Where the Constitution of the Bank of England is Defective.

The institution of a Federal Bank of Issue and of a State Bank on the lines suggested, and in touch with each other, would bear analogy to the two departments into which the Bank of England was divided by the Act of 1844. viz.. an issue department and a banking department, but without the limitations and provisions which make the administration of the Bank of England as much a danger as an aid to commercial security. The Bank of England has power to issue notes against Government and other securities to the extent of £15,750,000, but any further issue must be represented by coin or bullion. As a great deal more page 8 than the amount represented by securities is always in circulation, it follows that the market supply has to be regulated by notes issued against gold only. Instead of this being instrumental in preserving currency uniformity, it is a constant cause of embarrassment and anxiety, accentuated by the provision which compels the bank to publish reports of the notes in circulation and its reserves from week to week. As this "barometer" falls, apprehensions are created lest discounts may be refused and exchanges thrown into disorder. Of the crisis of 1847 Macleod tells us that "as the whole commercial world knew that the resources of the banking department were being rapaidly exhausted, a complete panic seized them. A complete cessation of private discounts followed. No one would part with money or notes in his possession." Deputation after deputation waited upon the Government to obtain relaxation of the Bank Act, and permit an issue of notes beyond the statutory limitation, but not until the situation became utterly desperate was "a letter of licence" to the bank granted by the Government, and as soon as this was made known, "the panic vanished like a dream." "Not only," Macleod continues, "did no infringement of the act take place, but the whole issue of notes was only £400,000, so that, while at one moment the whole credit of Great Britain was in imminent danger of total destruction, within one hour it was saved by the issue of £400,000." The notes were not really required. What was required was confidence that notes could be had if necessary. For want of this a most disastrous financial panic was produced, which could have been entirely avoided had the Bank of England been constituted on the lines advocated by the Sydney conference of bankers. The notes were not refused for want of plenty good securities, but for want of the necessary elasticity in the bank's constitution.