loans were made upon such securities only as were fitted to return to it, in their payment, its own liabilities. It was for more than one hundred years restricted by its charter from dealing in any thing but "bills of exchange and gold and silver bullion." The result was uniformity in the volume of the currency, and in the operations of production and trade.1 From 1797 to the present time, it has been little more than an arm of the government. The result has been constant and excessive fluctuations in such operations. Although nominally the manager of the currency, it has never attempted to manage any but its own. Such as it has issued, being at all times largely based upon governments, has necessarily been a great disturbing element in financial affairs. This evil, so deeply grounded, could only be reformed by a currency properly issued, and sufficient in amount for the exchanges of the country. Such a currency has now been created through the action of parties and institutions other than the Bank, and in such volume that the disturbing influence of the latter is no longer paramount. It is taken up and absorbed into the greater magnitude of

that with which it moves.

In this way, by a new growth, the English system of finance is passing from a condition of excessive fluctuation, due to its inherent defects, to one of comparative uniformity both as to quantity and value.

1

The jointAlthough, for a long time previous to the repeal, in 1793, of the provision

in the charter

loans, or as

of the Bank forbidding it to make loans to government, the

obligations of the latter were largely made use of by its customers as the basis of to make loans collateral to them, borrowers, undoubtedly, frequently preferred latter to meet their loans on " securities," when they fell due. Loans made at Bank by Private parties are not for the purpose of supplying to them the None but the thrifty classes could get access to it: there is, therefore, no reason means of consumption, but for use in their various industries or callings. to suppose that the greater part of the loans made by the Banks previous to

upon "public securities" rather than upon bills; holding the

1793 were

not

smaller portion, of them seemed to be made upon bills. This assumption is fully supported by the experience of the Bank through more than a century, during which the fluctuations in its issues, as well as in production and trade, were very slight. A government is a very different kind of borrower from an individual;

properly made, although only a portion, and sometimes the

as its loans

are

tribution of merchandise, but for its profitless consumption. Loans to individuals tend to keep the volume of currency uniform, as they serve as the basis of reproducing merchandise (which will also, in its turn, be symbolized), equal to, and, perhaps, greater in amount than, that which has been consumed. Loans to the government tend to disturb such uniformity; for the reason, that that which is borrowed is not repeated in kind, but is unproductively expended.

made, not for the purpose of supplying symbols for the dis

stock Banks and private Banks and bankers are now the issuers and managers of the currency, while the Bank contents itself with the more humble, but still honorable, office of the safekeeping of the reserves of those, by whom, as issuers of the currency, it is now in great measure supplanted.

While the evidence given before the Committee, already quoted, sufficiently illustrates the ideas prevailing at the time upon the subject of money, and upon the questions considered by it, the following summary of the evidence given before it by Mr. J. Horsley Palmer, then Governor of the Bank, and Mr. Ward and Mr. Norman, Directors, will illustrate the system of management which prevailed from the panic of 1826 to 1837, and, in fact, to 1844, when the great change in its organization took place :

"The principal functions which it is the ordinary duty of the Bank to perform, consist in its furnishing the public with paper money, convertible on demand into coin and bullion, and in affording a place of safe deposit for the money of the government, as well as for that of individuals who may prefer it to a private Bank. "It is not deemed desirable that, in ordinary times, the Bank of England should systematically regulate the amount of its issues, through commercial discounts in London. There are, usually, in the possession of the bankers of London, and other individuals, large deposits waiting for employment, with which it would not become the Bank to interfere. But upon occasions when there is a scarcity of money, or when a season of commercial alarm occurs, it is then the duty of the Bank to step forward to the aid of public and private credit, by discounting commercial bills. The Bank, for this purpose, occasionally fix, by official notice, a public rate of interest, at which they are willing to receive approved bills of a given description. Being the only body issuing money ad libitum, within the sphere of the circulation of such bills, the Bank define the maximum rate of interest, by such notice, during its continuThe consequence is, that all persons having money to employ must necessarily offer to lend it under that rate, unless, by the pressure of the moment, the market rate of interest advance to that fixed by the Bank.

ance.

