THECONNECTIONOFTHECURRENCYWITHPRICES，ANDTHE
EXPEDIENCYOFASEPARATIONOFISSUEFROMBANKING。
BYTHOMASTOOKE，ESQ。F。R。S。
LONDON：
PRINTEDFOR。
LONGMAN，BROWN，GREEN，ANDLONGMANS，PATERNOSTER—ROW。
1844。
PREFACE。SomepartofthefollowingpageswaswrittenimmediatelyaftertheappearanceofthereportsofthecommitteeoftheHouse
ofCommonsonBanksofIssue，andthegreaterparthassincebeenputtogetherwithoutanydefiniteviewtopublication。
Thereasonwhichhasdeterminedmeinnowpublishingthemis，thatwhethertheviewsherepresentedbeassentedtoornot，
theyaresuch，Ithink，asoughtnottobewhollyoverlookedintheconsiderationofthemeasureswhichthegovernmenthas
announceditsintentionofproposingtoParliamentinthecourseofthepresentsession，withaviewtoplacingthebankingsystemoftheUnitedKingdomonanunprovedandpermanentfooting。SomeofthepointswhichIhaveendeavouredtoestablishmayprobablybethoughtnottobemadeoutwithsufficient
fulnessofexplanation，anddoubt—lessonseveralofthetopicsamoreexhaustiveprocessofproofandillustrationmightbe
requiredforthepurposeofanticipatingandansweringobjections。Butsuchaprocesscouldnotbecomprisedwithinareadablecompass。Itwouldrequireabookinsteadofapamphlet。Thenecessityforcompression，whichIfeeltobethusimposeduponme，haspreventedmefromtouchingatallupontopics
whichareofimportanceandconnectedinsomepointsofviewwiththesubjectherediscussed，buttowhichjusticecouldnotbedoneinanincidentalnotice。Oneofthegreatdifficultiesofdealingwiththesubjectabouttobediscussed，asindeedinmostcasesofcontroversy，butin
thismorethaninmostothers，arisesfromtheuseofthesamewordsindifferentsenses。Nottomentionthemootedpoints，
astowhetherdeposits，bankers’cheques，andbillsofexchangeshouldbeconsideredasmoneyorcurrency;becausethese
involveratherdefinitionandclassifi—cation，accordingtothepurposesforwhichtheyaresupposedtobeemployed，thanthatlooseandam—biguoususeoftermstowhichIallude。Thisconsistsinashiftingofthemeaningoftheterm，whenappliedindiscriminatelyinthesameargumenttodesignatethingsandprocessestotallydistinct。Itwillbeseeninthecourseofthisdiscussionhowmuchoftheobscurityandperplexityanderror，inwhichtheobjectsof
inquiryareinvolved，maybetracedtothevagueandambiguouslanguagecommonlyemployedintreatingofthem：suchfor
instanceas\"goldandsilver，\"\"thepreciousmetals，\"and\"bullion，\"usedindiscriminatelyandsynonymouslywith\"money\"
and\"currency;\"theterms\"moneyandcurrency\"employedwhen\"capital\"ismeant。\"Issuesofpaper，\"meaningbanknotes，
formereadvancesofcapitalwherenobanknotespass;the\"valueofmoneyorcurrency，\"fortherateofinterestor
discount。\"Abundanceandcheapness，orscarcityanddearnessofmoney，\"tosignifyalowerorahigherrateofinterest，ora
tendencytoeither。And\"expansionandcontractionofthecurrency，orofthecirculation，\"whenundueextensionofcredit，anditsconsequentrevulsion，wouldbethecorrectdescriptionofthefactsofthecase。Theinstancesinwhichconfusionandinconsistencyinreasoningmaybetracedtothislooseandambiguoususeoflanguage
areinnumerable;andifIcouldhopethatbydirectingattentiontothesourcesoferrorsopointedout，andthusinducemore
careanddistinct—nessofphraseology，soastorenderfuturediscussionsonthesubjectmoreintelligible，andconsequently
tonarrowthegroundsfordifferenceofopinion，Ishouldconsiderthatmylabour，inthispublicationhasnotbeenthrown
away，evenalthoughIshouldfailofgainingassenttotheconclusions，oranypartofthem，whichIhaveendeavouredto
establish。
London，March，1844。
ANINQUIRY
intoTHECURRENCYPRINCIPLE，ETC。ETC。
INTRODUCTION。ItwasheldbymostwritersofanyauthorityonthesubjectoftheCurrency，tillwithinthelastfewyears，thatthepurposesof
amixedcirculationofcoinandpaperweresufficientlyanswered，aslongasthecoinwasperfect，andthepaperconstantly
convertibleintocoin;andthattheonlyevilstobeguardedagainstbyregulation，werethoseattendingsuspensionof
paymentandinsolvencyofthebanks，alargeproportionofwhichblendanissueofpromissorynoteswiththeirother
business。This，inpointoffact，iswhatisunderstoodingeneraltermsasthebankingprinciple，andisthatuponwhichoursystemofcurrencyisconstructedandconducted。Butanewcanonofcurrencyhasoflatebeenpromulgatedbypersonsofnomeanauthority。Accordingtotheseauthorities，
itisnotsufficientthatthebanknotesshouldbeatalltimesstrictlyconvertibleintocoin，andthatthebanks，whetherissuing
ornotissuing，shouldbesolvent;theyconsiderthatapurelymetalliccirculation（exceptingonlyasregardstheconvenience
andeconomyofpaper），isthetypeofaperfectcurrency，andcontendthattheonlysoundprincipleofamixedcurrencyis
thatbywhichthebanknotesincirculationshouldbemadetoconformtothegold，intowhichtheyareconvertible，notonly
invalue，butinamount;thatistosay，thatthebanknotesbeingsupposedtobeasubstitute，andtheonlysubstitute，forso
muchcoin，shouldvaryexactlyinamountasthecoinwouldhavedoneiftheCurrencyhadbeenpurelymetallic;andthat
thetestofgoodorbadmanagementisnot，asisconsideredunderthemerebankingprinciple，intheextentorproportionof
reserveintreasureandinimmediatelyconvertiblesecuritiesheldbythebanks;butinthedegreeofcorrespondencebetween
variationsintheamountofbullion，andvariationsintheamountofbanknotesincirculation。Aregulationoftheissueofbanknotes，inconformitywiththisdoctrine，isnowunderstoodtobedesignatedastheCurrencyprinciple。Withaviewtotheapplicationofthisprincipletopractice，ithasbeensuggestedthateitheranationalbankshouldbe
establishedundercommissioners，whosedutyandfunctionsshouldbeconfinedtotheexchangeofpaperagainstgold，andof
goldagainstpaper，forallbeyondafixedamountofpaperissuedagainstsecurities;orthattheBankofEnglandshouldbethesolesourceofissue，underthestrictestruleofseparationofthefunctionsofissuefromthemerelybankingdepartment。Theargumentsurgedinfavourofsuchseparationhave，asitshouldseem，madeconsiderableimpressiononthepublicmind，
andschemesfoundeduponthisprinciplehavebeenstronglypressedontheattentionofgovernment，onthegroundnotonly
ofguardingagainstthedangerofsuspensionandinsolvencies，butofimpartingmoreconfidenceandstabilitytocreditand
trade，andofsecuringgreatersteadinessinprices，andthusobviatingorabatingthealternationsoffeverishexcitement，and
theextremeofdepression，whichhaveprevailedundertheexistingsystem，andwhichareimputedtoaneglectoftheCurrencyprinciple。Thequestionwhethertheconstantconvertibilityofthepapercan，orcannot，bepreservedandmaintainedunderaprudent
management，ontheexistingfootingofaunionofissueandbanking，willbeconsideredhereafter。But，waivingforthe
presentallconsiderationofthequestionofsecurityagainstsuspensionandinsolvencies，itisdesirabletoexaminethe
groundsonwhichitiscontendedthatotherevils，besidesthedangerofnon—convertibilityandinsolvenciesofbanksofissue，
ariseoutof，thepresentsystemascomparedwiththecurrency—principlesystem，andthatthetestofgoodorbad
managementofthecountrybanksofissueconsists，notintheamountoftheirreservesingoldandavailablesecurities，
comparedwiththeirliabilities，butintheconformityofthevariationsoftheircirculationtothoseofthecirculationofthe
BankofEngland;whilethetestofthemanagementoftheBankofEnglandisintheconformityofthevariationsinthe
amountofitscirculationtothoseoftheeffluxorinfluxofthepreciousmetals。
CHAPTERI。
STATEMENTOFTHECURRENCYPRINCIPLE。ThetheoryoftheCurrencyprinciplenumbersamongitsadvocatesmanydistinguishednames。Thefullestandmostelaborate
statementsofit，however，aretobefoundinthepublicationsofMr。Norman，Mr。Loyd，andColonelTorrens，andinthe
evidenceofthetwoformergentlemenbeforetheCommitteeoftheHouseofCommonsonBanksofIssuein1840。I
thereforeavailmyselfmainlyoftheirexpositionofthedoctrine，andtheirargumentsinsupportofit，asaffordingthebest
groundsforanexaminationofthetheory，andofthepracticerecommendedasanapplicationofit。Thefollowingextract
fromMr。Norman’sevidenceconveysaconcisestatementofthetheory，andoftheproposedapplicationofit，astheonly
soundruleforthepaperportionofthecurrency，namelybanknotes，whichhelimitstothosenoteswhichareinthehandsofthepublic：\"Iconsiderametalliccurrencytobethemostperfectcurrency，exceptsofarasrespectsinconvenienceinsomerespects，
andcost。Ineverythingelseametalliccurrencyisthemostperfect，andshouldbelookeduponasthetypeofallother
currencies;andasfromtheirsuperiorconvenienceandgreatercheapness，banknotesareintroducedtosupplytheplaceofa
certainportionofmetalliccurrency，Ithinkthatbanknotesshouldbesomanaged，thattheyshouldpossessalltheother
attributesofametalliccurrency，andamongthoseattributes，Iconceivethemostimportanttobetbattheyshouldincrease
anddecreaseinthesamewaythatametalliccurrencywouldincreaseanddecrease。Idonotthinkitispossibletoimproveuponametalliccurrency，exceptinthetwopointsofconvenienceandcheapness。\"（1）Mr。Normanafterwardsexplained，thatbyconveniencehemeanttheeasiertransfer，andbycheap—ness，theeconomyofusingthelesscostlymaterial;sothatthepaper，thusregulated，wouldbesofaranimprovementonametalliccurrency。Thefollowingarethechief（2）evilswhichpresentthemselves，accordingtoMr。Norman’sview，inourexistingpaper
circulation，fromitsnotconformingtosuchrule：
1。Atendencytovary，bothastoexcessanddeficiency，inanunnecessarydegree，andatunsuitableperiods。
2。Aliabilitytodiscredit，bothmercantileandpolitical，inalargeportionofit，ifnotthewhole。
3。Temporaryorpermanentinsolvencyonthepartofmanyoftheissuers。
Mr。Loydinhisevidencegivesthefollowingviewoftheinconvenience，whichheascribestothepresentsystem：
Q。2748。\"Arethereanyotherevilsbesidesthedangerofnonconvertibilitythatariseoutofthepresentsystem？\"A。\"Therecanbenodoubtaboutit;thestateofthecirculationhasaverydirecteffectuponthestateofcredit，of
confidence，ofprices，andofbanking;andifthestateofthecirculationbeallowedtobecomeanunnaturalone，unnatural
andperniciouseffectswillbeproduceduponallthose。Ifyourcirculationissubjecteithertodepreciationfromexcessofits
amount，ortoviolentfluctuationsofamount，thenundoubtedlythatwillbefollowedbycorrespondingeffectsupon
confidence，uponcredit，uponprices，uponbanking，andsoforth。Thosethingsarealsoaffectedbyotherconsiderations。I
donotseethatitispossibletoanalysetheeffects，andtoattributetoeachcauseitsrespectiveshareinproducingthose
effects;allthatcancertainlybeunderstoodis，thatifyouregulatethepapercirculationuponsoundprinciples，youmaybequitesurethatyouhavethenremovedthatportionoftheevileffectswhichwasattributabletothewantofdueregulation。\"Byanunnaturalstateofthecirculation，andthewantofdueregulation，mustbeunderstood，inthesenseinwhichMr。Loyd
usestheterm，anon—conformityoftheamountofbanknotestotheamountofbullion。
CHAP。II。
MODEOFOPERATIONOFAMETALLICCIRCULATION。Admitting，forthesakeofargument，thatametalliccirculationisthetypeofaperfectcurrency，itshouldseemthatthosewhoconfidentlypronounceittobeso，labourunderamostegregiousmisconceptionofwhattheworkingofitwouldbe。UponthegroundswhichIhavenowtostate，itwillbeevidentthattheoperationofaperfectlymetalliccirculationwould
notbeattendedwiththeadvantageswhichtheycontemplate;nor，ontheotherhand，withthedisadvantageswhichmightbeappre—hended，ifitweretoworkastheyseemtoimagineitwould。AccordingtotheCurrencyprinciple，everyexportofthepreciousmetalsunderametalliccirculation，wouldbeattended
withacontractionoftheamountandvalueofthecurrency，causingafallofprices，untilthedegreeofcontractionand
consequentfallofpricesshouldbesuch，asbyinducingadiminishedimportandincreasedexportofcommodities，tocausea
