there is not an increase of loans, at the time when there ought to be a diminution. If they do increase their discounts, not by means of notes, but at the expense of the deposits alone, their deposits (properly so called) are definite and exhaustible, while notes may be increased to any amount, or, after being returned, may be reissued without limit. It is true that a bank, if willing to add indefinitely to its liabilities, has the power of making its nominal deposits as unlimited a fund as its issues could be;

it has only to make its advances in a book credit, which is creating deposits out of its own liabilities, the money for which it has made itself responsible becoming a deposit in its hands to be drawn against by cheques; and the cheques, when drawn, may be liquidated (either at the same bank or at the clearing house) without the aid of notes, by a mere transfer of credit from one account to another. I apprehend it is chiefly in this way that undue extensions of credit, in periods of speculation, are commonly made. But the banks are not likely to persist in this course when the tide begins to turn. It is not when their deposits have already begun to flow out, that they are likely to create deposit accounts which represent, instead of funds placed in their hands, fresh liabilities of their own. But experience proves that extension of credit in the form of notes goes on long after the recoil from over-speculation has commenced. When this mode of resisting the revulsion is made impossible, and deposits and book credits are. left as the only source from which undue advances can be made, the rate of interest is not so often, or so long, prevented from rising, after the difficulties consequent on excess of speculation begin to be felt. On the contrary, the necessity which the banks feel of diminishing their advances to maintain their solvency, when they find their deposits flowing out, and cannot supply the vacant place by their own notes, accelerates the rise of the rate of interest. Speculative holders are therefore obliged to sub mit earlier to that loss by resale, which could not have been prevented from coming on them at fast: the recoil of prices and collapse of general credit take place sooner.

To appreciate the effect which this acceleration of the crisis has in mitigating its intensity, let us advert more particularly to the nature and effects of that leading feature in the period just preceding the collapse, the drain of gold. A rise of prices produced by a speculative extension of credit, even when bank notes have not

been the instrument, is not the less effectual (if it lasts long enough) in turning the exchanges: and when the exchanges have turned from this cause, they can only be turned back, and the drain of gold stopped, either by a fall of prices or by a rise of the rate of interest. A fall of prices will stop it by removing the cause which produced it, and by rendering goods a more advantageous remittance than gold, even for paying debts already due. A rise of the rate of interest, and consequent fall of the prices of securities, will accomplish the purpose still more rapidly, by inducing foreigners, instead of taking away the gold which is due to them, to leave it for investment within the country, and even send gold into the country to take advantage of the increased rate of interest. Of this last mode of stopping a drain of gold, the year 1847 afforded signal examples. But until one of these two things takes place-until either prices fall, or the rate of interest rises-nothing can possibly arrest, or even moderate, the efflux of gold. Now, neither will prices fall nor interest rise, so long as the unduly expanded credit is upheld by the continued advances of bankers. It is well known that when a drain of gold has set in, even if bank notes have not increased in quantity, it is upon them that the contraction first falls, the gold wanted for exportation being always obtained from the Bank of England in exchange for its notes. But under the system which preceded 1844, the Bank of England, being subjected, in common with other banks, to the importunities for fresh advances which are characteristic of such a time, could, and often did, immediately re-issue the notes which had been returned to it in exchange for bullion. It is a great error, certainly, to suppose that the mischief of this re-issue chiefly consisted in preventing a contraction of the currency. It was, however, quite as mischievous as it has ever been supposed to be. As long as it lasted, the efflux of gold could not cease, since neither would prices fall nor

interest rise while these advances continued. Prices, having risen without any increase of bank notes, could well have fallen without a diminution of them; but having risen in consequence of an extension of credit, they could not fall without a contraction of it. As long, therefore, as the Bank of England and the other banks persevered in this course, so long gold continued to flow out, until so little was left that the Bank of England, being in danger of suspension of payments, was compelled at last to contract its discounts so greatly and suddenly as to produce a much more extreme variation in the rate of interest, inflict much greater loss and distress on individuals, and destroy a much greater amount of the ordinary credit of the country, than any real necessity required.

I acknowledge, (and the experience of 1847 has proved to those who overlooked it before,) that the mischief now described, may be wrought, and in large measure, by the Bank of England, through its deposits alone. It may continue or even increase its discounts and advances, when it ought to contract them; with the ultimate effect of making the contraction much more severe and sudden than necessary. I cannot but think, however, that banks which commit this error with their deposits, would commit it still more if they were at liberty to make increased loans with their issues as well as their deposits. I am compelled to think that the being restricted from increasing their issues, is a real impediment to their making those advances which arrest the tide at its turn, and make it rush like a torrent afterwards: and when the Act is blamed for interposing obstacles at a time when not obstacles but facilities are needed, it must in justice receive credit for interposing them when they are an acknowledged benefit. In this particular, therefore, I think it cannot be denied, that the new system is a real improvement upon the old.

