mature within the time that its notes will find their way back to it, it is, when subjected to a drain of specie, in the dilemma of being liable to have the issues it may be called upon to make immediately presented for payment in coin, or notes, or to aggravate the alarm and run upon it by refusal to make any. In such a state of things, to discount the best paper may be as fatal, in its immediate consequences, as to discount the most worthless. It can neither act nor refuse to act with safety. It is impossible for it to liquidate all its obligations upon the moment, and this is what a panic calls upon it to do. As it is, it is wholly incompetent to manage or allay it. Its real and only safety, as well as that of the public, is in rendering panics, or any considerable aberration in production and trade, impossible, by making no issues that will not be taken care of by the borrowers, by discounting no paper and taking no securities that have not a constituent in merchandise.

The advances that were made in 1836-37 seemed to have accomplished their object; but, after all, they only perhaps postponed, while they aggravated, the crisis which was already inevitable. In 1839, after a partial recovery from 1837, the Bank was again subjected to a drain far more excessive than that of the former year; a drain which indicated a most unsound condition of affairs, which had, perhaps, been only skimmed over, instead of being healed. It was finally driven to make large loans at the Banks of France and Hamburg, to save it from what seemed to be impending bankruptcy.

Mr. Palmer was very probably correct in ascribing the drain upon the Bank, or a considerable part of it, to the rapid formation and increased operations of the joint-stock Banks. It was inevitable, in the outset, that their action, for the want of adequate experience and training, should have been somewhat eccentric, and should have led to excessive expenditures, not only in consumption, but in enterprises of various kinds. As the notes of the Bank were then legal tender, they constituted the reserves of all other issuers. It had thus to stand in the gap, and make good, from reserves held to meet its own liabilities, the mistakes and losses of every petty issuer in the kingdom. For all this, it was by no means prepared. The losses sustained by the joint-stock and other Banks, and from over-production and over-trading, proportionably reduced its

means, as well as those of the public. Its condition for a long period after 1837 was one of great comparative weakness, for which all the issuers of currency, including itself, were responsible. From the passage, in 1826, of the Act authorizing the formation of joint-stock Banks, and especially from 1833, previous to which no considerable number of these were in operation, a great revolution has been going on in the monetary system of the kingdom. Instead of holding reserves applicable only to its own operations, it has now, from the fact that its notes are legal tender, to hold them for those exceeding in amount ten times its own; and if its managers do not yet comprehend the principles upon which a symbolic currency must rest, they make good the lack by an excess of caution, which now holds out the signal of alarm at the least freshening of the breeze and the slightest turn of the vane.

Mr. Palmer had no sooner laid down his pen than he was instantly assailed on all sides, with no little vehemence, by a crowd of writers, the most distinguished of whom was Mr. Loyd, -Lord Overstone; whose reply chiefly deserves consideration from the fact, that it prepared the way for the Act of 1844, of which he was the originator and virtually the author.

"The principle upon which the Bank professes to be guided in the regulation of the currency," said Lord Overstone, "is this: to meet its outstanding liabilities, consisting of circulation and deposits, it holds at its disposal securities and specie; and its principle of action is, to keep the amount of its securities fixed, and to leave any variation in the amount of circulation and deposits to be balanced by a corresponding variation in the amount of specie. This principle was set forth by the Bank Directors in their evidence before the Parliamentary Committee, previous to the last renewal of the charter, and was recommended principally upon the ground, that the effect of it would be to render the Bank a passive agent, and that all variations in the amount of specie would thus become the result, not of any direct action on the part of the Bank, but solely on that of the public. If they demanded specie, it could be obtained only by paying in notes or diminishing deposits; and if, on the other hand, the specie was increased, there must at the same time be a corresponding increase in the amount of circulation or deposits. Under this view of its probable action, the principle above stated met with a degree of acquiescence which a more close examination of the subject will hardly warrant.

"The Bank, it must be observed, acts in two capacities: as a manager of the circulation, and as a body performing the ordinary

functions of a banking concern. The duties of these two characters, though very often united in the same party, are in themselves perfectly distinct. In the principle laid down by the Bank for its own guidance, the separate and distinct natures of these two characters has not been sufficiently attended to. The rules applicable to its conduct as manager of the currency are mixed with the rules applicable to its conduct as a simple banker, and the rule or principle under discussion is the result of this mixture. As a manager of the currency, it is undoubtedly a sound rule by which to guide itself, that against the amount of notes out it should hold at its disposal securities and specie; that the amount of securities shall be invariable; and that, consequently, all fluctuations in the amount of notes out shall be met by a corresponding fluctuation in the amount of specie on deposit; and thus the public, and not the Bank, will be made the regulators of the amount of the circulation; and that amount will, by this principle, be made to fluctuate precisely as it would have fluctuated had the currency been purely metallic.

"For the regulation of the conduct of the Bank as a manager of the currency, this rule is perfectly unobjectionable, and rests, indeed, upon the soundest principles.

"But when the same rule is further applied to the regulation of its conduct as a banking concern, it is necessarily found to be wholly impracticable. It is in the nature of banking business that the amount of its deposits should vary with a variety of circumstances; and, as its amount of deposit varies, the amount of that in which those deposits are invested (viz., the securities) must vary also. It is, therefore, quite absurd to talk of the Bank, in its character of a banking concern, keeping the amount of its securities invariable.

