to check a great outflow; and for many years there was a great prejudice against doing so.

We have observed that a difference in the rate of discount between any two countries more than sufficient to pay for the transmission of bullion, causes a flow of bullion from one to the other. But it must be remembered that, as all the cost of the transmission both ways falls upon the operator, the difference will be more considerable than might appear at first sight. And, if they be three months' bills, of course the profit reaped will be only one-fourth of the apparent difference. Thus, Mr. Goschen says, there must be a difference of 2 per cent. between London and Paris before the operation of sending gold over from France for the sake only of the higher interest will pay. And between other continental cities, of course, the difference may be much greater.

But whatever the difference may be, the method is absolutely certain. Directly the rate of discount rises here, people cease to export bullion from here, and the continental bankers and brokers increase their demand for English bills. And as the rate rises the demand will increase, until at last the price reaches the specie point, and gold begins to flow in; and as the rate rises more, more powerful will be the attraction, until at last the necessary equilibrium is restored between bullion and credit.

15. We must, however, notice one very remarkable occasion on which this law did not seem to act, and that is during the great monetary crisis and panic of 1866.

Upon examining the table given afterwards, shewing the variations in the rates of discount by the Banks of England and France, from 1857 to 1866, it will be seen that very often they were exactly the same, sometimes a difference of per cent.; and very seldom, indeed, more than one per cent. difference between them. Since the beginning of that year, however, the difference was constantly 2 per cent., and it gradually increased to 3, 4, and even 6 per cent. All the while that the storm was visibly gathering and then raging in England, the Bank of France was in a state of the greatest serenity. On March 21st, when discount in England for a very short period was lowered to 6 per cent., in France it was 3, and while it gradually rose here to 7, 8, 9, and 10, it only advanced to 4 per cent. in France, and

remained steadily at that rate for a month. More than that, while these high rates in England were unable to prevent a severe foreign drain, the Bank of France was rapidly gaining large quantities of bullion, while discount was only 4 per cent. In June, while discount was 10 per cent. here the bullion in the vaults of the Bank was only £11,878,775, the bullion in the Bank of France exceeded £22,000,000.

This most remarkable and, indeed, unprecedented state of matters actually led many persons to question the truth of the law, that a high rate of discount attracts bullion from foreign countries, and keeps it in the country, and to maintain that the rates ought to be quite independent of each other. To suppose, however, that a law is false which is founded on the widest and long-continued experience in every country, shews a hasty style of argument. When the moon ceases to sway the tides, thenbut not till then-will the rate of discount cease to attract the flood of bullion. To argue from the single case of this crisis that the law is false, is just as absurd as if a man, seeing a bar of iron falling down to the earth, and a balloon rising up from the earth, were to maintain that the law of gravitation is false. Or if he were to say that there is no such thing as gravity, because a drop of water, or a fly, can adhere to the ceiling. The law itself is perfectly true, and acts universally, but there may be other circumstances which, on particular occasions, may counteract its effects. The action of the moon on the tides is constantly counteracted or aggravated by furious gales of wind. In the chapter on Exchanges we pointed out that there are several causes which influence the flow of bullion, which, at any time, may act in the same or opposite directions. Of these the rate of discount is only one, and at particular times it may be overpowered by some other consideration. Now, with respect to the rate of discount here, the Money Market was liable to more severe disturbance than in France, on account of the multitude of new companies, especially the new Finance Companies, and also the connection of so many of our Banking Companies with the East. The quantity of "finance paper afloat created the greatest uneasiness here for a very considerable time, and this was well known abroad. It was fully expected that there would be great disasters among the banks; and, as if these failed, it was expected

that merchants would fail too, the rate of discount failed to attract supplies, because it was feared that the whole principal would be lost. In consequence of this, great quantities of longdated bills on England were hurried over here and turned into cash, which was exported at any sacrifice. It was just the same in 1839. It was generally expected then that the Bank of England was going to stop payment. The consequence was, as we have stated elsewhere,1 that long-dated bills held abroad were hurried over here for immediate realisation; and the proceeds withdrawn as speedily as possible. This, of course, would equally prevent specie being imported here, notwithstanding the high rate of discount. It is perfectly well known that this cause operated to a great extent during the crisis of 1866. However, when all danger of this had passed away, the rate of discount produced its natural effect, and gold rapidly flowed in, thus indicating the entire truth of the law.

