III.

In consequence of the opinion which your Committee entertained, that, in the present artificial condition of the circulating medium of this country, it is most important to watch the foreign exchanges and the market price of gold, your Committee were desirous to learn whether the Directors of the Bank of England held the same opinion, and derived from it a practical rule for the control of their circulation; and particularly whether, in the course of the last year, the great depression of the exchanges, and the great rise in the price of gold, had suggested to the Directors any suspicion of the currency of the country being excessive.

Mr. Whitmore, the late Governor of the Bank, stated to the Committee, that in regulating the general amount of the loans and discounts, he did “not advert to the circumstance of the exchanges; it appearing upon a reference to the amount of our notes in circulation, and the course of exchange, that they frequently have no connexion.” He afterward said, “My opinion is, I do not know whether it is that of the Bank, that the amount of our paper circulation has no reference at all to the state of the exchange.” And on a subsequent day, Mr. Whitmore stated, that “the present unfavourable state of exchange has no influence upon the amount of their issues, the Bank having acted precisely in the same way as they did before.” He was likewise asked, Whether, in regulating the amount of their circulation, the Bank ever adverted to the difference between the market and Mint price of gold? and having desired to have time to consider that question, Mr. Whitmore, on a subsequent day, answered it in the following terms, which suggested these further questions:

In taking into consideration the amount of your notes, out in circulation, and in limiting the extent of your discounts to merchants, do you advert to the difference, when such exists, between the market and the Mint price of gold?—We do advert to that, inasmuch as we do not discount at any time for those persons who we know, or have good reason to suppose, export the gold.

“Do you not advert to it any farther than by refusing discounts to such persons?—We do advert to it, inasmuch as whenever any Director thinks it bears upon the question of our discounts, and presses to bring forward the discussion.

“The market price of gold having, in the course of the last year, risen as high as 4s/. 10s. or 4/. 12s., has that circumstance been taken into consideration by you, so as to have had any effect in diminishing or enlarging the amount of the outstanding demands?—It has not been taken into consideration by me in that view.”

Mr. Pearse, now Governor of the Bank, agreed with Mr. Whitmore in this account of the practice of the Bank, and expressed his full concurrence in the same opinion.

Mr. Pearse.—“In considering this subject, with reference to the manner in which Bank notes are issued, resulting from the applications made for discounts to supply the necessary want of Bank notes, by which their issue in amount is so controlled that it can never amount to an excess, I cannot see how the amount of Bank notes issued can operate upon the price of Bullion, or the state of the exchanges, and therefore I am individually of opinion that the price of Bullion, or the state of the exchanges, can never be a reason for lessening the amount of Bank notes to be issued, always understanding the control which I have already described.

“Is the Governor of the Bank of the same opinion, which has now been expressed by the Deputy Governor?

Mr. Whitmore.—“I am so much of the same opinion, that I never think it necessary to advert to the price of gold, or the state of the exchange, on the days on which we make our advances.

“Do you advert to these two circumstances with a view to regulate the general amount of your advances?—I do not advert to it with a view to our general advances, conceiving it not to bear upon the question.”

And Mr. Harman, another Bank Director, expressed his opinion in these terms— “I must very materially alter my opinions before I can suppose that the exchanges will be influenced by any modifications of our paper currency.”