refluxofthemetalsandarestorationofpricestotheirproperlevel。So，ontheotherhand，aninfluxofthepreciousmetals
wouldraiseprices，tilltheyreachedalevelatwhichtheconverseoftheprocesswouldtakeplace。Thisoscillatingprocessof
ariseandfallofpriceswitheveryinfluxoreffluxofthepreciousmetals，independentlyofcircumstancesconnectedwiththe
costofproductionofcommodities，andtheordinaryrateofconsumption，wouldbeperplexingenough，andanythingbutconvenienttothecommercial，orthemanufacturing，ortheagriculturalcommunity。Theadvocates，however，ofthedoctrinecontendthat，althoughthustheoscillationsmightbemorefrequent，thescaleof
themwouldbemorecontracted，everydivergencebeingmorequicklychecked。Ifirmlybelieve，however，thatifevery
exportandimportofthepreciousmetalswereattendedwiththeeffectsimputedtothembythistheory，theinconvenience
wouldbefelttobeintolerable;andthatsomeofwhatMr。Normancallseconomisingexpedientswouldbedevisedand
appliedasaremedy。Buttheoperationwouldnotbethatwhichthetheory，asitisstatedinthefollowingpassages，
supposes：\"Itisuniversallyadmittedbypersonsacquaintedwithmonetaryscience，thatpapermoneyshouldbeso
regulatedastokeepthemediumofexchange，ofwhichitmayformapart，inthesamestate，withrespecttoamountandto
value，inwhichthemediumofexchangewouldexist，werethecirculatingportionofitpurelymetallic。Now，itisself—
evident，thatifthecirculationwerepurelymetallic，anadverseexchange，causinganexportationofthemetalstoanygiven
amount，wouldoccasionacontractionofthecirculatingcurrencytothesameamount;andthatafavourableexchange，
causinganimportationofthemetalstoagivenamount，wouldcauseanexpansionofthecirculatingcurrencytothesame
amount。Ifthecurrencyofthemetro—polisconsistedofgold，anadverseexchange，causinganexportationofgoldtothe
amountof1，000，000l。，wouldwithdrawfromcirculationonemillionofsovereigns。\"TORRENS。LettertoLordMelbourne，pp。29，30。\"Theamountoftheimportorexportofthepreciousmetals，isaprettysuremeasureofwhatwouldhavebeentheincreaseordecreaseoftheamountofametalliccurrency。\"S。J。LOYD。FurtherReflectionsontheCurrency，page34。AndMr。Norman，afterexplainingthemannerinwhichtheexchanges，asbetweentwocountries，AandB，mayberendered
adversetoA，soastocauseanexportofcoinorbullion，goesontosay\"TheexportofcoinandbullionwillcausegeneralpricestofallincountryA，andtoriseinB，supposingthedebttoBnotto
besoonerdischarged，untilitbecomesmoreadvantageoustoexportgoodsthanmoney。\"LettertoC。Wood，Esq。M。P。，p。17。Inthesepassages，andmanymorethatmightbecited，itisassumedthatthepreciousmetals，gold，andsilver，andbullion，
aresynonymouswithcurrencyandmoney，andareconvertibleterms。Andaccordinglyeveryexportofthepreciousmetalsis
notonlyconsidered，inthesuppositionofametalliccirculation，asacontractionofthecurrencyofthiscountry;butasso
muchaddedtothecurrencyofthecountrytowhichitisexported。Suchalterationintherelativequantityofthemetalsin
therespectivecountriesfromwhichortowhichtheyaretransmittedbeing，accordingtothistheory，anabstractionor
additionofsomuchmoney;andprices，thatis，thegeneralpricesofcommodities，beingconsideredasdependingonthe
quantityofmoney，acorrespondingriseorfallofthemisassumedtobetheconsequence。Inthisviewsomeveryimportantconsiderationsareoverlooked。Beforeenteringuponthem，however，Imustpremise，thatthroughoutthisdiscussionthevalueofgoldinthecommercial
worldisassumedtobeconstant，i。e。，thatthecostofproductionandthegeneraldemandareunvaried;alsothatthetariffsof
foreigncountriesareinstatuquo，soastoconfinetheconsiderationtotheeffectsofaninfluxoreffluxofbulliononthe
currenciesoftherespectivecountries，divestedofanyreferencetodisturbingcauses，beyondthoseincidentaltothecourseoftradeandinternationalbanking。Thereis，andmustgenerallybe，inacountrylikethisorlikeFrance，astockgreaterorlessofgoldandsilver，beyondthat
whichisinuseasmoneyorasplate，orwhichisinthemint，andingoldsmiths’andsilversmiths’hands，inpreparationforuse
aseither。Thissurplusorfloatingstockmaybeconsideredasseekingamarket，whetherforinternalpurposesorforexport;
and，bethequantitygreaterorless，canitbesaidofit，ifitisexported，thattheamountissomuchabstractedfromthecurrencyofthecountry，anymorethanifanequalvalueoftinorzinc，orleadorironwereexported？Moreover，ofthatpartofthestockexistingintheshapeofcoininthiscountryitmaybeobserved，thatasthecoinageisnot
subjecttoaseignorage，theremaybe，andfrequentlyis，inthatshapeaconsiderableamountofthepreciousmetalswhich
maynotbeinthehandsofthepublic，circulatingasmoney，norinthereservesofthedifferentbanks，theBankofEngland
excepted;butmay，liketheuncoinedmetals，beseekingamarketathomeorabroad。ItmaybeinthecoffersoftheBankof
England;butheldasbullion，beingintheshapeofcoinequallyconvenientforeverypurpose，andmoreconvenientforsomepurposes，inthatform，besidesthatofservingforcurrency，thaninuncoinedgold，thatis，inbarsoringots。Theideaofgoldseekingamarket，andnotimmediatelyfindingone，mayseemstrange，andbythefirmbelieversinthecurrency—principledoctrinemaybesetdownasparadoxicalandabsurd。Goldisanobjectinsuchuniversaldemand，orinotherwordssouniversallymarketable，thatitsbeingsupposedtobekept
onhandatall，undertheuncertaintyoffindingasuitablemarketforit，appearstobeinconceivable，oralmostacontradictioninterms。Iamreadytoadmitthatgoldisacommodityinsuchgeneraldemandthatitmayalwayscommandamarket，thatitcan
alwaysbuyallothercommodities;whereas，othercommoditiescannotalwaysbuygold。Themarketsoftheworldareopen
toitasmerchandiseatlesssacrificeuponanemergency，thanwouldattendanexportofanyotherarticle，whichmightin
quantityorkindbebeyondtheusualdemandinthecountrytowhichitissent。Sofartherecanbe，Ipresume，nodifferenceofopinion。Buttherewillbefoundtobenoinconsiderabledifference，ifwedistinguishasweoughttodo，forthepurposewhetherof
theoryorpractice，betweengoldconsideredasmerchandise，i。e。，ascapital，andgoldconsideredascurrencycirculatingintheshapeofcoinamongthepublic。Mr。Senior，inoneofhislecturesonthevalueofmoney，observes，\"Thevalueofthepreciousmetalsasmoneymustdepend
ultimatelyontheirvalueasmaterialsofjewelleryandplate;sinceiftheywerenotusedascommodities，theycouldnot
circulateasmoney。\"Andhemakesaremarktothesameeffectinanarticleinthe\"EdinburghReview\"forJulylast，onFree
tradeandRetaliation。\"Theprimarycauseoftheutilityofgoldisofcourseitsuseasthematerialofplate。Thesecondarycauseisitsuseasmoney。\"Ofthetruthofthesepropositionstherecanbenodoubt。Inanewandenlargededition，justpublished，ofthatvastrepertoryofvariousandimportantinformation，\"TheCommercial
Dictionary，\"Mr。M’Culloch，afterweighingdifferentauthorities，givesthefollowingestimateoftheconsumptionofthe
preciousmetalsforpurposesdistinctfromtheiruseasmoney\"Accordingtothisviewofthematter，thepresentannualconsumptionintheartswillbetheUnitedKingdom2，500，000l。;
France，1，000，000l。;Switzerland，450，000l。;therestofEurope，1，600，000l。;inall，5，550，000l。Towhichadding500，000l。fortheconsumptionofNorthAmerica，thetotalconsumptionwillbe6，050，000l。\"Butaportionofthegoldandsilverannuallymadeuseofinthearts，isderivedfromthefusionofoldplate，theburningoflace，pictureframes，etc。\"Assumingthat，asamedium，twentypercent，orone—fifthpart，ofthepreciousmetalsannuallymadeuseofinthearts，is
obtainedfromthefusionofoldplate，weshallhave，bydeductingthisproportionfromthe6，050，0001。appliedtotheartsin
EuropeandAmerica，4，840，000l。asthetotalannualappropriationofthenewgoldandsilverdugfromtheminestosuchpurposes，leavingabout4，400，000l。ayeartobemanufacturedintocoin，andexportedtoIndia，\"etc。Mr。M’CullochestimatesthepresentannualproduceofthepreciousmetalsfromtheAmerican，European，andRusso—Asiaticmines，at9，250，000l。（3）Asthiscountryisnotonlyalargeconsumerofthepreciousmetalsforpurposesotherthanmoney，butisalsoanentrepôt
forreceivingfromthemines，anddistributingthegreaterportionofthequantityapplicabletotheconsumptionofother
countries，thebulliontrade，totallyindependentlyofsupplyingthecurrency，mustofnecessitybeveryconsiderable。In
resortingtothisentrepôtthemetalscanonlybeconsideredasmerchandiseintransit，seekingamarketforconsumptioneitherinthiscountryorabroad。Butbeyondthestockwhichisrequisiteforthispurpose，andwhichmustalwaysincludemoreorlessofsurplustomeet
occasionalextrademand，theremustbeaveryconsiderableamountofthepreciousmetalsapplicableandappliedasthe
mostconvenientmodeofadjustmentofinternationalbalances，beingacommoditymoregenerallyindemand，andlessliable
tofluctuationsinmarketvaluethananyother。Iwillnotventure，intheabsenceofanyrecognisedgroundsforcomputation，
tohazardanestimateoftheamountsorequired;butbearinginmindtheimmenseextentofinternationaltransactions;and
thevicissitudesoftheseasons，andothercircumstancesaffectingtherelativeimportsandexportsoffood，andrawmaterials，
andmanufactures，besidesthevariationsinthemarketvalueofnationalandprivatesecuritiesinterchangeable，itcannotbut
bethatthequantityofbullionrequiredtobeconstantlyavailableforthepurposemustbeverylarge;theprincipaldepositsof
itbeingintheBankofEngland，theBankofFrance，andthepublicbanksofHamburgandAmsterdam。Thesedepositsmay，moreover，insomeofthepublicbanks，beswelledbycoinswhichhavebecomesuperfluousinthecirculation。If，therefore，wetakeintoaccountthemagnitudeofthestocknecessarilyimported，partlyfortheconsumptionofplatein
thiscountry，andpartlyforthatabroad，andoftheamountrequiredasavailablefundsfortheadjustmentofinternational
balances，itmaynotbedeemedanextravagantsuppositionthattheremightoccasionallybeunderaperfectlymetallic
circulationfluctuations，withinmoderatelyshortperiods，totheextentofatleastfiveorsixmillionssterlingintheimport
andexportofbullion，perfectlyextrinsicoftheamountorvalueofthecoincirculatingasmoneyinthehandsofthepublic，
andperfectlywithoutinfluenceonthegeneralpricesofcommodities，asequallywithoutgeneralpriceshavingbeenacauseofsuchfluctuations。ItmaybeobjectedthatthequantityofbullionwhichIhavesupposedtobeindepositamongtheprincipalpublicbanksof
thecommercialworld，applicabletotheadjustmentofinternationalbalances，shouldbelookeduponasperformingthe
functionsofmoney，inrestoringthelevelofthecurrencies，whichtheveryfactofthenecessityforthetransmissionof
moneyfromonecountrytoanotherprovestohavebeendisturbed。Thisobjectionisfoundedontheassumptionthatgold
andsilveraremoneyorcurrency，anditissupposedthatthetransmissionsofbullionforthepurposesinquestionhavea
directoperationupontheamountofmoneyorcurrencyinactualcirculationintheseveralcountries。Butinthisobjection
theconsiderationisoverlooked，thatthecoinsonlywhichenterinto，thatis，formpartoftheinternalcirculationofthecountry，canbedesignatedascurrency，whilebullioncanonlybeviewedinthelightofcapital。（4）Thedistinctionbetweenbullion，asmerchandiseorcapital，andcoins，asmoneyorcurrency，maybeexemplifiedinthecase
ofcoinswhicharesubjecttoaseignorage，andincasessuchasthatofHamburg，wherethemoneycurrentforallthe
ordinaryexpenditureofincomeconsistschieflyofavarietyofforeigncoins，passingfromhandtohandataconventional
value，whileallmercantilepaymentsaremadebytransfersofcapital，depositedintheformoffinesilver，andcalled。bank—money。InsuchacaseasthatofHamburgtherehavebeen，andmustoftenagainbe，verygreatfluctuationsintheamountofsilverin
thebank，andconsequentlyofbankmoney，withoutanyobviouslycorrespondingvariationsintheamountofmoneyin
circulationforcurrentpurposesofexpenditurebythecommunity，oranyvariationasarisingfromthatcauseinthegeneral