"But in ordinary times, when there is no such scarcity of money, or when no commercial discredit exists, if the Bank were to found their issue principally upon commercial bills, they would be under the necessity of entering into competition with all other parties in the purchase of bills of exchange, at the market rate of interest. Such competition would be justly deemed objectionable. All banking business is better done by private bankers than by public bodies. More facilities are afforded in the way of credit by the

former, than can be offered under the existing regulations by the Bank Directors, who give no credit to any one, and exact an adherence to forms which are not required by private bankers.

"No inflexible rule, indeed, exists that the Bank shall not, even in ordinary times, afford accommodation to the commercial classes. But the Bank do not, in general, found their issue upon commercial discounts. According to their present principles of management, they extend their assistance in that way only when any serious exigency arises. Being required to provide a requisite supply of money for the average circulation of the sphere in which they act, it is also their duty to uphold public and private credit when called upon; and, when so appealed to, it is then that the resources of a great body like the Bank of England may be rendered available to the commercial stability of the country.

"In the latter part of the year 1825, when the great panic occurred, the discounts of the Bank rose to about fifteen millions. The interest was raised from four to five per cent, with a view to limit the issue; but it did not produce the desired effect. On other occasions, it might be more successful; and it seems much better, when possible, to diminish the issue upon bills, by raising the rate of interest, than by caprice, by rejecting a portion of the paper that is offered. . .

...

"Since the resumption of cash payments, which can hardly be said to have been completely under the control of the Bank until after the events of 1825, and the entire suppression of the £1 and £2 notes in the country, the rule of that establishment has been to preserve in its coffers an amount of bullion equal to one-third of the whole of its liabilities. Thus, if we assume the circulation to be £21,000,000, and the deposits to be £6,000,000, the Bank would then, according to its principles of management, retain £9,000,000 in bullion in a period of full currency. The currency is said to be full when the exchanges are at par, or, rather, when they are on the point of becoming unfavorable, prior to the commencement of a demand for bullion. In that state of things, the circulation of the Bank is supposed to be neither more nor less than is necessary for the transactions of the country. The moment the exchanges become unfavorable, the fact is discovered by a demand for gold at the Bank; and, as notes must then be given by the parties who wish to procure it, the consequence is, that the circulation becomes pro tanto diminished, and the gold obtained in lieu of the notes goes abroad. When the demand ceases, and the exchanges take a favorable turn, then the Bank is in a progressive state towards reassuming its proportion of bullion. În May, 1832, the resignation of Lord Grey's ministry having produced great agitation throughout the country, there was a drain for gold upon the Bank, arising entirely out of political distrust. Before that drain began, the bullion in the Bank amounted to about £6,500,000. The total absorption of gold which took place at that period, including the sums paid on account of dividends, was near £2,000,000. Nevertheless, after the drain had ceased, the bullion in the Bank had accumulated to £5,500,000, in consequence of there having been a natural influx

of gold during that interval; and that, too, at a very high rate of exchange.

