upon, without further delay, to endeavor to change the system altogether, a sound system of banking being an object of the highest importance to the whole community. The view taken by government was strengthened by observing the little comparative derangement sustained by Scotland under the joint-stock Banks, by which the monetary concerns of that part of the kingdom have been almost exclusively conducted. Looking to that country as an example, it was perhaps natural to conclude that what afforded evidence of advantage in one part of the kingdom would be equally good for all the rest. There is no intention to criticise the Scottish system of banking; but, were it narrowly examined, it might not appear so perfect in all its parts as its many warm advocates are inclined to believe. Suffice it to say, that it has produced great benefit to Scotland, which is a sufficient reason for leaving it untouched so long as it commands public confidence. . . . The two systems were different in origin and principle. That of England had been formed upon the Bank of England, and private establishments precluded by Parliament from embracing more than six partners, while the system of joint-stock Banks had ever been the main support of the circulation of Scotland. Both systems existed with equal advantage in the several districts where established. A change in either could only be accomplished by competition, endangering the credit and currency of the country. . . . So dangerous does this system appear, as it now stands, that it becomes questionable whether the Bank of England and the bodies in question can permanently exist together." I

Such was the attempted explanation of the abandonment or failure of the rule requiring the Bank, on a full currency, to maintain reserves in coin equalling one-third of its liabilities. In adopting it, it merely followed the dogma of the Bullion Committee, that the condition of the currency was indicated by that of foreign exchange. If the latter were at par, the currency was necessarily in a healthy and normal condition. The Bullion Committee did not attempt to prescribe the requisite amount of coin to be held, when the exchanges were at par, and the currency consequently full. The managers of the Bank adopted the "one-third rule" for no other reason than that, for some time after it recovered from the effects of the panic of 1826, it held specie equalling about one-third its liabilities; the former averaging, from 1827 to 1830, inclusive, about £10,000,000; the latter, about £30,000,000. As the proportion was purely accidental, the rule was equally accidental. The exchanges being at par, the currency was full, and in a

1 Causes and Consequences of the Pressure in the Money Market.

healthy and normal condition. An adverse exchange caused contraction, which was still to disturb only temporarily the relation between liabilities and reserves, as the rate of interest would be raised to such a pitch that the coin lost would flow back into the country, and into the Bank, from being more valuable there than elsewhere. This doctrine was implicitly adopted by the Bank, and appeared to work satisfactorily in the drain which began in 1830, and continued until 1832, although the proportion of one-third between reserves and liabilities was by no means maintained. The drain continued so long as it was profitable to export gold, or so long as the country had no means of discharging its liabilities but by export. It turned, when it became profitable to import it, or when England became the creditor instead of the debtor nation. During these automatic movements, as they may be called, every thing worked pretty smoothly. In the mean time, the Bank conducted its operations as if the currency had been full, and had the satisfaction of seeing its gold brought back to it in full volume, without raising a finger on its part. The correctness of the dogma of the Bullion Committee seemed to be established beyond cavil. From 1833 to 1837, however, the exchanges remaining at par, the Bank was subjected to a steady drain for coin, which took from it, in a period of three and a half years, nearly £7,000,000. The rule no longer worked; or, rather, the Bank no longer followed the rule. It no longer applied, for the reason that the demand for coin was domestic, not foreign. This demand, to use the language of Mr. Palmer," seems in no degree to have arisen from overtrading, or any undue speculative advance in commercial prices: occurrences of that nature tend to produce an unfavorable foreign exchange, an evil only to be remedied by that contraction of the circulation which eventually restores prices and currency to a level with those existing in foreign countries." With conditions not contemplated by the Bullion Committee, the Bank was no longer to be governed by the rules it had laid down. It must meet a domestic demand both for currency and coin; otherwise there would be a domestic convulsion or disturbance most fatal in its effects. "It is evident," said Mr. Palmer, "that the additional issue by the Bank has not caused any foreign demand for gold; and, unless that be exhibited, the Bank ought not, under circumstances of un

natural pressure, strictly to enforce the principle laid down. We must keep in mind that England is the centre of the whole commerce of Europe and America, if not of the world; and any hasty or unnecessary step taken will not only affect the credit and prices of this country, but, to a certain degree, those of all parts of the Continent from whence we are to obtain that bullion which we have lost. . . . And, in order to prevent that pressure, the Bank is required to reissue the amount of notes so cancelled" (taken in), "without reference to the amount of bullion in its possession." While no longer recognizing the old rule under the new condition of things, Mr. Palmer seems measurably to have lost confidence in its value in reference to the exchanges. "It remains for Parliament," he says, "to express an opinion upon either of those points" (that is, whether the rule should hold in reference to the currency when exchanges are even, or whether it should be abandoned when they are even, but when the demand for coin is a domestic one); "and there can be no question but that the Bank will immediately regulate its course accordingly. ... If, however, the amount of paper money be limited, and it be issued by one body with an adequate reserve of bullion, expanding and contracting as the currency may fluctuate in value with reference to foreign exchanges, there could be no difficulty in preserving it against depreciation for all purposes of foreign payment. If paper money ever become discredited by any internal convulsion, it can then be only upheld by the power of the government; and in such cases it becomes the duty of the ministers of the Crown to undertake the responsibility of upholding the public credit. For relief against commercial discredit, the issuing body should be so formed as to be able to afford protection."

