Iacknowledge，（andtheexperienceof1847hasprovedtothosewhooverlookeditbefore，）thatthemischiefnowdescribed，maybewrought，andinlargemeasure，bytheBankofEngland，throughitsdepositsalone。Itmaycontinueorevenincreaseitsdiscountsandadvances，whenitoughttocontractthem:withtheultimateeffectofmakingthecontractionmuchmoresevereandsuddenthannecessary。Icannotbutthink，however，thatbankswhichcommitthiserrorwiththeirdeposits，wouldcommititstillmoreiftheywereatlibertytomakeincreasedloanswiththeirissuesaswellastheirdeposits。Iamcompelledtothinkthatthebeingrestrictedfromincreasingtheirissues，isarealimpedimenttotheirmakingthoseadvanceswhicharrestthetideatitsturn，andmakeitrushlikeatorrentafterwards……andwhentheActisblamedforinterposingobstaclesatatimewhennotobstaclesbutfacilitiesareneeded，itmustinjusticereceivecreditforinterposingthemwhentheyareanacknowledgedbenefit。Inthisparticular，therefore，Ithinkitcannotbedenied，thatthenewsystemisarealimprovementupontheold。
4。Buthoweverthismaybe，itseemstomecertainthattheseadvantages，whatevervaluemaybeputonthem，arepurchasedbystillgreaterdisadvantages。Inthefirstplace，alargeextensionofcreditbybankers，thoughmosthurtfulwhen，creditbeingalreadyinaninflatedstate，itcanonlyservetoretardandaggravatethecollapse，ismostsalutarywhenthecollapsehascome，andwhencreditinsteadofbeinginexcessisindistressingdeficiency，andincreasedadvancesbybankers，insteadofbeinganadditiontotheordinaryamountoffloatingcredit，servetoreplaceamassofothercreditwhichhasbeensuddenlydestroyed。Antecedentlyto1844，iftheBankofEnglandoccasionallyaggravatedtheseverityofacommercialrevulsionbyrenderingthecollapseofcreditmoretardyandhencemoreviolentthannecessary，itinreturnrenderedinvaluableservicesduringtherevulsionitself，bycomingforwardwithadvancestosupportsolventfirms，atatimewhenallotherpaperandalmostallmercantilecredithadbecomecomparativelyvalueless。Thisservicewaseminentlyconspicuousinthecrisisof1825—6，theseverestprobablyeverexperienced;duringwhichtheBankincreasedwhatiscalleditscirculationbymanymillions，inadvancestothosemercantilefirmsofwhoseultimatesolvencyitfeltnodoubt;advanceswhichifithadbeenobligedtowithhold，theseverityofthecrisiswouldhavebeenstillgreaterthanitwas。IftheBank，itisjustlyremarkedbyMrFullarton，（4*）
complieswithsuchapplications，"itmustcomplywiththembyanissueofnotes，fornotesconstitutetheonlyinstrumentalitythroughwhichtheBankisinthepracticeoflendingitscredit。
Butthosenotesarenotintendedtocirculate，nordotheycirculate。Thereisnomoredemandforcirculationthantherewasbefore。Onthecontrary，therapiddeclineofpriceswhichthecaseinsuppositionpresumes，wouldnecessarilycontractthedemandforcirculation。ThenoteswouldeitherbereturnedtotheBankofEngland，asfastastheywereissued，intheshapeofdeposits，orwouldbelockedupinthedrawersoftheprivateLondonbankers，ordistributedbythemtotheircorrespondentsinthecountry，orinterceptedbyothercapitalists，who，duringthefervourofthepreviousexcitement，hadcontractedliabilitieswhichtheymightbeimperfectlypreparedonthesuddentoencounter。Insuchemergencies，everymanconnectedwithbusiness，whohasbeentradingonothermeansthanhisown，isplacedonthedefensive，andhiswholeobjectistomakehimselfasstrongaspossible，anobjectwhichcannotbemoreeffectuallyansweredthanbykeepingbyhimaslargeareserveaspossibleinpaperwhichthelawhasmadealegaltender。Thenotesthemselvesneverfindtheirwayintotheproducemarket;andiftheyatallcontributetoretard"（or，asIshouldrathersay，tomoderate）
"thefallofprices，itisnotbypromotingintheslightestdegreetheeffectivedemandforcommodities，notbyenablingconsumerstobuymorelargelyforconsumption，andsogivingbrisknesstocommerce，butbyaprocessexactlythereverse，byenablingtheholdersofcommoditiestoholdon，byobstructingtrafficandrepressingconsumption。"
Theopportunereliefthusaffordedtocredit，duringtheexcessivecontractionwhichsucceedstoanundueexpansion，isconsistentwiththeprincipleofthenewsystem;foranextraordinarycontractionofcredit，andfallofprices，inevitablydrawgoldintothecountry，andtheprincipleofthesystemisthatthebank—notecurrencyshallbepermitted，andevencompelled，toenlargeitself，inallcasesinwhichametalliccurrencywoulddothesame。But，whattheprincipleofthelawwouldencourage，itsprovisionsinthisinstancepreclude，bynotsufferingtheincreasedissuestotakeplaceuntilthegoldhasactuallyarrived:whichisneveruntiltheworstpartofthecrisishaspassed，andalmostallthelossesandfailuresattendantonitareconsummated。Themachineryofthesystemwithholds，untilformanypurposesitcomestoolate，theverymedicinewhichthetheoryofthesystemprescribesastheappropriateremedy。（5*）
Thisfunctionofbanksinfillingupthegapmadeinmercantilecreditbytheconsequencesofunduespeculationanditsrevulsion，issoentirelyindispensable，thatiftheActof1844continuesunrepealed，therecanbenodifficultyinforeseeingthatitsprovisionsmustbesuspended，astheywerein1847，ineveryperiodofgreatcommercialdifficulty，assoonasthecrisishasreallyandcompletelysetin。（6*）Werethisall，therewouldbenoabsoluteinconsistencyinmaintainingtherestrictionasameansofpreventingacrisis，andrelaxingitforthepurposeofrelievingone。Butthereisanotherobjection，ofastillmoreradicalandcomprehensivecharacter，tothenewsystem。
