096i
 
 THE LIBRARY 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 LOS ANGELES
 
 \ \
 
 , /
 
 THOUGHTS 
 
 SEPARATION OF THE DEPARTMENTS 
 
 BANK OF ENGLAND. 
 
 BY SAMUEL JONES LOYD. 
 
 LONDON: 
 PELHAM RICHARDSON, 23, CORNHILL. 
 
 1844. 
 [Price One Shilling.]
 
 Marchant, Singer, and Smith, Printers, Ingram-court, Fenchurch-street.
 
 6%t 
 
 I'he following remarks were drawn up and 
 printed in the year 1840. At that time they 
 were used only for private distribution ; but as 
 the question to which they refer has, during the 
 present Session of Parliament, occupied a large 
 share of the public attention, I now venture to 
 submit them, with slight alteration, to more 
 general perusal. 
 
 The arrival of the period at which it is com- 
 petent for Parliament to revise the Charter of the 
 Bank of England has afforded to Sir Robert Peel 
 the opportunity for bringing forward a measure, 
 in which it is proposed to carry out the prin- 
 ciples advocated in the following pages, to a 
 greater extent than, at the time of writing them, 
 I could venture to anticipate. This measure has 
 received the generous and cordial approval of 
 the most distinguished men of opposite parties ; 
 and the readiness with which the Directors of 
 the Bank of England have acquiesced in it, 
 clearly proves their confidence in the practica- 
 bility and safety of its provisions. It has been 
 justly described by its author as the complement 
 
 A 2 
 
 CJ;^:
 
 of the Bill of 1819; as the further step which 
 was necessary, to render that measure complete, 
 and to give to the public every possible security 
 for the effectual maintenance of specie pay- 
 ments. This is the true object of the measure ; 
 and by its efficacy or otherwise in this respect, 
 the success or failure of the measure ought to be 
 tested. 
 
 To guard against commercial convulsions is 
 not the direct or real purpose of the Bill. To 
 subject the paper issues to such regulation as 
 shall secure their conformity in amount and value 
 with, and consequently their immediate converti- 
 bility at all times into, metallic money, is the 
 purpose to which the provisions of the measure 
 are avowedly directed ; and if the Bill further 
 exerts any indirect influence in restraining the 
 oscillations of commercial excitement or the fluc- 
 tuations of prices, it can only do this to the ex- 
 tent to which mismanagement of the circulation 
 has hitherto under the existing system been the 
 means of originating or fomenting these evils. 
 It has, however, been urged as an objection to 
 this measure, that it will not eff'ectually prevent 
 the recurrence of commercial revulsions. The 
 answer to this cannot be so well given as in the 
 words of one of the ablest supporters of the 
 measure ; to whose unwearied industry, singu- 
 larly acute perception, and sound philosophic 
 views, as Chairman of the Parliamentary Com-
 
 5 
 
 mittee of Inquiry, the public are mainly in- 
 debted for the successful conduct of that inves- 
 tigation, and for whatever public benefit may 
 result from it. " I anticipate from the adoption of 
 this measure a less fluctuation in the amount of 
 the circulation — a less fluctuation in the range of 
 prices; but I am not so unreasonably sanguine as 
 to suppose that it will put an end to all speculation 
 and to all miscalculation in commercial matters. 
 Prices will necessarily vary, according to the rela- 
 tive supply and demand for commodities at various 
 times. Speculators will make mistakes in their 
 calculations as to the amount of the supply and 
 the urgency of the demand. Prices may be un- 
 naturally forced up, and individuals may be 
 ruined in the collapse. All this cannot be put 
 an end to, so long as competition exists in trade, 
 and hope of gain influences human minds ; but 
 it is no reason why we should not remedy what 
 is in our power, because we cannot attain every 
 thing. We can prevent an additional stimulus 
 being given to a rise of prices and undue specu- 
 lations by the influence of an ill-regulated cur- 
 rency ; and this it is the duty of the legislature 
 to attempt." 
 
 Another objection has been stated : — That the 
 Bill will unduly contract the circulation of the 
 country, and deprive all classes of that accom- 
 modation which is requisite for the prosperity of 
 their respective pursuits. Those who urge this
 
 objection either omit to state their real views, or 
 they object to the measure on false grounds. If 
 they intend to object to that degree of contrac- 
 tion of the circulation, which, under any system 
 of management, may be necessary for the secu- 
 rity of specie payments, and are prepared to 
 abandon the maintenance of our standard of 
 value, let them at once openly and explicitly 
 avow their purpose. The public mind, I believe, 
 is made up on that point, and will not sanction 
 their views. The evil consequences of having 
 once consented by suspending cash payments to 
 abandon our frxed standard of value, and the 
 almost insuperable difficulty of effecting a return 
 to a sound state, are now well understood. Whilst 
 the recollection of these remains fresh in the 
 public mind, no proposal for a repetition of so 
 fatal an experiment will be listened to. 
 
 But, if they mean that the present Bill will cause 
 a contraction more extensive or more inconvenient 
 than that which has been found necessary under the 
 present system for the protection of the bullion, 
 the obligation of establishing this assertion by 
 direct proof rests with those who urge the ob- 
 jection. I refer to the following pages for the 
 reasons by which I am led to the conclusion that 
 such apprehensions are destitute of any real 
 foundation ; and that the public may justly anti- 
 cipate, under the operation of this Bill, a dimi- 
 nution, rather than an increase, of the incon-
 
 venience and pressure which have usually cha- 
 racterised the last stages of a drain of bullion. 
 
 The present system, equally with that which it 
 is proposed to substitute for it, recognises the 
 necessity of protecting the convertibility of the 
 notes by contraction of circulation ; the only 
 point in doubt is, by which system will the ne- 
 cessary result be accomplished with the least 
 contraction of circulation, and therefore with 
 the least inconvenience and pressure on the 
 public. Hitherto contraction of circulation has 
 usually been delayed till the effect of adverse 
 exchanges has been long in operation, and the 
 amount of bullion has been seriously diminished. 
 This has been done, if indeed with any definite 
 purpose, in the hope probably that the mere 
 payment and export of bullion would prove suf- 
 ficient to correct the exchanges, and to stop the 
 drain ; without any corresponding contraction of 
 circulation. Abundant experience, however, has 
 proved the futility of such expectations, which 
 are altogether of an empirical character, resting 
 upon no certain or well-defined principle. The 
 consequence of this system has been, an abrupt 
 and violent action upon credit and prices at an 
 advanced period of the drain ; and the ultimate 
 evil, exhaustion of the bullion, obviated, not 
 without great difficulty, and at the expense of 
 severe pressure upon the public. The Bill now 
 under consideration proposes to substitute a sys-
 
 8 
 
 tern of early, steady, and continuous contraction in 
 the place of that which has been late in its com- 
 mencement, sudden and violent in its operation, 
 and irregularly carried out. By this means, it seems 
 almost a matter of demonstration, that the occur- 
 rence of many circumstances, by which the in- 
 tensity and extent of former drains have been in- 
 creased, will be prevented; and that the correction 
 of those causes of drain which cannot be alto- 
 gether obviated, will be brought into operation 
 in an earlier stage of the drain, and will there- 
 fore be effected with less contraction of the circu- 
 lation, and consequently with less inconvenience 
 to the public. 
 
 Many other ingenious objections have been 
 brought forward in the course of these discus- 
 sions. Country Banks, it has been said by some, 
 and even the Bank of England, cannot arbi- 
 trarily increase the amount of circulation. Com- 
 petition accompanied by convertibility is an 
 effectual and sufficient regulator of the issues — 
 an increase in the amount of paper issues does 
 not increase the purchasing power, and therefore 
 does not necessarily raise prices — a restriction of 
 the amount of paper issues will not necessarily 
 involve a restriction of credit or of the general 
 power of purchasing — it will only cause an in- 
 creased resort to other forms of credit— specu- 
 lation, when such is the disposition of the com- 
 munity, will have its way, and in spite of all
 
 artificial regulations it will find the means of 
 gratifying itself. 
 
 It is not necessary to investigate the separate 
 fallacy upon which each of these arguments 
 depends. This has been done with great 
 acuteness and perspicuity in a short tract which 
 has recently proceeded from the pen of Colonel 
 Torrens, and to which those may safely refer 
 who wish to pursue more refined and abstract 
 discussions on points connected with this subject 
 than it is the purpose of these remarks to enter 
 upon. One general answer, however, may be 
 given to all of them. 
 
