and we should have a rise in the rate of interest to 4½ or perhaps 5 per cent., accompanied by a contraction in the total circulation to the extent of £1,000,000, as a means of correcting the exchanges, which there is little doubt it would suffice to do, if the drain were one of only slight severity.
The drain of 1847, however, was much more severe than this—and in order to show the operation in a somewhat analogous case, we shall suppose the efflux of bullion to proceed to the extent of a second £4,000,000. The effect would necessarily be very similar to that just described, except that it would be more strongly marked in its features. According as the demand for accommodation would increase, and as the Bank would approach the exhaustion of the £11,000,000 of unrepresented notes allowed to be issued at 2 per cent., it would be obliged to raise the rate of discount still higher, so that, by the time that the efflux of the second £4,000,000 would be complete, the rate of discount would probably be not less than 5½ or 6 per cent., and as this rise would undoubtedly have considerable effect in checking the increased demand for accommodation, we may confidently assume the consequent contraction of the circulation to be at least one million of the four. The total issues therefore would have assumed this position:—
| Issued on bullion | £16,000,000 |
| ” at 1 per cent. | 11,000,000 |
| ” at 2 per cent. | 10,000,000 |
| £37,000,000 |
exhibiting a rise in the rate of discount, from 4 to 5½ or 6 per cent., and a decrease of £2,000,000 in the amount of circulating medium, as the total effect produced by a drain of £8,000,000 of bullion. And should the drain proceed no further, we have ample data both in theory and practise, for assuming that this rise in the rate of interest would draw over foreign capital in the purchase of securities—that this contraction in the currency would lower prices sufficiently to stimulate the export of commodities, without paralyzing industry—and that through the combined operation of the two agencies, the bullion would be slowly but certainly recovered, with the smallest possible detriment to commercial interests.
The case of a drain arising out of military expenditure presents no peculiar feature of difficulty, as compared with the preceding. Should the loss of gold continue to the extent of another £4,000,000, making £12,000,000 altogether, the chief point of difference would be, that the exhaustion of the £11,000,000 of unrepresented notes allowed to be issued at 2 per cent., would necessitate a recourse to the issues at 4 per cent.; and that this would require a proportionate rise in the rate of discount, in order to render such issue adequately profitable to the Bank. But a rise in the rate of discount to 6 or 6½ per cent., would allow the Bank a profit of 2 or 2½ per cent. out of such issue, over and above the governmental charge; we may, therefore, assume that such a rise would suffice as an inducement for the Bank to draw on those issues. And supposing that a rise to 6 or 6½ per cent. would produce a contraction in the demand for accommodation of a single million, as before, the total operation on the issues would be as follows:—
| Issued on bullion | £12,000,000 |
| ” at 1 per cent. | 11,000,000 |
| ” at 2 per cent. | 11,000,000 |
| ” at 4 per cent. | 2,000,000 |
| £36,000,000 |
the efflux of £12,000,000 of bullion having raised the rate of interest from 4 to suppose 6 or 6½ per cent., and having reduced the total issues of bullion notes and unrepresented notes from £39,000,000 to £36,000,000; that is, by £3,000,000 out of £39,000,000. Now, in order to convey an adequate conception of the advantages derived from such a plan as this, we must contrast it more closely with the operation of the present system in a similar case. We will suppose, therefore, that a drain of £12,000,000 of bullion commences under the present system, at a time when the bullion notes and unrepresented notes of the Bank are both about their ordinary average, viz. £14,000,000 and £8,000,000 respectively, making a total of £22,000,000. Now, bearing in mind that the reserve of unrepresented notes can never practically be reduced below £2,000,000, it will be at once apparent that a drain of £12,000,000 in such a case would produce the following change:—
| Issued on gold | £2,000,000 |
| ” on securities | 12,000,000 |
| £14,000,000 |
thereby effecting a reduction in the total circulation of the Bank of £8,000,000 out of £22,000,000, while raising the rate of discount in some fabulous proportion in order to keep down the demand for accommodation, and at the same time placing in imminent jeopardy the convertibility of the issues, if not the solvency of the Bank.
We should not be doing justice to our proposed system if we did not subject it to a test still more severe than any of the preceding, and one which could not arise under the present currency laws without entailing upon the nation a very serious difficulty in meeting its engagements. We refer to the very possible contingency already alluded to, of our being obliged to discharge some heavy foreign liabilities through the failure of some important article of domestic consumption, or through any other cause, while already embarrassed by an excessive military outlay. The events of the past twelve months, indeed, have indubitably proved that it lies within the competency of a foreign country at any time, when the bullion is at a minimum, to buy up all the marketable English bills on the Continent at a trifling monetary sacrifice, and by transmitting them for discount, entail so sudden a demand for gold upon the Bank as may completely exhaust the treasure in the coffers of that establishment. Now, it can be readily shown that the provisions which we have proposed would altogether preclude the possible occurrence of such a calamity as this. For, supposing such an operation to be effected at a time when the bullion had been already reduced, as just now supposed, to £12,000,000, and supposing £4,000,000 to be the highest probable limit of such a demand, the effect of this sudden drain of an additional £4,000,000 might possibly be to raise the rate of discount momentarily to perhaps 7 per cent., and might thereby produce a contraction in the actual circulation of £1,000,000 or £2,000,000, yet the result upon the issues could hardly be more violent than to reduce them as follows:—