Professing，intheory，torequirethatapapercurrencyshallvaryinitsamountinexactconformitytothevariationsofametalliccurrency，itprovides，infact，thatineverycaseofaneffluxofgold，acorrespondingdiminutionshalltakeplaceinthequantityofbanknotes;inotherwords，thateveryexportationofthepreciousmetalsshallbevirtuallydrawnfromthecirculation;itbeingassumedthatthiswouldbethecaseifthecurrencywerewhollymetallic。Thistheory，andthesepracticalarrangements，areadaptedtothecaseinwhichthedrainofgoldoriginatesinariseofpricesproducedbyanundueexpansionofcurrencyorcredit;buttheyareadaptedtonocasebeside。
Whentheeffluxofgoldisthelaststageofaseriesofeffectsarisingfromanincreaseofthecurrency，orfromanexpansionofcredittantamountinitseffectonpricestoanincreaseofcurrency，itisinthatcaseafairassumptionthatinapurelymetallicsystemthegoldexportedwouldbedrawnfromthecurrencyitself;becausesuchadrain，beinginitsnatureunlimited，willnecessarilycontinueaslongascurrencyandcreditareundiminished。Butanexportationofthepreciousmetisoftenarisesfromnocausesaffectingcurrencyorcredit，butsimplyfromanunusualextensionofforeignpayments，arisingeitherfromthestateofthemarketsforcommodities，orfromsomecircumstancenotcommercial。Inthisclassofcauses，four，ofpowerfuloperation，areincluded，ofeachofwhichthelastfiftyyearsofEnglishhistoryaffordrepeatedinstances。Thefirstisthatofanextraordinaryforeignexpenditurebygovernment，eitherpoliticalormilitary。asintherevolutionarywar，and，aslongasitlasted，duringtheCrimeanwar。Thesecondisthecaseofalargeexportationofcapitalforforeigninvestment;suchastheloansandminingoperationswhichpartlycontributedtothecrisisof1825，andtheAmericanspeculationswhichweretheprincipalcauseofthecrisisof1839。Thethirdisafailureofcropsinthecountrieswhichsupplytherawmaterialofimportantmanufactures;suchasthecottonfailureinAmerica，whichcompelledEngland，in1847，toincurunusualliabilitiesforthepurchaseofthatcommodityatanadvancedprice。Thefourthisabadharvest，andagreatconsequentimportationoffood;ofwhichtheyears1846and1847presentedanexamplesurpassingallantecedentexperience。
Innoneofthesecases，ifthecurrencyweremetallic，wouldthegoldorsilverexportedforthepurposesinquestionbenecessarily，orevenprobably，drawnwhollyfromthecirculation。
Itwouldbedrawnfromthehoards，whichunderametalliccurrencyalwaysexisttoaverylargeamount;inuncivilizedcountries，inthehandsofallwhocanaffordit;incivilizedcountrieschieflyintheformofbankers’reserves。MrTooke，inhis"InquiryintotheCurrencyPrinciple，"bearstestimonytothisfact;butitistoMrFullartonthatthepublicareindebtedfortheclearestandmostsatisfactoryelucidationofit。AsIamnotawarethatthispartofthetheoryofcurrencyhasbeensetforthbyanyotherwriterwithanythinglikethesamedegreeofcompleteness，Ishallquotesomewhatlargelyfromthisableproduction。
"NopersonwhohaseverresidedinanAsiaticcountry，wherehoardingiscarriedontoafarlargerextentinproportiontotheexistingstockofwealth，andwherethepracticehasbecomemuchmoredeeplyengraftedinthehabitsofthepeople，bytraditionaryapprehensionsofinsecurityandthedifficultyoffindingsafeandremunerativeinvestments，thaninanyEuropeancommunity——nopersonwhohashadpersonalexperienceofthisstateofsociety，canbeatalosstorecollectinnumerableinstancesoflargemetallictreasuresextractedintimesofpecuniarydifficultyfromthecoffersofindividualsbythetemptationofahighrateofinterest，andbroughtinaidofthepublicnecessities，nor，ontheotherhand，ofthefacilitywithwhichthosetreasureshavebeenabsorbedagain，whentheinducementswhichhaddrawnthemintolightwerenolongerinoperation。IncountriesmoreadvancedincivilizationandwealththantheAsiaticprincipalities，andwherenomanisinfearofattractingthecupidityofpowerbyanexternaldisplayofriches，butwheretheinterchangeofcommoditiesisstillalmostuniversallyconductedthroughthemediumofametriccirculation，asisthecasewithmostofthecommercialcountriesontheContinentofEurope，themotivesforamassingthepreciousmetalsmaybelesspowerfulthaninthemajorityofAsiaticprincipalities;buttheabilitytoaccumulatebeingmorewidelyextended，theabsolutequantityamassedwillbefoundprobablytobearaconsiderablylargerproportiontothepopulation。（7*）Inthosestateswhichlieexposedtohostileinvasion，orwhosesocialconditionisunsettledandmenacing，themotiveindeedmuststillbeverystrong;andinanationcarryingonanextensivecommerce，bothforeignandinternal，withoutanyconsiderableaidfromanyofthebankingsubstitutesformoney，thereservesofgoldandsilverindispensablyrequiredtosecuretheregularityofpayments，mustofthemselvesengrossashareofthecirculatingcoinwhichitwouldnotbeeasytoestimate。
"Inthiscountry，wherethebankingsystemhasbeencarriedtoanextentandperfectionunknowninanyotherpartofEurope，andmaybesaidtohaveentirelysupersededtheuseofcoin，exceptforretaildealingsandthepurposesofforeigncommerce，theincentivestoprivatehoardingexistnolonger，andthehoardshaveallbeentransferredtothebanks，orrather，I