With respect to the Bank of France the explanation is also easy. There was no commercial crisis there, but, unhappily, strong expectations of war. Consequently, mercantile enterprise was curbed, and specie naturally flowed into the vaults of the Bank of France. Also, in anticipation of war, the Government of Italy suspended cash payments and adopted paper money. This, of course, produced its natural effect in driving specie out of the country, and it also naturally first went to the Bank of France.

These circumstances are quite sufficient to explain the remarkable phenomena alluded to.

But it is much to be regretted that no Parliamentary inquiry was made into the circumstances of the panic, as no doubt much valuable information would have been elicited about a phenomenon so unusual.

The state of indebtedness, however, may be so great as to deepen an adverse exchange into a monetary crisis, but what may become advisable to be done in such an emergency, we must defer discussing until a future chapter, when the policy of the Bank Act of 1844 is examined.

Theory and Practice of Banking, ch. 9, § 75.

Z

CHAPTER XVI.

ON SOME THEORIES OF CURRENCY.

1. It now becomes our essential and most important duty to investigate some Theories of Currency, which have acquired great celebrity, not only from their historical interest, as having led to some of the most extraordinary and heartrending public calamities on record, but because they are still extensively believed in at the present day. It is of essential importance, not only to lay the true foundations of monetary science, but also to point out the fundamental fallacies upon which some specious, but fatally delusive, theories rest, which have brought the most disastrous consequences upon those nations which have adopted them, as will always be the case when the eternal laws of nature are systematically and perseveringly violated.

2. The first of these theories we shall designate as LAWISM, not because John Law was the original deviser of it, but because he was the first who wrote the most formal treatise on it, and he had the opportunity of carrying it out on the most extensive scale. His name, therefore, must always be most prominently associated with it; and it is one so specious, but so dangerous, and so widely prevalent at the present time, that it requires to be branded with a distinctive name, and to be combated with all the power of argument that can be brought against it.

3. The question shortly stated is this. All persons, except those who advocate an inconvertible paper currency, agree that a paper currency must represent some article of value, and bullion has been generally chosen for that purpose. Now, the idea has occurred to a great many persons-If it is only necessary that a paper currency should represent some article of value, why should it not represent any or all articles of value, such as land, corn, silk, or any other commodities, and, among others, the public funds? And this has actually been tried in several

instances, yet they have universally failed, and in many cases have been attended with the most dreadful calamities. Now, as this has uniformly happened, and, as we shall shew further on, it must happen, it necessarily follows that there must be some radical error in the principle, and that it must violate some great law of nature. And this is beyond all comparison the most momentous problem in Economics-Why is it improper to issue a paper currency on any other basis than that of bullion? All the most eminent British statesmen have instinctively resisted such proposals, although repeatedly pressed to do so. No doubt it has been a most fortunate instinct for the country; but all their reasoning on the subject, if only pursued to their legitimate consequences, tend to that result. The Bank Act of 1844 was the first occasion on which a small bit of this theory was introduced, which, if only followed out to its legitimate conclusion, would produce in this country the horrors of the Mississippi scheme in France. But though the British Parliament, by a blind, unreasoning instinct, has always, with the exception just named, resisted such fatal advice, this will not satisfy the demands of science. Science imperatively demands a reason why such a plan is wrong; she will not be satisfied with a simple dogmatic assertion that it is wrong, even though that dogma may be right, but she must know the reason why; and, until a true, scientific reason is given why such plans are fatal, there will be a constant demand for them.

4. It is, moreover, the thing which has brought the name of Law into such unhappy notoriety. Law has, in many respects, very great merit as a writer. In many respects he had clearer and sounder views on monetary science; he had infinitely more practical insight and scientific knowledge of what he was writing about, than the most eminent of modern political economists. In his various writings is to be found the refutation of all the absurd follies of the Government and of the Bank of England in 1811. But all this was marred by a single defect. He was the great advocate of what is now the popular crybasing a paper currency upon any article of value beside bullion. The only difference between him and our greatest statesmen is that he carried out their arguments to their legitimate conclusion. He had the opportunity of carrying this theory