These gentlemen, as well as several of the merchants who appeared before the Committee, placed much reliance upon an argument which they drew from the want of correspondence in point of time, observable between the amount of Bank of England notes and the state of the Hamburgh exchange during several years; and Mr. Pearse presented a paper on this subject, which is inserted in the Appendix. Your Committee would feel no distrust in the general principles which they have stated, if the discordance had been greater; considering the variety of circumstances which have a temporary effect on exchange, and the uncertainty both of the time and the degree in which it may be influenced by any given quantity of paper. It may be added, that the numerical amount of notes (supposing 1/. and 2/. notes to be excluded from the statement) did not materially vary during the period of the comparison; and that in the last year, when the general exchanges with Europe have become much more unfavourable, the notes of the Bank of England, as well as those of the country Banks, have been very considerably increased. Your Committee, however, on the whole, are not of opinion that a material depression of the exchanges has been manifestly to be traced in its amount and degree to an augmentation of notes corresponding in point of time. They conceive, that the more minute and ordinary fluctuations of exchange are generally referable to the course of our commerce; that political events, operating upon the state of trade, may often have contributed as well to the rise as to the fall of the exchange; and in particular, that the first remarkable depression of it in the beginning of 1809, is to be ascribed, as has been stated in the evidence already quoted, to commercial events arising out of the occupation of the North of Germany by the troops of the French Emperor. The evil has been that the exchange, when fallen, has not had the full means of recovery under the subsisting system. And if those occasional depressions, which arise from commercial causes, are not after a time successively corrected by the remedy which used to apply itself before the suspension of the cash payments of the Bank, the consequences may ultimately be exactly similar to those which a sudden and extravagant issue of paper would produce. The restoration of the exchange used to be effected by the clandestine transmission of guineas, which improved it for the moment by serving as a remittance; and unquestionably also in part, probably much more extensively, by the reduction of the total quantity of the remaining circulating medium, to which reduction the banks were led to contribute by the caution which every drain of gold naturally excited. Under the present system, the former of these remedies must be expected more and more to fail, the guineas in circulation being even now apparently so few as to form no important remittance; and the reduction of paper seems therefore the chief, if not the sole corrective, to be resorted to. It is only after the Bank shall have for some time resumed its cash payments, that both can again operate, as they did on all former occasions prior to the restriction.

The Committee cannot refrain from expressing it to be their opinion, after a very deliberate consideration of this part of the subject, that it is a great practical error to suppose that the exchanges with foreign countries, and the price of Bullion, are not liable to be affected by the amount of a paper currency, which is issued without the condition of payment in specie at the will of the holder. That the exchanges will be lowered, and the price of Bullion raised, by an issue of such paper to excess, is not only established as a principle by the most eminent authorities upon commerce and finance; but its practical truth has been illustrated by the history of almost every state in modern times which has used a paper currency; and in all those countries, this principle has finally been resorted to by their statesmen, as the best criterion to judge by, whether such currency was or was not excessive.

In the instances which are most familiar in the history of foreign countries, the excess of paper has been usually accompanied by another circumstance, which has no place in our situation at present, a want of confidence in the sufficiency of those funds upon which the paper had been issued. Where these two circumstances, excess and want of confidence, are conjoined, they will co-operate and produce their effect much more rapidly then when it is the result of the excess only of a paper of perfectly good credit; and in both cases an effect of the same sort will be produced upon the foreign exchanges, and upon the price of bullion. The most remarkable examples of the former kind are to be found in the history of the paper currencies of the British Colonies in North America, in the early part of the last century, and in that of the assignats of the French Republic: to which the Committee have been enabled to add another, scarcely less remarkable, from the money speculations of the Austrian government in the last campaign, which will be found in the Appendix. The present state of the currency of Portugal affords, also, an instance of the same kind.

Examples of the other sort, in which the depreciation was produced by excess alone, may be gathered from the experience of the United Kingdom at different times.

In Scotland, about the end of the seven years' war, banking was carried to a very great excess; and by a practice of inserting in their promissory notes an optional clause of paying at sight, or in six months after sight with interest, the convertibility of such notes into specie at the will of the holder was in effect suspended. These notes accordingly became depreciated in comparison with specie; and while this abuse lasted, the exchange between London and Dumfries, for example, was sometimes four per cent, against Dumfries, while the exchange between London and Carlisle, which is not thirty miles distant from Dumfries, was at par. The Edinburgh banks, when any of their paper was brought in to be exchanged for bills on London, were accustomed to extend or contract the date of the bills they gave, according to the state of the exchange, diminishing in this manner the value of those bills, nearly in the same degree in which the excessive issue had caused their paper to be depreciated. This excess of paper was at last removed by granting bills on London at a fixed date; for the payment of which bills, or in other words, for the payment of which excess of paper, it was necessary in the first instance to provide, by placing large pecuniary funds in the hands of their London correspondents. In aid of such precautionary measures on the part of the Edinburgh banks, an act of Parliament prohibited the optional clauses, and suppressed ten and five shilling notes. The exchange between England and Scotland was speedily restored to its natural rate: and bills on London at a fixed date having ever since been given in exchange for the circulating notes of Scotland, all material excess of Scottish paper above Bank of England has been prevented, and the exchange has been stationary.