shouldsay，totheBankofEngland。ButinFrance，wherethebank—notecirculationisstillcomparativelylimited，thequantityofgoldlandsilvercoininexistenceIfindnowcurrentlyestimated，onwhataredescribedasthelatestauthorities，attheenormoussumof120millionssterling;noristheestimateatallatvariancewiththereasonableprobabilitiesofthecase。Ofthisvasttreasurethereiseveryreasontopresumethataverylargeproportion，probablybymuchthegreaterpart，isabsorbedinthehoards。Ifyoupresentforpaymentabillforathousandfrancstoafrenchbanker，hebringsyouthesilverinasealedbagfromhisstrongroom。Andnotthebankeronly，buteverymerchantandtrader，accordingtohismeans，isunderthenecessityofkeepingbyhimastockofcashsufficientnotonlyforhisordinarydisbursements，buttomeetanyunexpecteddemands。Thatthequantityofspecieaccumulatedintheseinnumerabledepots，notinFranceonly，butallovertheContinent，wherebankinginstitutionsarestilleitherentirelywantingorveryimperfectlyorganized，isnotmerelyimmenseinitself，butadmitsofbeinglargelydrawnupon，andtransferredeveninvastmassesfromonecountrytoanother，withverylittle，ifany，effectonprices，orothermaterialderangements，wehavehadsomeremarkableproofs:"amongothers，"thesignalsuccesswhichattendedthesimultaneouseffortsofsomeoftheprincipalEuropeanpowers（Russia，Austria，Prussia，Sweden，andDenmark）toreplenishtheirtreasuries，andtoreplacewithcoinaconsiderableportionofthedepreciatedpaperwhichthenecessitiesofthewarhadforceduponthem，andthisattheverytimewhentheavailablestockofthepreciousmetalsovertheworldhadbeenreducedbytheexertionsofEnglandtorecoverhermetalliccurrency……Therecanbenodoubtthatthesecombinedoperationswereonascaleofveryextraordinarymagnitude，thattheywereaccomplishedwithoutanysensibleinjurytocommerceorpublicprosperity，oranyothereffectthansometemporaryderangementoftheexchanges，andthattheprivatehoardsoftreasureaccumulatedthroughoutEuropeduringthewarmusthavebeentheprincipalsourcefromwhichallthisgoldandsilverwascollected。Andnoperson，Ithink，canfairlycontemplatethevastsuperfluxofmetallicwealththusprovedtobeatalltimesinexistence，and，thoughinadormantandinertstate，alwaysreadytospringintoactivityonthefirstindicationofasufficientlyintensedemand，withoutfeelingthemselvescompelledtoadmitthepossibilityoftheminesbeingevenshutupforyearstogether，andtheproductionofthemetalsaltogethersuspended，whiletheremightbescarcelyaperceptiblealterationintheexchangeablevalueofthemetal。"（8*）
Applyingthistothecurrencydoctrineanditsadvocates，"onemightimagine，"saysMrFullarton，（9*）"thattheysupposedthegoldwhichisdrainedoffforexportationfromacountryusingacurrencyexclusivelymetallic，tobecollectedbydribletsatthefairsandmarkets，orfromthetillsofthegrocersandmercers。Theyneverevenalludetotheexistenceofsuchathingasagreathoardofthemetals，thoughupontheactionofthehoardsdependsthewholeeconomyofinternationalpaymentsbetweenspecie—circulatingcommunities，whileanyoperationofthemoneycollectedinhoardsuponpricesmust，evenaccordingtothecurrencyhypothesis，bewhollyimpossible。Weknowfromexperiencewhatenormouspaymentsingoldandsilverspecie—circulatingcountriesarecapable，attimes，ofmaking，withouttheleastdisturbanceoftheirinternalprosperity;andwhenceisitsupposedthatthesepaymentscome，butfromtheirhoards？letusthinkhowthemoneymarketofacountrytransactingallitsexchangesthroughthemediumofthepreciousmetalsonly，wouldbelikelytobeaffectedbythenecessityofmakingaforeignpaymentofseveralmillions。Ofcoursethenecessitycouldonlybesatisfiedbyatransmissionofcapital;
andwouldnotthecompetitionforthepossessionofcapitalfortransmissionwhichtheoccasionwouldcallforth，necessarilyraisethemarketrateofinterest？Ifthepaymentwastobemadebythegovernment，wouldnotthegovernment，inallprobability，havetoopenanewloanontermsmorethanusuallyfavourabletothelender？"Ifmadebymerchants，woulditnotbedrawneitherfromthedepositsinbanks，orfromthereserveswhichmerchantskeepbythemindefaultofbanks，orwoulditnotobligethemtoobtainthenecessaryamountofspeciebygoingintothemoneymarketasborrowers？"Andwouldnotallthisinevitablyactuponthehoards，anddrawforthintoactivityaportionofthegoldandsilverwhichthemoney—dealershadbeenaccumulating，andsomeofthemwiththeexpressviewofwatchingsuchopportunitiesforturningtheirtreasurestoadvantage？……
"Tocometothepresenttime，thebalanceofpaymentswithnearlyallEuropehasforaboutfouryearspastbeeninfavourofthiscountry，andgoldhasbeenpouringintilltheinfluxamountstotheunheard—ofsumofaboutfourteenmillionssterling。Yetinallthistime，hasanyoneheardacomplaintofanyserioussufferinginflictedonthepeopleoftheContinent？
Havepricestherebeengreatlydepressedbeyondtheirrangeinthiscountry？Havewagesfallen，Orhavemerchantsbeenextensivelyruinedbytheuniversaldepreciationoftheirstock？
