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Principle." The banking department of the Bank does business like any other bank. That is, it purchases or discounts bills of exchange in the first instance, by creating Credit in its books; that is, it increases its liability in another form besides notes. This Credit is equally in excess of the metallic Currency. The reserve of notes and gold being the basis of the Bank's power of creating credit, of course, they must use their own judgment as to how far they may safely extend this, just as every other banker, does. But any one who examines the Bank's returns will perceive that its liabilities payable on demand exceed its notes in reserve and gold many times.

Therefore, it is quite clear that those who seriously maintain that the Bank Act really carries out the "Currency Principle," must maintain this proposition:

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It has been shewn that in Banks constructed on the "Currency Principle," the Credit created is always exactly equal in quantity to the money deposited and kept in the Bank. But how does this matter stand with the Bank of England? Let us test this principle by any one of its published returns taken at random. On the 27th March, 1873, it appears that the Credit created by the Bank amounted to £61,021,187, and the specie held by the Bank amounted to £23,886,372, or about 26 to 1. If, therefore, it be maintained that the Bank is constructed on the "Currency Principle," it must also be maintained that 2.6 are equal to 1.

As a matter of pure arithmetic, therefore, it is perfectly manifest that the Bank Act completely fails to carry out the Principle" it was intended to enforce. In fact, the framers of the Bank Act had a THEORY, and they passed an Act; but they never took the slightest pains to ascertain whether the Act corresponds with the Theory.

Now, we say nothing here as to the correctness, or the contrary, of the "Currency Principle," or as to the expediency of carrying it out; but to suppose that the Bank Act does really carry it out is simply one of the most astonishing delusions that ever deceived the public mind. Truly says Bastiat-"To be the dupe of another is not very pleasant; but to employ a vast apparatus to dupe oneself, to dupe oneself doubly, and in a simple

matter of arithmetic, is well calculated to abate a little one's pride

in this enlightened age."

Every banker whatever who discounts a bill of exchange, violates the "Currency Principle. There is no mode whatever of carrying out the "Currency Principle" but by abolishing discount banking altogether; the banks constructed on this principle did no discount business.

25. Lord Overstone, in his evidence before the Committee of the House of Commons, said that it was a fundamental vice of the principle devised by the Directors in 1832, to carry out the doctrines of the Bullion Beport, that the gold might all leave the country without causing any diminution of the amount of Notes in the hands of the public: and we have seen that this assertion was completely verified in 1839.

It was, therefore, expressly declared that it was the purpose of the Act to cause a withdrawal of Bank Notes from circulation, i. e., from the public, exactly equal in quantity to the gold withdrawn from the Bank-in strict accordance with the "Currency Principle:" and it was supposed that if the Directors neglected this duty, the "Mechanical" action of the Act would compel them to fulfil it. It is now to be shewn how this expectation was fulfilled.

No occasion arose for testing the powers of the Act till April, 1847. The well known disasters of 1846 caused a steady drain of bullion from the Bank to commence in September, 1846. But the Bank made no alteration in the Rate of discount till January, 1847, when the bullion was below 14 millions, when it raised it to 3. Having lost another million in a fortnight, it raised discount to 4 per cent. But it made no alteration till it had lost three millions more, and then it raised discount to 5 per cent. Here we have exactly the same inveterate error committed by the Bank as on so many previous occasions-an immense drain of bullion, and yet none but the most feeble, inefficient, and puerile means taken by the Bank to stop it. But this pressure is an excellent example to test the alleged "mechanical" action of the Act. We shall now see, 1st, How the Bank was inclined to act on the principle; and 2ndly, Supposing they were disinclined to do so, how far the Act, by its self-acting principles, could compel them to do so. The following figures speak for themselves :

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26. These figures shew the utter futility of the idea that, as the bullion diminishes, the Act could compel a reduction of notes in the hands of the public, for the notes in circulation were within an insignificant trifle as large in amount when the bullion was only £9,867,000, as when it was £16,366,000. Consequently, nothing could be a more total and complete failure of the Act of 1844, on the very first occasion its services were required; and it was manifestly proved that the Act provided no effectual check against mismanagement on the part of the Bank.

