But this does not show the full extent of the error of those who think that the Bank Act enforces the "Currency Principle." The Banking Department does business like any other bank. It purchases or discounts Bills of Exchange by creating Credit in its books; that it increases its liabilities in another form besides Notes. This Credit is equally in excess of the Metallic Currency.

Therefore it is quite clear that those who seriously maintain that the Bank Act really carries out the Currency Principle must maintain this proposition -

Twice 15 millions + an indefinite number of millions=15 millions.

In Banks constructed on the "Currency Principle" the Credit created is always exactly equal in quantity to the money deposited and kept in the bank. But how does this matter stand in regard to the Bank ? To test this we need only take any one of its published returns at random. On the 27th March 1873, it appears that the Credit created by the Bank amounted to £61,021,187, and the specie held by the Bank amounted to £23,886,372 or about 26 to 1. If therefore it be maintained that the Bank is constructed on the "Currency Principle" it must also be maintained that 2·6 are equal to 1.

As a matter of pure arithmetic, therefore, it is perfectly clear that the Bank Act completely fails to carry out the "Principle" it was intended to enforce. In fact the framers of the Act had a Theory, and they passed an Act: but they never took the slightest pains to ascertain whether the Act corresponds with the Theory.

9. The expressed purpose of the Act was to cause a withdrawal of Notes from circulation, i.e. from the public, exactly-equal in quantity to the gold withdrawn from the Bank - in strict accordance with the "Currency Principle;" and it was supposed that if the Directors neglected this duty, the "mechanical" action of the Act would compel them to fulfil it. It is now to be seen how this expectation was fulfilled.

No occasion arose for testing the powers of the Act till April 1847. The well-known disasters of 1846 caused a steady drain of bullion from the Bank to commence in 1846. But the Bank made no alteration in the Rate of Discount till 1847, when the bullion was below 14 millions, and the bank raised its discount to 3 1/2. Having lost another million in a fortnight it raised discount to 4 per cent. But it made no further alteration till it had lost three millions more, and then it raised its discount to 5 per cent. Here we have the same inveterate error committed by the Bank as on so many previous occasions - an immense drain of bullion, and none but the most feeble and inefficient means taken to stop it. But this pressure is an excellent example to test the alleged "mechanical" action of the Act. We shall now see - 1st: How the Bank was inclined to act on the principle. 2nd: Supposing they were disinclined to do so, how far the Act, by its self-acting principles, could compel them to do so The following figures speak for themselves -

These figures show the utter futility of the idea that, as the bullion diminished, the Act could compel a reduction of notes in the hands of the public, for the notes in circulation were within an insignificant trifle as large in amount when the bullion was only £9,867,000, as when it was £16,366,000. Consequently, nothing could be a more total and complete failure of the Act of 1844, on the very first occasion its services were required.

Lord Overstone complained to the Committee of 1840 that the principle laid down by the Directors for managing the Bank in 1832, provided no security that Notes should be withdrawn from circulation as the gold was withdrawn from the Bank: and it was the precise purpose of the Act of 1844 to compel the withdrawal of Notes from the public exactly in the same degree as gold was withdrawn from the Bank: and yet the foregoing figures show that the Bank Act failed on the very point it was expected to effect; and that it provided no effectual check whatever against mismanagement on the part of the Bank.

Whence did this failure arise? From this very simple circumstance. The framers of the Act supposed that there is only one way of extracting gold from the Bank, namely, by means of its Notes; and that if people want gold they must bring in Notes, and consequently, that as the gold comes out, Notes must go in.

But as a matter of simple banking business, there are two methods of extracting gold from the Bank - namely by Notes and Cheques. Those persons who have Credit in its books may go and present Cheques, and thus draw out every ounce of gold from the banking department, without a single Bank Note being withdrawn from the public.

In fact instead of withdrawing the notes from the public, as was intended by the Act, the Directors threw the whole effect of the drain of gold on their own reserves. And that happened in this way. The public has two methods of extracting gold from the Banking Department, namely by Notes and Cheques: but the Banking Department has only one method of extracting gold from the Issue Department, namely, its Notes in reserve. And when the Banking Department felt a drain on its gold, it had to replenish it by obtaining a fresh supply from the Issue Departmerit, at the same time giving up an exactly equal amount of Notes. And thus the whole drain fell on its own reserves, without withdrawing a Note from the public.

No legislation can prevent this power of extracting gold from the Bank by means of Cheques. And thus is explained the complete failure of the "mechanical" action of the Act to compel the Directors to carry out the "Currency Principle." The Directors were able to commit, and actually did commit, the very same error as they had done before the Act - which Lord Over-stone had truly said was the fundamental vice of the Bank principle of 1832 - and it was powerless to prevent them.

And this simple fact completely upsets the whole theory of the Act.