pricesoftheircommodities。Andifaseign—oragewereimposedonthegoldcoinofthiscountryoncorrectprinciples（that
is，accompaniedbyalimitationoftender，andbyapoweronthepartoftheholderstodemandgoldbullionat3l。17s。
10絛。perounce），theremightbe，andtherewouldbe，supposingapurelymetalliccirculation，occasionallyvery
considerablevariationintheamountofbullioninthecoffersofthenationalbank，orinthehandsofdealersinbullion，
withoutnecessarilyintheslightestdegreeaffectingtheamountofthecurrencyactuallyincirculation，intheordinarydailytransactionsarisingoutoftheexpenditureofindividualscomposingthepublic，andwithoutvariationingeneralprices。Theviews，ofwhichanoutlinehasherebeensketched，distinguishingbullionasacommodity，constitutingthereadiest
meansofinternationaltransfersofcapital，fromthecurrencyemployedforinternalpurposes，willberenderedmoreclear
whenIcometopointout，asIshallpresentlyendeavourtodo，animportantdistinctionbetweenthatpartofthecirculating
mediumwhichisemployedinthetransferanddistributionofcapital，fromthatwhichisemployedintheexpenditureof
incomes，thatis，intheretailtradeofthecountry。AndIdonotnowentermorefullyintodetailastowhatIconceivewould
betheworkingofapurelymetalliccirculation，becausethatquestiondoesnotformthemaingroundofthepresentinquiry，
whichisastothesufficiencyoftheargumentsadducedinaccordancewiththetheoryofthecurrencyprinciple，infavourofanentireseparationofthefunctionsofbanksofissuefromthoseofordinarybanking。Inthedoctrinewhichitismypurposeheretoexamine，theperfectionofametalliccirculationisassumedtobebeyond
question;whiletheimperfectionofourpresentsystemofpapercredit，quiteapartfromthedangerofinconvertibility，is
pointedoutandenlargedupon，byreferencetothedegreeinwhichitisassertedtodepartfromthisassumedmodelof
perfection，amodelofwhosepropertiesandmodeofoperationthemosterroneousnotionsseemtobeentertainedby
thosewhosetitup。（5）
CHAP。III。
MISTAKENVIEWBYTHECURRENCYTHEORYOFTHEWORKINGOFTHEEXISTINGSYSTEM。Ifsufficientgroundshaveherebeenadducedtogiveriseto，atleast，asuspicionthatthepropoundersofthecurrencytheory
areunaware，orratherareunderatotalmisconception，ofwhatwouldbetheworkingofapurelymetalliccirculation，we
areinevitablyledtosuspect，orratherIshouldsaytoconclude，thattheymayanddolabourunderamisconceptionfullyas
great，notonlyastowhatwouldbetheworkingofamixedcirculationofcoinandbanknotes，administeredaccordingto
thecurrencyprinciple，thatis，soastoconformtowhattheysupposewouldbetheworkingofametalliccirculation，butastowhattheworkingofitactuallyhasbeenandisundertheexistingbankingsystem。Themisconceptionwhich，asitshouldseem，theylabourunder，maybereferredmainlytotheviewwhichtheytakeofbank
notes，asbeingessentiallydistinctinalltheirattributesandfunctionsfromeachandeveryotherofthecomponentpartsofthecirculatingmedium，andascomingexclusivelyalongwithcoinunderthedesignationofmoney。Banknotes，accordingly，theycallpapermoney，andascribing，astheydo，adirectinfluencetothequantityofmoneyonthe
stateoftrade，ofconfidence，andcredit，andonprices，theyattachgreatimportancetothefactofanyincreaseordiminution
ofbanknotesincirculation，moreespeciallyasregardsaconformity，ornon—conformity，ofsuchincreaseordiminutionto
variationsintheamountofbullion。Asthereforetheyconceivethatitisinthepowerofthebanksofissuesotoregulatethe
amountoftheirnotesincirculation，astoconformtovariationsintheamountofbullion，or，asitismorecommonlytermed，
toregulatetheirissues，bytheexchanges（inasmuchasattentiontotheexchangeswillservetoindicatewhethergoldis
cominginorgoingout，orlikelytocomeinorgoout），theyconsidertheconformityordiscrepancybetweenthefluctuations
intheamountofbanknotesincirculationandtheamountofbullioninthecoffersoftheBankofEngland，asthetestorcriterionofthegoodorbadmanagementofthebanks。Onoccasionsofmarkeddiscrepancy，thepersonswhoespousethecurrencyprinciple，andare，atthesametime，favourable
totheBankofEngland，chargethecountrybankswithcounteracting，bytheirinattentiontotheexchangesinregulating
theirissues，allattemptsoftheBankofEnglandtorestrainthegeneralcirculationwithinduebounds;whilethecountry
banks，bothprivateandjoint—stock，maintain，throughtheirorgans，thatitisnotintheirpowertodeterminewhatshallbe
theamountoftheirnotesinthehandsofthepublic。Andnotcontentwiththusrepellingthechargemadeuponthem，they
retortitupontheBankofEngland，which，accordingtothem，hasthecontroulofthewholecirculation，andexpandsorcontractstheamountaccordingassuitsitsownpurpose。Itappearstomethatneitherofthesepartiesisrightinchargingtheother;and，moreover，thatthosepersonswho，onthe
partofthepublic，judgingonlybytheCriterionsetupbythecurrencytheory，namely，bytheconformityofvariationsinthe
amountofbanknotestovariationsintheamountofbullion，chargethepresentsystemwithcausingirregularityinthecirculation，andwithalltheevilswhichflowfrombadregulation，areequallyfarfromarightjudgment。Iamquiteconvinced，andwillendeavourtoshow，thattheamountofbanknotesincirculation，thatis，outofthewallsof
theissuingbanks，andinthehandsofthepublic，furnishesnocriterionofgoodorbadmanagementbythebanksofissue，
andisnotanefficientcauseoperatingupontradeandconfidenceandcredit，anduponprices;andthat，exceptingthegreater
inconvenienceattendingtheinsolvencyofanissuingthanofanon—issuingbank，thereisnodifferencebetweenthetwodescriptionsofbanksasregardstheirinfluenceonthevalueofthecurrency。Icannothelpthinkingthatthereisalurkingimpressionamongthedoctrinairesofthecurrencytheory，arisingmainlyfrom
theiruseoftheterm\"issueofpapermoney，\"whichleadsthemtoconfoundbanknotesstrictlyconvertibleintocoin，witha
compulsoryandinconvertiblepapercurrency。Itistrue，nodoubt，thattheyareawarethattheliabilitytopaymenton
demandingoldwilleventuallycheckanyexcessofissueintheone，andwillthusdistinguishitfromtheother。Butitseems
tomeequallytrue，judgingbyalltheirexpressionsandthewholecourseoftheirarguments，thattheyaremisledbyafalse
analogy，andthatalthoughtheyadmitingeneraltermsthattheremustbeachecktothepowerofissuebyitsbeingbrought
tothetestofconvertibility，theyareofopinionthatthereisapowerineachindividualbankofissue，andinthebanksof
issuecollectively，tooperateatanygiventimeinaddingdirectlytotheamountofbanknotesincirculation，andin
withdrawingthemfromit。Thepresumptionthattheadvocatesofthecurrencyprincipleareundertheinfluenceofthis
mistakenanalogywillbestrengthenedwhenwecometotheconsiderationoftheeffectsontrade，credit，andprices，which
theyascribetotheinfluenceofthequantityofmoney，meaningbanknotesandcoin。Inthemeantimeitmaybeproperto
bestowsomeremarksonthereasoningbywhichitisproposedtobeprovedthatbanknotesdifferinallessentialproperties，
asregardstheperformanceofthefunctionsofmoney，fromallotherformsofpapercreditemployedinthebusinessof
interchange。
CHAP。IV。
DISTINCTIVEPROPERTIESASCRIBEDTOBANKNOTES。Mr。Norman，afternoticingwhathecallsthecontrivancesusuallyresortedtoforthepurposeofeitherdispensingwiththe
useofmoneyaltogether，orofdiminishingthequantityofit，whichisabsolutelyrequiredfortheadjustmentofexisting
transactions，observes，\"Onthesecontrivancesonegeneralremarkmaybemade，asitaffordsareadyandpractical，ifnotastrictlyscientific
distinctionbetweensuchsubstitutesformoney，andthatwhich，asIconceive，reallyconstitutesmoney，viz，coinandbank
notes。Ifbanknotesarewithdrawnfromcirculation，theirplacemustnecessarilybesuppliedbyanequalamountofcoin;but
theabolitionofany，orofallofthecontri—vancesfordispensingwiththeuseofmoney，willnotnecessitatetheintroductionintheirplaceofanequalamountofcoinorbanknotes。\"LettertoC。Wood，Esq。，p。34。Indealingwiththisproposition，letustryitbyputtingthecaseinthestrongestway，andsupposethattheBankofEngland
hasthepower，andisdisposedtowithdrawallitsnotesfromcirculation;or，inordertoobviatetheobjection，thatinsuch
caseotherbanksmightsupplythevacuum，letussupposethatallpromissorynotes，payableondemand，weresuppressedby
actofparliament。WouldMr。Normancontend，thatthewholeamountmustofnecessitybereplacedbycoin？Mostassuredlysuchwouldnotbetheeffect。Amoment’sconsiderationmustbesufficienttosatisfyanyonethatitwouldonlybethesmallerdenominationofnotes，
which，ifsuppressed，wouldrequiretobereplacedbycoin;thewholeofthe1l。noteswhichstillcirculateinIrelandand
Scotland，wouldrequiretobesoreplaced，andthegreaterpartofthe51。notes，andasmallpartofthe10l。notes，inthe
UnitedKingdom。
Allthelargeramountsmightbe，andmostprobablywouldbe，suppliedbychequesandbillsofexchangeandsettlements。
TheemploymentofthehigherdenominationsofBankofEnglandnotesischieflyforthefollowingpurposes：
1。Collectionofthepublicrevenue，andthepaymentofitintotheExchequer。2。Paymentsonsalesandmortgagesoflandedandotherfixedproperty。Tilllatelytheruleintrans—actionsofthisnature，
wasalmostuniformlythatthepayment，onconveyanceofthedeeds，shouldbemadeinbanknotes。Buttherehasoflate
beenatendencytorelaxthisrule，andchequesarenownotunfrequentlyreceivedinpaymentonsuchoccasions。
3。Dividendsandrentsreceivedbypersonswhodonotemploybankers。4。Paymentsfordebtsincasesinwhichthedebtorhasnotabanker，orinwhichhewouldnotbetrustedsofarastohavehis
chequereceivedinsatisfactionoftheclaim。
5。PaymentsintoCourtinlitigatedclaims。6。Reservesheldbybankers，andespeciallythoseofthewestendofthetown，andbythejoint—stockbanksinthecitywho
arenotadmittedtotheclearing—house。
7。Settlementsattheclearing—house。Nowthesearepeculiarpurposes，mostorallofwhichmightbeansweredbyothermeansthanbanknotes，andmost
assuredlynotbysupplyingtheirplacebycoin。
1。Thepublicrevenueis，inanincreasingnumberofinstances，paidintotheExchequerbydraftsontheBankofEngland。
2。Paymentsforlandedandfixedpropertyareinanincreasingnumberofinstancespaidbycheques。
3。Dividendstopersonsnotkeepingbankers，mightberetainedbythemintheshapeofwarrants。
4。and5。Involvesosmallanamount，asnotmateriallytoaffectthequestion。6。ThecirculationofBankofEnglandnotesamongbankers，whetherbetweentheBankofEnglandandthewest—end
bankers，andthecityjointstockbankers，andthecirculationofcountrybanknotes，insettlementsamongeachother，are
mereconventionaltransfersofcapital，which，with7。TheclearingsamongthebankersofthecityofLondon，mightallbeeffectedeitherbyExchequerbills，asinthecaseofthebanksofEdinburgh，orbychequesontheBankofEngland。Thecountrybanknotesabovethelowestdenominations，（whichareinuseintheretailtrade，andinthepaymentofwages，）
aremostlyemployedintheprovisionmarkets，andincattleandhorsefairs，purposesforwhich，asIshallproceedtoshow，
billsofexchangewereformerly，andmightbeagainveryextensivelyemployed。
CHAP。V。
DEPOSITSANDCHEQUES。Amongthecontrivanceswhichthecurrencytheoryallowstobethemeansofdispensingwiththeuseofmoney，althoughit
willnotadmitthattheyperfectlyperformthefunctionsofmoney，aredepositsorlodgementsinbanks，subjecttocertain
stipulationsofrepayment。IntheexaminationbytheCommitteesonBanksofIssuein1840，thereseemstohavebeena
greatwasteoftimeandtemperinthediscussionofthequestion，whetherdepositsshouldbeconsideredascurrency，andasperformingthefunctionsofmoney。Thereisanobviousobjectiontospeakingofdepositsingeneraltermsasperformingthefunctionsofmoney，inasmuchas
depositsareofdifferentdescriptionsastotheconditionsofrepaymentattachingtothem。Butsupposingthedepositstothestrictlypayableondemand，thereisstillanapparentimproprietyinascribingtothemquadepositsadirectagencyoractivity。Itsoundsoddly，tosaytheleastofit，tospeakofdepositsorlodgementsofmoneyasbeingactive。Theactivity，ifany，isin