"The rule is, that, the securities being kept equal, any diminution in the amount of specie may be met by a corresponding decrease in the aggregate amount of circulation and deposits." The possible consequence is, that a large diminution of specie may take place, and be met, not by a corresponding decrease of circulation, but solely by a decrease of deposits.. Thus, a heavy drain upon the treasury of the Bank might take place under this rule, without any contraction of the currency by which that drain is to be checked or the Bank to be protected.

"To those who are practically conversant with banking business, or who have reflected upon the nature of it, it can hardly be necessary to point out the simple considerations, that banking deposits are necessarily variable in their amount and duration; and that, with such variation, the amount of the securities held by the Bank will fluctuate. It is, therefore, unreasonable to talk of the invariable amount of a banker's securities; and this observation is equally applicable to banking business when conducted by the Bank of England as when it is conducted by any other body. On the other hand, I apprehend there will be no difference of opinion, amongst those who have reflected upon the principles of paper currency, as to the soundness of the rule, that the amount

of the paper issued shall be represented by an amount of securities which never varies, and an amount of specie which is left to fluctuate with the fluctuations of the amount of notes out.

"If these rules be correct, it follows, that the rule now adopted by the Bank is incorrect, and cannot be safely relied upon in the management of the currency. The rule ought to be, that the variations in the amount of circulation shall correspond to the variations in the amount of bullion; and the adherence of the Bank to this rule ought to be obvious on the face of its published accounts. By this means, and by this means only, can we obtain ‘a paper circulation varying in amount exactly as the circulation would have varied had it been metallic;' and, in addition to the establishment of this only sound principle of currency, shall we obtain a simple and intelligent account, requiring no further explanation, nor the production of any information not at the command of the public, to enable them to come to a correct understanding of it.

"Was the management of the currency intrusted to a body established exclusively for that purpose, this is the rule by which such body must govern its operations. It is only by an adherence to such a principle that a paper currency can be made to vary in amount precisely as the circulation would have varied had it been exclusively metallic. The importance of a rigid adherence to this rule cannot be over-estimated; and, if it be incompatible, as is alleged by some, with the mixed functions of the Bank of England, it seems to become a very serious question, whether it is not better to separate altogether the business of banking from that of regulating the currency, rather than suffer so essential a rule to be in any degree compromised. It is not, however, very easy to perceive any insuperable difficulty in rendering the currency department of the Bank of England totally distinct and separate from the management of its other business; so that the one should not interfere with or affect the other more than they would do where they were under the control of different bodies. In proportion as these two functions are kept distinct, will each be rendered more effectual for its proper purpose. The two branches of the business of the Bank, thus divided, will proceed with equal efficiency, and without mutual interruption. Like those animals described by naturalists, whose pecular property it is, that, when cut into two parts, they move off in opposite directions, each half full of life and energy; thus, if the two natures of the Bank of England were completely dissociated, each would proceed to the discharge of its respective functions with more simplicity and efficiency, unencumbered by the conflicting tendencies and opposite action of its former companion. . . .

"We impose upon the Bank of England the duty of regulating the value of the currency, and providing for the payment of the whole of it in specie, without giving to that body the exclusive power of issuing the paper money, or investing it with any direct control over the conduct of rival issuers. We look to the Bank for a strict regulation of the amount of its issues according to the

state of the exchanges and the drain for bullion, while, at the same time, we very inconsistently look to it, also, as responsible for the maintenance of public credit in a period of pressure.

"We thus unite in the same body functions which, it can be easily shown, are in many cases conflicting, and therefore incompatible; viz., those of ordinary banking business, and of regulating the amount of a paper currency. And, lastly, to perform those very delicate duties, in every step of which the personal interests of the mercantile, trading, and money classes must be immediately affected, we select, not a body of individuals, qualified (by their total separation from all such interests) to exercise a dispassionate and disinterested judgment, but, on the contrary, men the most largely engaged in mercantile and moneyed operations, and, therefore, more than any other exposed in their private interests to the immediate effects of any action upon the currency.

66

Again, with respect to joint-stock Banks, we create by law large and powerful establishments, to which is given the right to issue paper money without any absolute restriction; and even that knowledge of the action of the Bank which is essential to enable them to take a just view of the condition of the currency, and of their corresponding duty, is afforded them only through such imperfect and delusive accounts as those published by the Bank are represented by the Bank Directors themselves to be.

"A Bank of issue is intrusted with the creation of the circulating medium.

"A Bank of deposit and discount is concerned only with the use, distribution, or application of that circulating medium.

"The sole duty of the former is to take efficient means for the issuing its paper money upon good security, and regulating the amount of it by one fixed rule.

"The principal object and business of the latter is to obtain the command of as large a proportion as possible of the existing circulating medium, and to distribute it in such manner as shall combine security for repayment with the highest rate of profit.

"That those two functions are perfectly separate and distinct, and that there is no connection between them which renders it necessary that they should be administered by the same parties, is very clear. A very short explanation will be sufficient to show that they are, in many respects, conflicting duties.

"The history of what we are in the habit of calling the 'state of the trade' is an instructive lesson. We find it a subject to various conditions which are periodically returning; it revolves apparently in an established cycle. First, we find it in a state of quiescence; next, improvement, growing confidence, prosperity, excitement, over-trading, convulsion, pressure, stagnation, distress; ending again in quiescence.

"Now during the progress of trade through this circular course, what is the necessary situation, and the inevitable conduct of the banker? The connection between him and his customers is necessarily very close and intimate: they must sympathize with each others' views and feelings, and act, to a considerable degree, in