 Since the resumption of cash payments in 
 . IS 19, the power of converting the notes into 
 specie on demand, and consequently the stability 
 of our monetary system, has on several occasions 
 been brouoht into imminent dano-er. The Bank 
 has been reduced, by the continued demand for 
 gold, to the last extremity ; and the actual sus- 
 pension of its payments in specie, and conse- 
 quently the entire derangement of our monetary 
 system, has been obviated rather by some for- 
 tunate accident or chance remedy than by the 
 certain operation of any definite principle. With 
 a metallic circulation no danger of total exhaus- 
 tion of the gold could arise. As a portion 
 of the metallic money was exported, the quan- 
 tity of that which remained being diminished, 
 the value of it would be proportionately increased ;
 
 10 
 
 and consequently a limited proportion only of 
 the gold in circulation could be drawn out of the 
 country by any foreign demand. The effect of 
 an adverse exchange must be the same when it 
 acts upon a mixed circulation of gold and paper ; 
 provided this mixed circulation is so regulated 
 that the amount of it necessarily varies as the 
 amount of a purely metallic circulation would 
 vary. The danger therefore to which our mone- 
 tary system has been exposed, and the public in- 
 convenience and alarm which have accompanied 
 that danger, must have arisen from the fact, that 
 the aggregate paper circulation of the country 
 has not been so regulated as to secure a con- 
 formity in the fluctuations of its amount with 
 what would have been the fluctuations in the 
 amount of a metallic circulation. To establish 
 such regi'ulations as shall obviate this defect is the 
 object of the Bill now before Parliament. The 
 issues of the Bank of England will, under the 
 provisions of that Bill, be made to conform 
 strictly to the fluctuations of the bullion ; whilst 
 the possible irregularities of the Country issues, 
 so far as England is concerned, will be restricted 
 within narrow limits. The regulation, upon 
 similar principles, of the paper issues of Scot- 
 land and Ireland remains a matter for future 
 legislation. The Bill therefore, though not ab- 
 solutely complete in all its provisions, goes far 
 towards placing the circulation of the country
 
 11 
 
 upon a sound basis, and thus affords important 
 additional guarantees for the effectual mainte- 
 nance of our established standard of value. 
 
 The Bill of 1819 restored the depreciated 
 currency of the country to its just value — moneta 
 in justum valorem restituta — and the present 
 measure gives further strength and security to 
 that settlement, by removing those unsuspected 
 sources of danger w^hich subsequent experience 
 has developed. Public gratitude is due to the 
 Minister w^ho has had the integrity and courage 
 successively to introduce these measures, and 
 thus has placed the monetary system of the 
 country upon an honest and sound foundation. 
 Some degree of inconvenience and pressure must 
 arise under any system whatever for the manage- 
 ment of the circulation. It is the price which 
 must be paid for protection against the far more 
 serious evils which would attend a continuous 
 depreciation of the currency ; and it will, there- 
 fore, be cheerfully submitted to by every intelligent 
 and honest community. But a system of depre- 
 ciating the currency must have its limit ; it is a 
 process which cannot be carried on to an inde- 
 finite extent. Whenever that limit is reached, 
 then will necessarily commence the difficulty and 
 pressure connected with the measures requisite 
 for checking further depreciation of the currency 
 by limiting its amount. These evils cannot upon 
 any plan be ultimately avoided ; the postpone-
 
 12 
 
 ment of the necessary contraction will, however, 
 greatly increase the intensity of them ; by super- 
 inducing- that ruinous injustice to extensive classes, 
 and that general confusion and alarm, which are 
 the certain consequences of any course of action 
 which tampers with, and endangers the stability 
 of, the fixed standard of value in a country. By 
 what means the necessary regulation of the amount 
 of the issues may be enforced, how the standard 
 value of our currency may be secured against 
 every danger, with the least sacrifice on the part 
 of the public, is the question now before us. 
 The present system relies upon delay and expe- 
 dients ; it endeavours to fly from, rather than to 
 meet and overcome, difficulties ; it shrinks from 
 the prompt and manly application of the remedies, 
 painful at first but safe and effectual in the end, 
 which science dictates ; and 
 
 empirick-like, applies 
 To each disease unsafe chance remedies. 
 
 The result is shown in the following pages. The 
 crises of 1825, 1837, and 1839, are the fruits 
 which we have gathered under this system. 
 
 It is now proposed to adopt a different course. 
 The difficulty is henceforth to be met at the very 
 moment of its commencement ; and the corrective 
 measures, founded upon intelligible and well- 
 ascertained principles, are to be applied without 
 interruption, until the evil has been subdued.
 
 13 
 
 Contraction of circulation is to be made precisely 
 coincident, as regards both time and amount, 
 with diminution of the bullion ; and thus it is 
 conceived that the danger of total exhaustion, 
 which could not befal a metallic circulation, 
 will be rendered equally impossible with re- 
 spect to a mixed circulation of gold and paper. 
 The result remains to be ascertained ; but all 
 reasoning confirms the soundness of the grounds 
 upon which this experiment is founded ; and 
 justifies a sanguine expectation, that, by a close 
 and steady adherence to principle, the safety of 
 our monetary system will be more effectually 
 secured. Whatever may be the inconvenience 
 to the public involved in the measures necessary 
 for this purpose, it would be unvs^ise in the ex- 
 treme not to submit to it. There is fair ground, 
 however, to anticipate that many adventitious 
 difficulties, which have arisen out of the working 
 of the present system, will be obviated ; and that 
 the essential object of the Bill will be accom- 
 plished without subjecting the public to any 
 increase of the inconveniences which they have 
 hitherto experienced during a drain of bullion. 
 
 July 4th, 1844.
 
 No arguments are to be looked at with more suspicion than 
 those, which, from the acknowledged impossibility of attaining 
 to perfection, would infer, that it is absurd to attempt the 
 nearest possible approximation to it. If a system be erroneous, 
 the very consequences of its errors generally constitute the 
 most powerful impediment to a correction of it. But if that 
 impediment were to be held conclusive, the result would be no 
 other than this — that the errors of inadvertency when they 
 have prevailed for a certain time, are, upon a discovery of their 
 nature, to be persevered in, from deliberation and choice. — 
 Huskisson on Depreciation of the Currency. 
 
 If the currency consists partly of coin and partly of paper, 
 the excess of paper, above what the currency would be if it 
 were coin, must be an excess of currency, and naturally tend 
 to depreciation. — Huskisson s Speech on Mr. Horner s Reso- 
 lutions.
 
 THOUGHTS, 
 
 I. The only object of the proposed separation of 
 the departments of the Bank of England is, to 
 obtain an effectual security for the regulation of 
 the amount of the paper circulation of the country 
 in correspondence with the fluctuations of the 
 bullion ; such regulation being deemed to be 
 essential for the certain maintenance, under all 
 circumstances, of the convertibility of paper 
 issues into specie. 
 
 The present union of Banking functions with 
 management of the circulation, not only in the 
 same parties but in the same system of accounts, 
 is deemed to be incompatible with the accom- 
 plishment of this object, for the following reasons : 
 
 1. Because the paper circulation is thus issued 
 upon mercantile securities, and there is, therefore, 
 a very strong tendency to increase its amount 
 with rising prices and to diminish its amount with 
 falling prices ; which is the reverse of what 
 would take place with a metallic circulation. 
 
 2. Because, as the issuers also receive deposits 
 as well as issue notes, they are subjected to a 
 strong temptation to meet the demand of depo-
 
 16 
 
 sitors by an improper increase of paper issues, 
 instead of a realization of securities. 
 
 3. Because the connexion of the issuers with 
 trade and commerce creates a strong inducement 
 to aid and support public and mercantile credit, 
 during a period of pressure, by improper increase 
 of issues. 
 
 4. Because the mismanagement of the circula- 
 tion seems in almost all cases to be distinctly 
 traceable to these causes. 
 
 5. Because the union of the two functions, of 
 circulation and of deposits, is found to cause 
 inevitable confusion both in reasoning and in 
 action. This appears in the measures of the 
 Bank of England and in the defence which has 
 been made of them — similarly as regards the 
 country issues — in the confusion of ideas preva- 
 lent amongst the public respecting the connexion 
 between the amount of circulation and the 
 amount of liabilities. 
 
 " No correct notions can ever be formed upon 
 the subject of currency, unless the business of 
 issue be clearly separated in the reader's mind 
 from the other transactions which form the real 
 and legitimate employments of the Banker." — 
 Normans Remarks, p. 32. 
 
 A regulation of the amount of the paper circu- 
 lation of the country in correspondence with the 
 fluctuations of the bullion is deemed to be essen- 
 tial on the following grounds : —
 
 17 
 
 1. A metallic circulation could never be drained 
 out. Because as the drain went on, the decreased 
 amount would produce a continually increasing 
 value of the circulation ; which by its effect upon 
 the rate of interest, upon the state of credit, and 
 upon prices, would assuredly stop the drain at 
 some stage of its progress.* 
 
 2. The case will be the same with a paper cir- 
 culation, provided the paper issues be contracted 
 as the metallic money would have been. 
 