thepaymentbychequesfoundeduponthedeposits。Itisnotthedeposits，butthetransfersofthem;or，inotherwords，the
chequesthatconstitutetheactualinstrumentsofinterchange，andeffectpaymentsconcurrentlywithbanknotes。They
performthefunctionsofmoneynotonlyasperfectlyasbanknotes，butinthedescriptionoftransactionstowhichtheyareapplicable，theyaremoreconvenientthanbanknotes。Theyobviatethetroubleofpayingfractionalpartsofthesumincoin;they，inmanycases，supersedetheuseofstamped
receipts，inasmuchasthebooksofthebankersserveasevidenceofthepayment。Theyobviatetheriskofrobberyorfire，
whichattendsthepossessionofbanknotesbypersonsnothavingtheaccommodationofstrongandfire—proofsafes。The
chequebooksofthedrawersservealsotopreserveacounterpartofalltheparticularsofthepayment，andsoassistin
tracingerrororirregularity，iftherebeany，inthepaymentorintheentryofit。Andtheuseofcrossedcheques，asfaras
regardstheLondonbankerswhoresorttotheclearing—house，admitsofthedrawersofsuchchequesadjustingtheirreceipts
andpaymentsbetweentheopeningofbusinessandhalf—pastthreeorfouro’clock，soasthattheirbankershallhaveonlythe
balancetopay，orreceive，orsetoff。Someoralloftheseadvantages，withpossiblyothers，whichmayexistandmayhave
escapedmyobservation，aresufficienttoaccountforthegreatandincreasingtendencytotheemploymentofchequesin
preferencetobanknotesinthepecuniarytrans—actionsof。themetropolisandofthemetropolitandistrict。（6）Independently
ofthegreaterconveniencewhichisfoundtoattachtotheuseofchequesinsteadofbanknotes，bypersonswhoareinthe
habitofemployingbankers，theemploymentofbankersbypersons，whethertradersornot，ofthemiddleclasses（theupper
classesofcourse，all，ornearlyall，employbankers），isdailygainingground，andthisisanadditionalcauseofthedisplacementofbanknotesbycheques。Thereiseveryreasontobelievethatamuchlargeramountofpaymentsinthemetropolitandistrictsiseffectedbydraftson
bankersthanbybanknotes。Andthecircumstancethatdepositspayableondemandarethefoundationsonwhichdraftsare
passed，suchdraftseffectingmorepaymentsthanbanknotes，seemstobethegroundonwhichthelateMr。Pageinhis
evidence（andMr。Humeinhisexaminations，hisviewsbeingidenticalwiththoseofMr。Page）con—tendedthatdepositsarecurrencyandmoreactiveinmakingpaymentsthanbanknotes。Qu……770。（Mr。Hume。）\"Asyouhavestatedthatcirculationanddepositsarebothcurrency，whichofthetwodoyou
considertobemostactiveinmakingpayments？\"
An。\"Depositsbeyondallquestion。\"Idonot，asIhavebeforehadoccasiontoobserve，concurintheproprietyofapplyingthetermcurrencytodeposits，
because，althoughsuchofthemasarepayableondemandmayanddoserveforpaymentsbythemeansoftransfer，itisthe
transfersorcheques，andnotthedeposits，which，inpointoffact，constitutetheinstrumentsofexchange。Butwhether
depositspayableondemand，oronlythedraftsagainstthem，aretobeconsideredascurrency，isimmaterialtothispartof
myargument，whichistoshowthat，asinstrumentsofexchange，cheques，orthedepositsonwhichthesearefounded，
answerthepurposesofmoney，asconvenientlyinnearlyallinstancesasbanknotes，andmoreconvenientlyinmostcases;（7）andthatthereforewhateverinfluencemaybeascribedtobanknotes，whetheronprices，orontherateofinterest，oronthe
stateoftrade，cannotbedeniedtochequesortotheirsubstratum，depositspayableondemand。
CHAP。VI。
BILLSOFEXCHANGE。Thattransactionstoaverylargeamountareadjustedbybillsofexchangehaslongbeenknownandadmittedingeneral
terms;butthevastnessoftheamountwasnotbroughtdistinctlyunderthenoticeofthepublictilltheappearanceofa
pamphletbythelateMr。Leatham，aneminentbankeratWakefield。Accordingtoacomputation，whichheseemstohavemadewithgreatcare，foundeduponofficialreturnsofbillstampsissued，thefollowingaretheresultsRETURNOFBILLSTAMPS，FOR1832TO1839INCLUSIVEBillscreatedinGreatBritainand
Ireland，foundedonreturnsofStamps
issuedfromtheStampOffice。BillAverageamountincir—culation，at
onetimeineachyear。
1832356，153，40959，038，852
1833383，659，58595，914，896
1834379，155，05294，788，763
1835405，403，051101，350，762
1836485，943，473121，485，868
1837455，084，445113，771，111
1838465，504，041116，316，010
1839528，493，842132，123，460Mr。Leathamgivestheprocessbywhich，uponthedatafurnishedbythereturnsofstamps，hearrivesattheseresults;andI
amdisposedtothinkthattheyareasnearanapproximationtothetruthasthenatureofthematerialsadmitsofarrivingat。
Andsomecorroborationofthevastnessoftheamountsisaffordedbyareferencetotheadjustmentsattheclearinghousein
London，whichintheyear1839amountedto954，401，600l。，makinganaverageamountofpaymentsofupwardsof3，000，000l。ofbillsofexchangeandchequesdailyeffectedthroughthemediumoflittlemorethan200，000l。ofbanknotes。AsillustrativeofthepositionforwhichMr。Leathamcontends，andconclusively，asIthink，thatbillsofexchangeperform
thefunctionsofmoney，heobserves，\"Foragreatnumberofyears，ithadbeenthecustomofmerchantstopaytheclothiersinsmallbillsof10l。，15l。，20l。，and
soupto1001。，drawnattwomonthsafterdateonLondonbankers。Ihavealwaysconsideredthisthebestpartofourpaper
currency，rankingnexttogold;thebillsexistingonlyforlimitedperiods，andacquiringincreasedsecurityastheypassfrom
handtohandbyendorsement。Fromtheunreasonablyhighstamplaidonsmallbillsin1815，themerchantshaveceasedto
payinbills，butpaynotesinstead，requiring2d。inthepoundforcashfromthereceiver;andIfindtherevenuehasmuchdecreasedinconsequenceinthisclassofstamps。\"pp。44，45。Mr。LewisLoyd，whenexaminedbytheHouseofLords’CommitteeontheResumptionofCashPaymentsin1819，gavethe
followingevidenceQu。9。AtthetimewhenyoubeganbusinessinManchester，in1792，werethereanycountrybankswhichissuednotesinthat
town，orinanyotherpartofLancashire？
None，Ibelieve。
10。Havethereneverbeen，atanytime，countrybanksissuingnotesinLancashire？Nonewithinmyrecollection。IbegantoresideinManchesterin1789。Therehadbeen，beforethatperiod，notesissuedthere
abouttheyear1787or1788;Ithinkbyabankwhichfailed。IbelievethatwastheonlyattemptevermadeinLancashiretill
lately，exceptthattherewaslately，andisnow，anattemptmadetoissuethematBlackburn。
11。HowhasthecirculationofLancashirebeencarriedonsincetheperiodtowhichyourefer？
WhollyinBankofEnglandnotesandbillsofexchange。
12。IstheproportionofBankofEnglandnotesveryconsiderableascomparedwithbillsofexchange？Aboutone—tenth，Ithink，inBankofEnglandnotes，andnine—tenths，atleast，inbillsofexchange。Thesebillsofexchange
circulatefrombandtohand，tilltheyarecoveredwithendorsements。
13。Isanyinconveniencefeltfromthismodeofcirculationbybillsofexchange？
Nonewhatever。
14。HasthecirculationofBankofEnglandnotesin—creasedordecreasedoflateyearsinproportiontobillsofexchange？
Ithinktheproportionofbanknoteshasincreased。
15。Towhatdoyouattributethatincrease？Partlytothegreatincreaseofthestampduties。Itiswithinmyknowledge，fromthetransactionsofmyownhouse，thatthe
suppliesofprovisions，whicharedrawnfromtheneighbouringcounties，usedtobepaidforinsmallbillsofexchange，
mostlyof10l。orlower;butnowthepersonsgoingtotheneighbouringlocalitiesforsuppliesofprovisionstakewiththem
banknotesandbankpostbills，statingthatthestampistooseriousanobjecttothemtobepaidonsuchsmallsums。Thereis
scarcelyadaywhenIdonotsend2000l。inbankpostbillsforthatpurposetoManchester，whichwehardlyeverusedtodobeforethelastadditiontothestampduty。16。Werethesebillsofexchangedrawnforspecificloansprevioustotheiremployment，orweretheybillsresultingfromantecedenttransactions？Thosewhopurchasedprovisionsusedtogotofairsandmarketswithbillsreadydrawnintheirfavour，veryoftenfor
specificsums，asfortheroundsumof10l。，justastheynowtake10l。inBankofEnglandnotesandbankpostbills。There
wasthispeculiarcircumstanceattendingthem，thatthebillswereusuallydrawnattwomonths’date，andwereconsideredas
cashpayment;theywerebillsdrawnonLondonbycountrybankers，andremittedtoLondonassuitedtheconvenienceof
thepartieswhoreceivedthem。Now，inconsequenceofhavingbankpostbillsandBankofEnglandnotes，thepersonswho
receivethebillsmakeanallowancetothosewhopaythemoftwomonths’interest。Myanswerappliestothesupplyofthe
townwithprovi—sions。NearlyalltheothertransactionsofManchester，exceptthepaymentoflabourers，arestillcarriedoninbillsofexchange，andthepaymentoflabourersismostlymadein1l。BankofEnglandnotes。Ifbyanalterationinanoppositedirection，thestampdutyonbillsofexchangewerereducedorabolished，whilethaton
promissorynotesondemandremainedthesame，andstillmore，ifitwereraised，therewouldbeaconsiderablechangeinpractice，bymakingthesmallerpaymentsamongdealersinbillsofexchangeasasubstituteforbanknotes。InaworkbythelateMr。HenryThornton，（8）whichattractedconsiderableattentionatthetime，andwhichformedthe
subjectofanarticlebyMr。Homer，inthefirstNumberoftheEdinburghReviewin1802，thereisadistinctandfull
descriptionofthemannerinwhichbillsofexchangeperformedinhistimethefunctionofmoney;adescriptionwhichis
strictlyapplicableatthepresentday。Heobserveswithreferencetobillsofexchange，\"Theynotonlysparetheuseofreadymoney，theyalsooccupyitsplaceinmanycases。Letusimagineafarmerinthe
countrytodischargeadebtof101。tohisneighbouringgrocer，bygivingtohimabillforthatsum，drawnonhiscorn—factor
inLondon，forgrainsoldinthemetropolis;andthegrocertotransmitthebill，hehavingpreviouslyendorsedittoa
neighbouringsugarbaker，inthedischargeofalikedebt，andthesugarbakertosendit，whenagainendorsed，toaWest
Indiamerchantinanout—port，andtheWestIndiamerchanttodeliverittohiscountrybanker，whoalsoendorsesit，and
sendsitintofurthercirculation。Thebill，inthiscase，willhaveeffectedfivepayments，exactlyasifitwerea10l。note
payabletobearerondemand。Itwill，however，havecirculatedinconsequencechieflyoftheconfidenceplacedbyeach
receiverofitinthelastendorser，hisowncorrespondentintrade;whereasthecirculationofabanknoteisratherowingto
thecircumstanceofthenameoftheissuerbeingsowellknownastogivetoitanuniversalcredit。Amultitudeofbillspass
betweentraderandtraderinthecountryinthemannerwhichhasbeendescribed;andtheyevidentlyform，inthestrictestsense，apartofthecirculatingmediumofthekingdom。\"Bills，sincetheycirculatechieflyamongthetradingworld，comelittleundertheobservationofthepublic。Theamountof
billsinexistencemayyet，perhaps，beatalltimesgreaterthantheamountofallthebanknotesofeverykind，andofallthe
circulatingguineas。LiverpoolandManchestereffectthewholeoftheirlargermercantilepayments，notbycountrybank
notes，ofwhichnoneareissuedbythebanksofthoseplaces，butbybillsatoneortwomonths’date，drawnonLondon。Thebillsannuallydrawnbythebanksofeachofthosetownsamounttomanymillions。\"ThelateSirFrancisBaring，writingatastillearlierperiod（1797），andofastateofthingswithinhisimmediateexperience，
refers，inthefollowingpassage，tothepracticeprevalentamongcountrybankers，ofissuingnotespayableafterdateorafter
sight，\"Inthebeginningoftheyear1793，andofthepresentyear，1797，thebanksofNewcastlestoppedpayment，whilethoseof
ExeterandoftheWestofEnglandstoodtheirground。ThepartnersinthebanksatNewcastlewerefarmoreopulent，but
theirprivatefortunesbeinginvestedcouldnotberealisedintimetoanswerarunontheirbanks。Theirnotesallowed
interesttocommencesomemonthsafterdate，andwerethenpayableondemand;bywhichmeanstheyhadnotanhourto
preparefortheirdischarge。ThebanksofExeterissuednotespayabletwentydaysaftersightwithinterest，tocommence
