credit of a bank is firmly established, and when habit has confirmed the people in the ufe of paper money, cafh will very feldom be demanded for notes; and the paper may fafely bear a very large proportion to the gold which is referved as its fecurity. Where, on the other hand, the credit of a bank is fufpected by the people, or where they have a taste for a good deal of gold in their circulation, there the paper must bear a lefs proportion to the gold which must be referved as its fecurity. But, in both cafes, the bank has a very obvious motive in impofing limits upon the quantity of notes which it may iffue, and which it is obliged to pay in cafh;-it will not advance, even to the importunities of government, beyond all chance of fafety, if the leaft pecuniary alarm fhould arife.

In the next place, let us confider the effects of the obligation to pay in cafh, upon the ftate of the currency, when an overiffue has really been made. It is not the immediate effect of a fuperabundance of paper money, to produce what is called a run upon the bank, or a demand for guineas. What the man wants, who has in his hands more notes of good credit than he has immediate occafion for, is-not to get coin for them, which would not in the fmallest degree alter his fituation, but to get them employed. On the other hand, if guineas were univerfally obtained, it would not directly reduce the fuperabundant currency; because, for every note which was then withdrawn, a portion of coin would be fubftituted. Indirectly, however, the demand for guineas upon the bank would have a powerful effect. Whenever guineas were by this means thrown into circulation, fo as in any degree to exceed the effective demand, they would experience that flight-reduction of price, which so rapidly carries the precious metals out of one country into another. They would continue to be exported, till this drain from the circulation, together with the notes which the bank in the mean time would call in, should have reduced the currency to that quantity, which the tranfactions' of the nation, and the price of gold and filver in the neighbouring countries, might require.

Thefe effects are fo vifible, that they must be acknowledged by all; and fo falutary, that their importance can be difputed by none: but there are certain other effects which are ascribed to them as concomitants, which are not of fo agreeable a nature, and which we must now endeavour to understand. Mr Henry Thornton, our present author, and other writers who have had an intereft in defending the fufpenfion of payments in cafh at the bank of England, have attempted to prove that this bank may, by means of a demand for coin, raised by an alarm, or any other caufe, be drained of guineas to any poffible amount, however small be the

quantity

quantity of paper which the maintains in circulation. The amount of notes which the finds it useful to maintain in circulation are at prefent, we shall say, 15 millions. If the bank refolves to maintain thefe 15 millions, in circulation, and if a demand for guineas arife, fhe may be called upon for gold to double, or ten times, or, indeed, to any number of times that amount. Thus, for example, notes to the amount of 100,000l. we fhall fuppofe, are brought to her for gold; but, when fhe has drawn back thofe notes, and given for them gold, her paper currency is reduced to that extent; and if the refolves to maintain her quantity of notes in circulation, fhe muft immediately reiffue the notes which have been thus returned. But no fooner are they reiffued, than they are brought back for gold: again the quantity of the paper circulation is reduced; again the notes must be iffued; and, if the demand for gold continues, and this procefs is repeated a fufficient number of times, the bank may be exhaufted to any conceivable extent, while fhe has never had more than her ufual quantity of notes in circulation. Even,' fays Mr Thornton, (Inquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 92.) if we should fuppofe the bank to bring down its paper circulation to one hundred thousand pounds, and to maintain it at that fum, it is obvious that this fame operation might be fo reiterated from day to day, as to extract at length from the bank the greatest imaginable number of guineas.'

In order to fee further into this fubject, we must analyze a little the operations of this bank. Let us fuppofe, for the fake of fimplifying the inquiry, that the fole bufinefs of the bank of England is that of iffuing notes in the discounting of bills. Let us fuppofe that, as the discounts none at more, fo she discounts none at lefs than fixty days date. And let us fuppofe, too, that fhe maintains 15 millions of paper currency in circulation. She has thus at all times in her coffers bills of exchange to the amount of 15 millions. But, of all this quantity of bills, the whole must be paid in fixty days; the therefore draws back in fixty days the whole of her 15 millions of notes; that is to fay, fhe draws back, at the rate of 250,000l., or a quarter of a million, every day. But, if the draws back notes by the retiring of bills, at the rate of a quarter of a million a day, fhe muft iffue notes in the difcounting of bills at the rate of a quarter of a million a day, to compenfate this return, and keep the paper in circulation at its accustomed amount. That this would be the courfe of bufinefs in regular times, is abundantly evident. The rate of discounting bills at the bank every day would exactly balance the rate at which bills were retired; and the notes drawn in by the one operation, would exactly correfpond to the notes fent out by the other. If the perfons by

whom

whom the bills were retired were, on each day, an entirely dif tinct fet of perfons from those to whom bills were discounted, 250,0col. would literally every day be paid into the bank, by the one operation, and the fame fum drawn out by the other. It fo happens, however, in practice, that the man who has a bill to retire, has very often, on the fame day, a bill to get discounted: in this manner, inftead of giving one fum, and receiving another, the two fums are compared together, and the man only gives or receives the balance. But it is very evident that this common way of retiring one fet of bills by discounting another, in no refpect alters the nature of the cafe. It is ftill true, in fact, that quarter of a million has been paid, and a quarter of a million drawn, though thefe payments and drawings may, to a certain degree, have balanced one another, without the actual trouble of counting and transferring the money.

