time so depreciated, that 500 paper ounces were only equal to 1 silver ounce. It produced all the evils and misery which its use has caused in modern times in Europe and America. In 1644 the Tartar dynasty conquered China, and seeing that the fall of the Ming dynasty was greatly owing to the course of inconvertible paper money, they totally suppressed it.

3. Several Banks in Europe have been constructed on this principle, such as those of Venice in 1587, Amsterdam in 1609, Hamburg in 1619, and others. We have already1 explained the cause of the institution of these Banks. They were founded solely for the purpose of remedying the inconvenience caused by the circulation of foreign and depreciated coins in their respective cities, and to insure a uniform standard of payment. They created Credit only in exchange for specie and bullion deposited with them; and they professed to keep it all in their vaults. The Credit was either in the form of entries in their books, or notes; but it is manifest that it was of no consequence which form it was in. These Banks were the exact realisation of the ideas of the Chinese writer: when the money went in, the Credit came out; when the money came out, the Credit went in.

These Banks never did any discount business; and if they had done so it would have been a violation of the "Currency Principle," because if the Credit created in exchange for specie had remained in circulation; and if they had purchased bills with the specie in their possession, that would manifestly have increased the quantity of currency in circulation by exactly the amount of the specie. Just as Smith observes that if paper be substituted for gold, that gold is like a new fund created for carrying on a new trade.2

We may here observe that Colonel Torrens is entirely mistaken when he asserts that Smith calls money and bank notes only, currency, excluding bank credits. For Smith, speaking of the Bank of Amsterdam, says 3-"For the value which remained, after this small deduction was made, it gave a Credit in its books. This Credit was called Bank Money." And the Credit in the books of these Banks was expressly called Bank Money: which shews that a Bank Credit is precisely the same thing as a Bank Note.

1 Vol. I., ch. 7. § 66. Wealth of Nations, B. II., ch, 2. 3 Ibid, B. IV., ch. 3.

Now the principle of these Banks is perfectly clear and intelligible: and the school of which Lord Overstone, Colonel Torrens, and Mr. Norman are the most eminent members, maintained that this is the true principle of a paper currency, and that all Notes created in excess of the specie they displace are a depreciation of the currency. So also Mill says "The substitution of paper for metallic currency is a national gain; any further increase of paper beyond this is but a form of robbery."

4. But no banks of this description ever existed in England. When the goldsmiths commenced the business of banking, they received money on deposit, for which they gave interest; and they made their profits by multiplying their promises to pay several times beyond the amount of specie they held: and, therefore, they violated the "Currency Principle" every time they discounted a bill.

So also the Bank of Scotland received no deposits from the public at first: it was founded by its shareholders paying in £10,000 in money; and upon the basis of specie it was easily able to maintain £50,000 of its notes in circulation. Now this was most clearly a violation of the "Currency Principle." These notes as well as those of the English goldsmiths were clearly an increase of the currency; they were not merely in substitution for existing specie, but they were a creation of notes where no specie existed at all; and, consequently, according to the doctrine of those who hold the Currency Principle, they were a depreciation of the Currency; and, according to Mill, they were robbery! And, according to Mill, the whole of the Scotch system of banking is robbery; for when the banks established their branches in the country to promote agriculture and other works, they created and issued notes where no specie existed. But the Scottish people, who see the whole of their agriculture and commerce carried on by means of this system, will smile at such extravagant notions.

5. In fact, both the Currency Principle and Law's theory of money, although their effects are so different, are based on the same fundamental fallacy, namely, that paper represents money or commodities. Those who maintain the Currency Principle con1 Principles of Ivlitical Economy, B. III., ch. 13, § 5.

sider Bank Notes to resemble Bills of Lading or Dock Warrants, which merely represent certain specific goods, and wish to restrain the amount of Bank Notes to the actual amount of specie, in the same way that Bills of Lading and Dock Warrants are limited to the actual amount of the goods. Law wished to extend paper to represent all commodities and land, as well as specie. But these ideas, as we have shewn, are entirely erroneous. For the quantity of Credit which may be generated does not represent simply the quantity of specie, but the quantity of specie combined with its velocity of circulation. Every future payment has a PRESENT VALUE; and this Present Value is an Exchangeable Commodity which may be bought and sold. And, therefore, the quantity of Credit which may be safely generated purely depends upon the methods of extinguishing it, which we have fully set forth in a former chapter.

