To this, however, it is replied by Mr. Tooke and Mr. Fullarton, that the increase of the circulation always follows instead of preceding the rise of prices, and is not its cause, but its effect. That in the first place, the speculative purchases by which prices are raised, are not effected by bank notes but by checks, or still more commonly on a simple book credit; and, secondly, even if they were made with bank notes, borrowed for that express purpose from bankers, the notes after being used for that purpose would, if not wanted for current transactions, be returned into deposit by the persons receiving them. In this I fully concur, and I regard it as proved, both scientifically and historically, that during the ascending period of speculation, and as long as it is confined to transactions between dealers, the issues of bank notes are seldom materially increased, nor contribute anything to the speculative rise of prices. It seems to me, however, that this can no longer be affirmed when speculation has proceeded so far as to reach the producers. Speculative orders given by merchants to manufacturers induce them to extend their operations, and to become applicants to bankers for increased advances, which, if made in notes, are not paid away to persons who return them into deposit, but are partially expended in paying wages, and pass into the various channels of retail trade, where they become directly effective in producing a further rise of prices. I cannot but think that this employment of bank notes must have been powerfully operative on prices at the time when notes of one and two pounds value were permitted by law. Admitting, however, that the prohibition of notes below five pounds has now rendered this part of their operation comparatively insignificant by greatly limiting their applicability to the payment of wages, there is another form of their instrumentality which comes into play in the later stages of speculation, and which forms the principal argument of the more mod

erate supporters of the currency theory. Although advances by bankers are seldom demanded for the purpose of buying on speculation, they are largely demanded by unsuccessful speculators for the purpose of holding on; and the competition of these speculators for a share of the loanable capital, makes even those who have not speculated, more dependent than before on bankers for the advances they require. Between the ascending period of speculation and the revulsion, there is an interval, extending to weeks and sometimes months, of struggling against a fall. The tide having shown signs of turning, the speculative holders are unwilling to sell in a falling market, and in the mean time they require funds to enable them to fulfil even their ordinary engagements. It is this stage that is ordinarily marked by a considerable increase in the amount of the bank note circulation. That such an increase does usually take place, is denied by no one. And I think it must be admitted that this increase tends to prolong the duration of the speculations; that it enables the speculative prices to be kept up for some time after they would otherwise have collapsed; and therefore prolongs and increases the drain of the precious metals for exportarion, which is a leading feature of this stage in the progress of a commercial crisis; the continuance of which drain at last endangering the power of the banks to fulfil their engagement of paying their notes on demand, they are compelled to contract their credit more suddenly and severely than would have been necessary if they had been prevented from propping up speculation by increased advances, after the time when the recoil had become inevitable.

3. To prevent this retardation of the recoil, and ultimate aggravation of its severity, is the object of the scheme for regulating the currency, of which Mr. Loyd, Mr. Norman, and Colonel Torrens, were the first promul

gators, and which has, in a slightly modified form, been enacted into law.

According to the scheme in its original purity, the issue of promissory notes for circulation was to be confined to one body. In the form adopted by Parliament, all existing issuers are permitted to retain this privilege, but none are to be hereafter admitted to it, even in the place of those who may discontinue their issues; and, for all except the Bank of England, a maximum of issues is prescribed, on a scale intentionally low. To the Bank of England no maximum is fixed for the aggregate amount of its notes, but only for the portion which are issued on securities, or in other words, on loan. These are never to exceed a certain limit, fixed for the present at fourteen millions.* All issues beyond that amount must be in exchange for bullion; of which the bank is bound to purchase, at a trifle below the mint valuation, any quantity which is offered to it, giving its notes in exchange. In regard, therefore, to any issue of notes beyond the limit of fourteen millions, the bank is purely passive, having no function but the compulsory one of giving its notes for gold at £2 17s. 9d., and gold for its notes at £3 17s. 10d., whenever and by whomsoever it is called upon to do so.

The object for which this mechanism is intended is, that the bank note currency may vary in its amount at the exact times, and in the exact degree, in which a purely metallic currency would vary. The precious metals being by universal experience the commodity approaching nearest to that invariability in all the circumstances influencing value, which fits a commodity for being adopted as a me

* A conditional increase of this maximum is permitted, but only when by arrangement with any country bank the issues of that bank are discon tinued, and Bank of England notes substituted; and even then the increase is capriciously limited to two thirds of the amount of the country notes to be thereby superseded.

dium of exchange, it is an essential requisite of any substitute for those metals, that it should conform exactly in its value to a metallic currency, and for that purpose it is very plausibly considered necessary that it should conform in its quantity likewise.

How far this purpose is really fulfilled by the means adopted, we shall presently examine. First, however, let us consider whether the measure effects the practical object chiefly relied on in its defence by the more sober of its advocates, that of arresting speculative extensions of credit at an earlier period, with a less drain of gold, and consequently by a milder and more gradual process. I think it must be admitted that to a certain degree it is successful in this object.

I am aware of what may be urged, and reasonably urged, in opposition to this opinion. It will be said, that when the time arrives at which the banks are pressed for increased advances to enable speculators to fulfil their engagements, a limitation of the issue of notes will not prevent the banks, if otherwise willing, from making these advances; that they have still their deposits as a source from which loans may be made beyond the point which is consistent with prudence as bankers; and that, even if they refuse to do so, the only effect would he, that the deposits themselves would be drawn out to supply the wants of the depositors; which would be just as much an addition to the bank notes and coin in the hands of the public, as if the notes themselves were increased. This is true, and is a sufficient answer to those who think that the advances of banks to prop up failing speculations are objectionable chiefly as an increase of the currency. But the mode in which they are really objectionable, is as an extension of credit. If, instead of lending their notes, the banks allow the demand of their customers for disposable capital to act on the deposits, there is the same increase of

currency, (for a short time at least,) but there is not an increase of loans. The rate of interest, therefore, is not prevented from rising at the first moment when the difficulties consequent on excess of speculation begin to be felt. Speculative holders are obliged to submit earlier to that loss by resale, which could not have been prevented from coming on them at last; the recoil of prices and collapse of general credit take place sooner.

To appreciate the effect which this acceleration of the crisis has in mitigating its intensity, let us advert more particularly to the nature and effects of that leading feature in the period just preceding the collapse, the drain of gold. A rise of prices produced by a speculative extension of credit, even when bank notes have not been the instrument, is not the less effectual (if it lasts long enough) in turning the exchanges; and when the exchanges have turned from this cause, they can only be turned back, and the drain of gold stopped, either by a fall of prices or by a rise of the rate of interest. A fall of prices will stop it by removing the cause which produced it, and by rendering goods a more advantageous remittance than gold, even for paying debts already due. A rise of the rate of interest, and fall, consequently, of the prices of securities, will accomplish the purpose still more rapidly, by inducing foreigners, instead of taking away the gold which is due to them, to leave it for investment within the country, and even send gold into the country to take advantage of the increased rate of interest. Of this last mode of stopping a drain of gold, the year 1847 afforded signal examples. But until one of these two things takes place until either prices fall, or the rate of interest rises— nothing can possibly arrest, or even moderate, the efflux of gold. Now, neither will prices fall nor interest rise, so long as the unduly expanded credit is upheld by the continued advances of bankers. It is well known that when a drain of gold has set in, even if bank notes have not increased