Therehasoccurrednothingofthekind。Thetenorofcommercialandmonetaryaffairshasbeeneverywhereevenandtranquil;andinFrancemoreparticularly，animprovingrevenueandextendedcommercebeartestimonytothecontinuedprogressofinternalprosperity。Itmaybedoubted，indeed，ifthisgreateffluxofgoldhaswithdrawnfromthatportionofthemetallicwealthofthenationwhichreallycirculates，asinglenapoleon。Andithasbeenequallyobvious，fromtheundisturbedstateofcredit，thatnotonlyhasthesupplyofspecieindispensablefortheconductofbusinessintheretailmarketbeenallthewhileuninterrupted，butthatthehoardshavecontinuedtofurnisheveryfacilityrequisitefortheregularityofmercantilepayments。Itisoftheveryessenceofthemetallicsystem，thatthehoards，inallcasesofprobableoccurrence，shouldbeequaltobothobjects;thattheyshould，inthefirstplace，supplythebulliondemandedforexportation，andinthenextplace，shouldkeepupthehomecirculationtoitslegitimatecomplement。Everymantradingunderthatsystem，who，inthecorseofhisbusiness，mayhavefrequentoccasiontoremitlargesumsinspecietoforeigncountries，musteitherkeepbyhimasufficienttreasureofhisownormusthavethemeansofborrowingenoughfromhisneighbours，notonlytomakeupwhenwantedtheamountofhisremittances，buttoenablehim，moreover，tocarryonhisordinarytransactionsathomewithoutinterruption。"
InacountryinwhichcreditiscarriedtosogreatanextentasinEngland，onegreatreserve，inasingleestablishment，theBankofEngland，suppliestheplace，asfarasthepreciousmetalsareconcerned，ofthemultitudinousreservesofothercountries。Thetheoreticalprinciple，therefore，ofthecurrencydoctrinewouldrequire，thatallthosedrainsofthemetal，which，ifthecurrencywerepurelymetallic，wouldbetakenfromthehoards，shouldbeallowedtooperatefreelyuponthereserveinthecoffersoftheBankofEngland，withoutanyattempttostopiteitherbyadiminutionofthecurrencyorbyacontractionofcredit。Nortothiswouldtherebeanywell—groundedobjection，unlessthedrainweresogreatastothreatentheexhaustionofthereserve，andaconsequentstoppageofpayments;adangeragainstwhichitispossibletotakeadequateprecautions，becauseinthecaseswhichweareconsidering，thedrainisforforeignpaymentsofdefiniteamount，andstopsofitselfassoonastheseareeffected。AndinallsystemsitisadmittedthatthehabitualreserveoftheBankshouldexceedtheutmostamounttowhichexperiencewarrantsthebeliefthatsuchadrainmayextend;whichextremelimitMrFullartonaffirmstobesevenmillions，butMrTookerecommendsanaveragereserveoften，andinhislastpublication，oftwelvemillions。Underthesecircumstances，thehabitualreserve，whichwouldneverbeemployedindiscounts，butkepttobepaidoutexclusivelyinexchangeforchequesorbanknotes，wouldbesufficientforacrisisofthisdescription;whichthereforewouldpassoffwithouthavingitsdifficultiesincreasedbyacontractioneitherofcreditorofthecirculation。Butthis，themostadvantageousdenouementthatthecaseadmitsof，andnotonlyconsistentwithbutrequiredbytheprofessedprincipleofthesystem，thepanegyristsofthesystemclaimforitasagreatmeritthatitprevents。Theyboast，thatonthefirstappearanceofadrainforexportation—whatevermaybeitscause，andwhether，underametalliccurrency，itwouldinvolveacontractionofcreditornot——theBankisatonceobligedtocurtailitsadvances。Andthis，beitremembered，whentherehasbeennospeculativeriseofpriceswhichitisindispensabletocorrect，nounusualextensionofcreditrequiringcontraction;
butthedemandforgoldissolelyoccasionedbyforeignpaymentsonaccountofgovernment，orlargecornimportationsconsequentonabadharvest。
Evensupposingthatthereserveisinsufficienttomeettheforeignpayments，andthatthemeanswherewithtomakethemhavetobetakenfromtheloanablecapitalofthecountry，theconsequenceofwhichisariseoftherateofinterest;insuchcircumstancessomepressureonthemoneymarketisunavoidable，butthatpressureismuchincreasedinseveritybytheseparationofthebankingfromtheissuedepartment。ThecaseisgenerallystatedasiftheActonlyoperatedinoneway，namely，bypreventingtheBank，whenithaspartedwith（say）threemillionsofbullioninexchangeforthreemillionsofitsnotes，fromagainlendingthosenotes，indiscountsorotheradvances。ButtheActreallydoesmuchmorethanthis。Itiswellknown，thatthefirstoperationofadrainisalwaysonthebankingdepartment。Thebankdepositsconstitutethebulkoftheunemployedanddisposablecapitalofthecountry;andcapitalwantedforforeignpaymentsisalmostalwaysobtainedmainlybydrawingoutdeposits。Supposingthreemillionstobetheamountwanted，threemillionsofnotesaredrawnfromthebankingdepartment（eitherdirectlyorthroughtheprivatebankers，whokeepthebulkoftheirreserveswiththeBankofEngland），andthethreemillionsofnotes，thusobtained，arepresentedattheIssueDepartment，andexchangedagainstgoldforexportation。
Thusadrainuponthecountryatlargeofonlythreemillions，isadrainupontheBankvirtuallyofsixmillions。Thedepositshavelostthreemillions，andthereserveoftheIssueDepartmenthaslostanequalamount。Asthetwodepartments，solongastheActremainsinoperation，cannotevenintheutmostextremityhelponeanother，eachmusttakeitsseparateprecautionsforitsownsafety。Whatevermeasures，therefore，onthepartoftheBank，wouldhavebeenrequiredundertheoldsystembyadrainofsixmillions，arenowrenderednecessarybyadrainonlyofthree。TheIssueDepartmentprotectsitselfinthemannerprescribedbytheAct，bynotre—issuingthethreemillionsofnoteswhichhavebeenreturnedtoit。ButtheBankingDepartmentmusttakemeasurestoreplenishitsreserve，whichhasbeenreducedbythreemillions。Itsliabilitieshavingalsodecreasedthreemillions，bythelossofthatamountofdeposits，thereserve，ontheordinarybankingprincipleofathirdoftheliabilities，willbearareductionofonemillion。Buttheothertwomillionsitmustprocurebylettingthatamountofadvancesout，andnotrenewingthem。