On the 5th inst. the Bank of England raised its minimum rate of 
discount from 8 per cent, at which it was fixed on October 19, to 
9 per cent. This enhancement, unprecedented as it is in the 
history of the Bank since the resumption of its cash payments, has, 
we presume, not yet reached its highest point. It is brought about 
by a drain of bullion, and by a decrease in what is called the 
reserve of notes. The drain of bullion acts in opposite directions — 
gold being shipped to this country“ in) consequence of our 
bankruptcy, and silver to the East, in consequence of the decline 
of the export trade to China and India, and the direct 
Government remittances made for account of the East India 
Company. In exchange for the silver thus wanted, gold must be 
sent to the continent of Europe. 

As to the reserve of notes and the influential part it plays in the 

London money market, it is necessary to refer briefly to Sir Robert 
Peel’s Bank act of 1844,1” which affects not only England, but also 
the United States, and the whole market of the world. Sir ae 
Peel, backed by the banker Lloyd, now Lord Overstone, and ¢ 
number of influential men beside, proposed by his act to put so 
practice a self-acting principle for the circulation of paper money, 
according to which the latter would exactly conform = in_ its 
movements of expansion and contraction to the laws of a purely 
metallic circulation; and all) monetary crises. as he and his 
parusans affirmed, would thus be warded off for all me to come. 
The Bank of England is divided into two departments—the 
nee department and the banking department; the former being 

a simple manufactory of notes and the latter the real bank. .The 
issuing department is by law empowered to issue notes to the 
amount of fourteen millions sterling, a sum supposed to indicate 
the lowest point, beneath which the actual circulation will never 
fall, the security for which is found in the debt due by the British 
Government to the Bank. Beyond these fourteen millions, no note 
can be issued which is not represented in the vaults of the issuing 
department by bullion to the same amount. The aggregate mass of 
notes thus limited is made over to the banking department, which 
throws them into circulation. Consequently, if the bullion reserve 
in the vaults of the issuing department amounts to ten millions, it 
can issue notes to the amount of twenty-four millions, which are 
made over to the banking department. If the actual circulation 
amounts to twenty millions only, the four millions remaining in 
the till of the banking department forms its reserve of notes, 
which, in fact, constitutes the only security for the deposits 
confided by private individuals, and by the State to the banking 
department. 

Suppose’ now that a drain of bullion sets in, and successively 
abstracts various quantities of bullion from the issuing department, 
- withdrawing, for instance, the amount of four millions of gold. In 
this case four millions of notes will be cancelled; the amount of 
notes issued by the issuing department will then exactly equal the 
amount of notes in circulation, and the reserve of disposable notes 
in the till of the banking department will have altogether 
disappeared. The banking department, therefore, will not have a 
single farthing left to meet the claims of its depositors, and 
consequently will be compelled to declare itself insolvent; an act 
affecting its public as well as its private deposits, and therefore 
involving the suspension of the payment of the quarterly 
dividends due to the holders of public funds. The banking 
department might thus become bankrupt, while six millions of 
bullion were still heaped up in the, vaults of the issuing. 
department. This is not a mere supposition. On October 30, 1847, 
the reserve of the banking department had sunk to £1,600,000 
while the deposits amounted to £13,000,000. With a few more 
days of the prevailing alarm, which was only allayed by a financial 
coup d’état on the part of the Government, the Bank reserve would 
have been exhausted and the banking department would have 
been compelled to stop payments, while more than six millions of 
bullion lay still in the vaults of the issuing department. 

It is self-evident then that the drain of bullion and the decrease 
of the reserve of notes act mutually on each other. While the 

withdrawal of bullion from the vaults of the issuing department 
directly produces a decrease in the reserve of the banking 
department, the directors of the Bank, apprehensive lest the 
banking department should be driven to insolvency, put on the 
screw and raise the rate of discount. But the rise in the rate of 
discount induces part of the depositors to withdraw their deposits 
from the banking department, and lend them out at the current 
high rate of interest, while the steady decrease of the reserve 
intimidates other depositors, and induces them to withdraw their 
notes from the same department. Thus the very measures taken to 
keep up the reserve, tend to exhaust it. From this explanation the 
reader will understand the anxiety with which the decrease of the 
Bank reserve is watched in England, and the gross fallacy 
propounded in the money article of a recent number of The London 
Times. It says: 

“The old opponents of the Bank Charter Act are beginning to bustle in the 
storm, and it is impossible to feel certain on any point. One of their great modes of 
creating fright is by po‘nting to the low state of the reserve of unemployed notes, 
as if when that is exhausted the Bank would be obliged to cease discounting 
altogether.” 

As a bankrupt, under the existing law it would be. in fact, 
obliged to do so. 

“But the fact is that the Bank could, under such circumstances, still continue the 
discounts on as great a scale as ever, since their bills receivable each day of course, 
on the average, bring in as large a total as they are ordinarily asked to let out. 
They could not increase the scale, but no one will suppose that, with a contraction 
of business in all quarters, any increase can be required. There is, consequently, 
not the shadow of a pretext for government palliatives.” @ . 

