bills growing out of real commercial transactions falling due in a fixed and short period, are sound and well established principles. But that while the Bank is restrained from paying in specie, there need be no other limit to the issues of their paper than what is fixed by such rules of discount, and that during the suspension of cash payments, the discount of good bills falling due at short periods cannot lead to any excess in the amount of Bank paper in circulation, appears to your Committee a doctrine wholly erroneous in principle, and pregnant with dangerous consequences in practice."

"If at any time," say the Committee, "they" (the directors) "incautiously exceeded the proper limit for their advances and issues, the paper was quickly brought back to them by those who attempted to profit by the market price of gold, or by the rate of exchange." But all the issues of the Bank are speedily brought back to it in the payment of its bills, or for coin, if these be not paid, only after they have performed their function as currency. The method by which, according to the Committee, they were brought back was a pure fiction. They assumed, with Adam Smith, that the moment there was an excess of paper, such excess would instantly cause a rise in the exchanges, and would immediately be taken back to the Bank for coin by its holders, in order to profit by such advance. But an excess of currency acts upon exchanges, not directly, but through its consequences or effects. If an amount be issued for which there is no constituent, there will be an increased consumption of foreign goods, to pay for which coin must be exported. The consumers of such goods pay the importer in Bank of England notes, which are drawn by him in coin. A long period, however, may elapse between importation and payment, as the purchases may be made on very long time, or may be carried for a long time on bankers' credits. The effect of an over-issue, therefore, is remote and consequential, seldom direct. Nothing whatever would be gained by buying up the notes of the Bank, for the sake of obtaining coin for the purpose of profiting by the rise of exchange, for the reason that the notes would cost their purchaser their value in coin. The only parties who would profit by a rise in exchange would be importers who had accumulated notes when the exchanges were at par, and who could put up the price of their goods with the rise in the price of the former. The Committee simply repeated Smith in saying, that "the whole paper money which can easily be circulated in a country can

never exceed the value of the gold and silver of which it supplies the place. Should the circulating paper at any time exceed that sum, as the excess could neither be sent abroad, nor employed in the circulation of the country, it must return immediately upon the Banks, to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home; and, as they could not send it abroad, they would immediately demand payment for it at the Banks. When this superfluous paper was converted into gold and silver, they could easily find a use for it by sending it abroad; but they could find none while it remained in the shape of paper." i Such was precisely the idea of the Committee. The assumption and process, however, were purely imaginary. All the issues of the Bank, so long as confidence is felt in them, return to it with equal regularity and in equal volume, whether they represent capital, or whether they are purely fictitious. If loans are properly made, its issues are returned 2 by its customers; if not, they must be taken in out of its reserves. The result alone can determine the character of the issue, and such result may be postponed for a long time; for an excess of issue, by inflating prices, will, for a time, cause payments to be made more promptly in consequence. Years may elapse before the period of liquidation comes round. The question, therefore, is not one of quantity, but of quality. The issues of

1 See ante, p. 129.

2 A calculation made by the Bank in 1818, to ascertain the number of days that bank-notes of each denomination remained in circulation, showed the following results :

The average time the notes remained in circulation, assuming that equal amounts of the different denominations were issued, equalled about twenty-eight days. The one, two, and three pound notes remained in circulation about four and a half months. The time in which the notes of £300 and upwards, by means of which the greater portion of the exchanges must have been effected, remained in circulation, equalled thirteen and one half days. -Gilbart on Banking, p. 43.

the Bank, if properly made, can never be in excess. If improperly made, every note will be in excess. The Committee simply reiterated, in effect, the dogma of Smith, that money was an instrument, a wheel of commerce, the value of which depended upon the relation its quantity bore to the quantity or value of goods to be exchanged; and that inherent value was no necessary attribute of it.

So long as the Bank was liable, say the Committee, to discharge its notes in coin on presentation, it conducted its affairs in view of such a liability. Relieved from this obligation, it should have conducted them in reference to the price of gold and the condition of the exchanges. To act in reference to such standard or rule would be to resume; for it could make its notes equal in value to coin, only by paying coin when demanded. This it was forbidden to do. It could not do this so long as it remained in the power of government; and there was no hope that the latter would relax its grasp till peace was finally established. The proposition of the Committee, therefore, was an absurdity upon its face. No contraction of the currency in the condition of affairs would have increased the amount of gold in the Bank. It could not expect its bills to be paid in any other currency than its own notes; and, if it had not reissued them, the country would speedily have been without any currency whatever. The nation would have succumbed in the tremendous struggle in which it was engaged, while society would speedily have been remitted to a condition of barter. In the emergency, the Bank adopted the only possible. course open to it: it continued to pursue that which had enabled it to maintain specie payments for more than a hundred years consecutively, previous to the Restriction Act. By a rigid adherence to it, it restored its position, after suspension, with marvellous celerity. So rapidly did it recover itself, that in 1800 it was perfectly able to resume payment, and would have resumed could the consent of government have been obtained. It is very probable that the Directors did not realize the great importance of such a step, or they might have brought the government to their views. The rule they followed during suspension, of discounting paper representing merchandise and having a short time to run, was the only possible one for them to follow. It not only saved the nation from ruin, but promoted

