Front Page Titles (by Subject) CHAP. IX - An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
Return to Title Page for An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
The Online Library of Liberty
A project of Liberty Fund, Inc.
CHAP. IX - Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain 
An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, edited and with an Introduction by F.A. Hayek (London: George Allen and Unwin, 1939).
About Liberty Fund:
This works appears online with the permission of the Estate of F.A. Hayek. A further annotated version of Hayek’s introduction appears as a chapter in volume 3 of the Collected Works of F.A. Hayek (University of Chicago Press, 1991).
Fair use statement:
Of the Circumstances which cause the Paper of the Bank of England, as well as all the other Paper of the Country, to fail of having their Value regulated according to any exact Proportion to the Quantity of Bank of England Notes.
SEVERAL points may be considered as having been assumed, for the sake of describing clearly the principle which was laid down in the close of the former Chapter. They may be stated to have been the following.
First, the notes of the Bank of England were spoken of as forming exclusively the whole circulating medium of the district which surrounds the metropolis, and as having no circulation beyond the boundaries of that district. The object was, then, to evince, that supposing, secondly, the quantity of Bank of England paper to continue the same; and supposing, thirdly, the payments within the district to be the same; and supposing also, fourthly, the general circumstances to be such as to render the same quantity of circulating medium just as sufficient as before to effect the same payments; the Bank of England paper could not fail both to maintain its own value, and also to maintain the value as well to restrict the quantity of the general paper of the country.
In attempting to shew in what respects the case thus put may have differed from the actual one, I shall advert to each of the four points which have just been mentioned.
First, the notes of the Bank of England have a circulation, which is not perfectly exclusive, over any definable district. In the metropolis itself, and in its neighbourhood, they are the only current paper, some coin circulating also. In many distant parts of the country a very small quantity of Bank of England notes circulate, and also much other paper, as well as a certain quantity of coin. This London and country coin, as well as country paper, may happen through various causes to supplant the Bank of England paper, or to be supplanted by it, either in a greater or in a less degree; and every such variation will have an effect which it is necessary to consider. If, for example, a larger quantity than usual of Bank of England notes should circulate in the country; then the quantity of them which remains applicable to the uses of the London district will be smaller, supposing the total amount issued to be the same. In the case, therefore, of more Bank of England notes circulating in the country, and in the case also of some Bank of England notes occupying the place of guineas antecedently current in London, an issue of a larger total quantity of Bank of Engand paper will be necessary, in order to give the same means as before of effecting London payments, and in order to produce the same limitation as before of the total quantity of circulating paper in the country.
All the one and two pound notes of the Bank of England (a species of paper which has been issued only since the suspension of its cash payments) have clearly formed that sort of addition to the bank paper of which I have been speaking. These have circulated, some in London, and many of them in the country, in the place of guineas, which have disappeared; and the amount of them has lately been two millions. In order, therefore, to produce the same effect on the country paper as before the suspension, the total amount of Bank of England notes lately circulating ought to have exceeded the quantity issued before the suspension by about two millions, supposing all other things the same. There are other causes which occasionally produce variations in that part of the Bank of England paper, which assists in supplying the distant country circulation: and these variations may sometimes be considerable, and may not easily be estimated. They probably, however, have not lately been material. For though, while the practice of paying in gold has been suspended, country banks, on the one hand may have been encouraged somewhat more than before to push their notes into circulation, and may thus have supplanted some of the paper of the Bank of England usually passing in their neighbourhood; they certainly, on the other hand, have many of them kept lately in their drawer a fund of Bank of England notes, which was not heretofore deemed necessary, for the sake of being able to offer these in payment of their own paper* .
I have to consider, secondly, how far, allowing for that difference of two millions of which mention has been made, the circulating quantity of Bank of England paper has lately corresponded with that of antecedent periods.
The average amount of Bank of England notes in circulation during three years ending in December 1795, appears to have been 11,975,573l. The amount in circulation on the 26th of February 1797, the day antecedent to the suspension of the cash payments of the bank, has been already stated to have been about 8,600,000l., this being that very low sum to which they were then reduced. By a statement of their amount on the 6th December 1800, laid before the House of Commons, they appear to have been then 15,450,970l. This last mentioned sum includes the two millions of one and two pound notes. If these two millions are deducted, the amount on the 6th December 1800 will exceed the average amount in three years antecedent to the suspension of the cash payments of the bank by 1,475,397l. It remains, however, to be observed, that the notes of the Bank of England were stated to the House of Commons by the governor of that company, in the spring of 1801, to have been then reduced to a sum less by about a million and a half than their amount on the 6th December 1800. The total quantity, therefore, of the Bank of England notes in circulation in one part of the spring of 1801, if the two millions be deducted, almost exactly agrees with their average amount during the three years ending December 1795† .
We have to consider, thirdly, whether the payments of the metropolis may be likely to have been the same in the last year as in some preceding years.