The experience of the Bank of England itself, within a very short period after its first establishment, furnishes a very instructive illustration of all the foregoing principles and reasonings. In this instance, the effects of a depreciation of the coin, by wear and clipping, were coupled with the effect of an excessive issue of paper. The Directors of the Bank of England did not at once attain a very accurate knowledge of all the principles by which such an institution must be conducted. They lent money not only by discount, but upon real securities, mortgages, and even pledges of commodities not perishable; at the same time, the Bank contributed most materially to the service of government for the support of the army' upon the Continent. By the liberality of these loans to private individuals, as well as by the large advances to government, the quantity of the notes of the Bank became excessive, their relative value was depreciated, and they fell to a discount of 17 per cent. At this time there appears to have been no failure of the public confidence in the funds of the Bank; for its stock sold for 110 per cent., though only 60 per cent. upon the subscriptions had been paid in. By the conjoint effect of this depreciation of the paper of the Bank from excess, and of the depreciation of the silver coin from wear and clipping, the price of gold bullion was so much raised, that guineas were as high as 3,os.; all that had remained of good silver gradually disappeared from the circulation; and the exchange with Holland, which had been before a little affected by the remittances for the army, sunk as low as 25 per cent. under par, when the Bank notes were at a discount of 17 per cent. Several expedients were tried, both by Parliament and by the Bank, to force a better silver coin into circulation, and to reduce the price of guineas, but without effect. At length the true remedies were resorted to: first, by a new coinage of silver, which restored that part of the currency to its standard value, though the scarcity of money occasioned by calling in the old coin brought the Bank into straits, and even for a time affected its credit; secondly, by taking out of the circulation the excess of Bank notes. This last operation appears to have been effected very judiciously. Parliament consented to enlarge the capital stock of the Bank, but annexed a condition, directing that a certain proportion of the new subscriptions should be made good in Bank notes. In proportion to the amount of notes sunk in this manner, the value of those which remained in circulation began presently to rise; in a short time the notes were at par, and the foreign exchanges nearly so. These details are all very fully mentioned in authentic tracts published at the time, and the case appears to your Committee to afford much instruction upon the subject of their present inquiry.

Your Committee must next refer to the confirmation and sanction which all their reasonings receive from the labours of the Committee of this House, which was appointed in a former Parliament to examine into the causes of the great depreciation of the Irish exchange with England in 1804. Most of the mercantile persons who gave evidence before that Committee, including two Directors of the Bank of Ireland, were unwilling to admit that the fall of the exchange was in any degree to be ascribed to an excess of the paper currency arising out of the restriction of 1797; the whole fall in that case, as in the present, was referred to an unfavourable balance of trade or of payments; and it was also then affirmed, that “notes issued only in proportion to the demand, in exchange for good and convertible securities, payable at specific periods, could not tend to any excess in the circulation, or to any depreciation.” This doctrine, though more or less qualified by some of the witnesses, pervades most of the evidence given before that Committee, with the remarkable exception of Mr. Mansfield, whose knowledge of the effects of that over issue of Scotch paper, which has just been mentioned, led him to deliver a more just opinion on the subject. Many of the witnesses before the Committee, however unwilling to acknowledge the real nature of the evil, made important concessions, which necessarily involved them in inconsistency. They could not, as practical men, controvert the truth of the general position, that “the fluctuations of exchange between two countries are generally limited by the price at which any given quantity of bullion can be purchased in the circulating medium of the debtor country, and converted into the circulating medium of the creditor country, together with the insurances and charges of transporting it from the one to the other.” It was at the same time admitted, that the expense of transporting gold from England to Ireland, including insurance, was then under one per cent.; that before the restriction, the fluctuations had never long and much exceeded this limit; and, moreover, at the exchange with Belfast, where guineas freely circulated at the time of the investigation by that Committee was then 1¼ in favor of Ireland, while the exchange with Dublin, where only paper was in use, was io/. per cent, against that country. It also appeared from such imperfect documents as it was practicable to furnish, that the balance of trade was then favourable to Ireland. Still, however, it was contended, that there was no depreciation of Irish paper, that there was a scarcity and consequent high price of gold, and that the diminution of Irish paper would not rectify the exchange. “The depreciation of Bank paper in Ireland” (it was said by one of the witnesses, a Director of the Bank of Ireland) “is entirely a relative term with respect to the man who buys and sells in Dublin by that common medium: to him it is not depreciated at all; but to the purchaser of a bill on London, to him in that relation, and under that circumstance, there is a depreciation of 10 per cent.” By thus avoiding all comparison with a view to the point in issue between the value of their own paper and that of either the then circulating medium of this country or of gold bullion, or even of gold coin then passing at a premium in other parts of Ireland, they appear to have retained a confident opinion, that no depreciation of Irish paper had taken place.

