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MITTEE OF THE HOUSE OF LORDS ON COMMERCIAL DISTRESS, 1847–48, page 1. (Quotation from the report.)

In Conclusion, the Committee think it right to add, that, whilst they feel deeply the Necessity of a sound System of Legislation for the Bank of England, and for all other Establishments entrusted with the Privilege of issuing Notes used as Substitutes and Representatives of the current Coin of the Realm, they are far from suggesting that it is upon Laws, however wisely framed they may be, that Reliance can or ought exclusively to be placed. The best Banking System may be defeated by imperfect Management; and, on the other hand, the Evils of an imperfect Banking System may be greatly mitigated, if not overcome, by Prudence, Caution, and Resolution. In the Confidence universally and justly placed in the Bank of England the fullest Testimony is borne to the Integrity and good Faith with which its great Transactions have been conducted; and the Opinion of the Committee in this respect is best shown in their Desire to see vested in the Bank a wider Discretion than they possess under the Act of 1844,-a Discretion which the increased Knowledge produced by Experience and Discussion, and in which the Bank of England can hardly fail to participate, will enable them to exercise to the Advantage of their own Corporation, and to their own Honor, and to the permanent Benefit of the Public, and more especially of the Coinmercial Classes of England.



After considering this evidence we may turn to Doctor N. G. Pierson's history and criticism of the currency theory and the banking principle and his remarks on the Bank Act of 1844. These give so clear a statement of the questions involved in that Act that I subjoin them here. Doctor N. G. Pierson was for some time President of the Bank of the Netherlands. His practical knowledge of banking renders his opinions the more valuable. He says,

“On the one side stood the school of the Currency Theory, on the other that of the Banking Principle. The former numbered among its adherents JONES LOYD, better known as Lord OVERSTONE; also NORMAN and TORRENS. The latter school numbered TOOKE, WILSON, and FULLARTON. The victory rested entirely with the adherents of the Currency Theory, and it is on this theory that the English Bank Law of 1844 is based.

“The authorship of the currency theory is wrongly ascribed to DAVID RICARDO, although it is to him that we are indebted for the grain of truth which it contains. The nature of this theory will appear from what follows.

“If, asks Lord OVERSTONE—who was the first to proclaim the currency theory—there be no bank notes in circulation in a country, can there ever be scarcity of metallic money in that country? Would it be possible, for instance, for the balance of payments of such a country to

IN. G. Pierson: Principles of Economics, pp. 454-467.)

become so unfavorable as to cause all the metallic

money and bullion to be exported ? The answer is, that it would not be possible; for, when money is scarce, its value rises, and prices fall. And when prices fall, exports increase and imports diminish, until there is sufficient money and bullion in the country once more.

A nation which does not use bank notes can never, in the long-run, have too little metallic money in relation to other things. It may be a poor nation, certainly, but its capital will always include such a proportion of coined money as shall be needful.

"It is different with a country which uses bank notes as well as coined money; for, in such a country, exportation of the latter does not necessarily cause scarcity of money. The balance of payments becomes unfavorable; considerable exports of gold take place; but at the same time, by granting credit, the banks greatly increase their uncovered circulation. Will prices fall in this case too? Will the balance of payments change and cause the exported gold to return to the country? There is no reason to expect that it will, because no deficiency will have arisen in the monetary circulation. In the first of the two cases described, the evil cures itself; in the second, it grows more acute. With a mixed circulation—that is, with a circulation consisting partly of metal and partly of paper--the whole of the metal may disappear without causing any reduction in prices.

“What then are the means which a country using bank notes should adopt in order to prevent the whole of its gold from being exported? The law should prevent the banks from substituting paper for the exported metal; or,

better still, it should compel them to reduce their uncovered circulation in proportion to the exports of metal. Suppose the stock of money required in a country to be represented by the figure 100, and to consist entirely of gold; if a quantity of this money corresponding to the figure 10 were to leave the country, there would remain 90, consequently not enough to meet the demand, and this of itself would cause prices to fall. But suppose the needful stock of 100 to consist of 50 parts gold and 50 parts paper. In this case, if, while to parts of the metallic money left the country, the paper circulation were increased to 60, the total stock of money would still remain at 100, and therefore suffice to meet the demand. And if a second 10 parts of the metallic money were to leave the country and to be followed by a third and fourth 10 parts, while the paper circulation was increased, at first from 60 to 70, then from 70 to 80, and then from 80 to go, there would always be a sufficient stock of money in the country, and the exported gold would not return. This must be prevented. A deficiency in the monetary circulation must not be met with paper. Measures must be adopted to prevent the possibility of the whole of the specie and bullion being drained from a country, and the bank notes of that country thus becoming inconvertible.

“Such is the currency theory; now let us examine its defects. First of all, it is not true that a bank invariably does wrong when it supplies a deficiency in the monetary circulation by issuing notes. We forfeit one of the greatest advantages of a well-regulated banking system when we conform strictly to the currency theory. Suppose, for

instance, that a crisis has occurred, and that the demand for money has greatly increased in consequence. Will it not have a salutary effect if the bank of issue is able to meet this demand, and would it not be the height of folly to interfere with such action on the part of the bank ? Or, suppose that the corn crop has failed, so that it has become necessary to import large quantities of grain for home consumption. Is it not an advantage in such a case not to have to part at a given moment with large quantities of interest-bearing bonds, or cattle, or machinery, or other necessaries, in order to pay for the imports of grain and to be able to pay for them in the meantime by exporting precious metal, for which paper can be temporarily substituted ? Steps must be taken to ensure the return of the exported metal; but this need not be done immediately. A well-managed bank always has a larger metallic reserve than it needs in ordinary times, and of which it will therefore be able to spare a part in times of emergency. When the time of stress has passed, the bank will gradually restrict its credits, thus enabling its metallic reserve to accumulate once more. In the meantime it will have rendered a great service to the community, for it will have mitigated the adverse effects of the crop failure by enabling them to be spread over a more extended period of time.

“There is a second mistake in the currency theory. It is not true that, in a country where no bank notes are in circulation, exportation of specie results in an immediate fall in prices and consequently in an alteration in the balance of payments. It would be so if bank notes were

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