Many suppose that the debt of fourteen millions due by the Government to the Bank - which we may presume was the reason why the line between the uncovered and the covered issues was drawn at fourteen millions is specially appropriated as a security for payment to the uncovered issues emitted by the bank on its own liability, so that in the event of the bank's insolvency there will be a special asset of that amount for the uncovered notes; but it is extremely doubtful whether this view is sound in law. The point is not decided, nor is it likely to be.
3. Uncovered notes are restricted in amount They cannot exceed fifteen millions now. Any quantity of notes above this amount may be obtained from the Issue Department, but they must be purchased with gold, and that gold kept locked up in the office. Absolute restriction, therefore, there is none the public may have as many notes as it pleases; but it must pay with gold, for all above fifteen millions. No portion of the whole issue is available for lending either on discount to traders, or by loans and advances. What the bank receives from the public, the fifteen millions, must be invested in securities; the gold given for all above is stored away in the vault of the Issue Department.
4. The gold stored and kept in the Government Office, the Issue Department, in no sense whatever belongs to the Bank of England. It is no part of its reserve, and it is a great misfortune that the framers of the Act of 1844 should have made the exceedingly unintelligent blunder of mixing up together in the weekly reports of the bullion at the Bank, two absolutely dissimilar and distinct things - the gold stored away by one office to face the bank-notes, and the gold belonging to the Bank of England as a banker. The gold at the State's office lies under self-acting rules. It may be said to belong to an automaton, so many more notes out, so much more gold in store, or the reverse. The fluctuations of the notes denote that the public is buying fewer or more notes with gold, nothing more. Fluctuations, on the contrary, in the bank-notes held by the Banking Department, are genuine changes in the reserve of a private bank, and alone should be subject to banking discussions as to the state of the Bank, the rate of interest, and other kindred matters.
5. The figure which divides the issues resting on the Bank's liability and those for which gold is actually stored, has great importance. It was laid down in the Act at fourteen millions, upon no deeper reason probably than that this sum was due by the State to the Bank, and that a vague notion prevailed at the time that this debt was specially assigned as a security for the notes. The lapse of private issues raises the figure as time rolls on. The important practical point is to ascertain the figure up to which the public will retain the notes issued and never present them for payment in the worst of crises. From the nature of things only a rough approximation to this limit can be made; but this much is ascertained fact, that since the passing of the Act the public has never asked for payment in cash of any notes beyond those for which the automaton, the State Office, had gold ready in hand to give; not one of the uncovered notes, which the Bank of England was liable for, has been presented. There has never been since 1844 the slightest tendency of a run upon the Bank for the payment of a single one of the fifteen millions of notes. Gold, no doubt, is constantly asked for at the counters of the Bank; but what does the Bank do? It sends the notes over to the State Office, and gets gold for them at once; but the stock of the Issue Department has never been exhausted. The Directors of the Bank of England have never been called upon in the worst times to give a thought about providing gold for the uncovered notes. These fifteen millions, so far, have proved to have been founded on a rock, and are covered either by gold or securities. The currency of England is thus shown to be of the very strongest: a gold currency for every practically possible demand, and a paper currency purchased by the public for which the public has a constant and unbroken demand.
6. Lastly the great principle is observed that the pro fits of the issues shall at least be shared with the State, and not be the exclusive benefit of a private banker. The Bank, we are informed by Mr Thompson Hankey, pays nearly ^200,000 a year to Government for the fifteen millions of notes which it issues on its own liability. Its own profit from this source, after deducting expenses of management, amounts to about £100,000. Thus the State reaps from the issues double the profit of that earned by the Bank.
And now, what is the final judgment to be passed on this much-disputed law? In respect of the supposed aims of its promoters, it must be pronounced a failure. It failed, because they sought to perform the impossible. They framed it as a machine to act on the amount of the paper currency of the country, to be a self-acting contrivance for enlarging or contracting the circulation, according as gold flowed into, or ebbed away from, England. The Act, there is reason to believe, was designed as a remedy against drains, an impracticable scheme founded on a real ignorance of the nature and laws of currency. It proposed to regulate the amount of the currency by law. Inflation would be prevented, for issues which had to be bought with gold could never be excessive. Thus wild emissions of bank-notes, consequent speculation and rise of prices, high discounts, drains of gold leaving the country, and the offspring of all these evils, panics, crises, bankruptcies, and ruin would be averted. All this was to be done by a self-acting machine, that nicely adapted its corrective action to the precise maladies of the money-market. Alas! these wonderful effects never came to pass; they proved to be only dreams of the imagination. Panics have been as severe since 1844 as before. The fluctuations of the rate of discount have been as violent; speculative joint-stock companies, works commenced on credit, destroy ing capital and with no means for completion, depres sion and elevation of stocks and shares, bankruptcies and commercial paralyses which have required years to heal, have reached, under this cunningly devised Act, heights of extravagance previously unknown. The Bank Act was as helpless as a baby to counteract the mischief, for the very simple reason that these matters lay clean out of its reach: it had no hands wherewith to touch them. Its authors did not know that the quantity of a metallic or of a convertible paper currency in circulation is determined by the number of those particular transactions that buying and selling, including, of course, bankers' reserves, as being currency at work - which employ ready money; and that it is the public, so wanting and so using ready money, be it coin or bank-notes, which regulates the number of these tools of exchange which shall be used, and not the law, nor issuing bankers, nor any other extraneous force or authority. The law, of course, may forbid the public from having as many notes as it would otherwise buy and employ; it may amend the Act of 1844, and declare that there shall be ten millions of bank-notes in England, and no more. The effect of that would be to increase vastly the use of cheques, which would be only the substitution of one piece of banking paper for another, or it might compel more coin to be bought from miners, which would be a diminution of the national capital; but it would not touch speculation. Nor was this what the parents of the Statute had in their minds. They thought of a machine which should act on the voluntary employment of notes by the public, and thereby control mercantile operations. But a gigantic speculation, covering the whole English trade, with its rise of prices and its crashes, may be carried on without requiring a single additional bank-note, if ready-money transactions - which are always relatively few are not altered. The Issue Department cannot act on loans, discounts and rates of interest, except so far as it fixes the figure at which the storing of gold commences too low. If the public would keep out permanently in circulation twenty millions, without ever presenting one for payment, then the loan and discount market loses five millions of means; but this would be a permanent unchanging diminution of its resources made once for all, affecting all times, and utterly unconnected with oscillating movements. The nation would be so much the poorer permanently by the needless purchase of gold. That would be the only result; and this is the only way in which the Issue Department can come in contact with the money-market and the rate of interest.