fromthedateofthenote，andtoceaseonthedayofacceptance。Therecanbenodoubtthatthepracticeofthebanksat
Newcastleismorelucrative，whilstitmustforever，bemoreliabletoareturnofwhathashappened。Thetwentydays
receivedatExeterfurnishesampletimetocommunicatewithLondon，andreceiveeverydegreeofassistancewhichmayberequired。\"（9）If，accordingtothecurrencytheory，thecircum—stancethatwrittenpromisestopaybeingafterdateorsight，andtoorder，
andthereforerequiringanendorsement，aredisqualifiedfrombeingconsideredasperformingthefunctionsofmoney，on
whatgroundisitthatbankpostbills，whichareaftersightandtoorder，havebeenalwaysincludedinthereturnsofthe
circulationoftheBankofEngland？Theyarebytheirformstrictlybillsofexchange，beingnotonlyaftersightandtoorder，
butcommonlyusedfortransmissionbypost;andiftheseareconsideredtobepartofthecirculation，onwhatgroundarethe
billsoftheBankofIreland，andofthecharteredBanksofScotland，andofsuchbanksthroughouttheUnitedKingdomas
areofundoubtedcredit，notincludedinthereturnofthecountrycirculation？Thisappliesindeedonlytoshort—datedbillsof
themostunquestionedcredit;longer—datedbills，ofmoredoubtfulsecurity，seemtohavebeenaloneintheviewofthose
personswhoasserttheexclusivetitleofbanknotestobeconsideredasmoney。Billsofthisdescription，thatislong—dated
bills，aresometimesnotusedforpurposesofcirculation，theyaresimplywrittenevidenceofadebtwhichisdischargedat
maturity，withoutpassingintothirdhands。Iwillnotstopnowtoenterintothedistinctionbetweenlongandshort—datedbills
inthecomparisonwithbanknotes，andbetweenbillsdrawnbybankers，andbillsbymerchantsordealersondealers。Itisa
sufficientnegativeofthemainpropositiononwhichthecurrencytheoryrests，tohaveshownthatshort—datedbillsofexchangearesubstitutesnotonlyforcoin，butforbanknotes。###第2章If，asalastresortintheargument，itbesaidthatbillsofexchangerequiretheinterventionofbanknotesfortheultimate
payment，theansweris，thatthisisamerefiction，forthatinfacttheadjustmenttakesplacebysettlement，andthatasmall
amountofbanknotesforthebalanceeffectstheliquidation，whichmightequallybeeffectedbydraftsontheBankof
England;or，asisdoneinScotland，byexchequerbills。Analterationinthestampdutieshas，asstatedbyMr。LewisLoyd
andMr。Leatham，operatedagainsttheemploymentofthesmallerbillsofexchangeinsteadofbanknotes。Ifthecasewere
reversed，thestampsloweredonbillsandraisedonnotes，weshouldseeanimmenseincreaseintheformer，andagreatdiminutioninthelatter，inotherwords，banknoteswouldbewithdrawn，andbillsofexchangesupplytheirplace。Itishardlyperhapsnecessarytoadverttothelatterpartofthepropositionquotedatpage20，viz。，thattheabolitionofany
orofallthecontrivancesfordispensingwiththeuseofmoney，willnotnecessitatetheintroductionintheirplaceofanequal
amountofcoinorbanknotes。Theresurelycanbelittledoubtbutthattheabolitionofsuchcontrivanceswouldnecessitatethesubstituteofanequalamountofbanknotesorcoin。Sufficientgroundshave，asIventuretothink，beenstatedforestablishingtheclaiminbehalfofchequesonbankers，andof
billsofexchange，tobeconsideredasperforming，concurrentlywithbanknotes，thefunctionsofmoneyforthepurposesforwhichtheyarerespectivelyused。Ifthepropoundersofthecurrencytheorywouldconfinetheirdistinctioninfavourofbanknotestothelowest
denominations，namely，the1l。noteswholly，andthe5l。and10l。notespartially，itmight，asIhavealreadyobserved，be
conceded;butthenwhatbecomesofthedogmaortheaxiomofMr。NormanandMr。Loyd，onwhichthecurrencytheoryis
madetorest？andwhatbecomesoftheinferenceswhichtheyhavedrawnastothemanagementofbanks，fromaview
exclusivelytothewholeofthecirculation，largenotesaswellassmall？Intruth，theirtestsofgoodandbadmanagement，
andtheirviewsofthepurposesandpropertiesofthewholeofthecirculatingmediumandofitscomponentparts，are
essentiallydefectiveanderroneous。Theydrawdistinctionswhicharenotrealorsubstantial，as，forinstance，ofthehigher
denominationofbanknotescomparedwithbillsofexchangeandcheques;whiletheytotallyoverlookandconfoundthe
distinctivecharacteroftheinstrumentsofinterchangewhichareusedinthedistributionandexpenditureofin—comes，as
comparedwiththatoftheinstrumentswhichareusedinthedistributionandemploymentofcapital。
CHAP。VII。DISTINCTIONOFCIRCULATIONASBETWEENDEALERANDDEALER，ANDBETWEENDEALERANDCONSUMER。Itisofthegreatestimportancetoaclearviewoftheworkingofthepresentsystemthatthedistinctivecharactersofthe
instrumentsofinterchangeshouldbeobservedanddefined。Dr。AdamSmithhasnoticedthedistinction，andhas
accordingly，inhisviewsoftheoperationofpapermoney，steeredclearoftheconfusionbetweencurrencyandcapitalwhichpervadesanddisfiguresnearlyallmodernreasoningsonthesubject。\"Thecirculationofeverycountry，\"Dr。Smithobserves，\"maybeconsideredasdividedintotwodifferentbranchesthe
circulationofthedealerswithoneanother，andthecirculationbetweenthedealersandtheconsumers。Thoughthesame
piecesofmoney，whetherpaperormetal，maybeemployed，sometimesintheonecirculationandsometimesintheother，
yetasbothareconstantlygoingonatthesametime，eachrequiresacertainstockofmoneyofonekindoranothertocarry
iton。Thevalueofthegoodscirculatedbetweenthedifferentdealerswithoneanothernevercanexceedthevalueofthose
circulatedbetweenthedealersandtheconsumers，whateverisboughtbythedealersbeingultimatelydestinedtobesoldto
theconsumers。Papermoneymaybesoregulatedaseithertoconfineitselfverymuchtothecirculationbetweenthe
differentdealers，ortoextenditselflikewisetoagreatpartofthatbetweenthedealersandtheconsumers。Whennobank
notesarecirculatedundertenpoundsvalue，asinLondon，papermoneyconfinesitselfverymuchtothecirculationbetween
thedealers。Whenatenpoundbanknotedomesintothehandsofaconsumerheisgenerallyobligedtochangeitatthefirst
shopwherehehasoccasiontopurchasefiveshillings’worthofgoods，sothatitoftenreturnsintothehandsofadealerbeforetheconsumerhasspentafortiethpartofthemoney。\"（10）Therecanbenodoubtthatthedistinctionheremadeissubstantiallycorrect。Bearinginmindthisdistinction，thereasonis
obviouswhy，asfarasrelatestotheinterchangebetweendealersandconsumers（includingthepaymentofwages，which
constitutetheprincipalmeansoftheconsumers），coin，andthesmallerdenominationofnotesservingascoin，areessential
tosuchinterchange，andwhy，consequently，ifthosesmallernotesarewithdrawn，theirplacemustbesuppliedbycoin;but
notsoasregardstheinterchangebetweendealersanddealers。Banknotesarenotonlynotessentialtothatinterchange，but
itmustbemanifesttoanyonehavingevenaslightknowledgeonlyofthemannerinwhichsuchinterchangeisconducted，that，inpointoffact，banknotesarerarelyusedinthelargerdealingsofsalesandpurchases。Thegreatbulkofthewholesaletradeofthecountryiscarriedonandadjustedbysettlementsorsets—offofdebtsand
credits，thewrittenevidencesofwhichareinbillsofexchange（includinginthattermallpromissorynotespayabletoorder
afterdate），whilecurrentpaymentsforwhatarecalledcashsalesaremostlydischargedbycheques;theultimatebalance
only，arisingoutofthevastmassofsuchtransactions，requiringliquidationinacomparativelysmallamountofbanknotes。
Theprincipalexceptionstothis，Iapprehend，areintheprovisiontrade，andinthesheepandcattleandhorsefairs，inwhich
thepaymentsaremostlymadeincoinandbanknotes;buttherecanbenoquestionthatforamountsof10l。andupwards，billsofexchangemightbe，astheyformerlywere，and，butfortheincreasedstampduty，wouldbe，substituted。Ofthefactthat，withtheexceptionofthese，andperhapsofsomefewotherwholesaletradesinwhichnocreditisgiven，
thereislittleornointerventionofbanknotesinpurchasesorsalesamongwholesaledealers，nodoubtcanbeentertained。
AndIhavenowtostatetheexplanation，whichIamnotawareofhavingmetwithamongthevariouslucubrationsonthe
subjectofthecurrencywhichithasbeenmylottosee，ofthereasonwhy，withtheexceptionsIhavepointedout，suchsales
andpurchasesareeffectedwithoutactualpaymentinmoney，which，bythecurrencytheory，isdefinedtobecoinorbanknotes。Thereasonis，thatallthetransactionsbetweendealersanddealers，bywhicharetobeunderstoodallsalesfromthe
producerorimporter，throughallthestagesofintermediateprocessesofmanufactureorotherwisetotheretaildealerorthe
exportingmerchant，areresolvableintomovementsortransfersofcapital。Nowtransfersofcapitaldonotnecessarily
suppose，nordoactuallyasamatteroffactentail，inthegreatmajorityoftransactions，apassingofmoney，thatis，bank
notesorcoinImeanbodily，andnotbyfictionatthetimeoftransfer。Allthemovementsofcapitalmaybe，andthegreat
majorityare，effectedbytheoperationsofbankingandcreditwithouttheinterventionofactualpaymentincoinorbank
notes，thatis，actual，visible，andtangiblebanknotes，notsupposititiousbanknotes，issuedwithonehandandreceivedback
bytheother，or，moreproperlyspeaking，enteredononesideoftheledgerwithacounter—entryontheother。Andthereis
thefurtherimportantconsideration，thatthetotalamountofthetransactionsbetweendealersanddealersmust，inthelastresort，bedeterminedandlimitedbytheamountofthosebetweendealersandconsumers。Thebusinessofbankers，settingasidetheissueofpromissorynotesondemand，maybedividedintotwobranches，
correspondingwiththedistinctionpointedoutbyDr。Smithofthetransactionsbetweendealersanddealers，andbetween
dealersandconsumers。Onebranchofthebanker’sbusinessistocollectcapitalfromthosewhohavenotimmediate
employmentforit，andtodistributeortransferittothosewhohave。Theotherbranchistoreceivedepositsoftheincomes
oftheircustomers，andtopayouttheamount，asitiswantedforexpenditure，bythelatterintheobjectsoftheir
consumption。Theformermaybeconsideredasthebusinessbehindthecounter，andthelatterbeforeoroverthecounter：theformerbeingacirculationofcapital，thelatterofcurrency。Thedistinctionorseparationinreasoningofthatbranchofbankingwhichrelatestotheconcentrationofcapitalontheone
handandthedistributionofitontheother，fromthatbranchwhichisemployedinadministeringthecirculationforlocal
purposesofthedistrict，issoimportantinitsbearingonthequestionofregulatingthecirculationbytheforeignexchanges，
andonthatoftheconnectionbetweenthecurrencyandprices，thatthefullestelucidationofthepracticaloperationofthat
distinctionmaynaturallyberequired。Ihave，therefore，asthebestmethodofelucidatingthispoint，drawnlargelyonthe
examinationsbytheCommitteeonBanksofIssuein1841;andifitbeobjectedthatmorethanenoughoftheevidenceis
hereadducedforthepurpose，seeingthatthepointissoclearwhensimplystated，myanswertotheobjectoris，thatsimple
andclearasthedistinctionmayappeartohim，soimbuedwerethemembersoftheCommitteewhotookaprominentpartin
theexamination，withthetenetsofthecurrencytheory，astohaveremainedapparently（judgingatleastbythereiterationof
theirquestionstothesameeffect）unconvincedofthepowerlessnessofthebanksofissuetoinfluencedirectlytheamountof
thecirculation。Andeventothisday，withallthelightofsubsequentexperience，itshouldseem，judgingbyspeechesand
publications，andthedeclamationsagainstexcessivepaperissues，whichstillappearoccasionallyonthesubject，thatthe
dogmaofthepowerofbanksofissuetocreatepapermoneyadlibitumprevailstonearlyasgreatanextentasever。
CHAP。VIII。
REGULATIONOFTHECIRCULATIONBYTHEFOREIGNEXCHANGES。Allthecountrybankersexaminedconcurinstatingthattheyhavenotthepowerbyloansordiscountsbeyondtheordinary
transactionsoftheneighbourhoodtoextendorcontractthelocalcirculationortoinfluenceprices。Theycould，indeed，
refusetoissuetheirownnotesinansweringthedemandsoftheir`depositors，butsuchrefusalmustbeaccompaniedby