It is further observable, that the value of a considerable quantity of dollars put into circulation by the Bank of Ireland at this period was raised to 5s. a dollar, for the professed purpose of rendering the new silver coin conformable to the existing state of the exchange, a circumstance on which the Committee animadverted in their Report, and which serves to show that the Irish paper currency could not stand a comparison with the standard price of silver, any more than with that of gold bullion, with gold in coin, or with the then paper currency of this kingdom.

A fact was mentioned to that Committee on the evidence of Mr. Colville, a Director of the Bank of Ireland, which though it carried no conviction to his mind of the tendency of a limitation of paper to lower exchanges, seems very decisive on this point. He stated that in 1753 and 1754, the Dublin exchange being remarkably unfavourable, and the notes of the Dublin Bank being suddenly withdrawn, the exchange became singularly favourable. The mercantile distress produced on that occasion was great, through the suddenness of the operation, for it was effected, not by the gradual and prudential measures of the several Banks, but through the violent pressure which their unguarded issues had brought upon them. The general result, however, is not the less observable.

With a view to the further elucidation of the subject of the Irish exchanges, which so lately attracted the attention of Parliament, it may be proper to remark that Ireland has no dealings in exchange with foreign countries, except through London, and that the payments from Ireland to the Continent are consequently converted into English currency, and then into the currency of the countries to which Ireland is indebted. In the spring of 1804 the Exchange of England with the Continent was above par, and the Exchange of Ireland was in such a state that 118/. 10s. of the notes of the Bank of Ireland would purchase only 100/. of those of the Bank of England. Therefore, if the notes of the Bank of Ireland were not depreciated, and it was so maintained, it followed that the notes of the Bank of England were at more than 10 per cent, premium above the standard coin of the two countries.

The principles laid down by the Committee of 1804, had probably some weight with the Directors of the Bank of Ireland; for between the period of their Report (June, 1804) and January, 1806, the circulation of the notes of the Bank of Ireland was gradually (though with small occasional fluctuations) reduced from about three millions to 2,410,000l., being a diminution of nearly one-fifth; at the same time, all the currency which had been issued under the name of silver tokens, was by law suppressed. The paper currency, both of the Bank of England and of the English country Banks, seems during the same period to have gradually increased. The combination of these two causes is likely to have had a material effect in restoring to par the Irish exchange with England.

The Bank of Ireland has again gradually enlarged its issues to about 3,100,000l., being somewhat higher than they stood in 1804, an increase probably not disproportionate to that which has occurred in England within the same period. Perhaps, however, it ought not to be assumed, that the diminution of issues of the Bank of Ireland between 1804 and 1806, would produce a corresponding reduction in the issues of private Banks in Ireland, exactly in the same manner in which a diminution of Bank of England paper produces that effect on the country banks in Great Britain; because the Bank of Ireland does not possess the same exclusive power of supplying any part of that country with a paper currency, which the Bank of England enjoys in respect to the metropolis of the empire. The Bank of England, by restricting the quantity of this necessary article in that important quarter, can more effectually secure the improvement of its value; and every such improvement must necessarily lead, by a corresponding diminution in amount, to a similar augmentation of the value of country Bank paper exchangeable for it. That the same diminution of the circulation of private Banks took place in Ireland is more than probable, for the private Banks in Ireland are accurtomed to give Bank of Ireland paper for their own circulating notes when required to do so, and therefore could not but feel the effect of any new limitation of that paper for which their own was exchangeable.