Notonlymustitraiseitsrateofinterest，butitmusteffect，bywhatevermeans，adiminutionoftwomillionsinthetotalamountofitsdiscounts:oritmustsellsecuritiestoanequalamount。ThisviolentactiononthemoneymarketforthepurposeofreplenishingtheBankingreserve，iswhollyoccasionedbytheActof1844。IftherestrictionsofthatActdidnotexist，theBank，insteadofcontractingitsdiscounts，wouldsimplytransfertwomillions，eitheringoldorinnotes，fromtheIssuetotheBankingDepartment;notinordertolendthemtothepublic，buttosecurethesolvencyoftheBankingDepartmentintheeventoffurtherunexpecteddemandsbythedepositors。Andunlessthedraincontinued，andreachedsogreatanamountastoseemlikelytoexceedthewholeofthegoldinthereservesofbothdepartments，theBankwouldbeundernonecessity，whilethepressurelasted，ofwithholdingfromcommerceitsaccustomedamountofaccommodation，atarateofinterestcorrespondingtotheincreaseddemand。（10*）
IamawareitwillbesaidthatbyallowingdrainsofthischaractertooperatefreelyupontheBankreserveuntiltheyceaseofthemselves，acontractionofthecurrencyandofcreditwouldnotbeprevented，butonlypostponed;sinceifalimitationofissueswerenotresortedtoforthepurposeofcheckingthedraininitscommencement，thesameorastillgreaterlimitationmusttakeplaceafterwards，inorder，byactingonprices，tobringbackthislargequantityofgold，fortheindispensablepurposeofreplenishingtheBankreserve。Butinthisargumentseveralthingsareoverlooked。Inthefirstplace，thegoldmightbebroughtback，notbyafallofprices，butbythemuchmorerapidandconvenientmediumofariseoftherateofinterest，involvingnofallofanypricesexceptthepriceofsecurities。
EitherEnglishsecuritieswouldbeboughtonaccountofforeigners，orforeignsecuritiesheldinEnglandwouldbesentabroadforsale，bothwhichoperationstookplacelargelyduringthemercantiledifficultiesof1847，andnotonlycheckedtheeffluxofgold，butturnedthetideandbroughtthemetalback。
Itwasnot，therefore，broughtbackbyacontractionofthecurrency，thoughinthiscaseitcertainlywassobyacontractionofloans。Buteventhisisnotalwaysindispensableforinthesecondplace，itisnotnecessarythatthegoldshouldreturnwiththesamesuddennesswithwhichitwentout。Agreatportionwouldprobablyreturnintheordinarywayofcommerce，inpaymentforexportedcommodities。Theextragainsmadebydealersandproducersinforeigncountriesthroughtheextrapaymentstheyreceivefromthiscountry，areverylikelytobepartlyexpendedinincreasedpurchasesofEnglishcommodities，eitherforconsumptionoronspeculation，thoughtheeffectmaynotmanifestitselfwithsufficientrapiditytoenablethetransmissionofgoldtobedispensedwithinthefirstinstance。
Theseextrapurchaseswouldturnthebalanceofpaymentsinfavourofthecountry，andgraduallyrestoreaportionoftheexportedgold;andtheremainderwouldprobablybebroughtback，withoutanyconsiderableriseoftherateofinterestinEngland，bythefallofitinforeigncountries，occasionedbytheadditionofsomemillionsofgoldtotheloanablecapitalofthosecountries。Indeed，inthestateofthingsconsequentonthegolddiscoveries，whentheenormousquantityofgoldannuallyproducedinAustralia，andmuchofthatfromCalifornia，isdistributedtoothercountriesthroughEngland，andamonthseldompasseswithoutalargearrival，theBankreservescanreplenishthemselveswithoutanyre—importationofthegoldpreviouslycarriedoffbyadrain。Allthatisneedfulisanintermission，andaverybriefintermissionissufficient，oftheexportation。
Forthesereasonsitappearstome，thatnotwithstandingthebeneficialoperationoftheActof1844inthefirststagesofonekindofcommercialcrisis（thatproducedbyover—speculation），itonthewholemateriallyaggravatestheseverityofcommercialrevulsions。AndnotonlyarecontractionsofcreditmademoreseverebytheAct，theyarealsomadegreatlymorefrequent。"Suppose，"saysMrGeorgeWalker，inaclear，impartial，andconclusiveseriesofpapersintheAberdeenHerald，formingoneofthebestexistingdiscussionsofthepresentquestion—"supposethat，ofeighteenmillionsofgold，tenareintheissuedepartmentandeightareinthebankingdepartment。Theresultisthesameasunderametriccurrencywithonlyeightmillionsinreserve，insteadofeighteen……
TheeffectoftheBankActis，thattheproceedingsoftheBankunderadrainarenotdeterminedbytheamountofgoldwithinitsvaults，butare，oroughttobe，determinedbytheportionofitbelongingtothebankingdepartment。Withthewholeofthegoldatitsdisposal，itmayfinditunnecessarytointerferewithcredit，orforcedownprices，ifadrainleaveafairreservebehind。Withonlythebankingreserveatitsdisposal，itmust，fromthenarrowmarginithastooperateon，meetalldrainsbycounteractivesmoreorlessstrong，totheinjuryofthecommercialworld;andifitfailtodoso，asitmayfail，theconsequenceisdestruction。HencetheextraordinaryandfrequentvariationsoftherateofinterestundertheBankAct。Since1847;whentheeyesoftheBankwereopenedtoitstrueposition，ithasfeltitnecessary，asaprecautionarymeasure，thateveryvariationinthereserveshouldbeaccompaniedbyaniterationintherateofinterest。"TomaketheActinnocuous，therefore，itwouldbenecessarythattheBank，inadditiontothewholeofthegoldintheIssueDepartment，shouldretainasgreatareserveingoldornotesintheBankingDepartmentalone，aswouldsufficeundertheoldsystemforthesecuritybothoftheissuesandofthedeposits。