 3. But, if the paper be not contracted upon this 
 principle, the security for the certain stoppage of 
 the drain is lost. Suppose the paper circulation 
 to be thirty-six millions, against which twelve 
 millions of bullion are held in reserve. Suppose 
 further this amount of circulation to be excessive 
 as compared with the currencies of other coun- 
 tries, and that, consequently, a drain of bullion 
 ensues. 
 
 If under these circumstances the paper be con- 
 
 * This exportation of bullion can never continue long-, be- 
 cause the transmission of a comparatively small quantity of 
 that metal which forms the standard and currency of a country, 
 not only operates, like that of any other commodity, to dimi- 
 nish in so much the balance of debt to other countries ; but 
 likewise to force the exportation, and to diminish the importa- 
 tion, of all other goods ; and thus more rapidly to improve the 
 exchange, than the export of any other commodity to the same 
 amount. As the exchange improves, the exportation of bullion 
 of course ceases. — Huskisson on Depreciation of (he Currency, 
 p. 97.
 
 18- 
 
 traded as the bullion goes out, this contraction 
 will soon equalise the value of our currency com- 
 pared with that of other countries, and thus the 
 drain will be stopped.* 
 
 But, if the paper circulation be not contracted 
 in correspondence with the decrease of the bul- 
 lion, there can then be no certainty that the value 
 of the currencies will be thus equalised ; and, 
 consequently, there can be no security that the 
 bullion may not be entirely drained out. 
 
 The larger the amount of the bullion, the 
 greater, no doubt, becomes the difficulty of drain- 
 ing it out ; it will require a longer continuance 
 of the drain, or a more intense drain. 
 
 But bullion, equal to the amount of the whole 
 circulation, may be drained out, if its place be 
 continually supplied by paper issues, and the 
 total amount of the circulation be thus kept undi- 
 minished. 
 
 Thus it appears that contraction of the circu- 
 lation in correspondence with the decrease of 
 the bullion is the only measure which can 
 afford effectual security for stopping the drain of 
 bullion. 
 
 * I do not think that the suspension of cash payments was 
 at that time (1797) of absolute necessity ; 1 have never enter- 
 tained the least question but that if the Bank had continued to 
 pay, and to suppress its notes as it issued treasure, the 
 crisis would have been got over. — Tooke's Evidence, 1832, 
 Qu. 3827.
 
 19 
 
 It is equally necessary for the effectual recovery 
 of the requisite amount of bullion after it has 
 been parted with. 
 
 It may be asked of those who object to the 
 principle that a paper currency should vary 
 directly as a metallic currency, what principle 
 they would substitute for it ? 
 
 To this no satisfactory or sufficient answer can 
 be given by them. They must trust to the chap- 
 ter of accidents, and leave the stoppage of the 
 drain to depend upon circumstances over which 
 they cannot pretend to exercise any certain, 
 definite, or efficient controul. 
 
 But it is said that a large store of bullion, and 
 a continuance of the present system of acting 
 upon a blended account of circulation and depo- 
 sits, will enable the Bank of England to delay 
 the period of commencing the contraction of cir- 
 culation, and thus render it more ' convenient' 
 and ' accommodating ' to the public. 
 
 The effects of postponing the period of con- 
 traction and of subsequent expansion are very 
 important. 
 
 Contraction of circulation acts — first upon the 
 rate of interest — then upon the price of securities 
 — then upon the market for shares, &c. — then upon 
 the negociation of foreign securities — at a later 
 period, upon the tendency to enter into specula- 
 tion in conmiodities — and lastly, upon prices 
 generally. These efiects may be retarded or 
 
 B 2
 
 20 
 
 accelerated by other circumstances ; possibly 
 they may not occur precisely in the manner here 
 stated ; but this is something- like the order of 
 succession in which the effects of contraction of 
 the circulation are gradually developed. 
 
 The case is similar, when the action is in the 
 opposite direction ; that is, when the circulation 
 is increasing. 
 
 Interest is first affected ; speculation in com- 
 modities and prices are the last to be affected. 
 
 An attentive consideration of this process will 
 enable us to perceive the important difference 
 between contraction of circulation at the com- 
 mencement of a drain, and contraction resorted to 
 at a more advanced stage of the drain. And it 
 will probably lead us to doubt, whether the con- 
 venience of the public will be promoted, and the 
 severity of the action upon the rate of interest, upon 
 the state of credit, or of confidence, will in the end 
 be diminished, by any plan, which proposes to 
 mitigate the effects of contraction by postponing 
 the period of its commencement. It must be 
 observed, moreover, that to whatever extent the 
 rule of contracting the paper issues in precise 
 correspondence with the decrease of bullion is 
 suspended or modified, to that extent uncertainty 
 and danger, with respect to the convertibility of 
 the notes, are introduced. 
 
 There can be no fixed and definite rule to de- 
 termine the time and extent of the proper con-
 
 21 
 
 traction of paper circulation, except correspon- 
 dence with the bullion. 
 
 Without this rule, all must be left to the irre- 
 gularity and uncertainty of individual discretion. 
 The manap:er of the circulation must undertake 
 to foresee and to anticipate events, instead of 
 merely making his measures conform to a self- 
 acting test. 
 
 In the exercise of such a discretion, the mana- 
 ger of the circulation, be he who he may, we 
 may safely say will, in nine cases out of ten, fall 
 into error ; whilst the interests of the whole com- 
 munity, and the fate of all mercantile calcula- 
 tions, will be dependent upon the sound or un- 
 sound discretion of some individual or body ; 
 instead of depending upon their own prudence 
 and judgment, exercised under the operation of 
 a fixed and invariable law, the nature and 
 provisions of which are equally known to every 
 body. 
 
 II. Let us now proceed to examine the ma- 
 nagement of the circulation during the last few 
 years, with the view of ascertaining, if possible, 
 how far that management has deviated from the 
 course which must have been pursued under the 
 separation of the departments, and what have 
 been the effects of such deviation.
 
 22 
 
 
 Bullion. 
 
 Bank 
 Circulation 
 
 Aggregate 
 Circulation. 
 
 Country 
 Issues. 
 
 *1833, 
 Septem. • • 
 
 £ 
 11,078,000 
 
 £ 
 19,780,000 
 
 £ 
 29,932,000 
 
 £ 
 10,152,000 
 
 1835. 
 
 
 
 
 
 Septem.. • 
 December 
 
 183(S 
 
 6,261,000 
 6,626,000 
 
 18,240,000 
 17,321,000 
 
 28,660,000 
 28,455,000 
 
 10,420,000 
 11,134,000 
 
 March .. 
 June • . . . 
 Septem.. • 
 December 
 
 1837. 
 
 7,701,000 
 7,362,000 
 5,719,000 
 4,545,000 
 
 17,739,000 
 17,899,000 
 18,147,000 
 17,361,000 
 
 29,186,000 
 30,101,000 
 29,880,000 
 29,372,000 
 
 11,447,000 
 12,202,000 
 11,733,000 
 12,011,000 
 
 March . . 
 
 4,048,000 
 
 18,178,000 
 
 29,209,000 
 
 11,031,000 
 
 In the year 1837 commercial and monetary 
 pressure occurred. It is important to trace accu- 
 rately the progress of the circulation previous to 
 that period. 
 
 In September, 1833, the bullion, the Bank cir- 
 culation, and the aggregate circulation of Bank 
 and country issues, were all at their maximum. 
 
 * Since these remarks were written, further returns, more 
 accurate in detail, respecting the bullion and circulation, have 
 been furnished in the Appendix to the Report of the Com- 
 mittee on Banks of Issue, 1841. I have not, however, thought 
 it necessary to recast the above statement ; although there 
 exists some difference in actual amounts between it and the 
 later returns, there is no real difference whatever in the 
 character of the statements, or in the inferences justly dedu- 
 cible from them. I place the facts and the reasoning before 
 the public now, in the form in which they were submitted to 
 the more limited circle of my private friends in 1840.
 
 23 
 
 At the same moment the country issues were 
 at their minimum. 
 
 By the month of December, 1836, the bullion 
 had sustained a decrease of £6,533,000, the Bank 
 circulation of £2,419,000, the aggregate circula- 
 tion of £560,000, whilst in the same period the 
 country circulation had ittcreased £ 1 ,859,000. 
 
 In the following three months, viz. from Decem- 
 ber, 1836, to March, 1837, the bullion sustained 
 a further decrease of £500,000; but the Bank 
 circulation was increased £800,000. The aggre- 
 gate circulation was diminished £170,000; the 
 country circulation was diminished £1,000,000. 
 It is further to be observed, that during this 
 period, within which the bullion passed by a 
 steady and almost uninterrupted course of de- 
 crease from its maximum to its miniiyium point, — 
 a decrease of more than sii'ty per cent. — 
 
 The aggregate circulation did not vary more 
 than Jive per cent, ; and that variation was not in 
 accordance with the bullion, but very irregular- — 
 the period of maximum amount occurring when 
 the bullion had sustained a large decrease. 
 