"But when the drain upon the Bank for gold arises from the unfavorable state of the foreign exchanges, and bullion is wanted for exportation, then the Bank would wait, under ordinary circumstances, until the exchanges should take a turn the other way, before it would replenish its coffers. If, however, an extraordinary demand arose, and continued to go on increasing, the Directors, in order to provide for the safety of the Bank, would have recourse to operations for the contraction of the circulation. Thus, for instance, if they foresaw a bad harvest, or any other circumstance likely to turn the exchanges against the country, they would, even if the exchanges were at the moment favorable, anticipate their becoming unfavorable, and make their preparations accordingly. They would, in such a case, proceed to shorten the amount of the currency in this way. The Bank is possessed of a certain number of securities, always coming into it. A considerable amount of these arises from the annuities, the dead weight, and other assets of that description. These moneys they would not reissue. If they had silver at their disposal, they would, perhaps, as a further measure, send it to Paris, and draw against it; and, finally, if the extraordinary necessity of the case required it, they would sell all their Exchequer bills, and reduce the amount of their other securities. They would not thus forcibly contract their issues in anticipation of uncertain events, or of events not likely to be of any magnitude. Their object in taking such precautions would be to prevent sudden jerks in the currency, and to provide against the extraordinary demand they saw coming, before it was actually at their door. If they did not thus anticipate the period of the exchanges becoming unfavorable, they would have to buy gold at a very high price, and to furnish those who demanded it in exchange for notes at a low price; the Bank losing the difference upon the transaction.

"But, when matters assume this momentous character, the conduct of the Bank becomes a question of State policy: and it is but justice to that institution to remember, that when it was within a few hours of losing all its gold, in consequence of the panic of 1825, instead of separating itself from the interests of the country, it was deliberately identified with them; and the resolution was taken, that the interests of the Bank and the nation should fall or stand together. It should never be forgotten, that all the principles of management upon which the Bank ordinarily acts were flung to the winds upon that occasion; and that their discounts and advances upon all kinds of securities were swelled to upwards of fifteen millions, at an hour when their bullion was reduced below

one.

"If, therefore, an emergency should arise, in which, referring to their general rules, the Directors might deem it prudent to contract their circulation, they would probably recollect that no state of commercial alarm has ever yet affected the character of the Bank; but that, on the contrary, the credit of that establishment has risen above the common credit of other bodies of individuals,

at such periods, higher than at any other time. There is little doubt that, under such circumstances, the Governor would communicate with his Majesty's ministers, and consult with them as to what would be the most expedient course for the Bank to adopt, with a view to the general welfare of the kingdom. There is no resolution recorded on the point, whether the Directors shall wait until the demand for gold actually arises, before they contract the currency, or whether they shall anticipate the period of such demand. But there is not one person in the Directors who does not consider it a sacred duty to do always the very best that can be done, in order to preserve the principle of the currency.

"During the last two years, the Directors of the Bank have spontaneously taken no measures for the purpose of contracting the circulation. Whatever diminution has occurred, has been effected almost entirely by the return of notes for gold. Their policy is to keep in view the foreign exchanges and the state of the bullion market; and to be prepared for the increase of their issue when favorable, as well as for a diminution of it when they are unfavorable, seeing that such increase and diminution would take place if there were no notes in existence. With the exception of the special circumstances above alluded to, the principle of the Bank is, when the currency is full, and the exchanges consequently at par, to invest and retain in securities bearing interest the proportion already mentioned of the deposits, and the value already received from the notes in circulation, the remainder to be held in coin and bullion; the circulation of the whole currency of the country, so far as the same may depend upon the Bank, being subsequently regulated by the action of the foreign exchanges. Whatever power the Bank may have in reference to the currency, they are very desirous not to exercise it, but to leave individuals to use the right which they possess of returning bank-notes for bullion. The exchanges are in due season corrected, when left wholly in the hands of the community. If the Bank be adequately supplied with bullion, as they usually are, when the exchanges are full they experience no inconvenience by waiting to have the exchanges corrected by the operations of the public." 1

Such is a picture of the management of the Bank from the time that it fairly surmounted the effects of the Act of Restriction to 1844, and in reality from that to the present time.2 The Bank, in possession of great sums from depositors, used them in the purchase of securities, wholly regardless of the consequences. Loans of deposits made in the purchase of governments do not necessarily cause an inflation. None, certainly, would be caused, if depositors, instead of putting their money into the Bank, had invested it in the

1 Quinn's Trade of Banking in England, pp. 4-6, 85–96.

2 The following statement will show the character of the loans of the Bank,