Here, then, are the motives attributed to the promoters of the Act by the two contending parties in the House at the time; to prevent the occurrence of commercial crises or to ensure the convertibility of the note. Has the Act succeeded in both or either of these directions?

A glance at the events of the years succeeding the passing of the Act compels us unhesitatingly to answer "no" to this question. In 1847, within three years of the passing of the Act, in 1857, and again in 1866, England experienced acute crises amounting almost to panics, and in each case it was found necessary to suspend the clause of the Act forbidding the Bank of England to issue notes beyond the limit fixed except against the deposit of gold to an equal amount. In each of these cases the feeling of nervous anxiety and insecurity which is the chief source of danger at such times, was almost instantly assuaged by the knowledge that this clause of the Act was suspended, and that notes could be obtained if required, whether gold were there to secure them or not. In each case not only the convertibility of the note, but the immediate solvency of the Bank was seriously endangered, and was undoubtedly secured not by the Act but by its suspension.

(b) Sir R. Peel's speech in Committee of the House of Commons on the Bill of 1844.

The Act had failed to prevent the occurrence of financial crises, it had also failed to ensure the convertibility of the Bank of England note.

Briefly, the reason of the failure was this: No one had sufficiently realised that not only is the Bank of England liable to pay gold for every note in the hands of the public, but it was also liable to pay gold for all the deposits in the Banking Department, and. this gold was all to come from the one stock. The Act had divided the Bank into two departments, and had provided that all the gold except a small quantity for immediate use should be transferred to the Issue Department. The promoters of the Act seem to have taken it for granted that if this gold were withdrawn, the liabilities of the Bank in the shape of notes would suffer a corresponding diminution. But the whole of this stock of gold could be withdrawn by cheques drawn upon the Banking Department, without reducing the Bank's liabilities in the shape of notes to any extent whatever. The only way to make the convertibility of the notes absolutely assured would be to refuse to pay cheques and so confess the Bank insolvent.

The Act had said the two departments were to be entirely separate, but the reserve of gold was a reserve not only against note liabilities but also against liabilities in the form of deposits, that is to say banking liabilities, and you could only ensure one class of liabilities at the expense of the other.

The failure of the Act to fulfil the expectations of its supporters was due therefore to the rather unaccountable neglect of its promoters to take into sufficient account the action of cheques upon the reserve of gold.

Mr. F. T. Baring, speaking soon after the crisis of 1847, said: "I believe if we look back we shall find that the operation of the deposits and the question of the reserves was not sufficiently considered either by those who were favourable or those who were opposed to the Bill. It certainly never entered into the contemplation of anyone then (in 1844) considering the subject that £7,000,000 in gold should run off, and yet that the notes in the hands of the public would rather increase than diminish" (c).

But although the Act disappointed the hopes of its framers, it by no means follows that it has been a failure. On the contrary, its action is generally admitted to be beneficial, and although in some quarters modifications of the Act are suggested, there has been of late years nothing like a general desire for its repeal.

(c) Macleod, Theory and Practice of Banking. Vol. II., p. 165.

It has failed to check speculation, but it is now generally admitted that speculation is both unavoidable and, up to a certain point, beneficial, under existing economic conditions. Excessive speculation can only be avoided by the co-operation of all classes of business men, bankers and traders alike, guided by "the progressive wisdom of the commercial world, gathered as it must be from its own eventful experience."

The Act has failed to prevent the over issue of credit by bankers by means of the deposits in their hands, but it has undoubtedly checked the over issue of credit by means of bank notes, which is a more dangerous and specious method. Bankers are, in the one case, limited by the amount of their deposits, but notes, which circulate for a long time and pass freely from hand to hand, could, when the public mind is optimistically inclined, be issued to an almost unlimited extent were it not for legal restrictions. But beyond this the Act has had an undoubtedly good effect. It has ensured that there shall be an ultimate reserve of gold at the Bank of England which, though it cannot legally be touched except by the cancellation of a corresponding sum in notes, yet is there as a last resource, to which a resort can be had in emergency by the suspension of a clause of the Act.

Every note issued beyond the sum of £18,450,000 must be represented by gold in the Issue Department. Consequently the bullion in the Bank can never be exhausted unless the amount of notes in circulation shall fall below £18,450,000. The amount of these notes has never yet fallen to within several millions of the statutory limit of issue against securities. We have therefore, even in the worst panics, always had a reserve of gold which could not be touched.

This is the strong point of the Act. Three times since 1844 the Bank has been reduced to such straits that this locked up reserve was all it had to fall back upon. Either it must use this gold, or what was tantamount to doing so, it must issue notes which were not secured by the deposit of bullion. In each case the operation of the Act in this particular was suspended by the intervention of Government, and in each case it was successful. We are therefore driven to the rather paradoxical conclusion that the real strength of the Act lies in the power of suspending it.

Fortunately for our financial well-being, the notes of the Bank of England have never during the last century been in the slightest discredited. Even in the most acute stages of panic the public have been perfectly willing to take notes if they could get them, and the chief fear has been that the supply was too limited. If the people declined to receive notes and a rush for gold ensued, nothing could save the country from a general suspension of payment. Fortunately this is not likely to happen, and therefore this power of creating credit in emergency by the suspension of the Act, at times when most other supplies of credit are cut off or discredited, is an extremely valuable one. We are by it enabled to retain intact that ultimate reserve of gold, which, to a country like England with enormous foreign liabilities that may at any moment cause a demand for gold for export purposes, is a vital necessity.

The one point on which in some quarters a change is desired is in the substitution of the German "elastic limit" for the Government power of suspension. The Act has not been suspended since 1866, but in case of emergency there is no doubt that the public would again expect the intervention of the State. It is argued that a more logical method would be to allow the Bank of England on their own initiative to exceed the limit on payment of such a fine as would ensure against any abuse of the privilege. By this means it is contended the public would be spared the anxiety and stress of the days leading up to the stage when the Government would be expected to intervene, while the Bank would be in a better position to act with that promptitude and decision which go so far to allay public unrest.