 The Bank circulation varied tioelve per cent. ; 
 and more nearly, though by no means strictly, 
 in accordance with the bullion. The maximum 
 point corresponds with that of the bullion ; and 
 again, in December, 1836, we find the bullion 
 and the Bank circulation both at a low point.
 
 24 
 
 The following three months, however, present 
 a very different phenomenon — a farther decrease 
 of the bullion with a very large increase of Bank 
 circulation. 
 
 The country issues varied twenty per cent., and 
 with no sort of correspondence to the bullion or 
 to the Bank issues. The minimum of country 
 issues corresponds with the maximum of bullion 
 and of Bank issues (September, 1833). The 
 maximum of country issues, as also of the aggre- 
 gate circulation, occurs when the bullion has pro- 
 ceeded about half way in its course of redaction 
 (June, 1836). The country issues are again very 
 near their maximum point (in December, 1836) 
 when the bullion has sustained a serious and 
 rapid further reductio7i, and when the Bank circu- 
 lation is almost at its minimum point; and during 
 the three following months, — within which we 
 have already observed that the Bank circulation 
 underwent a most remarkable increase — we find 
 the country circulation undergoing an equally ex- 
 traordinary decrease. So that the result is, that 
 with violent and opposing fluctuations by the 
 Bank and Country circulation, between September 
 and December, 1 836, and again between Decem- 
 ber, 1836, and March, 1837, the aggregate circu- 
 lation varies but slightly, although during this 
 time the bullion, previously very much reduced, 
 continues to diminish steadily and largely.
 
 25 
 
 Such are the facts. 
 
 What are the inferences to be deduced from 
 them ? 
 
 1. That there exists no efficient connection 
 between the fluctuations of the Country Issues 
 and those of the Bank. 
 
 2. That by the conflicting action of those two 
 sources of issue, the aggregate circulation is main- 
 tained at a comparatively uniform amount, during 
 a period when the long-continued and heavy 
 drain of the bullion required a corresponding 
 contraction of circulation. 
 
 3. That consequently the aggregate circulation 
 cannot be considered as subject to any manage- 
 ment or regulation which has reference to the 
 bullion. 
 
 4. That in consequence of the absence of early 
 and steady contraction of the circulation, the 
 decrease of the bullion remains for a long time 
 unchecked, and therefore goes to a greater extent 
 than it otherwise would do ; that consequently, 
 to replace the Bank in a satisfactory position, a 
 larger amount of bullion has to be drawn back 
 to the country, and to eflect this there must be a 
 correspondingly heavier pressure upon trade and 
 upon prices, either in amount or in duration. The 
 eflect of early contraction of circulation in strict 
 accordance with the bullion, would be to keep the 
 fluctuations of the bullion within comparatively 
 small limits both as to amount and length of conti-
 
 26 
 
 nuance; and in proportion as those fluctuations are 
 rendered short in their continuance and of slight 
 amount, their pressure upon the Money-market 
 and trade, it is fair to conclude, would be light. 
 5. Had the aggregate circulation been steadily 
 contracted in correspondence with the bullion, 
 from the maximum period of both (in September, 
 1833), is there not the fairest and most reasonable 
 ground to conclude, that such timely and steady 
 contraction would have been gradual and easy in 
 its effects — that, commencing before any feeling 
 of alarm had arisen, it would have worked more 
 easily and not less effectually ; and that by put- 
 ting an earlier restraint upon the efflux of bullion, 
 it would have kept that action within smaller 
 limits, and thus probably have obviated a large 
 part of the pressure of 1837? Compare such 
 supposed contraction of the aggregate circulation 
 with what really took place. 
 
 
 
 Bank 
 
 Aggregate 
 
 Country 
 
 
 Bullion. 
 
 Circulation. 
 
 Circulation. 
 
 Issues. 
 
 1833. 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 Sept. 
 
 11,078,000 
 
 19,780,000 
 
 29,932,000 
 
 10,152,000 
 
 1834. 
 
 
 
 
 
 March • • 
 
 9,829,000 
 
 18,700,000 
 
 28,891,000 
 
 10,191,000 
 
 June* • • • 
 
 8,645,000 
 
 18,922,000 
 
 29,440,000 
 
 10,518,000 
 
 Sept. 
 
 7,693,000 
 
 19,126,000 
 
 29,280,000 
 
 10,154,000 
 
 Dec. 
 
 6,720.000 
 
 18,304,000 
 
 28,963,000 
 
 10,659,000 
 
 1835. 
 
 
 
 
 
 March . • 
 
 6,536,000 
 
 18,311,000 
 
 28,731,000 
 
 10,420,000 
 
 June 
 
 6,150,000 
 
 18,460,000 
 
 29,399,000 
 
 10,939,000
 
 27 
 
 Here is a period of two years, during which the 
 bullion suffers a continuous and heavy drain, 
 being diminished £4,928,000. The Bank circu- 
 lation is diminished £1,320,000, being a decrease 
 in proportion to that of the bullion of little more 
 than twenty-five per cent. ; and that decrease oc- 
 curring very irregularly ; not in the steady and un- 
 interrupted manner in which the bullion decreases. 
 The aggregate circulation is diminished only 
 £533,000 — or about eleven per cent, upon the 
 decrease of the bullion ; and this decrease again 
 occurred very irregularly. 
 
 The country issues increased £787,000, being 
 an increase in the proportion of about one-sixth to 
 the decrease of the bullion. 
 
 This course of things terminated in the pressure 
 and difficulties of 1837. What would have been 
 the effect of a different course? Had the Bank 
 and Country Issues been both contracted, in such 
 manner that the aggregate circulation should in 
 its fluctuations have followed the bullion ; the 
 certain and undeniable effects would have been, 
 a contraction of circulation commencing early, 
 proceeding gently and equably, acting during a 
 period when there was no alarm or apprehension 
 respecting the state of the bullion or of trade, 
 and producing a gradual, moderate, but conti- 
 nuous restraint upon confidence, rate of interest, 
 and speculation, before they had reached the 
 extent to which they were permitted to go.
 
 28 
 
 The p)vbable, if not certain, effects would have 
 been, a more early stop put to the drain of the 
 bullion ; a shorter continuance therefore of the 
 monetary and mercantile pressure ; a correction 
 of the evil before alarm had been excited, and 
 the difficulties of internal drain upon the bullion 
 had been added to those of external demand ; 
 the corrective action being regular and steady, 
 would have been more effective and less incon- 
 venient than when it is irregular and abrupt; the 
 management of the circulation being conducted 
 under a fixed rule, known to everybody, those 
 unreasonable hopes and fears, which an uncer- 
 tain course of action always produces upon the 
 minds of individuals according to their respective 
 characters, would have been obviated ; every 
 person, knowing certainly what was to be ex- 
 pected, and feeling from the beginning a practical 
 warning of it, would have taken their precau- 
 tionary measures accordingly, in due time and 
 with a steady purpose ; thus probably calm, deli- 
 berate, andj udicious preparation from 1 833 to 1 836, 
 whilst the bullion decreased from £11,000,000 to 
 £6,000,000, would have obviated the confusion 
 and despair which ensued in 1837 ; when the 
 alarm, occasioned by a very low state of the bullion, 
 acted abruptly upon an unprepared community. 
 The drain also upon the bullion having been 
 stopped at an earlier stage, the amount of bullion 
 parted with, and therefore the amount of bullion
 
 29 
 
 which it was neccessary that we should recover, 
 would have been less ; and consequently a less 
 pressure upon the mercantile world would have 
 been requisite for this purpose. 
 
 III. The next period of commercial and mone- 
 tary pressure, principally the latter, occurred in 
 1839. 
 
 Let us now examine the progress of the circu- 
 lation previous to that crisis. 
 
 
 Bullion. 
 
 Bank 
 Circulation. 
 
 Aggregate 
 Circulation. 
 
 Country 
 Issues. 
 
 1838. 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 March • • 
 June ••• • 
 Sept.**. . 
 Dec. 
 
 1839. 
 
 10,015,000 
 9,772,000 
 9,615,000 
 9,362,000 
 
 18,600,000 
 19,047,000 
 19,665.000 
 18,469,000 
 
 29,526,000 
 30,792,000 
 31,029,000 
 30,694,000 
 
 10,926,000 
 11,745,000 
 11,364,000 
 12,225,000 
 
 March .. 
 June " • • • 
 Sept. .... 
 
 8,106,000 
 4,344,000 
 2,816,000 
 
 18,298,000 
 18,101,000 
 17,960,000 
 
 30,557,000 
 30,376,000 
 29,044,000 
 
 12,259,000 
 12,275,000 
 11,084,000 
 
 The bullion was at its maMmum in March 1838, 
 and continued to decrease steadily from that time. 
 