It is due, however, in justice to the present Directors of the Bank of England, to remind the House that the suspension of their cash payments, though it appears in some degree to have originated in a mistaken view taken by the Bank of the peculiar difficulties of that time was not a measure sought for by the Bank, but imposed upon it by the Legislature for what were held to be urgent reasons of state policy and public expediency. And it ought not to be urged as matter of charge against the Directors, if in this novel situation in which their commercial company was placed by the law, and entrusted with the regulation and control of the whole circulating medium of the country, they were not fully aware of the principles by which so delicate a trust should be executed, but continued to conduct their business of discounts and advances according to their former routine.

It is important at the same time, to observe, that under the former system, when the Bank was bound to answer its notes in specie upon demand, the state of the foreign exchanges and the price of gold did most materially influence its conduct in the issue of those notes, though it was not the practice of the Directors systematically to watch either the one or the other. So long as gold was demandable for their paper, they were speedily apprised of a depression of the exchange, and a rise in the price of gold, by a run upon them for that article. If at any time they incautiously exceeded the proper limit of their advances and issues, the paper was quickly brought back to them, by those who were tempted to profit by the market price of gold or by the rate of exchange. In this manner the evil soon cured itself. The Directors of the Bank having their apprehensions excited by the reduction of their stock of gold, and being able to replace their loss only by reiterated purchases of bullion at a very losing price, naturally contracted their issues of paper, and thus gave to the remaining paper, as well as to the coin for which it was interchangeable, an increased value, while the clandestine exportation either of the coin, or the gold produced from it, combined in improving the state of the exchange and in producing a corresponding diminution of the difference between the market price and Mint price of gold, or of paper convertible into gold.

Your Committee do not mean to represent that the manner in which this effect resulted from the conduct which they have described, was distinctly perceived by the Bank Directors. The fact of limiting their paper as often as they experienced any great drain of gold, is, however, unquestionable. Mr. Bosanquet stated, in his evidence before the secret Committee of the House of Lords, in the year 1797, that in 1783, when the Bank experienced a drain of cash, which alarmed them, the Directors took a bold step and refused to make the advances on the loan of that year. This, he said, answered the purpose of making a temporary suspension in the amount of the drain of their specie. And all the three Directors who have been examined before your Committee, represent some restriction of the Bank issues as having usually taken place at those periods antecedent to this suspension of the cash payments of the Bank when they experienced any material run. A very urgent demand for guineas, though arising not from the high price of gold and the state of the exchange, but from a fear of invasion, occurred in 1793, and also in 1797, and in each of these periods the Bank restrained their discounts, and consequently also the amount of their notes, very much below the demands of the merchants. Your Committee question the policy of thus limiting the accommodation in a period of alarm, unaccompanied with an unfavorable exchange and high price of bullion; but they consider the conduct of the Bank at the two last mentioned periods, as affording illustration cf their general disposition, antecedently to 1797, to contract their loans and their paper, when they found their gold to be taken from them.

It was a necessary consequence of the suspension of cash payments, to exempt the Bank from that drain of gold, which, in former times, was sure to result from an unfavorable exchange and a high price of bullion. And the Directors, released from all fears of such a drain, and no longer feeling any inconvenience from such a state of things, have not been prompted to restore the exchanges and the price of gold to their proper level by a reduction of their advances and issues. The Directors, in former times, did not perhaps perceive and acknowledge the principle more distinctly than those of the present day, but they felt the inconvenience, and obeyed its impulse; which practically established a check and limitation to the issue of paper. In the present times the inconvenience is not felt; and the check, accordingly, is no longer in force.

But your Committee beg leave to report it to the House as their most clear opinion, that so long as the suspension of cash payments is permitted to subsist, the price of gold bullion and the general course of exchange with foreign countries, taken for any considerable period of time, form the best general criterion from which any inference can be drawn, as to the sufficiency or excess of paper currency in circulation; and that the Bank of England cannot safely regulate the amount of its issues, without having reference to the criterion presented by these two circumstances. And upon a review of all the facts and reasonings which have already been stated, your Committee are further of opinion, that, although the commercial state of this country, and the political state of the continent, may have had some influence on the high price of gold bullion and the unfavourable course of exchange with foreign countries, this price, and this depreciation, are also to be ascribed to the want of a permanent check, and a sufficient limitation of the paper currency in this country.