5。Thereremaintwoquestionsrespectingabank—notecurrency，whichhavealsobeenasubjectofconsiderablediscussionoflateyears:whethertheprivilegeofprovidingitshouldbeconfinedtoasingleestablishment，suchastheBankofEngland，orapluralityofissuersshouldbeallowed;andinthelattercase，whetheranypeculiarprecautionsarerequisiteoradvisable，toprotecttheholdersofnotesagainstlossesoccasionedbytheinsolvencyoftheissuers。
Thecourseoftheprecedingspeculationshasledustoattachsomuchlessofpeculiarimportancetobanknotes，ascomparedwithotherformsofcredit，thanaccordswiththenotionsgenerallycurrent，thatquestionsrespectingtheregulationofsoverysmallapartofthegeneralmassofcredit，cannotappeartousofsuchmomentousimportastheyaresometimesconsidered。
Banknotes，however，havesofararealpeculiarity，thattheyaretheonlyformofcreditsufficientlyconvenientforallthepurposesofcirculation，tobeableentirelytosupersedetheuseofmetallicmoneyforinternalpurposes。Thoughtheextensionoftheuseofchequeshasatendencymoreandmoretodiminishthenumberofbanknotes，asitwouldthatofthesovereignsorothercoinswhichwouldtaketheirplaceiftheywereabolished;thereissure，foralongtimetocome，tobeaconsiderablesupplyofthem，whereverthenecessarydegreeofcommercialconfidenceexists，andtheirfreeuseispermitted。Theexclusiveprivilege，therefore，ofissuingthem，ifreservedtotheGovernmentortosomeonebody，isasourceofgreatpecuniarygain。Thatthisgainshouldbeobtainedforthenationatlargeisbothpracticableanddesirable:andifthemanagementofabank—notecurrencyoughttobesocompletelymechanical，soentirelyathingoffixedrule，asitismadebytheActof1844，thereseemsnoreasonwhythismechanismshouldbeworkedfortheprofitofanyprivateissuer，ratherthanforthepublictreasury。If，however，aplanbepreferredwhichleavesthevariationsintheamountofissuesinanydegreewhatevertothediscretionoftheissuers，itisnotdesirablethattotheever—growingattributionsoftheGovernment，sodelicateafunctionshouldbesuperadded;andthattheattentionoftheheadsofthestateshouldbedivertedfromlargerobjects，bytheirbeingbesiegedwiththeapplications，andmadeamarkforalltheattacks，whichareneversparedtothosedeemedtoberesponsibleforanyacts，howeverminute，connectedwiththeregulationofthecurrency。Itwouldbebetterthattreasurynotes，exchangeableforgoldondemand，shouldbeissuedtoafixedamount，notexceedingtheminimumofabank—notecurrency;
theremainderofthenoteswhichmayberequiredbeinglefttobesuppliedeitherbyoneorbyanumberofprivatebankingestablishments。OranestablishmentliketheBankofEnglandmightsupplythewholecountry，onconditionoflendingfifteenortwentymillionsofitsnotestothegovernmentwithoutinterest;whichwouldgivethesamepecuniaryadvantagetothestateasifitissuedthatnumberofitsownnotes。
ThereasonordinarilyallegedincondemnationofthesystemofpluralityofissuerswhichexistedinEnglandbeforetheActof1844，andundercertainlimitationsstillsubsists，isthatthecompetitionofthesedifferentissuersinducesthemtoincreasetheamountoftheirnotestoaninjuriousextent。Butwehaveseenthatthepowerwhichbankershaveofaugmentingtheirissues，andthedegreeofmischiefwhichtheycanproducebyit，arequitetriflingcomparedwiththecurrentover—estimate。AsremarkedbyMrFullarton，（11*）theextraordinaryincreaseofbankingcompetitionoccasionedbytheestablishmentofthejoint—stockbanks，acompetitionoftenofthemostrecklesskind，hasprovedutterlypowerlesstoenlargetheaggregatemassofthebank—notecirculation;thataggregatecirculationhaving，onthecontrary，actuallydecreased。Intheabsenceofanyspecialcaseforanexceptiontofreedomofindustry，thegeneralruleoughttoprevail。Itappearsdesirable，however，tomaintainonegreatestablishmentliketheBankofEngland，distinguishedfromotherbanksofissueinthis，thatitaloneisrequiredtopayingold，theothersbeingatlibertytopaytheirnoteswithnotesofthecentralestablishment。Theobjectofthisisthattheremaybeonebody，responsibleformaintainingareserveofthepreciousmetalssufficienttomeetanydrainthatcanreasonablybeexpectedtotakeplace。Bydisseminatingthisresponsibilityamonganumberofbanks，itispreventedfromoperatingefficaciouslyuponany。orifitbestillenforcedagainstone，thereservesofthemetalsretainedbyalltheothersarecapitalkeptidleinpurewaste，whichmaybedispensedwithbyallowingthemattheiroptiontopayinBankofEnglandnotes。
6。Thequestionremainswhether，incaseofapluralityofissuers，anypeculiarprecautionsareneededtoprotecttheholdersofnotesfromtheconsequencesoffailureofpayment。
Before1826，theinsolvencyofbanksofissuewasafrequentandveryseriousevil，oftenspreadingdistressthroughawholeneighbourhood，andatoneblowdeprivingprovidentindustryoftheresultsoflongandpainfulsaving。ThiswasoneofthechiefreasonswhichinducedParliament，inthatyear，toprohibittheissueofbanknotesofadenominationbelowfivepounds，thatthelabouringclassesatleastmightbeaslittleaspossibleexposedtoparticipateinthissuffering。Asanadditionalsafeguard，ithasbeensuggestedtogivetheholdersofnotesapriorityoverothercreditors，ortorequirebankerstodepositstockorotherpublicsecuritiesasapledgeforthewholeamountoftheirissues。Theinsecurityoftheformerbank—notecurrencyofEnglandwaspartlytheworkofthelaw，which，inordertogiveaqualifiedmonopolyofbankingbusinesstotheBankofEngland，hadactuallymadetheformationofsafebankingestablishmentsapunishableoffence，byprohibitingtheexistenceofanybanks，intownorcountry，whetherofissueordeposit，withanumberofpartnersexceedingsix。