The Currency Theorists were thoroughly justified in urging that in issuing notes which were payable in gold on demand, bankers should keep a careful eye upon the stock of gold in the country which was available for this purpose. But they did not realise that a paper currency is an addition to the metallic currency, and not merely a substitute for it; that elasticity is a necessity under existing commercial conditions, and that notes may be required to fill the gap caused by the temporary deficiency of gold. If their theory were put into practice, and the amount of notes strictly limited to the amount of gold deposited to secure them, this elasticity of the paper currency, excluding for the moment the action of other forms of paper currency, is destroyed, their opponents emphasized the necessity for issuing notes only for legitimate business purposes. If this were possible, no doubt the note supply might automatically adjust itself to the needs of the country, but unfortunately a banker cannot always enquire the purposes for which his notes are required, and he certainly is very often quite unable to gauge the character of the operations he is assisting to finance. In fact, the power of a banker to control speculative operations is strictly limited. Neither of these theories then is entirely satisfactory, and perhaps this was realised by the framers of the Act, for it is a compromise, although leaning towards the position assumed by Lord Overstone and his adherents.

The main provisions of the Act were these:

(1) (a) The Bank of England was to be divided into two Departments, the Issue Department and the Banking Department, to be kept wholly distinct from each other.

(2) Securities to the value of £14,000,000 were to be transferred to the Issue Department, and notes were to be issued to this amount and transferred to the Banking Department. All coin and bullion not required for immediate use was to be deposited in the Issue Department, and all notes issued beyond the sum of £14,000,000 were to be secured by the deposit of gold and silver to an equal amount with that of such excess issue.

(3) The silver bullion held in the Issue Department was never to exceed a fourth part of the gold coin and bullion.

(4) Any one might demand notes from the Issue Department in exchange for gold bullion at the rate of £3 17s. 9d. per ounce.

{a) The numbers here given to the sections are not the numbers of the clauses of the Act.

(5) If any country bank should, after 1844, cease issuing notes, the Bank of England might be authorised by her Majesty in Council to increase the amount of the securities in the Issue Department to the extent of two-thirds of such lapsed issue, and to issue notes against such securities.

(6) An account of the notes issued, the securities and gold and silver coin and bullion in the Issue Department, the capital stock and deposits, the money and securities in the Banking Department was to be published weekly in the London Gazette.

(7) No stamp duty was to be payable on Bank of England notes.

(8) The Bank was to pay £180,000 a year for its privileges and exemption from stamp duty.

(9) All profits on the issue of notes beyond £14,000,000 were to go to the public.

(10) No person other than a banker was in future to issue notes payable to bearer on demand in the United Kingdom.

(11) After the passing of the Act no bankers were to issue notes payable to bearer on demand except such bankers as on May 6th, 1844, were issuing their own notes.

(12) If any such banker should become bankrupt or should from any causes cease to issue notes, he was not to resume such issues.

(13) Every banker claiming the right to issue notes was to send to the Commissioners of Stamps a return of the average amount of such issues for the twelve weeks preceding April 27th, 1844, and no banker should in future exceed on an average of four weeks the amount of this average of twelve weeks.

(14) If the monthly average should ever exceed this fixed amount, the bank should forfeit an amount equal to such excess.

(15) Every bank of issue should in future send a weekly account of its issues to the Commissioners of Stamps, which was to be published in the London Gazette.

(16) All bankers were to send their names once a year to the Stamp Office.

(17) All bankers were in future to have the right of drawing, accepting, or endorsing any bills of exchange not payable to bearer on demand.

First of all it must be noted that the action of the Issue Department is quite automatic. If gold is offered, the Bank must buy it, and must issue notes against such gold, which notes, if not required for circulation by the public, are kept in the Banking Department. Every note issued by the Bank must be represented by an equal amount of gold in the Issue Department, with the important exception that £14,000,000 in notes may be issued against securities. This latter amount, called the "fiduciary issue," has, in accordance with paragraph (5), been periodically increased until it now stands at £18,450,000. To this extent, therefore, the Act is a departure from the Currency Theory, and it is therefore described as a compromise. The second point to notice is that the Act aimed at the strict limitation and gradual extinction of the issues of the country banks, and by so doing it has conferred a practical monopoly of issuing notes upon the Bank of England, the reason for this step being not only that the country issues had in many instances proved untrustworthy, but that with the right of issue centred in one bank it would be an easier matter to control the note circulation than if scattered over a number of banks. Paragraphs (11), (12) and (13) have resulted in the gradual decline in the amount of the country circulation, which is now a purely local one. The number of banks which in 1844 retained the right of issuing notes in England and Wales was 279, with an authorised issue of £8,631,647, that being their average actual circulation for the twelve weeks preceding the date named in the Act. The number of banks who now retain the right is only thirty-eight, with an authorised issue of £1,889,484, and an actual circulation of less than half that amount.

The operation of the Act of 1844 is still a contested point, some bankers contending that it has been beneficial, others claiming that it is a standing menace to our financial position.

Let us see what were the objects of the framers of the Act, and how far these objects have been attained. Sir Robert Peel, in introducing the measure, spoke as follows: "Some apprehend that the proposed restriction upon issues will diminish the power of the Bank to act with energy at the period of monetary crisis and commercial alarm and derangement. But the object of the measure is to prevent (as far as legislation can prevent) the recurrence of those evils from which we suffered in 1825, 1836 and 1839. It is better to prevent the paroxysm than to excite it and trust to desperate remedies for the means of recovery" (b).

Another member took an opposite view. He said: "The honourable member for Lambeth said that its object was to prevent speculations and bankruptcies. Now the Bill would not do this and did not profess to do this. It was intended to ensure convertibility, and that it would ensure."