 The Bank circulation and the aggregate circu- 
 lation continued to increase largely till September. 
 
 The country issues continued to mcre^f^e largely 
 till June, 1839; and it is remarkable that they 
 were at their minimum point when the bullion 
 was at its maximum (March, 1838) and they 
 advanced to their maximum point whilst the bul- 
 lion was undergoing a decrease of sixty iper cent. 
 (June, 1839).
 
 30 
 
 In the following three months (June to Septem- 
 ber, 1839) whilst the bullion sustained a great 
 further decrease, to an alarmingly low point, the 
 country issues at last began to decrease and 
 rapidly — whilst the Bank circulation during this 
 period remained almost undiminished. 
 
 But the most important consideration connected 
 with this period arises from a comparison of the 
 fluctuations of the aggregate circulation with 
 those of the bullion. 
 
 Whilst the bullion is reduced, uninterruptedly, 
 from 10,000,000 to 2,800,000, that is, seventij-tiuo 
 per cent. ; 
 
 The aggregate circulation is J^educed, very irre- 
 gularly, less than £500,000, i. e. under tivo per 
 cent. 
 
 Even that reduction is effected only in the last 
 quarter. From March, 1838, to June, 1839, the 
 aggregate circulation is increased £850,000, or 
 nearly three per cent, whilst the bullion is dimi- 
 nished £5,660,000, or nearly si.vty per cent. 
 
 Under these circumstances can it be a matter of 
 any surprise that the bullion was nearly exhausted? 
 What was to stop the drain? Clearly not reduc- 
 tion of the circulation; for that was increased. 
 
 If it be said that the drain was to be stopped 
 by paying away bullion until the demand for it 
 was satisfied; we must first ask, what security 
 the country could have, that any given amount of 
 bullion would be sufficient for that indefinite pur-
 
 31 
 
 pose? And second, by what process, but that of 
 contraction and pressure, is the bullion so paid 
 away to be recovered ? 
 
 Is it not better, then, by early contraction to put 
 some restraint upon the drain, and thus prevent 
 the efflux of a portion of the bullion; rather than 
 incur the risk of a total exhaustion of the bullion, 
 and the subsequent necessity of submitting to the 
 heavy pressure which must necessarily attend the 
 measures requisite for recovering back so large an 
 amount ? By this means the additional evils are 
 avoided, of general alarm, want of confidence in 
 the safety of our monetary system, internal drain 
 of gold, further pressure on the exchanges by 
 sale of English bills by foreign holders, prolon- 
 gation of the period of pressure, &c. 
 
 But what was it which in reality did put a stop 
 to the drain ? 
 
 The Bank circulation underwent no diminution 
 of any consequence ; and the decrease of country 
 issues in the last quarter cannot be considered as 
 an efficient cause, it was rather an effect. 
 
 The drain was stopped by the prevalence of 
 general apprehension and alarm, which checked 
 confidence and credit, and rendered a given 
 amount of circulation less efficient. This alarm 
 arose from a knowledge of the exhausted state 
 of the bullion, and of the heavy drain still in 
 operation ; which it might be expected would
 
 32 
 
 necessitate some extraordinary and very severe 
 measure on the part of the Bank. 
 
 Without this knowledge of the state of the 
 bullion, it is not unreasonable to believe, that the 
 public mind would have remained in a state by 
 which credit and the efficiency of the circulation 
 would have been unaffected ; and the amount of 
 the circulation being also undiminished, the drain 
 of the bullion would have continued until the 
 stock was absolutely exhausted. Hence we see 
 the importance, 
 
 First, Of the publication of the accounts of 
 the Bank, from which many persons apprehended 
 the greatest danger. It is to the knowledge which 
 the public derives from them, that we owe, in 
 a great degree, the preservation of our monetary 
 system during the year 1839. 
 
 Second, Of the one measure by which the 
 Bank of England effectually contributed to check 
 the efflux of bullion, viz. raising the rate of inte- 
 rest; because by this act she gave warning, though 
 too tardily, to the public, and strengthened and 
 confirmed that alarm which had become necessary 
 for our preservation. We thus see the value of 
 this measure, which some persons have most 
 strangely represented as having been wholly 
 inefficacious ; and also the policy of that change 
 in the law which has admitted of such a step. 
 
 It is sometimes said that a rise in the rate of
 
 33 
 
 interest is inefficacious, because it is often fol- 
 lowed by an increased demand on the Bank for 
 discounts. The answer to this is — First, that the 
 demand would probably be greater if the rate 
 were not raised. Second, and especially, that 
 the measure tends to produce a contractive effect 
 upon the country circulation, and still more on the 
 state of confidence and of the auxiliary currency 
 which rests upon that confidence. 
 
 Third, We may clearly deduce from these 
 events, the probable inefficiency of any plan for 
 enabling the Bank to soften or postpone the con- 
 traction of circulation as the bullion diminishes. 
 
 The drain must either be stopped gradually 
 by an early and timely contraction of circulation, 
 or it will in the last stage be stopped by alarm 
 approaching to panic on the part of the public. 
 
 The advantage attending the first course is, 
 that the restrictive action is early, gradual, found- 
 ed upon principle, certain in its effect, always 
 under control, its nature and its extent known to 
 everybody. 
 
 The evil attending the latter course is, that it 
 is late; that instead of preceding and preventing, 
 it springs out of, alarm; that it is uncertain in 
 the extent of its action and under no control; 
 that it acts upon an evil grown more extensive 
 and strong from longer duration, and therefore 
 requiring more severe pressure to correct it; 
 that in the very act of restraining the foreign 
 
 c
 
 34 
 
 drain, it incurs the hazard of creating an ititernal 
 drain from alarm, and also an uneasy feeling 
 on the part of foreign holders of English bills 
 of exchange, which induces them to with- 
 draw their investment from these securities, and 
 thus produces a further derangement in the state 
 of the exchanges. 
 
 Suppose that, during 1838, the aggregate cir- 
 culation, instead of increasing largely, had been 
 diminished in correspondence with the bullion, 
 and consequently had stood in December, 1838, 
 at £28,873,000 instead of £30,694,000, at which 
 we find it at that time; is it possible to doubt that 
 we should have been better prepared to face the 
 monetary difficulties of 1839, or that those diffi- 
 culties would by this means have been materially 
 diminished in their severity? 
 
 Such contraction occurring in 1838 would 
 have produced none but easy, salutary, and even 
 acceptable restraint. The expansion which oc- 
 curred instead of it, we can hardly doubt, laid 
 the ground for greater subsequent mischief; and 
 the public alarm which occurred in 1839, from 
 the absence of contraction in 1838, produced 
 greater pressure upon the money-market with much 
 less certain protection to our specie payments. 
 
 IV. From this review of the progress of the 
 circulation in connection witli the two monetary 
 crises of 1837 and 1839, it is scarcely possible
 
 35 
 
 to doubt, that those crises were intimately con- 
 nected with mismanagement of the circulation ; 
 and that a large portion of the intensity which 
 characterized them, is attributable to the non- 
 contraction of the aggregate paper circulation of 
 the country in correspondence with the decrease 
 of the bullion in its early stages. 
 
 We have the authority of Mr. Tooke in his 
 History of Prices, vol. iii. p. 90,* that " earlier 
 measures of contraction would have obviated the 
 necessity for more stringent ones later." 
 
 We have further the same authority that the 
 drains of 1782-3 and of 1795-6 were surmounted 
 and the exchanges effectually stopped by a reso- 
 lute and extraordinary degree of contraction of 
 the circulation; though they arose from payments 
 for foreign corn, support of troops, subsidies, &c. 
 -p. 71. 
 
 We have also the same authority for the neces- 
 
 * " Credit, indeed, is taken by the Bank of England, for 
 having, although at the risk of suspension, preserved the 
 commerce of the country from the injury to it which might 
 have resulted from earlier and more effectual measures for the 
 contraction of the circulation. But there is every reason to 
 believe, that earlier measures for contraction, on the part 
 of the Bank, would have obviated the necessity for more 
 stringent ones later, and that the commerce of the country 
 would now be in a more satisfactory position if the proper 
 legitimate measures for regulating the exchanges had 
 been sooner adopted." — Tooke' s History of Prices, vol. iii. 
 p. 90. 
 
 c 2
 
 36 
 
 sity of strictly maintaining paper upon a level 
 with the value of gold. " It is the business of a 
 Bank that administers a paper currency in ex- 
 change for gold, or in lieu of gold, to have no 
 other end in viev^ than that of preserving its 
 paper strictly^ correctly, and invariably upon a 
 level with the value of gold." — Tookes Evidence, 
 1832, Qu. 3830. 
 
