The receipts and payments by Government would undoubtedly maintain the credit of a large amount of bank notes apart from, and independent of, a metallic basis. Experience alone could show what this amount might safely be, supposing there were but a single issuer.

In the present composite structure of the currency, this may be said to be indicated by the £14,500,000 issued on securities so far as the Bank of England is concerned. It cannot be the policy of the Legislature to encourage the issue of bank notes to the utmost extent that the credit of the issuer would keep in circulation. It would be most desirable, even if there were one sole issuer, that a metallic reserve should be maintained in the country, not alone for the purposes of internal credit, but for occasions of sudden exigencies, which might occasion and demand an external drain of the precious metals.

If this would be desirable when the Government should have all the profit of the circulation, it is still more so when the profit is distributed amongst private undertakings.

With this view it should be the policy of the Legislature to encourage the circulation of coin for small payments, and prohibit the use of £1 and £2 notes. This would be a reserve in times of extreme difficulty.

It may be said that this argument favours the limitation of a paper circulation to its exact equivalent in bullion. But besides that this would be an unnecessary sacrifice of capital, it must be considered that the complete disuse of a credit circulation would be a serious bar to its introduction in times of emergency, causing alarm, and thereby adding to the difficulty rather than relieving it. Two questions here suggest themselves:-1. Would it be desirable that the circulation should be issued by the Government? and 2. Should the functions of issue be separated from those of banking, by placing the former department in the hands of special Commissioners ?

1st. I think that the Government should have nothing to do with the issue of bank notes, as it would be subjected to all the clamour and unpopularity which are engendered by financial and monetary crises. The circulation would not be free from political influence, for reasons of State might be pleaded for measures

which would endanger the value and stability of property: and experience has shown that no Government hitherto has possessed this power that has not abused it. In times of emergency, discredit of the Government paper would enormously add to the difficulty.

Some of these reasons apply to the separation of the Issue Department from the Bank of England, and there are other reasons which render this inexpedient.

It would more apparently than at present reduce the Bank of England to the level of an ordinary joint-stock Bank; and thus the strength which is derived from the Bank's intimate connection with the Government would be lost.

This connection is assumed by the public to exist notwithstanding the enactment of 1844-the theory of which denies all value to this connection; and I think it is necessary to maintain this impression, so long as it is deemed advisable to publish the weekly accounts of the Liabilities and Assets of the Bank. The separation would, moreover, relieve the Bank of some portion of its responsibility, and would be an inducement to manage its banking business more nearly on the principle of an ordinary joint-stock bank, investing its deposits much more closely and shutting its doors when it was not convenient to discount.

By this the distinctive character of the Bank of England, as a bank of reserve, would be lost; and it is questionable whether a monied corporation, with so large a capital as the Bank of England, relieved from such responsibility, and deprived of such character, might not have a dangerous influence on the money market.

If the Act be continued in its present shape, there would remain to be discussed the questions, whether the present amount issued upon securities is correctly fixed at £14,500,000? and secondly, whether there should be a machinery provided for the relaxation of the Act in cases of emergency or discredit?

On the first question, arguing on the principle of the Act, that a certain proportion of the active circulation should be issued in gold; I am inclined to think the amount should not be increased. The circulation in the hands of the public varies from £18,000,000 to £21,000,000.

At the lowest point, the Act would require £3,500,000; at the highest, £6,500,000 in gold, as a basis to ensure convertibility. To raise the issue on securities to £16,000,000, as proposed by Mr. Norman, would reduce these bases respectively to £2,000,000 and £5,000,000, which appears to me too low a proportion.

Secondly, as to the power of relaxation. This point was fully considered by the framers of the Act. To provide machinery for the purpose of relaxing, it was thought, would encourage an undue reliance upon this exceptional means of relief, and that it was the function of the Government to intervene in such a case, and of the Government alone, under its official responsibility.

This power having been once exercised already, there is no cause to apprehend a panic, such as occurred in 1847. The public believe that it would be exercised again under similar circumstances. Some advantages might be derived, possibly, from an enactment, laying down rules how such power should be exercised. Having considered the question fully, as regards the limitation placed upon the power of issue, a large portion of the subject has not been adverted to, which relates to the management of the Bank of England, and, by implication, of other banks, as a bank of deposit.

And here the first anomaly that presents itself, and which is at the root of all the difficulty to which the Bank is subjected under any system of restriction, is that the Bank is expected to open its doors to all comers, and make advances to any amount, provided only good banking security, such as unexceptional bills of exchange, are tendered to it.

There are two ways of meeting the difficulty caused by this anomaly.

One is by successively raising the rate of interest, which, it is assumed, will eventually raise the value of money above its value abroad, and thus cause it to flow to this country; the other is, by placing restriction upon the term for which the Bank makes advances, and thus acting directly on the Foreign exchanges by discouraging the negotiation of any but bills at short date upon England.

The Bank has of late, to a certain extent, combined these modes of action.

It is not here the place to enter upon arguments pro. and con. upon this subject; and I therefore pass on to the question as to the proportion of reserve which the Bank should endeavour to maintain in its Banking Department.

This is notoriously very much higher than any private banker deems necessary in the management of his deposits; and, according to the usual practice of the Bank, varies in times of scarcity of money, from one - third to one-fourth the amount of its deposits.

But if this be contrasted with the reserves kept, for instance, by the joint-stock banks, a new and hitherto little-considered source of danger to the credit of the country will present itself. The joint-stock banks of London, judging by their published accounts, have deposits to the amount of £30,000,000. Their capital is not more than £3,000,000, and they have on an average £31,000,000 invested in one kind of security or another, leaving only £2,000,000 of reserve against all this mass of liabilities.

It is impossible to forsee the consequences of a failure of one of these large establishments; and it is a branch of the subject which, in my opinion, 'more pressingly requires the attention of Parliament than any alteration in the Banking Acts of 1844 and 1845.

Appendix to report from the Select Committee on the Bank Acts, pp. 1-4.

Papers of the House of Commons, 1857, Sess. II., vol. 10, pt. II., Bank Acts.

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APPENDIX C.

Letter of the First Lord of the Treasury and the Chancellor of the Exchequer authorising the suspension of the Bank Charter Act, 1844.

To the Governor and Deputy-Governor of the Bank of England.

Downing Street,

May 11th, 1866.

GENTLEMEN,

We have the honour to acknowledge the receipt of your letter of this day to the Chancellor of the Exchequer, in which you state the course of action at the Bank of England, under the circumstances of sudden anxiety which have arisen since the stoppage of Messrs. Overend, Gurney, and Co., Limited, yesterday.

We learn with regret that the Bank reserve, which stood so recently as last night at a sum of about five millions and three quarters, has been reduced in a single day by the liberal answer of the Bank to the demands of commerce during the hours of business, and by its great anxiety to divert disaster, to little more than half that amount, or a sum (actual for London and estimated for the branches) not greatly exceeding three millions.

The accounts and representations which have reached Her Majesty's Government during the day, exhibit the state of things in the city as one of extraordinary distress and apprehension. Indeed, deputations composed of persons of the greatest weight and influence, and representing alike the private and joint-stock banks of London, have presented themselves in Downing Street, and have urged with unaminity, and with earnestness, the necessity of some intervention on the part of the State, to allay the anxiety which prevails, and which appears to have amounted, through great part of the day, to absolute panic.