offeringBankofEnglandnotesorcoin，andthusthelocalcirculationwouldbeequallyfilledup;theymaycurtailorcallin
theiradvancesandsodiminishtheirengagements，andeventuallyrenderasmalleramountofcirculationnecessary;buttheimmediatedemandsfornotesforlocalpurposesmuststillbesatisfied。Itappearsbythatevidence，thattheircirculationisdevotedandconfinedtolocalpurposes，chieflyinsmallamounts，forthe
retailtrade;andintheruraldistricts，inadvancestofarmersforthepurchaseofstockandseed，andtocattledealersand
provisionmerchants：butthatwhencalledupontomakeadvancesbywayofloanordiscountonalargerscale，itisalways
byadraftororderuponLondon，oruponsuchoftheircorrespondentsinothertownsashappentosuittheborrowerssuchloansordiscountsbeinginvariablymadeoutofcapital，or，inotherwords，outofthegeneralresourcesofthebank。AmongthecountrybankersofEnglandIhaveselectedtheevidenceofMr。Stuckey，theheadoftheadmirablyconducted
banksofSomersetshireunderhisfirm，becausethereisnoonemoreconversant，boththeoreticallyandpractically，thanheis
withthesubjectofbanking。ByhispositionformerlyhewasinintimatecommunicationwithLordLiverpoolandMr。
Huskisson。HewasexaminedbytheBullionCommitteein1819。HewasanadherenttotheprinciplesofthelateMr。
Ricardo;andheexpressedopinionsofthedesirablenessofhavingthecirculationofbanknotesregulatedbyaviewtotheforeignexchanges。（11）Butwhatistheresultofhisverylargeexperienceasabanker？477。（Chairman。）Doyouconceivethat，generallyspeaking，thereisaninsuperabledifficultyincountrybanksexercising
suchacontroulovertheirownissues，astoreducethemtosomeextentduringaperiodofadverseforeignexchange？
Ireallydonotseehowthatistobedone。
478。Thenwhatisthepracticaleffectoftheregardtoforeignexchanges，whichyouthinkallcountrybankersoughttopay？Thepracticaleffectistomakethemmorecautiousandcircumspectinthemanagementoftheirmoneytransactions;butIshouldnotstate，thatintheagriculturaldistricts，thecirculationwouldbealteredbytheforeignexchanges。479。Doyouconceive，thatalthoughthecountrybankersoughttopayregardtothestateoftheforeignexchanges，itisnot
intheirpowertobringthatregardintopracticaleffectbyreducingtheamountoftheirissuesduringtheperiodofadverse
exchange？
Idonotseehowitcouldbedone。480。Willthentheregardwhichyourecommendtheyshouldpaytotheforeignexchangesproduceanypracticaleffect
whateverupontheirissues？
Yes，itwouldproduceeffectinthemanagementoftheirmoniedconcerns。
481。Whatpracticaleffectwoulditproduceontheirissues？
Verylittle;myownopinionis，thatcountryissueshaveverylittletodowithexchanges。
482。Wouldtheregardwhichyourecommendtotheforeignexchangesproduceanyeffectupontheirissues？
Verylittle;itwouldproducesomeeffectuponthemanagementoftheirmoniedconcerns。
483。（SirT。Fremantle。）Upontheirliabilities？
Yes。
484。Butcomparativelylittleontheirissues？
Yes：particularlyintheagriculturalpartsofthecountry。
485。Uponwhatdoyouthinktheissuesofthecountrybankersdepend？Moreonthestateofagriculturethananythingelse。Whenthelandedinterestisinacomfortablestate，Iconsidertheissuestobeincreased。491。（SirT。Fremantle。）Theadvancewhichyoumaketotheagriculturistsisanadvanceofcapital，whetheritispaidto
theminyourownnotes，orBankofEnglandnotesorgold？
Yes;theadvanceisgenerallymadetoagriculturistsinourownnotes。492。Butifthestateofthecountryissuchasnottorequireanincreaseofyourownissues，youarequitesurethatthose
noteswillcomebacktoyouinthecourseofashorttime？
Exactly。
493。Thereforetheadvancethatyoumakeinthatcaseisanadvanceofcapital，andnotanadvanceofmereissue？
Exactly;itismadeoutofourresources。
501。（Chairman。）Willyoustatehowyouareaffectedbyforeignexchanges？IthinktheLondonbankerisaffectedbythem，there—foreIamaffected;Inaturallyknowthatifmydepositsarewithdrawn，
andanydemandismadeuponme，Imustsellmysecurities;thereforeIlooktotheforeignexchangesinordertoascertainhowthemoneymarketis，thatImayknowwhatsecuritiesIshalldisposeof。524。（Chairman。）Supposethecaseofanadverseforeignexchange，when，accordingtoyourownopinion，thepaper
circulationofthecountryoughttobereduced，wouldyou，onadepositoraskingforthepaymentofadepositinnotes，beat
allguidedbythecircumstanceoftheforeignex—changes，astowhetheryoupaidthatdepositinBankofEnglandnotes，orinyourownlocalnotes？IadmitthatIshouldnotbeguidedbytheforeignexchanges，butIshouldbeguidedbyknowingwherethedepositmoneywastogoto。525。（SirT。Fremantle。）Youhavestatedthatwhenyouhaveobservedgoldgoingoutofthecountry，andmoneybecoming
tightinLondon，youhavebeeninthehabitofissuingdirectionstoyourdifferentbranches，tobemorecircumspectinthe
advancestheymake;hastheeffectofthatbeenpracticallytodiminishtheamountofyournotesincirculationinthose
districts？
Idonotthinkithas;Iamnotawarethatithas。
526。Whathastheeffectbeen？Tomakethemmorecautiousintheiradvances，keepingourresourcesmorewithinourowncommandinsteadof
discountingabill，whichweshoulddiscountundersomecircumstances，wehaverefusedit;andinsteadofadvancing1000l。
or2000l。，wehavedesiredthepersontotake5001。;thereforewekeepourbankingcapitalandbankingresourcesmore
underourowncommand。
527。Butareyoupreparedtosaythatthecirculationofyourownnoteshasnotbeenaffectedbythatcourseofcon—duct？
Iamnotawarethatithas。527。Supposing，forinstance，itshouldultimatelybethoughtthatitisdesirablethatthecountrycirculationshouldhavea
generalconformitytothestateoftheforeignexchanges，doyouconceivethatthiscouldbeinanywayeffectedbythecountrybankers？Idonotatpresentknowhowitcouldbeaccomplished;andImaytakethelibertyofgoingfurtherinthatquestion，and
sayingthatitappearstomethatthecountryissues，asconductedinthewestofEngland，haveverylittleornothingtodowiththeforeignexchanges。538。DoyouconceivethenthattheonlycirculationwhichoughttohavereferencetotheforeignexchangesisthatoftheBankofEngland？Idoconceivethatitistheonlythingwhichoughttohavereferencetothem，beingthecirculationofLondon，andLondonbeingthespotwheretheforeignexchangesaregenerallyeffected。539。（Mr。Grote。）DoyoumeantostatethatyouthinkthecirculationoftheBankofEnglandoughttobemadetovaryin
conformitywiththeforeignexchanges，butthatthecirculationofthecountrybanksoughtnottobeaffectedbytheforeignexchanges？No，Idonotgosofarasthat;myopinionisthatthecountrycirculationdoesnotaffecttheforeignexchanges，becauseitisa
differentkindofcirculation;theforeignexchangesare，weallknow，affectedinvariousways，butIdonotthinktheyareaffectedbythecountrycirculation，andIhavelookedattentivelyatthatquestion。TheevidenceofMr。Gilbart，oftheLondonandWestminsterBank，ofMr。Hobhouse，ofabankatBath，andofMr。
Rodwell，ofabankatIpswich，isfullofinformationastothecircumstanceswhichin—fluenceandlimitthecountry
circulationwithoutthepossibilityofreferencetotheexchanges。Butasthesegentlemendonotprofessevertohave
entertainedanopinionofitsbeingdesirable，ifitwerepracticable，toregulatethecountrycirculationbytheforeignex—
changes，IhavepreferredareferencetoMr。Stuckey’sevidence，hehavingentertainedandprofessedanopinionthatitwasdesirable，buthadmadethediscovery，confirmedbylongexperienceonaveryextensivescale，ofitsutterimpracticability。Mr。GurneywasexaminedonthispointbytheCommitteeontheBankCharterin1832。Ihavebeforehadoccasionto
noticehisevidenceatsomelength，（12）andwillnowonlyrefertotheconcludingpartofit：
Doesitnotfollowfromwhatyouhavesaid，thatanover—issueofnotesofcountrybankerscannoteasilybeeffected？
Mybeliefisthatitcannotbeeffectedbyanyactofthecountrybankers。Asfarasthispointisconcerned，itmightperhapsbedeemedto（besufficientlyprovedbytheevidencealreadyadduced。But
nottheevidenceonlyonthispointisconfirmed，butalsomuchadditionallightisthrownonthedistinctionbetweencapital
andcurrency，byaviewoftheScotchsystemofbanking。TheexaminationsofsomeofthemanagersoftheScotchbanksby
theCommitteein1841，areaccordinglywellworthyofattentionasillustrativeofthatdistinction。
CHAP。IX。SCOTCHBANKING。REGULATIONBYFOREIGNEXCHANGES，ANDDISTINCTIONBETWEENCAPITALANDCURRENCY。TheevidenceofMr。AlexanderBlair，treasurerandmanageroftheBankofScotland，whichistheoldestofthechartered
banks，havingbeenestablishedin1695，andwhichappearstobeconductedwithgreatabilityandprudence，isfullofvaluableinformationastothemachineryandworkingoftheScotchsys—temofbanking。Hementionsacuriousfactrelatingtothemodeinwhichthebalancesresultingfromtheexchangestwiceaweekamongthe
banksareadjustedbythemeansofexchequerbillswhich，totheamountof450，000l。，theyholdforthatexpresspurpose。HerewehaveexchequerbillsansweringallthepurposesthatBankofEnglandnotesattheclearinghouseinLondondo。Mr。Blairalsostatesthatsevenmillionsinamountofnotesisfoundtoberequisiteinordertokeepupanaveragecirculation
ofthreemillions，averycuriousfact，asitappearsthatthestampdutyispaiduponthewholestock，whetherinthehandsof
thepublicorwithinthewallsofthebanks，andthatthewholeamountisoutincirculationforafewdaysattwoseasonsoftheyear。Itisstated，moreover，uponthesameauthority，thatthetotalamountofdepositswhich，in1826，wascomputedtobeabouttwenty—onemillions，hadin1841reachedtoabouttwenty—sevenmillions。Itisaremarkablecircumstancethat，whiletherehasbeenagreatextensionofbankingcapital，andofbanking
accommodation，andofbankingcompetition，inScotlandsince1826，theamountoftheaggregatecirculationhas
considerablydiminished。Whatacommentaryuponthereceiveddoctrineofthepowerofbankstoincreasetheirissuesof
papermoneyassuitstheirinterestsorconvenience;andthatitistheeffectofthecompetitionofbanksofissuetocreatea
vastmassofworthlesspaper。
Mr。Blairgavethefollowingstatementofthein—creaseofbankingaccommodationinScotland：\"Thereareabout380bankofficesinScotland，ofwhich348arebranches。Thepopulationmaybestatedat2，500，000;thusthereisonebankforevery6600individuals。\"Therewerein1825，167offices，ofwhich133werebranchbanks。Thepopulationbeingthen2，200，000，therewasonebanktoevery13，170individuals。\"TheamountofnotesexchangedperannumbythebanksofScotlandisbelievedtobenotunder100，000，000l。delivered，and100，000，000l。received。TheBankofScotlandalonedelivers10，000，000l。，andreceivesinexchangeasmuch。\"ButtheimmediatepurposeofmyreferencetotheevidenceofMr。BlairandothermanagersoftheScotchbanks，istoshow
thattheydonotandcannotregulatetheircirculationbytheforeignexchanges;andthat，whentheymakeadvances，itisout
oftheircapitalorthatoftheirdepositors，withoutanydirectinfluenceontheircirculation;thattheyattendtotheconductoftheBankofEnglandinregulatingtheiradvances，which，however，havenoimmediateinfluenceontheircirculation。Mr。Blairwasaskedbythechairman，Doyouconceivethattheamountofnotesincirculationshouldberegulatedinanywaywithreferencetothestateofthe
foreignexchanges？Iconceivethattheloansanddiscountsofbanksshouldberegulatedwithreferencetothestateoftheforeignexchanges，butIwouldnotconsideritnecessarytoregulatethecirculationbytheforeignexchanges。1879。（Mr。Grote。）Then，isityouropinionthat，atthesametimewhentheBankofEnglandiscontractingitscirculation，
forthepurposeofcorrectinganunfavourableexchange，theprovincialbanksshouldproceedinthesametrack，andcontracttheircirculationalso？IthinkthattheyshouldconsidertheactionoftheBankofEngland，atthattime，withreferencetotheirgeneralrulesof
discount。Iwouldbegtoleavethecirculationoutofthequestion;Iwouldsaythatthebanksshouldlooktotheamountof
theirloansanddiscountsundersuchcircumstances;and，atthesametime，Iwouldsay，thattheBank（ofEngland）should
