The report of the Bullion Committee contained a clear explanation of the proper method of regulating an inconvertible paper currency. The Bank Charter Act of 1844 governs and restricts the issue of bank notes convertible into gold on demand.

For some years preceding the passing of this Act, the condition of the note issues of this country had caused very general dissatisfaction in financial circles. Commercial crises had occurred at frequent periodic intervals, involving the failure of numerous country banks, and gravely imperilling the ability of the Bank of England to meet its engagements. These crises were in many quarters attributed to the excessive issue of notes both by the Bank of England and more especially by the country bankers. Gradually two hostile theories were evolved, each of which was claimed by its supporters to be the only method of governing a note issue. These two theories were the Currency Theory and the Banking Theory. The Currency Theory is this: In issuing bank notes, care should be taken that the amount in circulation should always be the same as the amount of gold would be, provided the notes did not exist. Mr. S. J. Loyd, better known as Lord Overstone, was the chief exponent of these views, and the following is his opinion as expressed in his evidence before a Select Committee of the House of Commons on the note issue of the country in 1840:

"A metallic currency I conceive, by virtue of its own intrinsic value, will regulate itself; but a paper currency, having no intrinsic value, requires to be subjected to some artificial regulation respecting its amount. The use of paper currency is resorted to on account of its greater economy and convenience, but it is important that that paper currency should be made to conform to what a metallic currency would be, and especially that it should be kept of the same value with the metallic currency, by being kept at all times of the same amount. Now the influx and efflux of bullion is the only sure test of what would have been the variations of a metallic currency, and therefore I conceive that that constitutes the only proper rule by which to regulate the fluctuations of a paper currency."

Their opponents, the upholders of the Banking Theory, urged, on the other hand, that the only consideration a banker need bear in mind in regulating his issues of notes was whether these issues were made in legitimate banking transactions, as opposed to speculative dealings outside the ordinary commercial channels. If the amount of notes issued in this legitimate manner should be greater than that needed by the country, the excess will be automatically presented for payment.

Mr. J. W. Gilbart, the general manager of the London and Westminster Bank, was one of the chief exponents of this view, and he ridiculed the idea that a country banker should regulate his issues by the movements of gold to and from the country. The country circulation, he said, increased or decreased according to local conditions, the state of the harvest, and of local trade.

Each of these contending theories contained a certain amount of truth, but they each overlooked vital details which greatly weakened their position.