This is only the old story over again, that value is not necessary to the circulation of a government or inconvertible currency; that, no matter how worthless it may be, it will circulate at the value of coin, if it do not exceed the amount of convertible paper which would have circulated in its place, or if its quantity do not exceed the wants of the community in its exchanges. It is useless to repeat the demonstration that all currencies circulate at their real or assumed values.

The late Mr. James W. Gilbart was a striking instance of a voluminous writer upon money, without any proper comprehension of its nature and laws. He was the author of an elaborate work upon "The Principles and Practice of Banking," and of half a dozen others upon that and kindred subjects. He was, for a long time, manager of the London and Westminster Bank, which he conducted with no little ability and success. As a Political Economist, he belonged to the school of Tooke and Mill, in holding that the convertible notes of no other Bank than that of the Bank of England could influence prices or the rates of exchange. His reasons are sufficiently set forth by the following extracts from the evidence given by him before the House Committee of 1840-41 upon "Banks of issue."

"What reference is made in the issue of paper to the quantity of gold in the country, and to the ultimate ability of the parties to discharge their paper engagements in gold? The bankers in issuing their notes do not make any reference to the quantity of gold in the country; but they make reference to their ability to discharge these notes when returned to them for payment.

"What is the nature of the reference which they make? - By keeping securities available for the purpose of being sold, in order to discharge those notes whenever presented to them for payment.

"Suppose there was one Bank which had the charge of the paper circulation of the country, and had the means, therefore, by constant reference to the state of the exchanges, of determining the amount of the paper circulation, do not you think that there would be a greater security against a sudden demand for gold, and an inability to pay that gold, than there is when there are a great many issuers, none of whom, according to your own statement, pay the slightest regard to the state of the exchanges?—No; I think not.

"What, then, supplies the check? - The check upon the private bankers is, that their circulation cannot be issued to excess; whereas, if you had a Bank which should issue notes for so much gold, then every time there was a favorable course of exchange there would be a large issue of notes, which notes would necessarily

reduce the rate of interest, lead to speculation, and turn the exchanges again by causing investments to be made in foreign countries. Now, as issues are at present conducted, bankers are under several checks which would not apply to such a Bank, for instance, the check of the interchange with each other of their different notes once or twice a week, and the check of having their notes payable on demand; whereas, the notes of such a Bank as you suppose would not be diminished except when gold was wanted to be sent abroad. Another check is the practice of giving interest upon deposits, by which all the surplus circulation is called in and lodged with the Banks. Now, such a Bank as you have supposed would not be under the control of those checks, and it would be under the necessity of increasing the circulation whenever the exchange became favorable; and we know by experience that the most sure way of making the exchanges unfavorable is a previous excessive issue; that previous excessive issue would necessarily arise, on the principle you have supposed, every time the exchange was favorable.

"You think that there is some cause in operation which applies equally to all issuers of paper, and prevents any undue issue of paper, and dispenses with the necessity of any reference on the part of each issuer to the state of the exchanges? That is the case with all country issuers of paper. With regard to the Bank of England, who have the power of issuing their notes in exchange against bullion, in the purchase of Exchequer bills and government stock, it is quite clear that notes put into operation in that way, being thrown in a mass upon the previously existing state of trade, will have the effect of raising prices and reducing interest, and turn the exchanges; but if notes are issued merely to pay for transactions that have previously taken place, and are drawn out by the operations of trade, those notes will have no such effect.

"Then, you do think that the expansion of the circulation of the Bank of England may cause unfavorable exchanges?—Yes.

"Why should not the expansion of the circulation on the part of the country issuers produce the same effect? - Because the country circulation is under checks, whereas the Bank of England circulation is not: the country circulation can be issued only in consequence of transactions which have taken place, and to the extent only required by the wants of the district; whereas it is obvious that the Bank of England has the power of increasing the circulation by the purchase of Exchequer bills or stock, or by purchasing bullion, and throwing a mass of notes on the market when the state of trade does not require it.

"Chairman. Have you any further observations to make to the Committee? When the first question was asked of me, at the commencement of my examination, I stated that I appeared before the Committee as the representative of the joint-stock Banks, and that, therefore, in expressing any opinions consistently with the resolutions which they had passed, I wished to be considered as speaking the sentiments of the joint-stock Banks; but, should the

Committee ask me any question not connected with the circumstances of country issues, that I wish to be considered as speaking my own individual opinions. The points upon which I wish to be considered as speaking the sentiments of the joint-stock Banks are as follows: I speak the opinions of the joint-stock Banks in saying that their circulation cannot be made to fluctuate in exact conformity with the circulation of the Bank of England, or with the stock of gold in the Bank of England; that the country issue is drawn out by the demands of trade, and is subject to checks to which the circulation of the Bank of England is not liable; that the country bankers have not the power of issuing their notes to excess; that they cannot contract their circulation, or expand it, as they please; and, also, that the country circulation does not influence the prices of commodities, and that it cannot be regulated by the principles of the foreign exchanges."1

