It has been considered desirable to give a separate account of the note issues of this country, because at the commencement of the present century banking profits were to a great extent dependent upon the amount of notes which a bank could issue.

The subject of the currency was also the most prominent feature in the history of banking until some time after the passing of the famous Act of 1844

In the early history of banking many erroneous ideas were held in consequence of the question of the currency being interwoven with the former subject. It was thought at one time that the currency laws were really the cause of the commercial disasters which have occurred in this country at stated intervals. Now, it is quite clear that loss of capital is not in any way connected with the question of bank notes, but unfortunately these two questions have been mixed together in a very confused manner. No doubt many of the early bankers lent their notes to unsound borrowers, and by this means great disasters took place; but loss of capital was quite another matter.

At various times there has been too much capital converted from floating into fixed. We have already referred to floating capital as that which a banker lends to his customer. If, for example, capital is utilised in constructing a railway, we should call it fixed, because a great number of years would elapse before the capital was reproduced. When this takes place no alteration in the currency laws can alter the condition of capital. Many early writers said: Give us more notes, and then all these panics, etc., will disappear; but the nation during periods of financial distress does not require more notes, but capital. It is therefore important to recognise that gold and bank notes are only mere machinery required for a certain purpose. If notes and gold were abolished, other means or tools, as Professor Price designates bank notes, would be found to carry on the interchange of commodities.

Prior to the passing of the Bank Act of 1844 bank notes had been at various periods below their par value. This was seen from the price of gold. In September, 1799, gold was £3 17s. 6d. per oz., but in June, 1800, the price of gold rose to £4 5s. per oz. Now this was due to the inconvertible bank notes in circulation.

The following table shows the depreciation: -

Whenever there is a fall in the value of bank notes in comparison with gold, it shows that there is an excess of paper money in circulation.

The country bankers supported all kinds of wild speculation by lending these inconvertible notes, and when called upon to pay them they were unable to do so. In the panic of 1793, out of 400 country banks no less than 100 stopped payment, and the remaining 300 were much shaken.

During the years 1814-1817 eighty-nine country banks suspended payment, and in the year 1825 no less than seventy-three acted in the same manner. The country bankers could at this particular time discharge their liabilities by means of Bank of England notes, which were then at a discount, but were nevertheless a legal tender.

These great disasters called for some remedy. Many committees, both of the House of Lords and Commons, were appointed to inquire into the state of the currency. Most of the evils that had arisen were due to the suspension of cash payments by the Bank of England in the year 1797. The Bullion Committee of 1810 examined many witnesses in order to find out the cause of these disasters. One party stated that the bank notes were depreciated, and that the difference between the market price and the mint price of gold was the measure of the depreciation.

The other party asserted that the notes were not depreciated, but that the price of gold had risen. The Committee, however, came to the conclusion that the suspension of cash payments by the Bank of England had caused the depreciation of the paper, and that the sooner the Bank returned to paying its notes in gold the better it would be for the country.

It seems hardly credible that such a simple question should have been disputed. Whenever a note cannot be converted into gold on demand, it must depreciate in value. If the holder of an inconvertible note wishes to purchase goods, and tenders his note for payment, the seller might accept it, but only at a discount. Thus goods are valued at a higher price when notes are inconvertible. One of the disadvantages of an inconvertible paper currency is that it causes great fluctuations in prices. Bank notes in the present day are worth their face value, because it is known that gold can be obtained in exchange for them.

The Restriction Act prevented the Bank from cashing its notes in gold, and was passed because the Government of the day were afraid that all the gold would leave the country. Thus, in the years preceding 1819, the Bank was frequently ready and anxious to pay in gold.

The evil results of this restriction, which was the cause of depreciated bank notes, were at last seen, and an Act of Parliament was passed making it compulsory on the part of the Bank of England and the country bankers to pay their notes on demand.

The Bank Restriction Act was continued absolutely from 5th July, 1819, to 1st February, 1820, when the Bank was permitted to pay notes in gold as follows, viz: (1) Between 1st February and 1st October, 1820, the Bank was required to pay its notes in gold bullion of standard fineness at the rate of £4 1st. per oz., but only notes of the value or price of 60 ozs. of gold could be exchanged.

(2) Between 1st October, 1820, and 1st May, 1821, the Bank was required to pay its notes in gold bullion at the rate of £3 19s. 6d. per oz.

(3) Between 1st May, 1821, and 1st May, 1823, the Bank was to pay in gold bullion upon the same plan at the rate of £3 17s. 10 1/2d. per oz., which was the Mint price of gold.

(4) From 1st May, 1823, the Bank was to pay its notes in the gold coin of the realm.