§ 4. But however this may be, it seems to me certain that these ad

vantages, whatever value may be put on them, are purchased by still greater disadvantages.

In the first place, a large extension of credit by bankers, though most hurtful when, credit being already in an inflated state, it can only serve to retard and aggravate the collapse, is most salutary when the collapse has come, and when credit instead of being in excess is in distressing deficiency, and increased advances by bankers, instead of being an addition to the ordinary amount of floating credit, serve to replace a mass of other credit which has been suddenly destroyed. Antecedently to 1844, if the Bank of England occasionally aggravated the severity of a commercial revulsion by rendering the collapse of credit more tardy and thence more violent than necessary, it in return rendered invaluable services during the revulsion itself, by coming forward with advances to support solvent firms, at a time when all other paper and almost all mercantile credit had become comparatively valueless. This service was eminently conspicuous in the crisis of 1825-6, the severest probably ever experienced; during which the Bank increased what is called its circulation by many millions, in advances to those mercantile firms of whose ultimate solvency it felt no doubt; advances which if it had been obliged to withhold, the severity of the crisis would have been still greater than it was. If the Bank, it is justly remarked by Mr. Fullarton,* complies with such applications, "it must comply with them by an issue of notes, for notes constitute the only instrumentality through which the Bank is in the practice of lending its credit. But those notes are not intended to circulate, nor do they circulate. There is no more demand for circulation than there was before. On the contrary, the rapid decline of prices which the case in supposition presumes, would necessarily contract the demand for circulation. The notes would either be returned to the Bank of England, as fast as they were issued, in the

P.E.

* P. 106.

shape of deposits, or would be locked up in the drawers of the private London bankers, or distributed by them to their correspondents in the country, or intercepted by other capitalists, who, during the fervour of the previous excitement, had contracted liabilities which they might be imperfectly prepared on the sudden to encounter. In such emergencies, every man connected with business, who has been trading on other means than his own, is placed on the defensive, and his whole object is to make himself as strong as possible, an object which cannot be more effectually answered than by keeping by him as large a reserve as possible in paper which the law has made a legal tender. The notes themselves never find their way into the produce market; and if they at all contribute to retard" (or, as I should rather say, to moderate) "the fall of prices, it is not by promoting in the slightest degree the effective demand for commodities, not by enabling consumers to buy more largely for consumption, and so giving briskness to commerce, but by a process precisely the reverse, by enabling the holders of commodities to hold on, by obstructing traffic and repressing consumption.'

But,

The opportune relief thus afforded to credit, during the excessive contraction which succeeds to an undue expansion, is consistent with the principle of the new system; for an extraordinary contraction of credit, and fall of prices, inevitably draw gold into the country, and the principle of the system is that the bank-note currency shall be permitted, and even compelled, to enlarge itself, in all cases in which a metallic currency would do the same. what the principle of the law would encourage, its provisions in this instance preclude, by not suffering the increased issues to take place until the gold has actually arrived; which is never until the worst part of the crisis is past, and almost all the losses and failures attendant on it are consummated. The machinery of the system withholds, until for many purposes it comes too late, the very medicine very D D

This function of banks in filling up the gap made in mercantile credit by the consequences of undue speculation and its revulsion, is so entirely indispensable, that if the Act of 1844 continues unrepealed, there can be no difficulty in foreseeing that its provisions must be suspended, as they were in 1847, in every period of great commercial difficulty, as soon as the crisis has really and completely set in.† Were this all, there would be no absolute inconsistency in maintaining the restriction as a means of preventing a crisis, and relaxing it for the purpose of relieving one. But there is another objection, of a still more radical and comprehensive character, to the new system.

Professing, in theory, to require that a paper currency shall vary in its amount in exact conformity to the variations of a metallic currency, it provides, in fact, that in every case of an efflux of gold, a corresponding diminution shall take place in the quantity of bank notes; in other words, that every exportation of the precious metals shall be virtually drawn from the circulation; it being assumed that this would be the case if the currency were wholly metallic. This theory, and these practical arrangements, are adapted to the case in which the drain of gold originates in a rise of prices produced by an undue expansion of currency or credit; but they are adapted to no case beside.

