The refusal to admit the depreciation was due to the failure to realize that the value of money depends, other things being equal, on the quantity in circulation. Notes were at a discount because they had been issued in excess. An excessive issue of an inconvertible paper currency, however good may be the reputation of the issuing bank or government, and however complete may be the public confidence in its stability, is bound to result in a depreciation of the value or purchasing power of such a currency. The suspension of cash payments had first of all encouraged the hoarding of coin. Gold paid into the Bank of England could only be withdrawn in part, and it was inevitable that the holders of gold should quietly put it by. The gaps caused in the circulation were filled by an increase in the note circulation. Further increases resulted in a surplus of the currency, and part of it was driven abroad. This part was the gold and silver coinage, for foreigners would of course not accept inconvertible paper. When the bulk of the gold had disappeared from the ordinary channels of circulation, any further increase in the issue of notes would result in a depreciation of the currency, which had by now become practically all paper, and prices quoted would of course be paper prices. Between 1803 and 1809, the depreciation almost disappeared and the market price of gold was seldom above £4; but in 1809 and 1810 the evil became more pronounced than ever, and in the latter year the House of Commons appointed a "Committee to consider the high price of bullion." The report of this Committee, always called the Bullion Report, is of the utmost value as a study of the conditions governing an inconvertible currency.

The report first of all states five incontrovertible propositions:

(1) That the Mint price of gold is £3 17s. 10 1/2d. an ounce.

(2) That the market price at the beginning of 1810 was between £4 10s. and £4 12s. an ounce.

(3) That the Exchanges on Hamburg and Amsterdam were depressed from 16 to 20 per cent. below par.

(4) That the issues of the Bank of England and the country banks have considerably increased in amount.

(5) That gold has been driven from circulation, though not from the country altogether.

Having stated these propositions, which were admitted on all hands, the Committee reported the conclusions which they drew from these facts:

(1) That the variations of the metallic exchange with foreign countries can never, for any considerable time, exceed the expense of transporting and insuring the precious metals from one country to another.

The value of a sovereign estimated in Flemish coin was about 34 1/2 Flemish shillings. That was the value of the metals in the respective coins reckoned at the current price of silver, and is called the "par of exchange" between the two places, London and Hamburg. It is obvious that a debt payable in London may be worth slightly less in Hamburg, because it will have to be collected or liquidated in some way, and the proceeds remitted to Hamburg. This causes variations in the rate of exchange, but the Bullion Committee urged that such variations could not be more than the cost of settling the debt by remitting coin by sea.

Estimating this cost at 7 per cent. at the utmost, or 2 1/2 Flemish shillings on each £1 sterling, the latter would be worth not less than 32 shillings. But at the rate quoted on the Exchange, a debt of £1 sterling due in London was selling for 29 Flemish shillings only in Hamburg.

As an explanation of this, the Committee lays down as the second of their conclusions:

That this difference of about 9 per cent. or more which could not be accounted for, was due to the excessive issues of inconvertible paper by the Bank of England. A debt due in London would be paid in this paper as a matter of course. If the debtor wished to pay in gold, he would have to buy gold, and £1 in paper was worth considerably less than £1 in gold.

The third conclusion was:

That the market price of gold bullion can never exceed the Mint price to any appreciable extent, unless the currency in which the bullion is paid for, and in terms of which it is quoted, is depreciated below the value of full weight coins.

To all who have grasped the meaning of the term "Mint price of gold," this is obvious. The bullion may be quoted in terms of depreciated paper, as in this instance, or it may be quoted in terms of coins worn below their proper weight, but unless the currency be depreciated in some way, the difference cannot exist.

The fourth conclusion was the logical result of the third:

That therefore the difference between the market price of gold and the Mint price exactly measured the depreciation of the Bank of England notes.

The report continues: "Your Committee beg leave to report it to the House as their most clear opinion that, so long as the suspension of cash payments is permitted to subsist, the price of gold bullion and the general course of exchange with foreign countries, taken for any considerable period of time, form the best general criterion from which any inference can be drawn, as to the sufficiency or excess of paper currency in circulation; and that the Bank of England cannot safely regulate the amount of its issues, without having reference to the criterion presented by these two circumstances."

Finally, they strongly advise an immediate return to cash payments. "Upon a general view of the subject, your Committee are of opinion that no safe, certain and constantly adequate provision against an excess of paper currency, either occasional or permanent, can be found, except in the convertibility of all such paper into specie . . . Your Committee therefore cannot but see reason to regret that the suspension of cash payments, which, in the most favourable light in which it can be viewed, was only a temporary measure, has been continued so long."

Moderate and clearly expressed as were the opinions of the Committee, the House refused to adopt them, for the question had become a party one, the peace party against the war party, and a series of resolutions denying the truth of the conclusions drawn by the Committee, was passed by a large majority.

But time soon gave the advocates of the Bullion Report their revenge, and clearly vindicated the correctness of their views. In 1813, Napoleon was overwhelmed at Leipzig and peace was declared. Violent speculation followed, ending in commercial disaster. In two years, eighty-nine country banks failed, and hundreds tottered on the verge of ruin, and their notes were discredited. The Restriction Act of 1797 had not applied to the country banks, but these had been able to pay their obligations in Bank notes, and had consequently greatly increased their circulation. What the circulation of country notes amounted to we have no means of ascertaining, for no official returns were then made, but the total was undoubtedly large, and the failures of 1814 of course resulted in a sudden decrease in the total amount of the note circulation of the countrv.

The Bullion Report stated the cause of the high price of gold bullion and the adverse condition of the exchanges to be due to an excess of paper. The diminution of the amount of the paper currency in 1814 should therefore have resulted in a fall in the price of gold bullion, and this is exactly what happened. In October, 1816, the market price of gold was £3 18s. 6d. an ounce, and the exchanges with Hamburg and Paris rose above par.

The Bank of England therefore began to resume the payment of its notes in gold. The first attempt was a failure owing to a sudden drain of gold to France caused by the attempts of that country to place its currency on a sounder basis, but in 1819 the resumption was successfully carried out.

Since then, England has never had an incon-vertible paper currency in circulation, and we are apt to forget the possibilities of such a recurrence. The possibility, however, is always present; a glance at the history of our neighbours reveals the fact that, among others, the United States, France, Italy and Russia have all within the last forty years been reduced to the expedient, and have not all been successful in preventing the depreciation of their issues. If such a condition of affairs should ever occur again in this country, we shall find the lessons of 1797 - 1819 of great importance.