In connection with the general subject of this part of their report, the policy of the Bank of England respecting the amount of their circulation, your Committee have now to call the attention of the House to another topic, which was brought under their notice in the course of their inquiry, and which in their judgment demands the most serious consideration. The Bank Directors, as well as some of the merchants who have been examined, shewed a great anxiety to state to your Committee a doctrine, of the truth of which they professed themselves to be most thoroughly convinced, that there can be no possible excess in the issue of Bank of England paper, so long as the advances in which it is issued are made upon the principles which at present guide the conduct of the Directors, that is, so long as the discount of mercantile bills are confined to paper of undoubted solidity, arising out of real commercial transactions, and payable at short and fixed periods. That the discounts should be made only upon bills growing out of real commercial transactions, and falling due in a fixed and short period, are sound and well-established principles. But that, while the Bank is restrained from paying in specie, there need be no other limit to the issue of their paper than what is fixed by such rules of discount, and that during the suspension of cash payments the discount of good bills falling due at short periods cannot lead to any excess in the amount of bank paper in circulation, appears to your Committee to be a doctrine wholly erroneous in principle, and pregnant with dangerous consequences in practice.

But before your Committee proceed to make such observations upon this theory as it appears to them to deserve, they think it right to shew from the evidence, to what extent it is entertained by some of those individuals who have been at the head of the affairs of the Bank. The opinions held by those individuals are likely to have an important practical influence; and appeared to your Committee, moreover, the best evidence of what has constituted the actual policy of that establishment in its corporate capacity.

Mr. Whitmore, the late Governor of the Bank, expressly states, “The Bank never force a note in circulation, and there will not remain a note in circulation more than the immediate wants of the public require; for no banker, I presume, will keep a larger stock of bank notes by him than his immediate payments require, as he can at all times procure them.” The reason here assigned is more particularly explained by Mr. Whitmore, when he says, “The Bank notes would revert to us if there was a redundancy in circulation, as no one would pay interest for a bank note that he did not want to make use of.” Mr. Whitmore further states, “The criterion by which 1 judge of the exact proportion to be maintained between the occasions of the public, and the issues of the Bank, is by avoiding as much as possible to discount what does not appear to be legitimate mercantile paper.” And further when asked, What measure the court of Directors has to judge by, whether the quantity of bank notes out in circulation is at any time excessive? Mr. Whitmore states, that their measure of the security or abundance of bank notes is certainly by the greater or less application that is made to them for the discount of good paper.

Mr. Pearse, late Deputy-Governor, and now Governor of the Bank, stated very distinctly his concurrence in opinion with Mr. Whitmore upon this particular point. He referred “to the manner in which bank notes are issued, resulting from the applications made for discounts to supply the necessary want of bank notes, by which their issue in amount is so controlled that it can never amount to an excess.” He considers “the amount of the bank notes in circulation as being controlled by the occasions of the public, for internal purposes,” and that, “from the manner in which the issue of bank notes is controlled, the public will never call for more than is absolutely necessary for their wants.”

Another Director of the Bank, Mr. Harman, being asked, If he thought that the sum total of discounts applied for, even though the accommodation afforded should be on the security of good bills to safe persons, might be such as to produce some excess in the quantity of the Bank issues, if fully complied with? he answered, “I think if we discount only for solid persons, and such paper as is for real bonâ-fide transactions, we cannot materially err.” And he afterwards states, that what he should consider as the test of a superabundance would be, “money being more plentiful in the market.”

It is material to observe, that both Mr. Whitmore and Mr. Pearse state that “the Bank does not comply with the whole demand upon them for discounts, and that they are never induced, by a view to their own profit, to push their issues beyond what they deem consistent with the public interest.”

Another very important part of the evidence of these gentlemen upon this point, is contained in the following extract:

“Is it your opinion that the same security would exist against any excess in the issues of the Bank, if the rate of the discount were reduced from 5l. to 4l. per cent.?” Answer.—“The security of an excess of issue would be, I conceive, precisely the same.” Mr. Pearse.—“I concur in that answer.”