a

We may now difcern a fact, the confequences at least of which Mr Henry Thornton and his difciples have entirely overlooked. Let us fuppofe, while the bank is going on in her accustomed courfe, discounting bills at the rate of 250,000l. a day, that a demand for guineas comes upon her to the fame amount; and that her daily iffues are immediately paid back for gold. What is the confequence of this? First, her fifteen millions of notes in circulation, are reduced 250,000l., or a quarter of a million. I the refolves to keep up her 15 millions, fhe muft immediately reiffue, in the discounting of additional bills, the notes which have been thus returned. On the first day, therefore, of the demand for guineas, while the ufual quantity of bills, to the amount, name ly, of a quarter of a million, have been retired, fhe has difcount ed double that quantity. Another confequence, then, is, that at the end of this first day, the has added a quarter of a millio to the amount of bills in her coffers, while the fum of her note in circulation remains the fame. By the fame operation on th fecond day, fhe adds to her bills another quarter of a million; an the effect is every day repeated, till, at the end of fixty days, th amount of her bills is fairly doubled; that is to fay, the bank ha then extended her loans from 15,000,000l. to 30,000,cool.,-on half in her own notes, the other half in gold and filver.

Here, however, a very important question suggests itself Whence is this extraordinary quantity of bills for discount come? Or what possible use can there be in thus extending t discounts of the bank, for the sake of maintaining a certain qua tity of notes in circulation? To this question Mr Thornton h an answer very ready, and an answer on which he seems to 1 the greatest stress. The consideration of it will enable us to di cover the whole mystery of his reasoning.

He enters into a lo

det

detail to prove that any sudden revolution in the transactions of the bank of England, by which the regularity of payments in London should be interrupted, would occasion a shock to the credit of the whole country, attended with the most pernicious consequences; and to prevent this, the bank is under the necessity, he says, of always maintaining her accustomed quantity of notes. But it will appear that, in this answer, Mr Thornton has confounded two things together, of which the difference is peculiarly important;-he has confounded together the discounts of the bank and the currency of the bank. There is no doubt, that any considerable interruption to the regularity of the great payments in London, would occasion a shock to the general system of credit, which is anxiously to be avoided. It is very evident, too, that the bank, by withholding suddenly from the merchants those accommodations which they have been accustomed to receive, would produce that interruption. But wherein does the accommodation which the merchants are accustomed to receive from the bank consist? Most evidently in affording them loans,not in giving them one kind of currency in preference to another. If the bank, according to the foregoing supposition, has regularly afforded loans on bills to the amount of 15,000,000/., any considerable and sudden reduction of those loans, might produce the most serious consequences. But let her discounts be regularly maintained at this level, and she need give herself no trouble about the currency. Currency is a thing which always, and infallibly, provides for itself. Now, we have seen already in what manner a run upon the bank for guineas affects her discounts. If she persist in keeping out the usual quantity of notes, her discounts must be daily enlarged to the whole amount of the notes which daily return upon her for gold. But if the notes which come in for gold are merely not issued, her discounts remain invariably at 15,000,000/.,-and her business of discounting proceeds without any alteration. If the demand for gold continues till any considerable portion of her notes are withdrawn from circulation, what remain are not sufficient to retire the bills in her coffers which are daily becoming due; they must be retired, therefore, with gold; and, when this happens, she then begins to receive with one hand what she pays away with the other, and the drain upon her can proceed no further.

Mr Thornton, indeed, says, that as there is never any doubt about the credit of the bank of England notes, the guineas are drawn away to supply the discredited notes in the country. But to suppose that guineas could be accumulated in the country, and yet be impossible to be had in London, if there was occasion for them, is too absurd to require refutation. The guineas which

VOL. XIII. NO. 25.

E

are

are drawn from the bank of England to be sent to the country, are all drawn by the London bankers and money-dealers, in the first instance; and if there is any demand for them in London, there they will remain. Would a London banker send ten thousand guineas to the country to accommodate his correspondent, if to-day, or to-morrow, he had bills to that amount falling due upon himself, which he had no other means of retiring? Indubitably he would not ;-he would retire his own bills in the first instance, and leave his correspondent in the country to shift for himself. It is evident, that little or none of the gold issued by the bank would go to the country, or any where else, till the circulation of London was completely supplied.

It appears, therefore, that there is no danger to the regu larity of the London payments by diminishing the notes of the bank of England, provided she diminishes not her discounts; and, were the demand for guineas to continue so great as to exclude her notes from circulation, she could only be called upon to find a quantity of gold equal to her 15,000,000/. in notes, to afford the whole of the usual discounts, and preserve the regularity of the London payments. Even then, too, she would be in no worse condition, than the rest of the banks who discount without issuing notes, and find it still a very gainful trade. But it is perfectly certain that she could never be called upon, while she confined her business to the discounting of bills, for nearly so great a quantity of guineas as her notes amount to. It is always found, that when a bank can stand, with every demonstration of ease, a run for but a few days, confidence is restored, and the drain is interrupted. As to the drain which may arise from the exporting of guineas to foreign countries, it is perfectly evident, that the smallest increase to the difficulty of finding them at home gives them a value, which entirely prevents that operation, and even brings gold from abroad. Mr Henry Thornton enters into a long explanation of the difficulties and delay of bringing bullion from abroad; but he completely forgets another very obvious circumstance, that the delay and difficulties are equally great of drawing gold from this to other countries; and that these two sets of difficulties, therefore, exactly balance one another.

This doctrine is entirely confirmed by the facts connected with the crisis in our pecuniary affairs during the year 1796, and the beginning of 1797, when the suspension of payments in cash took place. From the end of 1794, or the beginning of 1795, there had been a rapid increase of the advances to government, insomuch, that these advances had risen, in the course of a few months, from six to ten millions; while the cash and bullion in the bank had, during the same months, sunk from eight millions

to