Thistrulycharacteristicspecimenoftheoldsystemofmonopolyandrestrictionvasdoneawaywithin1826，bothastoissuesanddeposits，everywherebutinadistrictofsixty—fivemilesradiusroundLondon，andin1833inthatdistrictalso，asfarasrelatestodeposits。Itwashopedthatthenumerousjoint—stockbankssinceestablishedwouldhavefurnishedamoretrustworthycurrency，andthatundertheirinfluencethebankingsystemofEnglandwouldhavebeenalmostassecuretothepublicasthatofScotland（wherebankingwasalwaysfree）hasbeenfortwocenturiespast。Butthealmostincredibleinstancesofrecklessandfraudulentmismanagementwhichtheseinstitutionshaveoflateafforded（thoughinsomeofthemostnotoriouscasesthedelinquentestablishmentshavenotbeenbanksofissue），haveshownonlytooclearlythat，southoftheTweedatleast，thejoint—stockprincipleappliedtobankingisnottheadequatesafeguarditwassoconfidentlysupposedtobe:anditisdifficultnowtoresisttheconviction，thatifpluralityofissuersisallowedtoexist，somekindofspecialsecurityinfavouroftheholdersofnotesshouldbeexactedasanimperativecondition。
NOTES:
1。RegulationofCurrencies，p。85。
2。Ithinkmyselfjustifiedinaffirmingthatthemitigationofcommercialrevulsionsisthereal，andonlyserious，purposeoftheActof1844。Iamquiteawarethatitssupportersinsist（especiallysince1847）onitssupremeefficacyin"maintainingtheconvertibilityoftheBanknote。"ButImustbeexcusedfornotattachinganyseriousimportancetothisoneamongitsallegedmerits。TheconvertibilityoftheBanknotewasmaintained，andwouldhavecontinuedtobemaintained，atwhatevercost，undertheoldsystem。AswaswellsaidbyLordOverstoneinhisEvidence，theBankcanalways，byasufficientlyviolentactiononcredit，saveitselfattheexpenseofthemercantilepublic。ThattheActof1844mitigatestheviolenceofthatprocess，isasufficientclaimtopreferinitsbehalf。
Besides，ifwesupposesuchadegreeofmismanagement，onthepartoftheBank，as，wereitnotfortheAct，wouldendangerthecontinuanceofconvertibility，thesame（oraless）degreeofmismanagement，practisedundertheAct，wouldsufficetoproduceasuspensionofpaymentsbytheBankingDepartment;aneventwhichthecompulsoryseparationofthetwodepartmentsbringsmuchnearertopossibilitythanitwasbefore，andwhich，involvingasitwouldtheprobablestoppageofeveryprivatebankingestablishmentinLondon，andperhapsalsothenon—paymentofthedividendstothenationalcreditor，wouldbeafargreaterimmediatecalamitythanabriefinterruptionoftheconvertibilityofthenote;insomuchthat，toenabletheBanktoresumepaymentofitsdeposits，noGovernmentwouldhesitateamomenttosuspendpaymentofthenotes，ifsuspensionoftheActof1844provedinsufficient。
3。Aconditionalincreaseofthismaximumispermitted，butonlywhenbyarrangementwithanycountrybanktheissuesofthatbankarediscontinued，andBankofEnglandmotessubstituted;andeventhentheincreaseislimitedtotwo—thirdsoftheamountofthecountrynotestobetherebysuperseded。UndertheprovisiontheamountofnoteswhichtheBankofEnglandisnowatlibertytoissueagainstsecurities，isaboutfifteenmillions。
4。p。106。
5。TruetheBankisnotprecludedfrommakingincreasedadvancesfromitsdeposits，whicharelikelytobeofunusuallylargeamount，since，attheseperiods，everyoneleaveshismoneyindepositinordertohaveitwithincall。But，thatthedepositsarenotalwayssufficient，wasconclusivelyprovedin1847，whentheBankstretchedtotheveryutmostthemeansofrelievingcommercewhichitsdepositsafforded，withoutallayingthepanic，whichhoweverceasedatoncewhentheGovernmentdecidedonsuspendingtheAct。
6。Thispredictionwasverifiedontheverynextoccurrenceofacommercialcrisis，in1857;whenGovernmentwereagainunderthenecessityofsuspending，ontheirownresponsibility，theprovisionsoftheAct。
7。Itisknown，fromunquestionablefacts，thatthehoardsofmoneyatalltimesexistinginthehandsoftheFrenchpeasantry，oftenfromaremotedate，surpassanyamountwhichcouldhavebeenimaginedpossible;andeveninsopooracountryasIreland，ithasoflatebeenascertained，thatthesmallfarmerssometimespossesshoardsquitedisproportionedtotheirvisiblemeansofsubsistence。
8。FullartonontheRegulationofCurrencies，pp。71—4。
9。Ib。pp。139—42。
10。This，whichIhavecalled"thedoubleactionofdrains。"hasbeenstrangelyunderstoodasifIhadassertedthattheBankiscompelledtopartwithsixmillions’worthofpropertybyadrainofthreemillions。suchanassertionwouldbetooabsurdtorequireanyrefutation。Drainshaveadoubleaction，notuponthepecuniarypositionoftheBankitself，butuponthemeasuresitisforcedtotakeinordertostopthedrain。ThoughtheBankitselfisnopoorer，itstworeserves，thereserveinthebankingdepartmentandthereserveintheissuedepartment，haveeachbeenreducedbythreemillionsbyadrainofonlythree。Andastheseparationofthedepartmentsrendersitnecessarythateachofthemseparatelyshouldbekeptasstrongasthetwotogetherneedbeiftheycouldhelponeanother，theBank’sactiononthemoneymarketmustbeasviolentonadrainofthreemillions，aswouldhavebeenrequiredontheoldsystemforoneofsix。Thereserveinthebankingdepartmentbeinglessthanitotherwisewouldbebytheentireamountofthebullionintheissuedepartment，andthewholeamountofthedrainfallinginthefirstinstanceonthatdiminishedreserve，thepressureofthewholedrainonthehalfreserveisasmuchfelt，andrequiresasstrongmeasurestostopit，asapressureoftwicetheamountontheentirereserve。AsIhavesaidelsewhere"itisasifamanhavingtoliftaweightwererestrictedfromusingbothhandstodoit，andwhereonlyallowedtouseonehandatatime:inwhichcaseitwouldbenecessarythateachofhishandsshouldbeasstrongasthetwotogether。"{EvidencebeforetheCommitteeoftheHouseofCommonsontheBankActs，in1857。
