at 8 per cent., and this operation, will infallibly go on, and the drain of bullion will not cease until the Rates of Discount are so nearly equalised as to destroy the profits to be made by fabricating bills. Hence, if such a state of things, as is just supposed, arises, the Bank must, as an indispensable measure to preserve its own security, raise its Rate of Discount so as to destroy these profits, and so arrest the drain which is exclusively caused by the difference of the Rates in the two places.

Now, this practice causes no increase of Bank notes in circulation; on the contrary, they are not wanted: it is gold that is demanded and taken for export, and it steals out of the country noiselessly and unobserved. Also, if bankers in this country will perversely maintain the rate of discount lower here than in neighbouring countries, and, therefore, lower than the natural rate, persons in foreign countries send their debts or securities over here for sale, and the proceeds are remitted abroad. Consequently this practice causes an export of gold without diminishing the notes in circulation. Of all species of property, debts are the most easily transportable. The charges even on the transmission of gold are heavy compared to those on the transmission of debts. Debts to any amount can be transmitted from one country to another at the mere expense of the postage. Consequently, if the Americans can only get £85 per cent. for their debts in their own country, and they can get £96 per cent. in England, of course, they will send them here in vast quantities for realisation. This was eminently and notoriously the case in 1839, when the Bank of England kept its rate so perversely below the natural rate, and it was the cause that aggravated the drain of bullion to so alarming an extent. Hence we have shewn that beyond the causes universally known for an export of specie, namely, payments of genuine debts, there is another and most potent cause, whose importance has only recently been sufficiently recognisednamely, an unnatural depression of the rate of discount, below that of neighbouring countries.

Now, this principle was certainly not generally understood at the time the Bank Act of 1844 was passed; and in our work on Banking (1856) we stated this as a fundamental principle in the Currency

"An improperly low Rate of Discount, is in its practical effects, a depreciation of the Currency."

We therefore shewed that the only true method of striking at this demand for gold is by raising the RATE of DISCOUNT, and that the true great power of governing and controlling the Paper Currency, or Credit, is by carefully ADJUSTING THE RATE OF DISCOUNT TO THE STATE OF THE FOREIGN EXCHANGES, AND THE STATE OF THE BULLION IN THE BANK.

Now, the weak point in the Act of 1844, is that it takes no notice of this grand principle, it takes no precaution that the Directors of the Bank of England shall recognise it, and counteract it. On the contrary, it leaves them in full power to repeat their oft-committed error of causing a depreciation of the Currency, from an unnaturally low rate of discount.

This principle was extremely ill understood in 1856, when our work was published, and was very unpopular; but its truth was soon signally verified, and acknowledged to be true by the most competent authorities. After the great crisis of 1857, a Committee of the House of Commons was appointed to investigate its causes, and Mr. G. W. Norman, a Director of the Bank of England, and one of the most prominent and distinguished advocates of the "Currency Principle," and of the Bank Act of 1844, was asked-Q. 3529. "Is it not principally by raising the rate of interest that you check the amount of discounts which may be demanded of you?—Yes; we have found, contrary to what would have been anticipated, that the power we possess, and which we exercise, of raising the rate of discount, keeps the demand upon us within manageable dimensions. There are other restrictions which are less important. The rate we charge for our discounts we find, in general, is a sufficient check."

In 1861, Mr. Goschen published his Theory of the Foreign Exchanges, in it he says

"The efficacy of that corrective of an unfavourable state of the Exchanges, on which we have been dilating (i. e., raising the rate of discount) has been most thoroughly tested by late events. Every advance in the Bank rate of discouut has been followed by a turn of the Exchanges in favour of England, and vice versa, as soon as the rate of interest was lowered, the Exchanges became less favourable."

This is now the acknowledged principle upon which the Bank of England is managed; and after our work was published in 1856, the Usury Laws in France were modified in order to enable

the Bank of France to adopt it, and, in fact, it is now universally adopted by every bank in the world.

In former times, when the only communication between different countries was by means of sailing ships and common roads, and therefore very slow, expensive, and uncertain, this principle, though actually true, could seldom be called into action, because the cost and delay of the transport of gold would far exceed any profit to be made in the difference of the Rates of Discount, in quiet times. It was like some mechanical force, which actually exists, but which is overpowered and prevented from producing any visible effect, in consequence of friction. But it did act in times of commercial crisis, when the rate became extreme. In 1799, enormous failures took place in Hamburg; discount rose to 15 per cent., and this rate immediately drew away gold from England.