6. We have now fully explained the Definition of Currency and the Theory of Currency which the framers of the Bank Act of 1844 adopted, and intended to carry into effect. We have now to examine how far the Bank Act does really carry that Theory into effect, and what have been the consequences of doing so. But in order to understand clearly the modifications introduced by that Act, we must explain the original constitution of the Bank, and also the leading principles upon which it has been successively managed at different times. In fact, to understand the subject thoroughly, we must refer the reader to the history of Banking in England given in our Theory and Practice of Banking, which is far too large to incorporate with this work, but which should be read in connection with it.

The Bank of England was founded by certain clauses in the Act, Statute 6 William & Mary (1694), c. 20, to provide means to carry on the war against France. The intention was to raise a loan of £1,200,000 for that purpose. The subscribers were to be incorporated as the Governor and Company of the Bank of England, with powers of banking. They were authorised to issue Bank Notes (called in those days Bills Obligatory, or of Credit) to the amount of their subscribed capital, which was advanced to Government: and these Notes might be freely transferred by indorsement each time, to those persons who should voluntarily accept them, and all such assignees might sue thereon in their

own name. In case the Bank issued Notes in excess of their capital, the proprietors were to be liable in their private capacity. The subscribers, in exchange for the original £1,200,000 advanced to Government, received stock bearing an interest of 8 per cent.: or an annuity of £100,000.

Now we at once observe the essential distinction between the Banks of Venice, Amsterdam, and Hamburg, and the Bank of England. The former banks were examples of the CURRENCY PRINCIPLE. The bullion paid into them was kept, or was professed to be so, in their vaults; and so long as it was so, the Credit created by them was exactly equal to the bullion paid in. Their function was solely to gratify the sigh of the Chinese writer to exchange Credit for Bullion, and Bullion for Credit. Hence these banks created no augmentation of the Currency.

But the case of the Bank of England was clearly wholly different. The Bank paid over to Government the whole of the money subscribed as capital, which they put into circulation for the expenses of the war. But the Bank was also permitted to create £1,200,000 in Bank Notes, and put them into circulation by discounting bills, or otherwise. Thus the Bank had not only sold its cash to Government, but it was also allowed to have it as well in the form of Notes to trade with, and make a profit.

Now can any one fail to see that this proceeding augmented the Currency by the amount of £1,200,000, and that the Bank made a double profit; first the interest on the money advanced to Government, for which they received stock in exchange bearing 8 per cent. interest; and secondly, the commercial profits made by trading with the notes ?

Therefore, so far as this went, this was clearly an example of LAWISM.

7. In 1697 the Bank was authorised to increase its capital by upwards of a million. Of this sum, above £800,000 was received in Exchequer tallies, then at a discount of 50 per cent., and £200,000 in its own notes, then at a discount of 20 per cent. Both the tallies and the Bank Notes were counted as specie at their full nominal value; and, upon this augmented capital of tallies and notes, they were permitted to create an equal amount of new notes to trade with!

Law only proposed to issue paper money based upon the security of land, or some other solid article of value. But the Bank of England was permitted to create Paper Currency based upon the security of its own depreciated Credit!

In 1709 the Bank was allowed to double its capital, and to create an equal amount of notes to trade with.

Now, is it not as clear as the sun at noon day, that each of these issues of Notes was so much increase of Currency, and an example of LAWISM?

8. Now, if the same principle had been carried out to the present time, is it not clear that all the public funds would have been Bank stock, and that the Bank Notes would have equalled the amount of the National Debt, or about £800,000,000? Some persons even now seem to think that this is a good principle. They seem to think, that if they carry stock to the Bank, they have a right to have it coined into notes to any amount. It is clear that this principle could never be carried out to its full extent. For, if it were true, Government might go on creating public debt ad infinitum, and then the Bank would create an equal amount of notes. If this principle be true, what would be the use of going to California and Australia for gold? Is not this principle more mad than any thing Law ever wrote? Law's issues of paper were limited by the value of the land, but this plan has positively no limits whatsoever.

9. Up to 1711 the issues of the Bank were strictly limited to the amount of their capital; and it was declared that, if the Directors exceeded that limit they should be liable in their personal capacity. Afterwards they were released from this limitation, and they were allowed to issue notes to any extent they pleased, provided always that they were payable in specie on demand.

And so the Bank went on till 1797, when it stopped payment, and committees were appointed by Parliament to investigate its affairs, who reported it to be in the most solid and flourishing condition; and that they had a surplus of assets above liabilities of nearly four millions, besides the Government debt amounting to £11,686,800.

The reason of this was plain. The notes it had issued were