keepalargereserve，tobedeterminedbytheirpastexperienceandobservation，forwhich，totheextentitisheldforpublicaccount，theyshouldreceivecompensation。1880。Then，isityouropinion，thatataperiodwhentheexchangesareunfavourable，andtheBankofEnglandare
contractingtheircirculation，theprovincialbanksoughttobemorecautiousingrantingloansanddiscountsthantheywere
before？
Certainly。
1881。（SirJ。R。Reid。）Doesyourbankactuponthatprinciple？
Itdoes。Theexaminations，however，ofMr。Kennedy，manageroftheAyrshireBank，and。ofMr。Anderson，oftheGlasgowUnion
BankingCompany，wentmoreparticularlytothequestionofthedistinctionbetweencapitalandcurrency;andtheirevidence
iscalculatedtothrowgreatlightonthispoint。
Mr。Kennedyisasked：2092。（Mr。Grote。）Youstatedthatthecausesaffectingthequantityofyournoteswhichwereoutincirculationatanytime，
were，inyouropinion，independentoftheactionoftheforeignexchanges？
Idid。2093。Butyoualsostatedthatatthetimewhentheforeignexchangeswereunfavourable，andwhentherewasapressure
uponthemoneymarket，youthoughtitimperative，asameasureofprudence，torealisesomeofyourreservestocallin
fundsfromEdinburghorLondon？
Yes，thatisanaccuraterepresentation。2094。Thendoyounotthinkthatthatactofyours，inbringingintoyourcountryfundsrealisedinEdinburghorLondonis，
inpointoffact，tantamounttoyouracquiringforyourselfacertainportionoftheLondoncurrencyortheEdinburgh
currency，inasmuchasthelocalincreaseofyourcurrencyisnotatthatmomenttantamounttotheincreaseoftheaggregatecurrencyofthecountry？ButwedonotbringintoourcountrytheEdinburghorLondonmoney。Thediminutionofourreservestakesplaceinthis
way：partieshavepaymentstomakeinEdinburghorLondonorotherplaces，andwedrawuponourreservestheretomeet
thosepayments，butwedonotbringdowngoldorBankofEnglandnotesfromtheLondonmarketinordertopaythemawayinourcountry。2095。ThoughyoumaynotactuallybringdowngoldorBankofEnglandnotes，isnottheeffectofyourdiminishingthe
amountofyourreserveinEdinburghandLondon，andincreasingbythatmeanstheadvancestocertainlocalbor—rowers，tantamounttobringingdownsomuchoftheEdinburghorLondoncurrencyintoyourlocality？IcannotseethatIbringanycurrencydown;itismerelyapaymentmadeinLondon，orinEdinburgh，fromonepartyto
another。
2096。Willyoudescribeinwhatwayyourreservesareusuallykept？Ineasynegociablesecurities，suchasexchequerbillsandshort—datedbillsofexchange，moneylyinginourbanker’shandsin
London，andinotherparties’handsinLondon，andmoneylyinginouragents’handsinEdinburghandGlasgow，andotherplaces。2097。SupposeyousellsomanythousandexchequerbillseitherinLondonorinEdinburgh，ofcoursetheproceedsofthose
exchequerbillsareplacedtothecreditofyouragent，whetheryourEdinburghagentoryourLondonagent？
Yes。2098。Inthatcase，whenyoudirectthosefundstobepaidout，youdoinpointoffactdisposeofanequalamountof
LondoncurrencyorofEdinburghcurrencyforthepurposesofyourbank？
Yes。2099。Then，inpointoffact，doyounotconsiderthatyouareenabledbymeansofthatportionoftheLondoncurrencyor
theEdinburghcurrencyofwhichyouthusacquirethedisposal，toobtainacertainincreaseoftheamountofnotesinyourowndistrict，anddoesnotthat，inpointoffact，occasionacertaindiminutionintheLondonortheEdinburghcurrencywhichmaybesetagainsttheincreaseofyourownlocalissuesatthetime？ButwhenIgiveadraftupontheLondonagentIdonotinconsequenceoftheincreasedsumthatIhaveputathiscommand
giveoutnotesforit。IgiveadraftuponLondonpayabletosomepartyinLondon;themoneyispaidoverinLondon，sothatIdonotmakeanissueuponthat。2100。ButthequantityofcurrencywhichisavailabletootherpartiesinLondonorEdinburghisdiminishedbythatportion
whichyoudrawforyourownuse？
IdonotseehowitdiminishesthequantityofcurrencyinLondon：itmerelytransfersitfromonepartytoanother。2101。IfyouwerenottoemploythatportionoftheLondoncurrencywhichyouacquirebyrealisingyourexchequerbills，
thatportionwouldbeatthedisposalofsomeotherpersoninLondonforthepurposeofgrantingaccommodationto
Londonborrowers？
ButIdonottakeitoutofLondon;itisstillinthehandsofsomepartyinLondon。2102。Butifbymeansofthatoperationyouareenabledtoextendyouraccommodationtoyourlocalborrowers，youdo
makeitserviceabletothewantsofyourdistrict，andisitnottantamount，inpointoffact，toatransferofsomuchcapitalfromemploymentinLondontoemploymentinAyrshire：isnotthatthegeneraleffectoftheoperation？Thatmaybetheeffectofit;butithasnoeffectindiminishingtheamountofthecurrencyintheLondonmarket。Idonot
bringoutofLondonanycurrency;ImerelytakethecurrencyfromonepartyinLondon，andgiveittoanother。
2103。DonotyoubringdownfromLondontoAyrshireacertainportionofcapitalwhichwasbeforeinLondon？
Idonotseethat。2104。IftheeffectofthistransactionbetoenableyoutosupplythewantsofborrowersinAyrshire，whichotherwiseyou
couldnotsupply，surelythatdoesamounttoatransferofsomuchofyourbankingcapitalfromLondontothecountry？
ItisrathermorethepaymentofadebtduebysomepartiesinAyrshiretosomepartiesinLondon。Mr。Kennedyisright：theoperationisthemeretransferofadebt。TheAyrshirebankiscreditorofabankinLondontothe
amountof1000l。，andpasses`itsdraftonLondonforthatsum;thepersonorfirmthattakesandpaysforthedraftofthe
AyrshirebankhasapaymenttomaketohiscorrespondentinLondon。Thetransactionsbalanceeachother。Theultimate
balances，asbetweenScotlandandEngland，mustbeadjustedbyanincreaseordiminutionofthefundspossessedinEngland
bytheScotchbanksandinsomecases，althoughnotfrequent，nortoanyconsiderableamount，theremaybeatransmissionofBankofEnglandnotesorcoin。Notwithstandingtheclearnessofthisevidence，thefollowingquestionsputbytheCommittee，astothedistinctionbetween
capitalandcurrency，inthesubsequentexaminationofMr。Anderson，manageroftheGlasgowUnionBankingCompany，
willshowthelittleimpressionproducedbyitontheexaminers：
2323。（Chairman。）Doyouatallattempttoregulateyourcirculationbythestateoftheforeignexchange？Notthecirculation;weregulateourbusinessbythestateoftheforeignexchanges，butweconsiderthatthecirculationdoesnotrequireanyregulation;ouradvancesandloansweregulate，butnotthecirculationofournotes。2324。Doyouconceivethatthecirculationissufficientlyregulatedbyyoursimplyansweringthedemandsofyour
customers？
Ithinkso。2335。Doyouconceivethattheconsequenceofrestrainingyourloansandadvancesistoproduceanyeffectuponthe
amountofyourcirculation？
Noimmediateeffectupontheamountofourcirculation。
2336。Doesiteventually？Thecirculationiseventuallyaffectedbythelanguorthatfollowsapressure;whenwagesarelowandpeopleareoutof
employment，thereislessmoneycirculatingamongthem，andourcirculationisdiminished，buttheimmediateeffectofapressureisnottodiminishthecirculation。2337。Doesthenanydiminutionofthecirculationwhichtakesplacearisefromalessdemandonthepartofthepublic，and
notastheresultofanygreatercautiononthepartof。thebank？
Exactly。2338。（Mr。Grote。）Buttheeffectsyouhavedescribedimplyanincreaseddemandonthepartofthepublicatsuchperiods
foryourcirculation？
Itisanincreaseddemandformoney，（13）butnotforcirculation。
2339。Whenthosedemandsaremade，inwhatmannerdoyousupplythem;isitnotbyanincreaseofyourownnotes？InmostcasesanincreaseddemandcomesuponusintheshapeofordersuponLondon，orordersuponManchesteror
Liverpool;thepressureuponusischieflyfromtheSouth，andanextrademandfromLondon，Liverpool，andManchesterwefeelasthefirstindicationofpressure;itisnotfromourownimmediatedistricts。2340。（Chairman。）Doyoumeanthatyourcustomershavedemandsuponthem，whichitisnecessaryforthemtodischarge
inManchester，London，andotherplaces？
Yes，thatistoaconsiderableextentthecase。2341。（Mr。Grote。）Inwhatmannerdoyouenableyourcustomerstomakethosepaymentswhichyouhavetomakein
Liverpool，orLondon，orManchester？
Bygivingthemordersuponouragentsandcorrespondentsinthoseplaces。2342。YoudirectacertainportionofthefundswhichyouhaveinLondon，orLiverpool，orManchestertobeappliedtothat
purpose？
Wedo。2343。Then，inpointoffact，youmakethoseadvancesnotoutofyourownlocalcurrency，butoutofacertainportionoftheLondoncurrencyuponwhichyouhaveademand？No;Ithinkthatdoesnotpreciselydescribetheoperation。itisourcapital;itiscapitalwhichwehavecollectedinScotland，
andplacedinLondonforthatpurpose;itisnotLondoncurrencylenttoScotland，butitiscapitalbelongingtoScotlandthathasbeenplacedinLondon，andisnowap—pliedtothepurposesforwhichitiswanted。2344。ButifyoudirectpaymenttobemadeinLondon，thispaymentmustbemadebymeansofthenotesoftheBankof
England，whichalonecirculateinLondon？
Ofcourse。（14）2348。WhenincreaseddemandsaremadeuponyoubyyourcustomersinGlasgow，doyounotanswerthosedemandsbymeansofyourownlocalnotes，andnotbyordersuponLondon？Certainly;ourcirculationfromTuesdaytoFriday，andfromFridaytoTuesdayagain，isincreaseduponthisoccasion;butwe
donotreckonthatcirculation，becauseweknowthatitisimmediatelytoreturnuponus，andthatitisanadvance，notofcirculation，butofcapital;itbecomesatthenextexchange—dayanadvanceofourcapital。2349。Youfeelsatisfiedthattheincreaseofnoteswhichyoumightmakeatthatperiodwouldimmediatelycomebackupon
youintheexchange，andthatyouwouldberequiredtopaythembyordersonLondon？
Yes;orbyexchequerbillsinEdinburgh。2361。Doyounot，bymeansofthisincreasedamountofadvancesintheextraordinaryperiodstowhichthequestionshave
alluded，addtothemeansofpurchasinggoodspossessedbythepersonswhoborrowfromyou？
Yes，wedo。2362。Andisnotthatpracticallytantamounttosomuchincreaseofcirculationinthelocaldistrictsinwhichyourloanstakeplace？Ithinknotofcirculation;Ithinkitiscapital;becausethenoteswepayoutarenotretainedfordaysorweekstomakethe
purchases，theyarepaidimmediatelytosomeotherbank，andcomebacktousupontheexchange，andtheybecomeanadvanceofcapitalbyustotheparty，toenablehimtomakehispurchases。（15）2363。Butalthoughultimatelyitcomestobeanadvanceoutofyourcapital，yetforacertaintimeitisanadvancemadeby
meansofyourcirculationonly，withouttheaidofyourcapital？
Fortwoorthreedaysitis。
2364。Foracertaintime，longerorshorter，asthecasemaybe？
Itcannot，Ithink，belongerthantillthenextexchange—daywithregardtothoseextraadvances。2365。（Mr。Gisborne。）Practically，hasitmoreeffectingivingpowerofpurchasinggoodsinLondon，thanifyougavethem
adraftuponyourbankerinLondon？
No;Ithinknot。2366。（Mr。Grote。）Butduringtheperiodwhichelapsesbetweenthetimeofyourmakingtheadvanceoriginallyinyourown
notes，andthetimewhenyougivetheorderonLondon，inconsequenceofthenotescomingbacktoyouduringthatinterval，whetheritbelongorwhetheritbeshort，musttherenotbeanincreaseofthecirculationofthecountrygenerally？Ithinkthatbringsusbacktothequestionwhichhasbeensomuchdiscussedhere，viz，whetherdepositsformapartofthe
circulation。Thosenoteswhichwepayoutdonotremainout;theymustbepaidbackeithertousortosomeotherbank，in
theshapeofdeposits，tilltheyaretobeused，andtheydonotincreasethepermanentcirculationofthecountry，unlessfora
dayortwo，scarcelyforevenaday。
2367。（SirJamesGraham。）WhatproportionofthepeopleofScotlandreceivingnotesemploybankers？AverylargeproportionofthepeopleofScotlandemploybankers;wehavebeenenquiringintothatsincewecametogether。
Oneofthegentlemenhere，whoisattheheadofabankwithalargenumberofcountrybranches，informsme，thatthe
numberofcreditorsofhisbankis20，000。InourcaseIhaveareturnsinceIcametotown，makingthenumberinourbank
15，770;andoneofthegentlemenwhoishere，andwhoisattheheadofabankwithoutbranches，saysthathehas7000
peopleholdinghisobligations。
2368。（Mr。Grote。）DepositaccountsYes;depositaccounts，orcurrentaccountsbearinginterest。2369。（SirJamesGraham。）Inasmuchaseverypaymentintoabank，whetherintheshapeofadeposit，ortothecreditofa