When the efflux of gold is the last

*True, the Bank is not precluded from making increased advances from its deposits, which are likely to be of unusually large amount, since, at these periods, every one leaves his money in deposit in order to have it within call. But, that the deposits are not always sufficient, was conclusively proved in 1847, when the Bank stretched to the very utmost the means of relieving commerce which its deposits afforded, without allaying the panic, which however ceased at once when the Government decided on suspending the Act.

†This prediction was verified on the very next occurrence of a commercial crisis, in 1857; when Government were again under the necessity of suspending, on their own responsibility, the provisions of the Act.

an increase of the currency, or from an expansion of credit tantamount in its effect on prices to an increase of currency, it is in that case a fair assumption that in a purely metallic system the gold exported would be drawn from the currency itself; because such a drain, being in its nature unlimited, will necessarily continue as long as currency and credit are undiminished. But an exportation of the precious metals often arises from no causes affecting currency or credit, but simply from an unusual extension of foreign payments, arising either from the state of the markets for commodities, or from some circumstance not commercial. In this class of causes, four, of powerful operation, are included, of each of which the last fifty years of English history afford repeated instances. The first is that of an extraordinary foreign expenditure by government, either political or military; as in the revolutionary war, and, as long as it lasted, during the late war with Russia. The second is the case of a large exportation of capital for foreign investment; such as the loans and mining operations which partly contributed to the crisis of 1825, and the American speculations which were the principal cause of the crisis of 1839. The third is a failure of crops in the countries which supply the raw material of important manufactures; such as the cotton failure in America, which compelled England, in 1847, to incur unusual liabilities for the purchase of that commodity at an advanced price. The fourth is a bad harvest, and a great consequent importation of food; of which the years 1846 and 1847 presented an example surpassing all antecedent experience.

In none of these cases, if the currency were metallic, would the gold or silver exported for the purposes in question be necessarily, or even probably, drawn wholly from the circulation. It would be drawn from the hoards, which under a metallic currency always exist to a very large amount; in uncivilized countries, in the hands of all who can afford it; in

of bankers' reserves. Mr. Tooke, in his "Inquiry into the Currency Principle," bears testimony to this fact; but it is to Mr. Fullarton that the public are indebted for the clearest and most satisfactory elucidation of it. As I am not aware that this part of the theory of currency has been set forth by any other writer with anything like the same degree of completeness, I shall quote somewhat largely from this able production.

"No person who has ever resided in an Asiatic country, where hoarding is carried on to a far larger extent in proportion to the existing stock of wealth, and where the practice has become much more deeply engrafted in the habits of the people, by traditionary apprehensions of insecurity and the difficulty of finding safe and remunerative investments, than in any European community-no person who has had personal experience of this state of society, can be at a loss to recollect innumerable instances of large metallic treasures extracted in times of pecuniary difficulty from the coffers of individuals by the temptation of a high rate of interest, and brought in aid of the public necessities, nor, on the other hand, of the facility with which those treasures have been absorbed again, when the inducements which had drawn them into light were no longer in operation. In countries more advanced in civilization and wealth than the Asiatic principalities, and where no man is in fear of attracting the cupidity of power by an external display of riches, but where the interchange of commodities is still almost universally conducted through the medium of a metallic circulation, as is the case with most of the commercial countries on the Continent of Europe, the motives for amassing the precious metals may be less powerful than in the majority of Asiatic principalities; but the ability to accumulate being more widely extended, the absolute quantity amassed will be found probably to bear a considerably larger proportion to the population.* In * It is known, from unquestionable facts,

"In this country, where the banking system has been carried to an extent and perfection unknown in any other part of Europe, and may be said to have entirely superseded the use of coin, except for retail dealings and the purposes of foreign commerce, the incentives to private hoarding exist no longer, and the hoards have all been transferred to the banks, or rather, I should say, to the Bank of England. But in France, where the bank-note circulation is still comparatively limited, the quantity of gold and silver coin in existence I find now currently estimated, on what are described as the latest authorities, at the enormous sum of 120 millions sterling; nor is the estimate at all at variance with the reasonable probabilities of the case. this vast treasure there is every reason to presume that a very large proportion, probably by much the greater part, is absorbed in the hoards. If you present for payment a bill for a thousand francs to a French banker, he brings you the silver in a sealed bag from his strong room. And not the banker only, but every merchant and trader, according to his means, is under the necessity of keeping by him a stock of cash sufficient not only for his ordinary disbursements, but to meet any unexpected demands. That the quantity of specie accumulated in these innu

Of

in the hands of the French peasantry, often from a remote date, surpass any amount which could have been imagined possible; and even in so poor a country as Ireland, it farmers sometimes possess hoards quite disproportioned to their visible means of subsistence.

that the hoards of money at all times existing

has of late been ascertained, that the small