 *' I agree with him (Mr. Mushet) in the general 
 rules which he would have proposed for the 
 management of the circulation of paper by the 
 Bank of England; he considered, as I do, that 
 when there was a drain upon its coffers, it should 
 suppress the paper in proportion as it ivas called 
 upon for the gold.'' — Ibid. Qu. 3844. 
 
 Upon the two recent occasions we have had no 
 such ' resolute contraction of the circulation,' and 
 consequently, though there have been no foreign 
 subsidies to provide for, we have had imminent 
 danger to our monetary system. 
 
 But have we avoided the other evil, pressure 
 upon the money-market and upon trade? Un- 
 doubtedly we have not. 
 
 In the management of the circulation we have 
 forborn to contract, upon the commencement of a 
 drain upon the bullion, and we have vacillated in 
 our action throughout. The consequence has 
 been the usual result of such conduct; we have 
 lost the advantages and incurred the evils of both 
 courses ; we have suffered heavy pressure, and we
 
 37 
 
 have not avoided imminent danger to our specie 
 payments. 
 
 It is not denied nor doubted by any person, 
 that contraction of the circulation in strict ac- 
 cordance with the decrease of the bullion would 
 effectually protect the bullion from exhaustion. 
 But it is contended, that such correspondence of 
 fluctuation, strictly enforced, would produce more 
 sudden and violent changes in the state of the 
 money-market and of credit than occur under the 
 present system. 
 
 " Although over-banking and over-trading 
 might not, under a rigid metallic variation, pro- 
 ceed so far as they might in the case of an ac- 
 companying increase of paper-money, the tran- 
 sition to a state of discredit, although perhaps, 
 but not certainly, within a shorter range in point 
 of time, would in some instances be more severe; 
 that is, the transition from a low to a high rate 
 of interest might be more abrupt, and to a higher 
 rate, and consequently a revulsion of credit, if 
 there had been previous over-trading, would be 
 more sudden and more severely felt." — Tooke^ 
 p. 179. 
 
 " The grounds which I have ventured to sug- 
 gest for hesitation as to the policy of adopting 
 the separation of departments, is the question, 
 whether there are not considerations oi ihe greater 
 convenieiice attending the working of the present 
 less sdeutijic system." — p. 252.
 
 38 
 
 " The more anomalous but more accommodatiiiii 
 system, which by the union of circulation and 
 deposits allows the action of the foreign exchan- 
 ges to operate upon the bullion in such a manner 
 as that, if the amount of it be of sufficient mag- 
 nitude, the money-marltet may be little if at all 
 disturbed:'—-^. 252. 
 
 The grounds upon which it may be doubted 
 whether greater occasional revulsions of credit 
 would arise from separation of the departments, 
 have been stated in the preceding remarks; those 
 who read them must form their own judgment on 
 that point. 
 
 It is however satisfactory to be able to find, in 
 the same work from which the foregoing passages 
 are quoted, some consolation under severe action 
 upon the rate of interest and the state of credit, 
 should such occur; and it is also a little curious 
 to measure the value of those considerations of 
 greater conven'wnce attending the working of the 
 present less scientific but more accommodating 
 system, by principles which are laid down in the 
 same work. 
 
 "There were periods, indeed, even during the 
 restriction on cash payments, when a rate of dis- 
 count by the Bank of eight or ten per cent, would 
 have been considered preferable to some of the 
 limitations which then prevailed ; and among 
 others, the length of the bills being confined to 
 sixty-one days, instead of the present limit of
 
 39 
 
 ninety-five days. At the same time, / am not 
 at all prepared to say that thei^e are not some 
 advantages attending this more severe mode of 
 limitation. 
 
 ** In an ambitious and enterprising- commercial 
 community, among whom there is generally a 
 tendency to outrun the due bounds of credit^ inevi- 
 tably leading to a reaction, it is desirable to hold 
 out a constant memento against the risks of over- 
 trading; and this is most effectually done by the 
 occasional recurrence of periods in w^hich there is 
 a difficulty, or at least a diminished facility, in 
 realizing the best securities.'" — p. 138. 
 
 " The claims of the public require that the due 
 regulation of the currency should not be made 
 subservient to considerations of partial conveni- 
 ence to particular branches of the trading com- 
 munity. I say partial convenience to particular 
 branches, because it cannot be too often repeated 
 that an interference with the due regulation of the 
 currency can never he for the general benefit of 
 trade.'" — p. 137. 
 
 " There is reason to believe that the trade and 
 manufactures of the country would be generally 
 in a sounder state if they depended less upon 
 what is called banking accommodation; and that 
 they have been more injured than benefited on 
 every occasion in which (except 1825) the Bank 
 has departed from its own supposed rule of re- 
 gulating its issues by the c.vchanges, in order, as
 
 ^0 
 
 alleged, to prevent mco72vemence, or discredit to 
 the commerce of the country T — p. 113.* 
 
 V. The revulsion of 1837 was tlie consequence 
 of a long preceding period of prosperity, which 
 had generated excessive credit, over-trading, and 
 over-bankino-. 
 
 These effects were exhibited more particularly 
 in excessive credits given to the United States, 
 in the negotiation in this market of American, 
 Dutch, and other foreign securities to a great 
 amount, in the rapid and excessive expansion of 
 Joint-Stock Banking in this country, and exces- 
 sive credits given by them. 
 
 * " Do you conceive that a sudden fall of prices is produc- 
 tive of less distress tl)an a gradual fall of prices ? — I am not 
 quite clear on this point. I know, however, many instances 
 in which persons have been ruined by a gradual fall of prices, 
 who would have been safe if it had been a sudden one ; 
 nothing is more injurious to parties who continue to hold than 
 a long' protracted fall. 
 
 " Is it your opinion that if the fall in prices is equal in amount, 
 it is less detrimental to commerce that it should take place a f 
 once than that it should take place gradually ? — In a very 
 large proportion of cases I should say it is better that it should 
 take place immediately ; there never is, in any particular arti- 
 cle of any trade, a sound state till the impression has become 
 perfectly general and confident in all classes of consumers that 
 the price has seen its lowest ; every body knows, who has any 
 experience in trade, that the moment such impression prevails 
 there is an end of distress among the persons concerned in that 
 particular article." — Tooke's Evidence, 1832, Qu. 3882-3.
 
 41 
 
 From 1833 to 1836 there were established in 
 England 72 Joint-Stock Banks, in Ireland 13 
 ditto. — See H. Palmer on Causes^ &c. p. 10. 
 
 Had the bullion been strictly followed as a 
 guide in regulating the amount of the paper cir- 
 culation, the check to this course of things 
 would have been applied at an early period, in 
 Sept. 1833, and would have been kept in steady 
 operation until the rectification had been effected. 
 
 But under our present more " convenient and 
 accommodating" system, the aggregate paper 
 circulation was kept at its full amount during a 
 heavy drain of bullion from September 1833 till 
 1837 ; no attempt to check that drain was made 
 through the medium of management of the cir- 
 culation : — 
 
 The result was the crisis of 1837. 
 
 The next crisis, i. e. the drain upon the bul- 
 lion in 1839, was the result of several circum- 
 stances : — 
 
 1. Large importation of foreign corn. 
 
 2. Large importation of American securities. 
 
 3. Large mercantile credits given to America. 
 
 4. Peculiar state of credit in France and Bel- 
 gium. 
 
 5. Peculiar circumstances connected with the 
 cotton speculation. 
 
 " The importation of the raw cotton had been 
 principally paid for by advances which the con- 
 signees on this side obtained upon it." — Tooke, 
 p. 74.
 
 42 
 
 Here, again, had the management of the cir- 
 culation followed the indications of the bullion, 
 the check to the importation of foreign securities, 
 to the excessive mercantile credits, and to the 
 advances made to the consignees of cotton, would 
 have been applied earlij in 1838. 
 
 Under the present system, however, the aggre- 
 gate circulation continued to increase in the face 
 of diminishing bullion, and was higher in June, 
 1839, than in March, 1838. 
 
 The result was the exhausted state of the bul- 
 lion, and the general alarm of the autumn of 
 1839. 
 
 Can it be doubted, that by applying contrac- 
 tion of circulation simultaneously with contrac- 
 tion of bullion, at the commencement of 1838, 
 the evil would have been arrested at an early 
 period, and, in that case, could never have 
 reached the height to which it attained under the 
 opposite course of procedure? 
 
 The case appears to have been the same with 
 respect to the convulsion of 1825. 
 
 1824. 
 February • 
 August • • • 
 
 1825. 
 February • 
 August ••• 
 
 Bullion. 
 
 £ 
 13,810,000 
 11,787,000 
 
 8,779,000 
 3,634,000 
 
 Bank Circulation. 
 