With such incoherency and incompetency on the part of its managers, no wonder that the Bank constantly found itself involved in the greatest straits, and commerce and trade in great uncertainty, embarrassment and loss. The reserves held by the Bank are, at all times, to have reference as much to a domestic as to a foreign demand, to its own condition as to that of the public. They are held to make good losses, however arising. That coin is drawn from it in considerable quantities, and continuously, is evidence that large losses have been made. It is the same, so far as the volume of the cur

rency is concerned, whether they have been made by the Bank or by its depositors. If the Bank make a loss of a million of sovereigns, it must reduce its issues in far greater ratio. If its depositors make a similar loss, and draw in consequence a corresponding amount of coin, it must reduce its issues in the same ratio as if the loss were its own. The capital on which it bases the greater part of its operations, belongs to the public; but, whether belonging to the public or itself, its loans must always be in ratio to its reserves. As already shown, the drain upon it for specie does not begin till the goods, the payment of which is to cause the foreign or domestic demand for coin, have been purchased for consumption, and probably in great part consumed. But for the instruments issued by the Bank, such purchases for consumption would never have been made. The Bank, when it makes its loans, has no means of knowing the purposes for which their proceeds may be applied. Their use in the purchase of imported merchandise may be upon a full currency; when, in fact, specie is flowing into its vaults. At that very moment it may be pursuing a course which imperils its condition. To make two sets of rules in reference to its reserves - one having reference to a foreign, and one to a domestic, demand-is to make distinctions where no differences whatever exist. assume the Bank to be in a perfectly safe condition when it is not being called upon for specie, is an absurdity which any tyro in finance should be able to detect. The step or act, which is to involve it in future embarrassment or loss, is always taken in a period of apparent prosperity,—in a period of full currency, and when it is not on its guard.

To

No such rule, however, as that formally set forth by Mr. Palmer ever did exist; nor could it exist, considering the manner in which the Bank is organized and conducts its operations. It can make no rule which shall control the operations of its depositors. They will draw the coin which belongs to them as it suits their necessities. It might as well make a rule that the exports of the United Kingdom shall not exceed a certain tonnage and value. In a panic, its gold as well as its rules are scattered to the winds. No more meaning was attached to the phrase "full currency" than to "rapidity of circulation." A paper currency can be said to be full, only

when all articles entering into consumption are symbolized. "Full currency" was borrowed from the Bullion Committee. It meant with them the equilibrium of the currency. If it were more than full, if it were redundant, then the rates of exchange rose, to be brought down again only by a reduction of the excess, by export of coin, which was the only part of the currency that could be exported. The reason that gold goes forward is not because the proper equilibrium in the circulating medium common to all commercial countries has been disturbed, but for the reason that, from an excess of instruments of expenditure, the country in which such excess exists has created debts which can be discharged only by an exportation of coin, in default of the ordinary subjects of commerce.

The holding, by the Bank, of an amount of gold unusually large, is always proof that the currency is, or, rather, that production and trade are or have been, in an unhealthy condition; that liquidations to a large extent have taken place; and that the business public, in their distrust, or want of opportunities, have deposited in Bank the balances due them, which have been liquidated in gold, for safe-keeping and to wait a favorable turn of affairs. A large amount of gold in its vaults, therefore, indicates the exact opposite of what it is supposed to indicate. With the Bank of England it is always a prelude to, or always follows, great speculative movements. It is the rule with it to issue notes against the coin it holds. If the amount be large, the issues act correspondingly upon prices and upon expenditure. As a necessary consequence, gold is drawn from the Bank to meet such expenditure, and in the adjustment of balances that necessarily arise. This done, the gold returns to it again, to be made the basis of loans to be drawn from, and again to be returned in manner described. As the viciousness of the system is not seen, the same inflations and contractions periodically occur, alike disastrous to itself as to the public, until their regular recurrence has come to be regarded as a necessary law or condition of all currencies.

There can be no doubt that the condition of the country in 1836 and 1837 seemed to call for extraordinary exertions on the part of the Bank; nor that, in making them, it was guided