“If it were reduced to 3l. per cent.?”—Mr. Whitmore.—“I conceive there would be no difference if our practice remained the same as now, of not forcing a note into circulation.” Mr. Pearse.—“I concur in that answer.”

Your Committee cannot help again calling the attention of the House to the view which this evidence presents, of the consequences which have resulted from the peculiar situation in which the Bank of England was placed by the suspension of cash payments. So long as the paper of the Bank was convertible into specie at the will of the holder, it was enough, both for the safety of the Bank and for the public interest in what regarded its circulating medium, that the Directors attended only to the character and quality of the bills discounted, as real ones and payable at fixed and short periods. They could not much exceed the proper bounds in respect of the quantity and amount of bills discounted, so as thereby to produce an excess of their paper in circulation, without quickly finding that the surplus returned upon themselves in demand for specie. The private interest of the Bank to guard themselves against a continued demand of that nature, was a sufficient protection for the public against any such excess of Bank paper as would occasion a material fall in the relative value of the circulating medium. The restriction of cash payments, as has already been shown, having rendered the same preventive policy no longer necessary to the Bank, has removed that check upon its issues which was the public security against an excess. When the Bank Directors were no longer exposed to the inconvenience of a drain upon them for gold, they naturally felt that they had no such inconvenience to guard against by a more restrained system of discounts and advances; and it was very natural for them to pursue, as before (but without that sort of guard and limitation which was now become unnecessary to their own security), the same liberal and prudent system of commercial advances from which the prosperity of their own establishment had resulted, as well as in a great degree the commercial prosperity of the whole country. It was natural for the Bank Directors to believe, that nothing but benefit could accrue to the public at large, while they saw the growth of Bank profits go hand in hand with the acommodations granted to the merchants. It was hardly to be expected of the Directors of the Bank, that they should be fully aware of the consequences that might result from their pursuing, after the suspension of cash payments, the same system which they had found a safe one before. To watch the operation of so new a law, and to provide against the injury which might result from it to the public interests, was the province, not so much of the Bank as of the Legislature: and, in the opinion of your Committee, there is room to regret that this House has not taken earlier notice of all the consequences of that law.

By far the most important of those consequences is, that while the convertibility into specie no longer exists as a check to an overissue of paper, the Bank Directors have not perceived that the removal of that check rendered it possible that such an excess might be issued by the discount of perfectly good bills. So far from perceiving this, your Committee have shown that they maintain the contrary doctrine with the utmost confidence, however it may be qualified occasionally by some of their expressions. That this doctrine is a very fallacious one, your Committee cannot entertain a doubt. The fallacy, upon which it is founded, lies in not distinguishing between an advance of capital to merchants, and an addition of supply of currency to the general mass of circulating medium. If the advance of capital only is considered, as made to those who are ready to employ it in judicious and productive undertakings, it is evident there need be no other limit to the total amount of advances than what the means of the lender, and his prudence in the selection of borrowers, may impose. But in the present situation of the Bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. In the first instance, when the advance is made by notes paid in discount of a bill, it is undoubtedly so much capital, so much power of making purchases, placed in the hands of the merchant who receives the notes; and if those hands are safe, the operation is so far, and in this its first step, useful and productive to the public. But as soon as the portion of circulating medium in which the advance was thus made performs in the hands of him to whom it was advanced this its first operation as capital, as soon as the notes are exchanged by him for some other article which is capital, they fall into the channel of circulation as so much circulating medium, and form an addition to the mass of currency. The necessary effect of every such addition to the mass is to diminish the relative value of any given portion of that mass in exchange for commodities. If the addition were made by notes convertible into specie, this diminution of the relative value of any given portion of the whole mass would speedily bring back upon the Bank which issued the notes as much as was excessive. But if by law they are not so convertible, of course this excess will not be brought back, but will remain in the channel of circulation, until paid in again to the Bank itself in discharge of the bills which were originally discounted. During the whole time they remain out, they perform all the functions of circulating medium; and before they come to be paid in discharge of those bills, they have already been followed by a new issue of notes in a similar operation of discounting. Each successive advance repeats the same process. If the whole sum of discounts continues outstanding at a given amount, there will remain permanently out in circulation a corresponding amount of paper; and if the amount of discounts is progressively increasing, the amount of paper, which remains out in circulation over and above what is otherwise wanted for the occasions of the public, will progressively increase also, and the money prices of commodities will progressively rise. This progress may be as indefinite, as the range of speculation and adventure in a great commercial country.