 £ 
 19,736,000 
 20,132,000 
 
 20,753,000 
 19,398,000 
 
 The returns of the country issues during this
 
 43 
 
 period are not given, but it is beyond all doubt 
 that they underwent a very large increase.* 
 
 Here, again, is a crisis preceded by a long 
 continued dec7xase of bullion and a large increase 
 of paper circulation. The panic of 1825 was 
 the result of this course ; but had the circulation 
 been contracted with the bullion from the begin- 
 ning of 1824, can any person entertain a doubt, 
 that the revulsion of credit in the latter part of 
 1825 would have been infinitely less sudden and 
 less severely felt ? 
 
 It ought to be observed, with respect to the 
 above statements, that, during 1834, 5, 6, con- 
 tracts were successively entered into for the sub- 
 stitution of Bank of England notes for those of 
 private issuers ; and allowance therefore, increas- 
 ing the country issues and diminishing the Bank 
 
 * Mr.Tooke, in his pamphlet of 1826 (p. 39), estimates this 
 increase to have been between six and seven millions. This 
 probably is an exaggerated estimate. 
 
 Lord Liverpool, in his speech, February 17, 1826, states the 
 country circulation to have been, 
 
 1823 £4,000,000 
 
 1824 6,000,000 
 
 1825 8,000,000 
 
 Mr. Burgess, in his evidence, (1832) qu. 5165, states that 
 " the circulation of Country Bankers was at the lowest in the 
 year 1823, and the highest in the year 1825," although he 
 estimates the increase at only 16 per cent. From these con- 
 flicting estimates it is sufficiently evident that the country 
 circulation increased largely during the period in question, but 
 that the amount of the increase cannot be exactly ascertained.
 
 44 
 
 issues pro tanto, ought to be made. — See Nor- 
 mans Remarks, p. 78. 
 
 To the aggregate circulation of the Bank of 
 England issues and the country issues, those of 
 Scotland and Ireland ought to be added. But 
 unfortunately we are without the means of ascer- 
 taining the amount of them. 
 
 We learn, however, from a statement given in 
 Mr. Norman's " Remarks," (p. 77,) that the 
 paper circulation of Ireland increased from De- 
 cember, 1833, to December, 1836, a period of 
 continuous and heavy decrease of bullion. 
 
 Circulation of Ireland, Dec. 1833, £5,081,000 
 Ditto, Dec. 1836, 5,864,000 
 
 Increase ... £ 783,000 
 
 Of the fluctuations of the Scotch issues we 
 have no means of obtaining any knowledge. 
 
 VI. By the statements, however, which are 
 before us, the following facts are established be- 
 yond the possibility of question : — 
 1. That both the convulsions of 1837 and 1839 
 were preceded by a long- continued drain of 
 bullion, lasting, in the first instance, three 
 years, with a slight interruption ; in the second, 
 eighteen months ; and, in both cases, com- 
 mencing slowly, and acquiring increased rapi- 
 dity and violence as it advanced.
 
 45 
 
 2. That in both cases the drain of bullion was 
 met by an increase of the Country Issues and 
 of the aggregate paper circulation of England ; 
 whilst the Bank circulation fluctuated very 
 irregularly, and in each case stood as high 
 when the bullion was reduced to a low point, 
 as it did when the bullion was at its maximum. 
 
 3. That in both cases the crisis was preceded by 
 a remarkable advance of the country issues 
 from a minimum to a maximum amount during 
 the drain of bullion. 
 
 4. That so far as we have any means of forming 
 a judgment of the Irish paper circulation, we 
 are led to conclude that its action was of a 
 similar character to that of the paper circula- 
 tion in England. 
 
 5. That there exists no reason for supposing that 
 the Scotch circulation differed in this respect 
 from that of England and Ireland. 
 
 6. That this conflicting action of decrease of 
 bullion with increase of circulation was, in 
 both cases, followed by a crisis characterised 
 by danger to our monetary system, extensive 
 destruction of credit, and a state of general 
 pressure and alarm.* 
 
 * Mr. Hawes, in his speech against the second 
 reading of the Bill, which he has since published, 
 asserts, in the most unqualified manner, that " no 
 tangible proof whatever has been adduced of an excess 
 of issues, or of a depreciation of the paper circulation ;
 
 46 
 
 With those events let us now contrast another 
 period, during which a decrease of bullion is ac- 
 companied by a decrease of circulation correspond- 
 
 nor has any injurious result been traced to the opera- 
 tion of the present system which can be shewn to be 
 within the reach of legislation, or which may not 
 be more safely left to be corrected by the results of 
 increased intelligence and experience." I submit to 
 his consideration the monetary events preceding, and 
 connected with, the crises of 1825, 1837, and 1839. 
 A careful investigation of these, I think, must lead a 
 candid mind, really seeking the truth, to qualify, if not 
 indeed altogether to abandon, the above assertion. 
 
 I may avail myself of this opportunity to remark that 
 the same speech (p. 19 to 23) evinces a most extraor- 
 dinary misconception of the true meaning of the rule 
 which requires " the aggregate circulation of the coun- 
 try to conform to the fluctuations of the bullion," and 
 of the results which would arise under the application 
 of that rule. The advocates of this principle contend, 
 that the ao-oreo^ate circulation should sustain an increase 
 or decrease of amount, equal to the increase or decrease 
 of the amount of the bullion ; and to produce this re- 
 sult, or something very nearly approaching it, is the 
 object of the present Bill. But Mr. Hawes interprets 
 the rule as requiring, that the increase or decrease of 
 the aggregate circulation shall be, not equal to the in- 
 crease or decrease of the bullion, but that it shall be in 
 the proportion which the total amount of the circulation 
 bears to the amount of the bullion. From this miscon- 
 ception Mr. Hawes deduces consequences, and charges 
 them upon the advocates of the rule in question, which,
 
 47 
 
 mg steadily with the bullion in its 'progi^ess, though 
 not to an equal amount. 
 
 
 Bullion. 
 
 Bank Circulation. 
 
 1830. 
 
 £ 
 
 £ 
 
 August 
 
 11,150,000 
 
 21,464,000 
 
 1831. 
 
 
 
 February • • • • 
 
 8,217,000 
 
 19,600,000 
 
 August 
 
 6,439,000 
 
 18,533,000 
 
 1832. 
 
 
 
 February • • • • 
 
 5,293,000 
 
 18,051,000* 
 
 On this occasion the drain upon the bullion 
 does not, as in all the other cases, terminate in 
 a crisis. 
 
 " Although during this period the bullion in 
 the Bank was diminished from twelve millions to 
 five millions, yet, in the progress of this reduc- 
 tion, as there was no excitement, and no undue 
 credit given by the banks in the interior of the 
 country, the interest of money graduallij rose 
 from two-and-a-half to four per cent. ; and then 
 without discredit or distrust of any kind, the bul- 
 lion returned into the coffers of the Bank, and 
 
 however, they utterly repudiate ; because such results 
 are altogether inconsistent with the principles of their 
 reasoning, and will not arise under a correct application 
 of the rule for which they contend, nor under the pro- 
 visions of the Bill against which the speech in question 
 is directed. 
 
 * See Appendix, No. 28, to Report from Select Committee 
 on Banks of Issue, 1840.
 
 48 
 
 money nearly resumed its former value." — Horsley 
 Palmer on Causes, S^c. p. 6. 
 
 In this case, it is not improbable that a com- 
 plete statement of the paper circulation of the 
 whole kingdom would show a fluctuation of 
 amount very nearly approaching to a strict cor- 
 respondence with the bullion. 
 
 It is very much to be regretted that we have 
 not the data from which to form such a table. 
 
 Enough, however, has been stated to establish 
 this very remarkable fact, 
 
 That in three out of the four occasions on 
 which the bullion has sustained a very heavy 
 drain, since the resumption of cash payments in 
 1819, the paper circulation has been increased 
 rather than diminished ; and these have all ter- 
 minated in severe pressure upon credit and trade, 
 viz. in 1825, 1837, 1839. Whilst in the remain- 
 ing case, the drain of bullion was met, from the 
 commencement, by a corresponding decrease of 
 paper circulation, and this passed off without dis- 
 credit or distrust of any kind. 
 
 VII. Upon a due consideration of these facts, 
 the public is called upon to come to a decision 
 upon two questions of the utmost importance. 
 
 First, Whether, under the existing system of 
 paper issues, the fluctuations of the amount of 
 the paper circulation of the kingdom can be pro- 
 perly regulated.
 
 49 
 
 Second, Whether a separation of the function 
 of issue from that of banking, and a consequent 
 regulation of the amount of the paper issues in 
 accordance with the fluctuations of the bullion, 
 would augment or diminish the intensity and 
 extent of those fluctuations, as well as tend to 
 secure greater or less steadiness to the state of 
 confidence and credit, and greater or less secu- 
 rity to our monetary system. 
 
 Of the practical difficulties which may attend 
 the attempt to carry on the separated departments 
 under the superintendence of the same body, 
 those only who have had experience in the 
 management of the Bank can form a competent 
 judgment. 
 
