4. The express function of a Bank then being to create Credit, we must now explain a phrase which has been frequently used in recent times, and which must be fully understood before we come to the exposition of the system which the Bank Charter Act of 1844 is designed to carry out.

Many writers have maintained that a Bank should only be allowed to create exactly as much Credit as the specie paid in, and that its sole function should be to exchange Credit for specie, and specie for Credit: and that the quantity of its Credit should always be exactly the same as the specie it displaces. This principle is called by its advocates the "Currency Principle:" and they assert that any creation of Credit in excess of the specie it displaces causes a depreciation of the Currency.

Many Banks have been constructed on this principle, especially those of Venice, Amsterdam, Hamburg, and several others.

These places, small in themselves, were the centres of a great foreign commerce; and as a natural consequence, an immense quantity of coin of all sorts, of different countries and denominations, was brought by the foreigners who resorted to them. These coins were moreover greatly clipped, worn, and diminished. This degraded state of the current coin produced intolerable inconvenience, disorder, and confusion among merchants, who when they had to make or receive payment of their bills, had to offer or receive a bagful of all sorts of different coins. The settlement of these bills, therefore, involved perpetual disputes - which coins were to be received, and which were not, and how much each was to count for. In order to remedy this it became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. In order to do this the Magistrates of these cities instituted a Bank of Deposit, in which every merchant placed all his coins of different kinds and nations. These were all weighed, and the Bank gave him Credit, either in the form of Notes, or a Credit in their books, exactly corresponding to the real amount of the bullion deposited. The owner of this Credit was entitled to have it paid in full weighted coin on demand. These Credits, therefore, always insured a uniform standard of payment: and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these Bank Credits, which were called Bank Money. The consequence was evident; as this Bank Credit, or Bank Money, was always exchangeable for money of full weight on demand, it was always at a premium, or agio, as compared with the worn, clipped, and degraded money in circulation. The difference was usually from 5 to 9 per cent, in the different cities. The expression agio or premium, is likely to mislead, because it is clear that it was the Bank Money which was the true standard, and the current Money which was at a discount. These Banks professed to keep all the coin and bullion deposited with them in their vaults. They made no use of it in the way of business, as by discounting bills. Thus the Credit created was exactly equal to the specie deposited; and their sole function was to exchange specie for Credit, and Credit for specie.

These Banks were examples of the Currency Principle. They were of no further use to commerce than that they served as a safe place to keep money in; and they insured a uniform standard of payment for Debts. They made no profit by their business; but those who kept their accounts with them paid certain fees to defray the expenses of the establishment.

We do not in any way discuss the soundness of this principle : our only object is to state clearly what the principle is.