But in modern times, since communications have been so much accelerated and cheapened, even since the Act of 1844, by means of railroads and steamers, this friction, as we may call it, has been immensely diminished; and this great principle is called into action with a much less difference between the Rates of Discount than at any former period. Bullion would probably take ten days, formerly, to go from London to Paris; it can go now in ten hours, and at probably the hundredth part of the expense. A difference of 2 per cent. between the rates of discount in London and Paris, will now draw bullion from one place to the other.

On the causes which compelled the Suspension of the Bank Act in 1847, 1857, and 1866.

28. The monetary pressure which we have been considering passed away for the time, but another much more severe came on in the autumn, which ended in a monetary panic, and on the 25th November, 1847, the Government authorised the Bank to exceed the limits allowed by the Act of 1844, if they considered it necessary so to do to restore commercial confidence. This suspension of the Act was perfectly successful; and on two similar occasions, in 1857 and in 1866, a similar course was followed with similar results. We have given a full narrative of the course of events preceding these panics in our Theory and Practice of Banking,

to which we must refer those who desire full information on the subject. We must now only examine the reasons which made this course necessary, and why it was successful.

Ever since the enormous development of the Credit system of commerce in modern times, great commercial failures have periodically recurred, producing the most wide-spread distress; and there have been two conflicting Theories as to what the action of the Bank ought to be in a Monetary Crisis.

1. One Theory maintains that in such a Crisis the Bank should liberally expand its issues, to support Commercial Credit. This Theory may be called the EXPANSIVE Theory.

2. The other Theory maintains that in such a Crisis the Bank should rigorously restrict its issues to their usual amount, or even contract them. This Theory may be called the RESTRICTIVE Theory.

Both these Theories have been tried in practice, and discussed by the most eminent authorities, and we may succintly examine the results.

The first great monetary crisis in modern times took place in 1763, after the termination of the seven years' war. This great disaster occurred at Hamburg and Amsterdam, where the Currency Principle" was in full operation, and there was no Banking Credit whatever, except what represented specie. The failures began at Amsterdam among the principal merchants. The Bank had no power to assist them; and the resources of the private bankers were exhausted. Hearing that the Amsterdam bankers had determined to allow the merchants to fail, the Hamburg bankers wrote to them in the greatest alarm to say that if they did not support the merchants, they would instantly suspend their own payments. But by the time the letter reached Amsterdam, the merchants had already stopped. General failure followed at Hamburg, where no business was for some time transacted but for ready money. The failures were equally general throughout Germany. The Crisis extended to England, and Smith says that the Bank made advances to merchants to the amount of a million.

Thus we see that the "Currency Principle" was no protection whatever against a Monetary Crisis; and on this occasion the Bank acted on the EXPANSIVE Theory.

In 1772 the most severe Monetary Crisis in England since the South Sea scheme took place. On this occasion again the Bank came forward to support Commercial Credit.

In 1782, our unhappy war with America was ended; and the usual results of the termination of a great contest took place. The Bank had greatly extended its issues; and a very alarming drain of specie took place, which at one time threatened to compel them to stop payment. The Directors, however, considered that if they could only restrain their issues for a short period, the returns in specie in payment of the exports would soon set in in a more rapid manner than they went out. They determined, therefore, to make no communication to the Government, but for the present to contract their issues UNTIL THE EXCHANGES TURNED IN THEIR FAVOUR. The Bank felt the greatest alarm in May, 1783. They then refused to make any advances to Government on the loan of that year; but they did not make any demand for payment of their other advances, which were between 9 and 10 millions. They continued this policy up to October, when at length the drain had ceased from the country, and money had begun to flow in from abroad. At length, in the autumn, when the favourable signs began to appear, they advanced freely to Government on the loan, although at that time the cash in the Bank was actually lower than at the time they felt the greatest alarm. It was then reduced to £473,000.

The doctrine then stated by Mr. Bosanquet that guided the Directors was this-That while a drain of specie was going on, their issues should be contracted as much as possible; but that as soon as the tide had begun to give signs of ceasing, and turning the other way, it was then safe to extend their issues freely. This policy had been entirely successful, and the credit of the Bank was saved.

29. After the peace of 1782, the commercial energies of the country were greatly developed: to carry on this increased commerce a greatly enlarged currency was necessary; and as the monopoly of the Bank prevented solid banks being founded, innumerable tradesmen started up in every part of the country issuing notes. Burke says that when he came to England in 1750, there were not twelve bankers out of London; in 1792 there were