 The principle, however, of making the fluctu- 
 ations of the paper issues conform to those of the 
 bullion seems to be essential to the good manage- 
 ment of the circulation ; and without a separation 
 between the currency and banking departments 
 this principle can hardly be carried out with effect. 
 
 To form a just judgment of the manner in 
 which the regulation of the paper circulation in 
 accordance with the bullion would work; the 
 principle must be supposed to be applied, not in 
 the advanced stage of the drain of bullion, but 
 in its commencement ; before excessive confi- 
 dence and credit have continued lona: enouoh to 
 work their full measure of mischief; before the 
 drain has become nipid in its progress or has 
 
 D
 
 50 
 
 materially diminished the stock of bullion ; and 
 before a knowledge of these circumstances has 
 produced alarm and apprehension upon the public 
 mind. It is upon this early application of the 
 principle, and the steady adherence to it from 
 the outset, that the safety and efficacy of its 
 action depends. If by procrastination at the 
 outset, we once part company from principle, the 
 attempt at a subsequent stage to commence a 
 strict adherence to it may no doubt be found 
 difficult, and not free from danger. 
 
 Hence arises the importance, and, indeed, the 
 necessity, of applying the principle, if at all, to 
 the whole paper circulation of the kingdom, and 
 not to that of the Bank of England alone. If 
 the contraction of the issues of the Bank be met, 
 even temporarily, by an expansion of the issues 
 of other parties, the amount of the aggregate 
 paper circulation may be kept up during the first 
 stages of the drain upon the bullion ; and the 
 critical opportunity, at which alone the principle 
 can be brought into operation with perfect confi- 
 dence, may be lost. 
 
 VIII. One difficulty has been suggested asliable 
 to attend the plan of a strict regulation of the paper 
 circulation in accordance with the bullion, which 
 deserves attention. In this country an immense 
 mass of liabilities exist which are subject to be 
 paid on demand, and if, in consequence of panic
 
 51 
 
 or any other cause influencing a great number of 
 persons simultaneously, the payment of a large 
 portion of these liabilities should be demanded 
 at the same time, either the circulation must be 
 largely increased, or the parties liable to such 
 demands must be seriously embarrassed. 
 Upon this point it may be remarked — 
 
 1. That such panics, as are supposed in this 
 case, have usually, if not invariably, originated in 
 a bad state of the paper circulation ; and that a 
 regulation which shall secure a perfectly safe 
 and sound system of paper circulation, will by 
 so doing greatly reduce the probability of the 
 occurrence of such a panic. 
 
 2. That some loose habits of business and un- 
 guarded forms of obligation have become preva- 
 lent, in consequence of the ' accommodating' 
 nature of our paper circulation ; and that pro- 
 bably all parties would be rather benefited than 
 injured, by an increased degree of care and strict- 
 ness on these points. Institutions to receive the 
 deposits of small capitalists and allow an interest 
 upon them are no doubt highly convenient and 
 beneficial to the public ; but it admits of very 
 reasonable doubt, whether it is a safe or an ex- 
 pedient system, to prevail throughout a country, 
 of holding those deposits to an immense amount, 
 payable, not on moderate notice, but immediately 
 on demand ; an obligation which, if the demand
 
 52 
 
 be made by the mass of depositors simultaneously, 
 it would obviously be impossible to fulfil. 
 
 A little more strictness in the management of 
 our paper circulation might probably lead to 
 some more prudent regulations on this subject; a 
 change which might be effected with no incon- 
 venience, and by which probably all parties 
 would in the end be benefited. 
 
 3. That the difficulty under consideration is 
 not created by the substitution of a paper for a 
 metallic currency — it is not a difficulty peculiar 
 to a paper currency, but would equally exist with 
 a metallic circulation. 
 
 4. That in other matters we are habitually and 
 daily incurring a similar danger; without, how- 
 ever, deeming such liability to constitute a suffi- 
 cient objection to the system which necessarily 
 involves it. For example — the use of a paper 
 currency, convertible but not represented by an 
 equal amount of gold in deposit, necessarily in- 
 volves the danger, arising from panic or political 
 causes, and not from a real depreciation in the 
 value of the paper currency, of a sudden demand 
 for gold in exchange for all the notes ; which, of 
 course, could not be met on the moment. 
 
 The proper reserve of bullion is usually con- 
 sidered as one-third of the Bank of England 
 circulation, which is itself about one-half of the 
 paper circulation of the kingdom. Consequently
 
 53 
 
 the bullion seldom, even at an ordinarily full 
 period, exceeds one-sixth of the paper circulation. 
 Should panic or any other cause produce the 
 simultaneous presentation of a large proportion 
 of this paper circulation for gold, the demand 
 could not be met. 
 
 Take again the case of the Savings' Banks. 
 The Government has subjected itself to a simul- 
 taneous demand to the extent of the deposits in 
 these banks, fifteen or sixteen millions. What 
 would be the effect of such a demand should it 
 occur ? 
 
 5. If, after all, the danger is deemed to be of 
 such a nature as to require an efficient provi- 
 sion against it — this is to be found, not in a 
 general abandonment of the attempt to place the 
 management of the circulation under some fixed 
 principle ; but in that power, which all Govern- 
 ments must necessarily possess, of exercising spe- 
 cial interference in cases of unforeseen emergency 
 and great State necessity. ' 
 
 " The consequences of sudden alarm cannot be 
 measured. They baffie all ordinary calculation. 
 Cash is then withdrawn, not because the circula- 
 tion is excessive, but by the country banks and 
 the town bankers, for the purpose of meeting 
 possible demands upon them, and by the com- 
 munity at large, either directly from the Bank, or
 
 54 
 
 indirectly through the former channels, for the 
 purpose of hoarding-, from the dread of some 
 imaginary or contingent danger. In such a crisis, 
 every reduction in the amount of Bank paper is 
 so far from checking the drain, that it aggravates 
 the general distress ; because the gold which is 
 taken out of the Bank, instead of being substituted 
 in circulation for the notes withdrawn from it, is 
 for the most part locked up, and thus, in propor- 
 tion as the stagnant and straightened circulation 
 wants life and aid, it becomes every day more 
 embarrassed, whilst each new calamity produced 
 by such a state of things, contributes to spread 
 and increase the general apprehension. It is 
 therefore manifest, that by a possible combination 
 of circumstances, the Bank might be driven to 
 part with its last guinea, not only without having 
 checked the drain, but with the certainty of in- 
 creasing it, in proportion as the amount of their 
 notes was diminished. At such a moment, the 
 preservation of the Bank from actual failure, 
 though an important, is but a secondary consi- 
 deration : — that of the country is the first. The 
 possible cases, however, which may call for such an 
 intervention of poiver, are not capable of being 
 foreseen or dejined by law. The necessity may 
 not occur again ; if it should, the application of 
 the remedy must be left to those icho may then be
 
 55 
 
 at the head of affairs, subject to their own respon- 
 sibiUti/ and to the judgment of Parliament '^ — 
 Huskisson, p. 147.* 
 
 * These remarks of Mr. Huskisson furnish the true 
 answer to the Memorial of some of the London Bankers, 
 in which they urged the introduction of a special clause 
 to facilitate the suspension of the operation of the Bill 
 in periods of peculiar pressure on the money-market. 
 To accede to such a request would be virtually to destroy 
 the efficacy of the measure. The commencement of a 
 drain of bullion, and consequently of pressure on the 
 money-market, is the period at which the provisions of 
 the Bill become practically important ; and unless they 
 are then strictly adhered to, the whole measure becomes 
 a nullity. A general conviction that they will not be 
 suspended on such occasions is essential, for producing 
 throughout the community that cautious forethought 
 and that healthy tone of self-reliance, upon which the 
 safety and utility of the measure must materially de- 
 pend. Any special provision, introduced into the Bill 
 itself, for suspending its application at critical periods, 
 must prove mischievous, by weakening the conviction 
 that the measure will be adhered to, and thus checking 
 the growth of the feelings and habits which are inti- 
 mately connected with its success. For all contingen- 
 cies which can be reasonably anticipated, and which 
 are susceptible of being previously defined by law, the 
 firm application of the provisions of the Bill is essential ; 
 and against the occurrence of those contingencies, which 
 are not capable of being foreseen or defined by law, but 
 which are not altogether impossible, the Bill itself afibrds 
 the best protection which can be obtained. Should a crisis
 
 5G 
 
 ever arrive " baffling all ordinary calculation," and not 
 amenable to the application of any ordinary principle, — a 
 crisis involving the exhaustion of the bullion, but " not 
 because the circulation is excessive," — the remedy must 
 be sought, not in the previous provisions of the law, 
 but in the discretion of " those who may then be at the 
 head of affairs, subject to their own responsibihty and 
 to the judgment of Parliament." 
 
 THE END. 
 
 
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