currentaccount，bearsinterestdaybyday，andinasmuchasnocommissionischargeduponoperationsonanaccount，and
inasmuchasagreatproportionofthepeoplereceivingmoneyinScotlandemploybankers，doesitnotfollowthatevery
paymentmadeinlocalnotesfindsitswayalmostimmediatelywithinthespaceoftwenty—fourhoursintothehandsofsome
banker？
Ithinkitdoes。2370。（Mr。Grote。）Wouldnottheconsequenceofthatpropositionbe，iffollowedout，thatthereshouldbenonoteswhateverinthehandsofthepublic，butthatallthenotesissuedbyeachbankshouldbeinfactinthehandsofotherbanks？Thatistheeffect。Therearethreemillionsofnotesout，whichisaverysmallamount;peoplemusthaveacertainamountof
moneyintheirpocketsandboxesathome，andshop—keepersmustkeepacertainamountofmoneyintheirtills，thedaily
receiptsoftheirbusiness;andmanufacturersmustkeepnotestopaypeople’swages，andsoon;butthataltogetherforms
butasmallproportioncomparedtothecirculationofEngland。OurthreemillionsinScotlandamounttoabout1l。aheadof
thewholepopulation;inEngland，althoughyouhaveagoldcirculationforeverythingbelow5l。，yourpapercirculationamountsto2l。ahead。Iamtakingaboutfifteenmillionsforthepopulation，andthirtymillionsforthecurrency。Thedistinctionbetweencurrencyandcapital，whichissoclearlyshownbytheseremarkablyintelligentwitnesses，isnota
merematterofclassificationorofverbalcriticism。Theconfoundingofonewiththeotherisaprolificsourceoffallacyinreasoning，andoferrorinpracticalapplication，inquestionsrelatingtothemanagementorregulationofbanks。Ofthisastrikinginstancewasexhibitedinthereasonsadducedbytheadvocatesofthecurrencytheory，injustificationof
theadvancesmadebytheBankofEnglandin1835，againstthedepositsontheWestIndialoan。Thejustificationproceeded
onthegroundthat，butforthoseadvances，thecurrencywouldhavebeenundulycontracted。Whatthenotioncouldbeof
unduecontractionofthecurrency，thatis，ofaninconvenientwantofbanknotesinthehandsofthepublicorofthebankers，
aslongasanyamountmightbeobtainedbydiscountat4percent，passesallreasonablecomprehension。Thetruthis，thatit
waswhollyaquestionofdisposablecapital;andwasitpossibletoimaginethattherecouldbeanydangerofaninsufficiency
ofit，atatimewhenthedisposalofitwassorecklesslygoingforwardincreditstoAmerica？Whileasregardsthe
circulationorcurrency，thereiseveryreasontobelieve，onaviewofthestateofthingsatthattime，thattheamountwould
havebeenneithermorenorlessthanitwas，whethertheadvanceshadbeenmadeorwithheld。
CHAP。X。
CHARGESAGAINSTTHEMANAGEMENTOFTHEBANKOFENGLAND。Theforegoingextractsfromtheexaminationsofthecountrybankersgivetheevidenceofwitnesseswho，whileexplaining
theworkingofthecountrybanksystem，offernoopinion，adverseorotherwise，astothemanagementoftheBankof
England。ButtherearewitnessesbeforethatCommitteewho，whilegivingveryelaborateevidence，comprisinghighly
interestingdetails，servingtoexhibitwhat，fromtheirregularity，maybedeemedtobelawsdeterminingthevariationsofthe
countrycirculation，changethewholecourseoftheirreasoningwhentheygivetheiropinionupontheconductoftheBankofEngland。Theychargethatinstitutionwithbeingthemaincause，byundueexpansionandsubsequentcontractionofitsissues，of
causingthealternationsofexcitementanddepressionwhichhavecharacterisedthecommercialstateofthiscountryoflate
years。Andawholehostofwriters，someaspartisansofthejointstockbanks，othersunconnectedwithanybanks，areloud
intheirdeclamationsagainstwhatappearsintheireyesthemonstermonopolyoftheBankofEngland;con—tending，asthey
do，thatwhereasthecountrybanksofissuearelimitedastoanypowerofaddingtothecirculation，nolimitationexiststo
thepoweroftheBankofEnglandtomakeanyadditiontoitsissues，whichaviewtotheinterestsofitsproprietorsmay
dictate;thatitcanpurchaseexchequerbillsandothergovernmentsecuritiesandbullion，anddiscountbills，andmake
advancestoanyamountthatmaysuititsconvenience，againstissuesofitsnotes;andthatifthentheexchangesbecomeadverse，anditsbulliongoesout，itputsonthescrew，tothegreatderangementofallcommercialoperations。TheevidenceofMr。HobhouseandMr。Gilbartfurnishesstrikinginstancesofthemadeofreasoningbywhichitis
attemptedtobeshownthat，whilethecountrybanksareperfectlypowerlessinanyattempttoregulatetheirissues，theBank
ofEnglandisallpowerful，andcanenlargeandcontractitscirculationatpleasure，subjectonlytoanultimatelimitationby
theexhaustionofitstreasure。
H。W。Hobhouse，Esq。
158。（Mr。Gisborne。）CanyoustateanymarkeddistinctionbetweentheBankofEnglandandcountrybankersasissuers？IthinkthebanksinthecountryarebanksofissuetoaverysmallamountcomparedwiththeBankofEngland。TheBankof
Englanddealswithnothingbutitsowncurrency;itisalwaysbuyingandsellingcirculation，ifImayusetheexpression;it
issuescirculationagainstgold，whichIconsidertobeaveryunwholesomething，whetherLondonorthecountrywantsthe
circulationornot。Then，again，theylendtheirnotesforcirculationinthecountry，whichacountrybankerneverdoes;he
wouldlosehiscreditifhedidthat：hecouldneverholduphisheadafterwards，ifheattemptedtoputouthiscirculationas
theBankofEnglanddoes;thentheBankofEnglandarebuyingandsellingsecurities，andactinguponthecirculation，
whereasthecountrybankersareentirelypassive，andthatisthegreatdistinctionwhichIshoulddraw：theycarryonthe
businessofissuingtoaninfinitelysmallerextentthantheBankofEngland，andthereforethatisnotafairmeasuretojudge
themby。
159。（Mr。Hume。）AretheCommitteetounderstandthatyouobjecttotheBankofEnglandissuingnotesforgold？Ifthereisnoactualdemandforpurposesofcirculation，itincreasesthecirculationwhenitisnotwanted。Ifapersonwere
tocometomybankandputaquantityofgoldintomybankandaskmetoissuenotesagainstit，Iwouldnotdoit，forI
couldnotmakethemstayoutunlesstheywerewanted;theywouldcomeback;therefore，asIsay，Icouldnotcon—ductmy
businessinthesamewayastheBankofEnglanddoes。IfapersonbroughtgoldtomeIshouldhavetopaycoinforit。
160。（Mr。Grote。）AndthepersonwhobringstoyoubullionmightgoandgetthatcoinedattheMint？Yes，butifthereisnodemandforcirculationhedoesnotdoit;butinthecaseoftheBankofEnglandheputsitinfora
temporarypurpose，andoutcomethebanknotes;itmaybeaverywholesomethingfortheBankofEnglandtohavethat
power，butIcouldnotdoit。Iknowthatthenoteswouldreturnuponmeimmediately;inshort，Ihavenopoweroverthe
circulation。
J。W。Gilbart，Esq。1015。（Chairman。）Whataretheothertestsbywhichyouascertainwhethertheissueofbanknoteswasorwasnot
required？
Besidestherateofinterest，Iconsidertheamountofmoneyincirculation，asfarasregardstheBankofEngland，asatest。
1016。Willyouexplainthatanswermorefully？AnincreaseinthecirculationoftheBankofEngland，Iconceive，differsfromanincreaseinthecirculationofthecountry
banks，becausetheincreaseofthecirculationofthecountrybanksisdrawnoutbythestateoftradeintheirrespective
districts。Thecountrybankershavingnopowertopurchasestock，orexchequerbills，orbullion，withtheirnotes，anincrease
ofcirculationbythemisindicativeofanincreaseoftradeintheirdistricts;eitherthatthereisagreaterbrisknessoftrade，
andagreaterquantityofcommoditiesboughtandsold，orelse，fromsomeothercircumstance，thereisanadvanceinthe
priceofthosecommodities，and，therefore，Idonotconsiderthatanypositiveincreaseintheamountofthecirculationof
thecountrybanksisanyabsoluteproofofexcessofissue;ifthatwerethecase，itwouldappearthatthecirculationof
Ireland，whichwasverymuchlargerinDecember，isaproofofanexcessiveissueofnotesinthatcountry，whereasthefact
is，thatalargernumberofnotesattheendoftheyeararedrawnoutbytheproduceoftheharvestbeingbroughttomarket。
ButanincreaseoftheBankofEnglandcirculationarisingfromanissueofitsnotesagainstbullion，oragainstpurchaseof
governmentsecurities，wouldbeanincreasenotrequiredbytrade，andwouldnecessarilyreducetherateofinterestandleadtospeculationintrade，andinvestmentsinforeignsecurities。1017。Doyoumean，then，thatanyincreaseofissueofbanknotesagainstbullion，orbythepurchaseofsecurities，is，inyouropinion，anexcessofissue？Imustagainguardmyself;Iamveryaversetouniversalpropositions，becauseIbelievetherearenouniversalpropositions
inthescienceofpoliticaleconomy;thattheyareallsubjecttoexceptions，andmaybemodifiedbycircumstances。Buttaking
itasageneralrule，and，referringtoexperience，Ithinkthatanissueofnotesagainstalodgementofbullionwillbeusuallyfoundtobeanexcessofissue。FromthetenouroftheseanswersitmightbeinferredthateverypurchaseofsecuritiesorofbullionbytheBankofEngland
ismadeinbanknoteswhichremainoutandaddtotheamountofthecirculation;andiftheydonotremainout，howcan
theybesaidtoaddtothecirculation？Astothebuyingandsellingofsecurities，this，theBank，havingalargecapitaland
deposits，mightdoifitwerenotabankofissue。But，sayMr。HobhouseandMr。Gilbart，thecountrybanks，iftheybuy
securities，cannotpayforthemintheirnotes，thedemandforthesebeinglimited;theymustthereforepayfortheminan
orderonLondon。Butwhatisthatorder？Itenablestheholderofittogetgoldforit，ifhehasoccasionfororcanmakeuse
ofthegold。AndwhatdoestheBankofEnglanddo，moreorless，whenitmakesadvancesbyloanordis—count，orbuys
securities？ThesellerofthesecuritiesortheborrowermayclaimbanknotesorgoldashemightclaimBankofEngland
notesorgoldfromanyotherbankofissue。Buthemaynot，andinmostcasesdoesnot，wantthebanknotesorgold。He
mayrequireonlythepowerofpassingachequeagainsttheamount，whichhepaysintohisbanker。And，inpointoffact，
unlessthereisademandforgold，thegreatbulkofthetransactionsoftheBankofEngland，whetherinthepurchaseorsale
ofsecuritiesorofbullion，isaccompaniedwithaslittleeffectupontheamountofbanknotesinthehandsofthepublicare
thetransactionsofthecountrybanksofissueThemostextraordinarypartofthechargeagainsttheBankofEnglandis，thatitissuesitsnotesinexcessbyitspurchasesof
bullion。Inthefirstplace，thereisnomorereasonforsupposingthatbanknotesofnecessityactuallypassoutoftheBank
forpurchasesofbullionthanforpurchasesofsecurities;but，inthenextplace，theBankcannothelppurchasinggold。The
goldcomesintotheBanksometimesfromtheinternalcirculation，andinthatcaseitispaidinasamatterofcourse;
sometimesitcomesinasbullionfromabroadintheshapeofsovereignswhichhadbeenpreviouslyexported，therebeingno
seignorage;andinsuchcasealsoitisquiteobviousthattheBankmustbepassiveinreceivingthemandinpayingforthem
eitherinnotesorinabookcredit。Buttakethecaseofuncoinedgold。IftheBankobjectedtobuyit，itmightbetakentothe
Mintbytheimporter，andwhencoinedpaidintotheBank。Mr。Hobhousesaysthatitwouldnotbetakenofnecessitytothe
Mint，becausetheremightbenowantofitinthecirculation。Thiswouldbetrueifitcouldonlyfindventinthecirculationas
currency，meaningforretailpurposes，thosebeingtheonlypurposesforwhichcoinscirculate。Buttheimporterrequiresthe
useofitascapital，andiftheBankwillnotbuyitasbullionhemustsubmittothedelayofhavingitcoined，sothathemight
payitintotheBank，andthusbyasmallsacrificeofinterestgetthecommandofhiscapital。TheBank，therefore，inbuying
thebullionat3l。17s。9d。perouncesparestheimportersthisround—aboutprocess。Itis，moreover，tobeob—served，thattheBankisbyitsconstitutionadealerinbullion，andifitwerenot，someotherestablishmentwouldbe。Soinconsistent，indeed，arethechargesagainsttheBankofEnglandwithreferencetoitssupposedmanagementofthe
circulation，thatwhilethecountrybankersarechargingitwithissuingitsnotesinexcessbypurchasesofbullion，the
partisansofthecurrencyprinciple，thatis，ofametallicvariation，considerittobeanimputationuponthepresentsystemor
uponthemanagement，thatanimportofbullionisnotattendedwithacorrespondingincreaseinthecirculation。