The issues of private Banks and bankers, says Mr. Gilbart, can never be in excess, for two reasons: 1st, from their constant retirement "by the interchange by the Banks with each other of their different notes and checks, once or twice a week ;" and, 2d, for the reason that, by allowing interest on deposits, "all the surplus circulation is called in, and lodged with the Banks." Suppose all the Banks to largely increase their issues, the exchange of £10,000,000 per week would be no more of a check than the exchange of £5,000,000. One quantity could be exchanged as well as another. An inflation may take place to a very large extent where exchanges are daily made, and where the Banks are on a specie basis, provided the issuers are all actuated by similar sentiments and move in a similar direction. This is the way inflations do take place, and continue till some link in the chain snaps, to disclose the weakness of all. Suppose all excess of currency to be called in by reason of an allowance of interest by the Banks, how is such interest to be paid? Of course, by reloaning the "excess" "so deposited, as fast as received. The "excess would be in circulation as much after as before it was taken in, only in a different form. Both of his checks, therefore, are only creations of his own imagination.

The issues of country Banks, says Mr. Gilbart, cannot affect prices like those of the Bank of England, for the reason that they are issued merely to pay for transactions that have pre

1 Principles and Practice of Banking, pp. 477–481.

viously taken place, or are drawn out by the operations of trade; while, "with regard to the Bank of England, which has the power of issuing its notes in exchange against bullion, in the purchase of Exchequer bills and government stock, it is quite clear that notes put into operation in that way, being thrown in a mass upon the previously existing state of trade, will have the effect of raising prices and reducing interest, and turn the exchanges," an effect which the issues of country Banks will not produce. Now a £1,000 bank-note of a country Bank, or a check for a like amount drawn against deposits in it, will exert precisely the same effect upon prices, and upon the rates of interest and exchange, as a £1,000 note or check upon the Bank of England. The one is thrown in mass upon the previously existing state of trade as much as the other. The Bank throws its notes into the market for the purchase of Exchequer bills and securities; the country Bank, in the purchase of similar securities, or to help forward some enterprise or speculative scheme. The impulse or motive that gave birth to each is precisely the same. Once in the market, they perform precisely the same functions, and are subject to precisely the same laws. They are equally promises to pay coin on demand; and must be equally discharged within similar periods, by the payment of coin or its equivalent. Mr. Gilbart assumed that the Bank of England notes, when issued against bullion and used in the purchase of securities, would remain in circulation till the gold, by the turning of the rates of exchange, is wanted for export; and, by remaining in circulation, would affect prices in a manner which the notes of private Banks and bankers could not, for the reason that the latter were called into existence only by commercial operations taking place, or which were to take place, and must be speedily retired. But years may elapse after the loans for getting rid of the bullion in the Bank were made, before the exchanges would turn sufficiently to cause an export of gold. In the mean time, the notes so issued would have been taken in and reissued, or others issued in their place, a dozen times; and in every case, by the payment of gold or its equivalent. When the notes of the Bank, or of any private Bank or banker, get into circulation, they produce an effect in ratio to their quantity or amount; and as the issues of the private Banks and bankers in England, including joint-stock Banks, exceed

tenfold those of the Bank of England, their effect must be in like ratio, that is, ten times greater than that exerted by those of the Bank. It is certain that the former do exert a much greater influence over prices and the rates of exchange, in ratio to their amount, than the latter; for the reason that they have a much more intimate connection than those of the Bank with the foreign commerce of the country, and are usually made upon securities, as a class, inferior to those which the rules of the Bank allow it to take. Mr. Gilbart's assumption, therefore, that the notes of the Bank exert an influence over prices and rates of exchange greater than those exerted by the notes of country Banks, is as wanting in meaning as was Lord Overstone's distinction between the effect produced by the notes of the Bank and checks drawn upon it.

To questions put to him by the Committee of 1840-41 as to what course he would advise the Bank to pursue in the event of a war, he replied as follows:

Question 1064. "Your answer assumes that the exchanges are never likely to be adverse during the period of a war, or that the drain of gold is not likely to be considerable; how do you reconcile that with the circumstances attending the last war, or with the war in 1797, when the Bank was reduced to a state of exhaustion of its treasure?"—"I do not know that any answer assumes that; but, however, as a political question, rather than a banking one, I confess that, if I were the Prime Minister, I would immediately, on the commencement of a war, issue an order in council for the Bank to stop payment."

Question 1065. "Then, you are of opinion that a suspension of payment is necessarily the consequence of a war?" "Necessarily ' is a strong term; but I should think it the best measure to adopt, and I should decidedly adopt it."

Question 1144, Sir Thomas Fremantle. "Do you mean to say that the Bank would be able to do so in a time of war?". "In a time of war I should stop payment at once. It would be better to stop before the gold was gone than afterwards."

Question 1145, Mr. Warburton. "You would recommend that as a desirable thing in itself?" "Yes, as an expedient thing."

Question 1148, Sir Robert Peel. "You would advise, under certain circumstances, a Bank-restriction as a immediate measure?" -"If you had a war, a Bank-restriction I should immediately recommend."

Question 1149. . . . "When you issued your measure of restriction, what is the corresponding security that you would take to prevent that excess of issue which you have admitted to be an evil?"-"In advocating immediate restriction, I am not speaking as a banker, but a politician. I should certainly enact the restriction