England, for every additional note issued beyond £14,000,000, was to hold metal in its vaults. Under the terms of Peel's Act one-fifth of this metal might be silver, and in the early returns issued by the Bank under the act a certain amount of silver is found among the assets of the issue department. In the first return issued, for example, which was dated September 7, 1844, the total note issue was £28,351,000, which was backed by £14,000,000 in securities, £12,657,000 in gold coin and bullion and £1,694,000 in silver. But since 1853, no silver has been held in the issue department of the Bank, and in 1897, when the influence of the bimetallists on the existing Government led to a proposal that the proportion of silver allowed by law should be held by the Bank as backing for its note issue, public opinion expressed itself so vigorously that the suggestion was promptly buried. The Bank's fiduciary note issue, thus fixed at £14,000,000, was only allowed to increase by the lapse of the issues of the existing issuers, the Bank being empowered to increase it by two-thirds of the amount lapsed. The lapsing process has proceeded steadily by the amalgamation of country banks with banks which have London offices and so are prohibited by the Bank's monopoly. And the Bank's fiduciary issue has thus been raised from the original £14,000,000 to £18,450,000. Above this line it can not go except by means of the suspension of the bank act, which has been found necessary occasionally in times of panic, the last of such occasions having occurred in 1866. The English currency system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the

law of 1844 was passed, the check currency, over which the law exercises no restriction, was already driving out the note, and banks without any right of note issue had been II years established in London. The Bank of England's note issue is now chiefly used by other banks as "till money," or part of the store of legal-tender cash they keep to meet demands on them. It has thus become part of the basis of credit in England, since the other banks roughly base their operations on their holding of cash in hand and at the Bank of England. Their cash at the Bank of England has already been discussed above; their cash in hand consists of coin and notes, and since the latter have thus become part of the foundation on which the deposit liabilities of the other banks are based, there is reasonable ground for the contention often put forward by practical expert critics of the English system, that the fiduciary note issue should be reduced by the repayment by the Government of the whole or part of a Government debt of £11,000,000 to the Bank, which backs the greater part of it, and its replacement by gold. It is evident that the amount of metallic backing for a note issue which is intended to circulate as currency is a different matter from that required in the case of a note issue which is held by bankers as a reserve and used by them as a foundation for a pyramid of credit operations.

4. By the ease with which the Bank of England provides emergency currency it gives the English banking system the great advantage of extreme elasticity and adaptability; and it is enabled to do this by the fact that it acts as banker to the other banks, and that every credit which they have in its books is regarded by them and by

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the rest of the community as "cash" to be taken as practically equal to so much gold. This cash at the Bank of England in the hands of the rest of the bankers can be multiplied as rapidly as the Bank of England is prepared to make advances, and as the mercantile and financial community can bring it bills for discount or securities to be borrowed on. There is no legal restriction of any sort or kind, and the close relations between the Bank and its borrowing customers enable the necessary operations to be carried through with a celerity which is unrivaled, at any rate in the Eastern Hemisphere. The process works as follows: In every English bank balance sheet there will be found an item among the assets cash at call or short notice," though in a few cases the slovenly habit is adopted of including this entry along with the cash in hand. This "cash," as it is called, really consists chiefly of loans made by the banks to the discount houses, and regarded by the banks as the most liquid of their resources. As such, it is at once made use of when for any reason, such as the many payments which have to be made on quarter days, or the end of the half year when the preparation of balance sheets by firms and companies requires an abnormal amount of cash for more or less ornamental purposes, the banks are subjected to extra pressure by their customers, who both withdraw actual currency from them for smaller payments, and require advances in order to show cash with bankers in their balance sheets.

The banks in order to meet this pressure, and at the same time to preserve an adequate amount of cash in their own statements, call in their loans from the discount houses; the discount houses, at a point, can only repay

them by borrowing from the Bank of England and transferring the credit raised with it to the bankers, whose cash at the Bank of England is thus increased. This book entry takes the place in their balance sheets of the legaltender cash that their customers have withdrawn, and is used as the basis for the increased deposits that have been created by the loans of the bankers to their customers for ornamental purposes. Similarly at the time of year when the transfer of the taxes to the Government's balance reduces the cash at the Bank of England held by the other banks the gap is filled by the loans made by the Bank of England to the customers of the other banks. In short, by discounting and making advances the Bank of England can at any time create book credits, which are regarded as cash by the English banking community, and on which the latter can base the credits which give the right to draw checks, which are the most important part of the English currency. The extent to which the Bank of England can create this credit is a matter for its own discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its reserve and liabilities. Consequently when it is applied to for amounts which bring that proportion too low the Bank of England has to take steps to reinforce its cash

reserve.

5. It has been shown that the Bank of England keeps the balances of the other banks, and from this it follows that the latter look to it for gold or notes at times when the local commercial community requires an extra supply. At the end of every month, especially at the ends of the quarters or at times of national holidays, the Bank's note

circulation expands and coin is taken from it. The duty is thus thrown upon it of keeping an adequate supply of cash for home purposes, and, as has been already stated, its normal proportion of cash to liabilities is very much higher than that of the other banks. But these movements are tidal and regular, and hough times of active trade increase slightly the demand for coin and note currency in England, the extensive and ever-growing use of the check reduces the importance of this part of the Bank's duties.

6. Much more important is the Bank of England's duty as custodian of the gold store for international banking. London is the only European center which is always prepared to honor its drafts in gold immediately and to any extent. The Bank of France has the right to make payments in silver, and uses it by often charging a premium on gold, sufficient to check any demand for it; and in other centers measures are taken which make apparently free convertibility of credit instruments optional at the choice of the central bank. Consequently the Bank of England has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the English banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in London so that the exchanges may not be allowed to become or remain adverse to a dangerous point. The difficulties of this task are increased by the extent to which the English banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further