It is necessary to observe, that the law, which in this country limits the rate of interest, and of course the rate at which the Bank can legally discount, exposes the Bank to still more extensive demands for commercial discounts. While the rate of commercial profit is very considerably higher than five per cent., as it has lately been in many branches of our foreign trade, there is in fact no limit to the demands which merchants of perfectly good capital, and of the most prudent spirit of enterprise, may be tempted to make upon the Bank for accommodation and facilities by discount. Nor can any argument or illustration place in a more striking point of view the extent to which such of the Bank Directors as were examined before the Committee, seem to have in theory embraced that doctrine upon which your Committee have made these observations, as well as the practical consequences to which that doctrine may lead in periods of a high spirit of commercial adventure, than the opinion which Mr. Whitmore and Mr. Pearse have delivered; that the same complete security to the public against any excess in the issues of the Bank would exist if the rate of discount were reduced from five to four, or even to three per cent. From the evidence, however, of the late Governor and Duputy Governor of the Bank it appears, that though they state the principle broadly, that there can be no excess of their circulation if issued according to their rules of discount, yet they disclaim the idea of acting up to it in its whole extent; though they stated the applications for the discount of legitimate bills to be their sole criterion of abundance or scarcity, they gave your Committee to understand that they do not discount to the full extent of such applications. In other words, the Directors do not act up to the principle which they represent as one perfectly sound and safe, and must be considered, therefore, as possessing no distinct and certain rule to guide their discretion in controlling the amount of their circulation.

The suspension of cash payments has had the effect of committing into the hands of the Directors of the Bank of England, to be exercised by their sole discretion, the important charge of supplying the country with that quantity of circulating medium which is exactly proportioned to the wants and occasions of the public. In the judgment of the Committee, that is a trust which it is unreasonable to expect that the Directors of the Bank of England should ever be able to discharge. The most detailed knowledge of the actual trade of the country, combined with the profound science in all the principles of money and circulation, would not enable any man or set of men to adjust, and keep always adjusted, the right proportion of circulating medium in a country to the wants of trade. When the currency consists entirely of the precious metals, or of paper convertible at will into the precious metals, the natural process of commerce, by establishing exchanges among all the different countries of the world, adjust, in every particular country, the proportion of circulating medium to its actual occasions, according to that supply of the precious metals which the mines furnish to the general market of the world. The proportion which is thus adjusted and maintained by the natural operation of commerce, cannot be adjusted by any human wisdom or skill. If the natural system of currency and circulation be abandoned, and a discretionary issue of paper money substituted in its stead, it is vain to think that any rules can be devised for the exact exercise of such discretion; though some cautions may be pointed out to check and control its consequences, such as are indicated by the effect of an excessive issue upon exchanges and the price of gold. The Directors of the Bank of England, in the judgment of your Committee, have exercised the new and extraordinary discretion reposed in them since 1797, with an integrity and a regard to the public interest according to their conceptions of it, and indeed a degree of forbearance in turning it less to the profit of the Bank than it would easily have admitted of, that merit the continuance of that confidence which the public has so long and so justly felt in the integrity with which its affairs are directed, as well as in the unshaken stability and ample funds of that great establishment. That their recent policy involves great practical errors, which it is of the utmost public importance to correct, your Committee are fully convinced; but those errors are less to be imputed to the Bank Directors than to be stated as the effect of a new system, of which, however it originated or was rendered necessary as a temporary expedient, it might have been well if Parliament had sooner taken into view all the consequences. When your Committee consider that this discretionary power of supplying the kingdom with circulating medium has been exercised under an opinion that the paper could not be issued to excess if advanced in discounts to merchants in good bills payable at stated periods, and likewise under an opinion that neither the price of bullion nor the course of exchanges need be adverted to, as affording any indication with respect to the sufficiency or excess of such paper, your Committee cannot hesitate to say that these opinions of the Bank must be regarded as in a great measure the operative cause of the continuance of the present state of things.