its welfare in the highest degree. While acting in such manner, they did not see that suspension removed the real check to an undue expansion of the currency. In this they were not wiser than their time. So long as a Bank pays specie, every mistake it makes, every improper discount, has finally to be made good by paying out a corresponding amount of coin. As this is drawn, its ability to make further loans is lessened in the same degree. After suspension, in case its notes are not retired by the payment of its bills, its ability to make loans in the future is not reduced, for the reason that, by creation of new notes which cost nothing, it can replenish its reserves, consisting of notes, to any amount. It is like a ship at sea that has lost its compass, and all means of determining its position. It must sail, if it sail at all, by the best lights it has; and, although its general direction may be plain enough, it may in time find itself far out of its proper course; so that, when it makes land, it may be wrecked, or may have to refit, and so reach its destined harbor with great loss and damage. It was only when the Bank came into port, as it were, when it undertook to resume by converting its assets into coin, — that the degree of its departure and the losses it sustained could be ascertained. It was not shipwrecked, although it suffered great loss. With the lights it had, it pursued the course best fitted to promote the welfare of the nation as well as its own. The error of the Committee consisted not only in denying the correctness of the rule followed by the Bank, which was the only practicable one, but in imposing one impossible to be followed. It never occurred to them to inquire whether the evils complained of might not have arisen from other modes by which the Bank made its loans. At that time it had loans upon governments, Exchequer bills, to the amount of fully £17,000,000; the amount of loans upon bills at the time equalling about £20,000,000. Such inquiry, if made, might have shown that the condition of affairs might be almost wholly referrible to the action of the Bank in its relation to the government. The sudden recovery of the former, after the passage of the Restriction Act, a recovery wholly due to a rigid adherence to the principles upon which a convertible currency must rest, attracted no attention whatever. It would be supposed that so remarkable a phenomenon would have received the most careful investigation. That

neither such recovery, nor the relation of the Bank to the government, were made subjects for consideration by the Committee, shows how narrow were their vision and scope. It is not improbable, however, that both Directors and Committee assumed that no inflation or harm could come of loans made upon public securities; that the value of such must be a sufficient guarantee of the propriety and value of all issues made upon them. Nothing can be more natural than such inference, as the share capital of the Bank had, from the outset, been wholly invested in public securities; and as the Bank, so organized, had continued to pay specie for more than one hundred years consecutively. With Englishmen, a precedent an ounce of the past - outweighs a ton of the future; so that, with them, the old disappears only by being absorbed or overlaid by the almost imperceptible growth of the new. Such trait may be referred to in their praise, and may be the reason why their progress, though so slow, has been so uniform and sure, and, through the ages, so immense.1

1 Economists have never been able to master the reason of the sudden recovery of the Bank after the Restriction Act, due wholly to the prudent conduct of the Directors in making their loans. For them, it only re-enforced the old dogma, that the value of the currency depends upon quantity alone. The rise of the notes of the Bank to par after the suspension is now accepted as fully proving such assumption. The explanation given by Tooke is a curious illustration of the treatment by the Economists of this as well as of similar subjects:

"It becomes a curious matter of speculation to inquire, how, with motives so strong to constant and progressive excess, and under the guidance of maxims and principles so unsound and of such apparently mischievous tendency as those professed by the Governor and some of the Directors of the Bank, in 1810, such moderation and (with some exceptions which will be noticed hereafter) such regularity of issue should, under chances and changes in politics and trade unprecedented in violence and extent, have been preserved, as that a spontaneous readjustment between the value of gold and the paper should have taken place, as it did, with out any reduction of their circulation.

"The explanation of the difficulty seems to be this: the rule by which the Bank Directors professed to be, and were in the main, guided, viz., the demand of good mercantile bills, not exceeding sixty-one days' date, at the rate of five per cent per annum, did, with the necessary policy of government in periodically reducing the floating debt within certain limits by funding, operate as a principle of limitation upon the total issues of the Bank. And the reason of the rule having so operated is to be found in the fact, that the market rate of interest for bills of the description which were alone discountable at the Bank did not materially, or for any length of time together, exceed the rate of five per cent per annum. But the Bank Directors seem to have been unaware of the precise mode of operation by which their rule had the effect of a principle of limitation against great or permanent excess in their circulation."- Tooke's History of Prices, Vol. i. p. 158.

The rule of the Bank in discounting bills having sixty-one days to run, at the