Whence did this failure arise? From this very simple circumstance. The framers of the Act supposed that there is only ONE way of extracting gold from the Bank, namely, by means of its Notes: and that if people want gold they must bring in Notes, and, consequently, as the gold comes out, Notes must go in.

But, as a matter of simple banking business, there are Two methods of extracting gold from the Bank-namely, by Notes and CHEQUES. Those persons who have Credit in its books may go and present CHEQUES, and thus draw out every ounce of gold from the banking department, without a single Bank Note being withdrawn from the public.

In fact, instead of withdrawing the notes from the public, as was intended by the Act, the Directors threw the whole effect of

the drain of gold on their own reserves. And that happened in this way. The public has Two methods of drawing gold from the banking department, namely, by Notes and Cheques; but the banking department has only one method of drawing gold from the issue department, namely, its Notes in reserve. And when the Bank felt a drain on its banking department for gold, it had to replenish it by obtaining a fresh supply from the issue department, at the same time giving up an exactly equal amount of Notes. And thus the whole drain fell on its own reserves.

No legislation can prevent this power of extracting gold from the Bank by means of Cheques. And thus is explained the complete failure of the "Mechanical" action of the Act to compel the Directors to carry out the "Currency Principle.” The Directors were able to commit, and actually did commit, the very same error as they had done before the Act-which Lord Overstone had truly said was the fundamental vice of the Bank principle of 1832-and it was powerless to prevent them.

And this simple fact completely upsets the whole theory of the Act.

The fact is there are two leaks to the ship. The framers of the Act could only perceive one; and they only provided against one: and they were utterly astonished to find the ship rapidly sinking from the other leak they had forgotten!

27. Now as the Act notoriously and manifestly failed in this most important point, which was fully and candidly admitted by Sir Robert Peel, it becomes a natural inquiry to ask why it failed on the very point, which it was supposed it had rendered so secure. We reply to this that the Act failed because it aimed at the wrong mark altogether. It wholly missed the true point in

the case.

In former times it was a mercantile dogma that the Exchanges could only be against the country in consequence of its being indebted to other countries. Nothing can be more striking than the vicious circle in which the Commercial witnesses argued before the Bullion Committee of 1810. They maintained with unflinching perseverance that the Exchanges could only be adverse, because the country was indebted: and as the Exchanges were adverse, they maintained that the country must be indebted (without the slightest inquiry into the fact) because the exchanges were adverse.

However, the Bullion Committee completely disproved this Commercial dogma; and they demonstrated beyond dispute, that the depreciated paper currency was the cause of the exchanges being apparently adverse; but that when this depreciated paper currency was reduced to its true value in gold, the Exchanges were in reality in favour of the country.

The Commercial witnesses maintained that when the indebtedness was paid off, the drain of bullion would cease of itself. But the Bullion Committee proved that with a paper currency so depreciated as Bank Notes then were, the drain would not cease until all the specie in circulation had left the country, which was amply verified.

The Bullion Committee thus shewed that there are two causes of a drain of bullion-1st, the indebtedness of the country; 2nd, a depreciated paper currency.

But in our Theory and Practice of Banking, we shewed that there is THIRD cause of a drain of bullion, and an adverse exchange, which, however, it might be known among commercial men had never yet, that we have seen, found its way into any commercial book whatever, and most certainly had never been brought forward prominently before the public in Currency discussions, as a cause of an adverse Exchange, wholly irrespective of any indebtedness of the country, or of the state of the Paper Currency.

The Principle is this

That when the Rate of Discount between any two places differs by more than sufficient to pay the cost of transmitting bullion from one place to the other, bullion will flow from where discount is lower to where it is higher.

The old mercantile dogma was that Bills of Exchange can only be created to represent debts arising from the sale of merchandise and if there are no debts, there will be no bills created: and that when bills are paid, no more bullion will go.

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But, suppose (the state of Credit at both places being assumed to be equally secure) that the Rate of Discount at London was 2 per cent., while the Rate at Paris was 8 per cent., we shewed that bullion dealers would fabricate bills-not based upon any previous debts, or any mercantile transaction whatever-but simply for the sake of being discounted; that is, for the purpose of buying gold in London at 2 per cent., and selling it in Paris

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