11。Pp。89—92。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter25
OftheCompetitionofDifferentCountriesintheSameMarket
1。InthephraseologyoftheMercantileSystem，thelanguage
anddoctrinesofwhicharestillthebasisofwhatmaybecalled
thepoliticaleconomyofthesellingclasses，asdistinguished
fromthebuyersorconsumers，thereisnowordofmorefrequent
recurrenceormoreperilousimportthanthewordunderselling。To
undersellothercountries——nottobeundersoldbyother
countries——werespokenof，andarestillveryoftenspokenof，
almostasiftheywerethesolepurposesforwhichproductionand
commoditiesexist。Thefeelingsofrivaltradesmen，prevailing
amongnations，overruledforcenturiesallsenseofthegeneral
communityofadvantagewhichcommercialcountriesderivefromthe
prosperityofoneanother:andthatcommercialspiritwhichis
nowoneofthestrongestobstaclestowars，wasduringacertain
periodofEuropeanhistorytheirprincipalcause。
Eveninthemoreenlightenedviewnowattainableofthe
natureandconsequencesofinternationalcommerce，some，thougha
comparativelysmall，spacemuststillbemadeforthefactof
commercialrivality。Nationsmay，likeindividualdealers，be
competitors，withoppositeinterests，inthemarketsofsome
commodities，whileinotherstheyareinthemorefortunate
relationofreciprocalcustomers。Thebenefitofcommercedoes
notconsist，asitwasoncethoughttodo，inthecommodities
sold;but，sincethecommoditiessoldarethemeansofobtaining
thosewhicharebought，anationwouldbecutofffromthereal
advantageofcommerce，theimports，ifitcouldnotinduceother
nationstotakeanyofitscommoditiesinexchange;andin
proportionasthecompetitionofothercountiescompelsitto
offeritscommoditiesoncheaperterms，onpainofnotselling
thematall，theimportswhichitobtainsbyitsforeigntrade
areprocuredatgreatercost。
Thesepointshavebeenadequately，thoughincidentally，
frustratedinsomeoftheprecedingchapters。Butthegreatspace
whichthetopichasfilled，andcontinuestofill，ineconomical
speculations，andinthepracticalanxietiesbothofpoliticians
andofdealersandmanufacturers，makesitdesirable，before
quittingthesubjectofinternationalexchange，tosubjoinafew
observationsonthethingswhichdo，andonthosewhichdonot，
enablecountriestounderselloneanother。
Onecountrycanonlyundersellanotherinagivenmarket，to
theextentofentirelyexpellingherfromit，ontwoconditions。
Inthefirstplace，shemusthaveagreateradvantagethanthe
secondcountryintheproductionofthearticleexportedbyboth;
meaningbyagreateradvantage（ashasbeenalreadysofully
explained）notabsolutely，butincomparisonwithother
commodities;andinthesecondplace，suchmustbeherrelation
withthecustomercountryinrespecttothedemandforeach
other’sproducts，andsuchtheconsequentstateofinternational
values，astogiveawaytothecustomercountrymorethanthe
wholeadvantagepossessedbytherivalcountry;otherwisethe
rivalwillstillbeabletoholdhergroundinthemarket。
Letusreverttotheimaginaryhypothesisofatradebetween
EnglandandGermanyinclothandlinen:Englandbeingcapableof
producing10yardsofclothatthesamecostwith15yardsof
linen，Germanyatthesamecostwith20，andthetwocommodities
beingexchangedbetweenthetwocountries（costofcarriage
apart）atsomeintermediaterate，say10for17。Germanycould
notbepermanentlyundersoldintheEnglishmarket，andexpelled
fromit，unlessbyacountrywhichofferednotmerelymorethan
17，butmorethan20yardsoflinenfor10ofcloth。Shortof
that，thecompetitionwouldonlyobligeGermanytopaydearerfor
cloth，butwouldnotdisableherfromexportinglinen。The
country，therefore，whichcouldundersellGermany，must，inthe
firstplace，beabletoproducelinenatlesscost，comparedwith
cloth，thanGermanyherself;andinthenextplace，musthave
suchademandforcloth，orotherEnglishcommodities，aswould
compelher，evenwhenshebecamesoleoccupantofthemarket，to
giveagreateradvantagetoEnglandthanGermanycouldgiveby
resigningthewholeofhers;togive，forexample，21yardsfor
10。Forifnot——if，forexample，theequationofinternational
demand，afterGermanywasexcluded，gavearatioof18for10，
Germanycouldagainenterintothecompetition;Germanywouldbe
nowtheundersellingnation;andtherewouldbeapoint，perhaps
19for10，atwhichbothcountrieswouldbeabletomaintain
theirground，andtosellinEnglandenoughlinentopayforthe
cloth，orotherEnglishcommodities，forwhich，onthese
newly—adjustedtermsofinterchange，theyhadademand。Inlike
manner，England，asanexporterofcloth，couldonlybedriven
fromtheGermanmarketbysomerivalwhosesuperioradvantagesin
theproductionofclothenabledher，andtheintensityofwhose
demandforGermanproducecompelledher，tooffer10yardsof
cloth，notmerelyforlessthan17yardsoflinen，butforless
than15。Inthatcase，Englandcouldnolongercarryonthetrade
withoutloss;butinanycaseshortofthis，shewouldmerelybe
obligedtogivetoGermanymoreclothforlesslinenthanshehad
previouslygiven。