The sleight-of-hand on which this argument rests is this: that 
the depositors are deliberately kept out of view. It needs no 
peculiar exertion of thought to understand that if the banking 
department had once declared itself bankrupt in regard to its 
lenders, it could not go on making advances by way of discounts 
or loans to its borrowers. Taken all-in-all, Sir Robert Peel’s much 
vaunted Bank law does not act at all in common times; adds in 
difficult times a monetary panic created by law to the monetary 
panic resulting from the commercial crisis; and at the very 
moment when, according to its principles, its beneficial effects 

No. 22831, November 6, 1857.— Ed. 

should set in, it must be suspended by Government interference. 
In ordinary times, the maximum of notes which the Bank may 
legally issue is never absorbed by the actual circulation—a fact 
sufficiently proved by the continued existence in such periods of a 
reserve of notes in the till of the banking department. You may 
prove this truth by comparing the reports of the Bank of England 
from 1847 to 1857, or even by comparing the amount of notes 
which actually circulated from 1819 till 1847, with that which 
might have circulated according to the maximum legally fixed. In 
difficult times, as in 1847, and at present by the arbitrary and 
absolute division between the two departments of the same 
concern, the effects of a drain of bullion are artificially aggra- 
vated, the rise of interest is artificially accelerated, the prospect of 
insolvency is held out not in consequence of the real insolvency of 
the Bank, but of the fictitious insolvency of one of its departments. 

When the real monetary distress has thus been aggravated by an 
artificial panic, and in its wake the sufficient number of victims 
has been immolated, public pressure grows too strong for the 
Government, and the law is suspended exactly at the period for 
the weathering of which it was created, and during the course of 
which it is alone able to produce any effect at all. Thus, on Oct. 
23, 1847, the principal bankers of London resorted to Downing 
street, there to ask relief by a suspension of Peel’s Act. Lord John 
Russell and Sir Charles Wood consequently directed a letter to the 
Governor and Deputy Governor of the Bank of England,’ | 
recommending them to enlarge their issue of notes, and thus to 
exceed the legal maximum of circulation, while they took upon 
themselves the responsibility for the violation of the law of 1844, 
and declared themselves prepared to propose to Parliament, on its 
meeting, a bill of indemnity.*° The same farce will be again 
enacted this time, after the state of things has come up to the 
standard of the week ending on Oct. 23, 1847, when a total 
suspension of all business and of all payments seemed imminent. 
The only advantage, then, derived from the Peel Act is this: that 
the whole community is placed in a thorough dependence on an 
aristocratic Government—on the pleasure of a reckless individual 
like Palmerston, for instance. Hence the Ministerial predilections 
for the act of 1844; investing them with an influence on private 
fortunes they were never before possessed of. 

We have thus dwelt on the Peel Act, because of its present 
influence on this country,” as well as its probable suspension in 
England; but if the British Government has the power of taking 
off the shoulders of the British public the difficulties fastened 
upon them by that Government itself, nothing could be falser than 
to suppose that the phenomena we shall witness on the London 
money market—the rise and the subsiding of the monetary 
panic—will constitute a true thermometer for the intensity of the 
crisis the British commercial community have to pass through. 
That crisis is beyond Government control. 

When the first news of the American crisis reached the shores 
of England, there was set up by her economists a theory which 
may lay claim, if not to ingenuity, to originality at least. It was said’ 
that English trade was sound, but that, alas! its customers, and, 
above all, the Yankees, were unsound. The sound state of a trade, 
the healthiness of which exists on one side only, is an idea quite 
worthy of a British economist.” Cast a glance at the last half-yearly 
return issued by the English Board of Trade for 1857, and you 
will find that of the aggregate export of British produce and 
manufactures, 30 per cent went to the United States, 11 per cent to 
East India, and 10 per cent to Australia.“ Now, while the 
American market is closed for a long time to come, the Indian 
one, glutted for two years past, is to a great extent cut off by the 
insurrectionary convulsions, and the Australian one is so over- 
stocked that British merchandise of all sorts is now sold cheaper at 
Adelaide, Sydney and Melbourne, than at London, Manchester or 
Glasgow. The general soundness of the British industrialists, 
declared bankrupt in consequence of the sudden failure of their 
customers, may be inferred from two instances. At a meeting of 
the creditors of a Glasgow calico printer, the list of debts exhibited 
a total of £116,000, while the assets did not reach the modest 
amount of £7,000. So, too, a Glasgow shipper, with liabilities of 
£11,800, could only show assets to meet them of £789. But these 
are merely individual cases; the important point -is that British 
manufactures have been stretched to a point which must result in 
a general crash under contracted foreign markets, with a 
consequent revulsion in the social and political state of Great 

Economist. No. 732, September 5, 1857.— Ed. 

Britain. The American crisis of 1837 and 1839 produced a decline 
in British exports from £12,425,601, at which they stood: in 1836, 
down to £4,695,225 in 1837, to £7,585,760 in 1838, and 
£3,562,000 in 1842. A similar paralysis is already setting in in 
England. It cannot fail to produce the most important effects 
before it is over. 

Written on November 6, 1857 Reproduced from the newspaper 

Tribune,.No. 5176, November 21, 1857 as