* Sinclair's 'History of the Revenue,' vol. ii, p. 307. + Francis, ' History of the Bank,' vol. ii, p. 261.

18

From April, 1807, the dividend also was raised from 7 to 10 per cent. per annum. Truly these advantages were very great, but in condemning the directors of the Bank for their action the difficulties of their position seem not to have been duly weighed, nor the probable effects of a different course well considered.

A clause in the original Act of 1694 prohibited the Bank from making advances to the Government, under the penalty of a fine of three times the amount so advanced. About the year 1793 the Bank having made certain advances to the Government it became necessary to pass an act of indemnity. Mr. Pitt took the opportunity to insert a clause by which the Bank was authorized to allow the Government to overdraw their account. It was intended that a limited sum should be named, but as finally passed this restriction was dropped altogether.

The practical effect of this was to take the management out of the hands of the directors, unless they resorted to the extreme measure of refusing to honour Government drafts and thereby proclaiming national bankruptcy. In this extreme need of resources to carry on the war Mr. Pitt did not fail to make use of his power, and to such an extent, that in an account dated February 10th, 1797 (only three years after the removal of the restriction), the temporary loans are stated at £7,185,645, exclusive of £400,000 for arrears of interest.+ Of course, this is altogether distinct from the permanent debt of £11,686,800, which was included in the national accounts as funded debt, and was the subscribed capital of the Bank; the advances in question formed part of the unfunded debt.

* "Report of Committee on Bank Charter, 1832,' Appendix No. 29. f Francis, 'History of Bank,' vol. i, p. 229.

The enormous subsidies this country was sending abroad to aid its allies on the continent in the struggle with Napoleon, and the long-continued adverse foreign exchanges, had caused a most serious drain on the metallic reserves of the Bank, whilst it was also called upon to supply the extra amount of bullion required to replace the bank notes withdrawn from circulation by the country banks, who had, according to Mr. Thornton's estimate, reduced their issues by one half since 1793. All these causes combined had so reduced the stock of bullion that the directors, in their anxiety to provide for the safety of the Bank, used every means to get notes in, and with such success that in five weeks' prior to February 25th, 1797, the circulation was reduced from £10,550,830 to £8,640,250.* The contraction of the note circulation increased the demand for gold; the possibility of invasion induced hoarding, and a run on two large banks at Newcastle, causing their stoppage on the 20th of February, produced a complete panic, which lasted all through the week, by which time the bullion in the Bank was brought down to £1,272,000. On Sunday, February 26th, 1797, a Cabinet Council was held, when it was resolved to suspend cash payments, and instructions to that effect were at once given to the Bank of England and the Bank of Ireland. From that day to May 1st, 1821, this country had, what it is to be hoped it will never have again, an inconvertible paper currency. Committees of both Houses of Parliament were immediately appointed to investigate the affairs of the Bank, and the causes and policy of the suspension. As to the first point, it was ascertained that the assets of the Bank exceeded its liabilities by £3,126,890, exclusive of the permanent debt of the Government. On the second point, the evidence both of the directors and of several eminent merchants was taken, but neither committee expressed a decided opinion thereon. The directors attributed the necessity for suspension to the advances made to Government, whilst the merchants contended that blame attached to the Bank for the contraction of the note issues.

* 'Lord's Reports,' 1797, p. 177.

Mr. Macleod after some remarks, in which he upholds the opinion of the merchants, says:*-"From the foregoing considerations, as well as the weight of authority on the subject, we can scarcely have any room to doubt that the suspension of cash payments was brought about at that particular time, by the erroneous policy of the directors. We must, in candour, state that it appears open to much doubt whether any management, however skilful, could ultimately have saved them from such a disaster during some period of the war." But he also says :-" We cannot help thinking that it was fortunate that it occurred at this early period. The alarm and dangers which preceded its stoppage were comparatively slight compared with those that menaced the country after that event. The mutinies in the fleet, the rebellion in Ireland, the enormous accumulation of troops on the heights of Boulogne, flushed with victory, and led by a more fortunate, though probably not a greater soldier than Hoche, and burning with zeal for the invasion of England, were dangers of such portentous magnitude as to render it, to the last degree improbable that any paper currency, convertible into gold, could have survived them."

Although, as already mentioned, cash payments were not resumed until the year 1821, the Act which confirmed the order in Council for suspension fixed the 24th June, 1797, as the date for resuming, but after a short extension it was finally settled by Act of Parliament to take place one month after the conclusion of a definitive treaty of peace.

To remedy the inconvenience arising from the want of small change an Act was passed by which £1 notes were legalised in England and in Scotland, where notes of this denomination had been current since 1704 for smaller sums; country notes were made payable in Bank of England notes.

* Macleod, * On Banking,' vol. i, p. 403.