On the 19th June, 1828, an Act was passed which enabled bankers in England to issue certain unstamped promissory notes and bills of exchange upon payment of a composition in lieu of the Stamp duties thereon. The object of this Act was chiefly to give country bankers the same advantages in respect of drafts as were granted to the branches of the Bank of England. In the following month of the same year notes under £5 were forbidden under certain penalties. In the year 1832 a Committee of the House of Commons discussed the question of the paper currency under the following sections: (1) Whether the paper circulation of the Metropolis should be confined to the issue of one bank, or whether there should be a competition of different banks of issue with an unlimited number of partners.

(2) Whether the note circulation of the country should be confined to one bank.

(3) What check should be provided to secure for the public a proper management of the banks of issue, and especially whether it would be expedient and safe to compel them periodically to publish their accounts.

The Committee did not draw up any report on these points, but from that time the Bank of England published a weekly statement of its accounts.

The crisis of 1836 brought the question of the currency again before the country. Lord Overstone stated that it was time the banking functions and the management of the currency should be separated.

In the year 1840 a Committee was again appointed to consider the effect of the paper currency on the country. Perhaps it will be as well to state the different opinions expressed upon this question prior to the passing of the famous Act of 1844.

Lord Overstone and Sir Robert Peel represented one party and Mr. Tooke and Mr. Fullarton the other.

Lord Overstone and Sir Robert Peel held: (1) That the amount of circulating medium may be greater or less than is properly required for the transaction of the current business of the community, and that where greater it tends by the excess to make the use of the circulating medium too cheap.

(2) As prices are measured by the circulating medium it enhances their price.

(3) That such enhancement, by reducing exports and stimulating imports, turns the foreign exchanges against us and leads to a drain of bullion.

(4) If the circulating medium be too low the opposite effect is produced in favourable exchanges and an influx of bullion.

(5) The principal cause of an undue expansion of .the circulating medium is due to a too large amount of bank notes payable on demand.

(6) Issuers of notes can regulate at will the amount of them in circulation.

(7) If notes are kept in proper proportion to the bullion the amount of the circulating medium will be prevented from becoming greater than it should be, and the mischief held to arise will be avoided.

Mr. Tooke and Mr. Fullarton held :(1) That no greater amount of gold or notes is in circulation than is required by the current transactions of the country. If there is more it is hoarded up by the bankers.

(2) That while a large portion of the circulating medium is dependent solely upon the credit of its issuers, its extensions can in part only be limited by the state of that credit on one hand and by the aggregate demand of those who are willing to pay for its use on the other.

(3) That while there is a large fund of deposits in the banks issuing, a banker cannot affect the aggregate amount of circulating medium by issuing or withdrawing notes.

(4) A restriction of notes must be ineffectual, because bank notes only represent one portion of the addition made by the operation of bankers.

(5) That the true measure of the voluntary addition made by a banker is to be found in the terms upon which he makes his advances.

(6) That any attempt to control the issuing banker bylaw would be in fact an attempt to fix the price of the use of money.

These different opinions show that the subject of the currency was not clearly understood.

After the passing of the Act of 1844, great disappointment was felt; because the great changes which it was supposed to accomplish did not take place.

No doubt the Act was good in some particulars. For example the convertibility of the note was secured, but commercial crises, panics, drains of gold, large issues of notes, and high rates of interest were as frequent after the year 1844 as they were previous to the passing of the Act.

The gradual extinction of the country bank issues was one of the objects intended by the framers of the Act, and it will be seen that the provincial circulation of notes has gradually diminished; but whether this was advisable or not is a question that has been much disputed.

The failure of many banks of issue was the chief reason why the Government by this Act intended to exercise some control over the note circulation. One of the popular errors with regard to paper money was that a banker could issue to an unlimited extent. Now the number of notes issued depends entirely upon the wants of the people. The banker cannot make his customers take notes, although he might be desirous of circulating a large number.

Again, the Bank of England cannot control its issue of notes, because any number can be obtained from that institution in exchange for gold. It was also supposed that notes could be issued by the Bank of England and that a certain amount of gold could always be held. Now this is impossible, because so long as notes are in circulation, gold can be obtained for them on demand. It is therefore possible to drain the Bank of England of all the gold in its possession. We must remember that there is no creation of capital by a banker issuing notes, which only represent capital lent. Thus the holder of a note is really the lender of capital, although it appears that the banker acts in that capacity. In this manner the banker makes a profit on the capital entrusted to him through the medium of his notes.

It has been disputed whether the issue of £15,000,000 of notes by the Bank of England against securities is sufficient, but when that institution was allowed to issue to any amount without holding gold against the excess in the years 1847, 1857, and 1866, it was only in 1857 that an excess occurred, and then only for the comparatively small sum of £800,000.

Notes economise capital, because without them a larger amount of gold would be required for circulation. It is very important that they should be always convertible, and in order to secure this the Bank of England raises the rate of interest when the amount of gold held in reserve appears too small.

The Government, in consideration of the privileges given to the Bank of England in respect of the note circulation, receives in return £172,000 per annum, which is really a part of the Stamp duty.

With these remarks upon bank notes we will now consider the leading provisions of the famous Bank Act of 1844, upon which the currency of our country is now definitely settled.