A subject, in the examination of which there may seem to be some difficulty, shall here, in the first place, be discussed. It has been already observed, that the quantity of Bank of England notes is limited by the bank directors who issue them; and that the quantity of country bank paper, though restricted in an equal degree, is limited not by the act of the issuers, but through the circumstance of its exchangeableness for London paper. By saying that the country paper is limited in an equal degree, I always mean not that one uniform proportion is maintained between the quantity of the London paper and that of the country paper, but only that the quantity of the one, in comparison with the demand for that one, is the same, or nearly the same, as the quantity of the other in proportion to the call for the other.
The reader, in reasoning on this state of the case, may, perhaps, be inclined to infer, and it is a question which seems to deserve consideration, that when the Bank of England paper is more than usually restricted, the pressure in London which in such case takes place (for it is there that the general pressure originates), may be likely to relieve itself either by drawing to London a large part of the Bank of England paper usually circulating in the country, the place which it occupied being supplied by country paper, or by causing many of the payments of London to transfer themselves to the country. If either of these two consequences should result from every pressure in London, then, even though the total amount of Bank of England paper should be diminished, that part of it which circulates in London may possibly continue to be just as sufficient as before to perform the task assigned to it of effecting the London payments; and in that case the country paper also, since it always takes the price of the London paper, will so far encrease itself as to become in the same manner as before commensurate with the country payments. If any considerable effect of this kind should follow from every limitation of the London paper; then the principle which was laid down in the close of the former Chapter in a great measure fails: and the bank has not that power which was ascribed to it of restricting the quantity and regulating the value of the paper of the country.
That a pressure in London is not likely to produce the first of the two effects which have been mentioned, that of drawing to London the Bank of England notes circulating in the country is a point on which I shall not separately dwell, except so far as to observe, that a pressure in London, if it be very sudden and severe, may be suspected of having a tendency directly contrary to that of bringing Bank of England notes from the country to London; for it is apt, through the alarm which it excites, to produce, as was formerly explained, an extraordinary diminution of country bank notes; a diminution, I mean, which is even greater in proportion to the country payments to be effected than that of the notes of the Bank of England in proportion to the London payments. In such case, a necessity is created for the substitution of other circulating medium in the place of the country paper which has been suppressed. The substitute principally demanded will be gold; but some Bank of England paper is not unlikely to be also employed in filling the void.
In proceeding to enquire whether a pressure in London, arising from the restriction of Bank of England paper, is likely to cause the transfer to the country of many of the payments usually made in London, I shall advert to past experience.
It was mentioned in an early Chapter of this Work, that there seems to have existed, for some time, an encreasing disposition to transfer to London the pecuniary part of even those commercial transactions which belong properly to the country. It here naturally occurs to us to enquire for what reason the restriction of the notes of the Bank of England by the issuers in time past, has not served to remove this disposition, and even to cause the quantity of London payments, compared with those of the country, continually to lessen, rather than to encrease. The Bank of England paper, let it here be observed, operated before the suspension of the cash payments of the bank in restricting the country paper, exactly in the same manner as it has done since that event. It is commonly and very naturally supposed, that it was the exchangeableness of the country paper for guineas which used to sustain its value. This, however, was not the case: its value was sustained by its exchangeableness for Bank of England notes. The country paper bore always and necessarily the same value as the notes of the Bank of England; and not always or necessarily the same value as the gold contained in the coin, for which the country paper was exchangeable. It is true, indeed, that the quantity of gold in our coin had an influence on the value of country paper. It had, however, only an influence which was imperfect and indirect. It served to dictate to the directors of the Bank of England what was that quantity of paper which they might properly emit. For, if at any time the exchanges of the country became so unfavourable as to produce a material excess of the market price above the mint price of gold; the directors of the bank, as appears by the evidence of some of their body given to parliament, were disposed to resort to a reduction of their paper as a means of diminishing or removing the excess, and of thus providing for the security of their establishment. They, moreover, have at all times been accustomed to observe some limit as to the quantity of their notes, for the same prudential reasons.
This interest in the prevention of any great excess of the market price above the mint price of gold was in no degree felt by the country banker; for the loss sustained by every new conversion of bullion into coin was borne not by him, but by the Bank of England, out of whose coffers all the guineas called for in every part of the kingdom were supplied. The Bank of England, if coin was demanded of it, had to purchase bullion at a losing price. The country banker, if coin was in like manner required of him, had only to possess himself of a Bank of England note, which was exchangeable at the bank for guineas without any discount. If, therefore, the directors of the Bank of England suffered their paper to be worth less than the gold contained in the coin for which their paper was exchangeable, the country paper was worth less also; or, in other words, the degree of expence and difficulty which the country banker incurred in obtaining guineas, was to be measured by the degree of expence and difficulty incurred in obtaining Bank of England notes, and not by the degree of expence and difficulty incurred in buying and then coining gold. The necessity which the Bank of England felt of curing any great excess of the market price above the mint price of gold, caused the limitation of Bank of England paper; and then this limitation, in proportion as it took place, produced the limitation of the paper of the country. It was in this manner that an excessive issue of the paper of the kingdom was restrained before the suspension of the cash payments of the Bank of England. If, then, the directors of the bank were used before the suspension of their cash payments to limit their issues through a necessity which sometimes urged them, and if thus they limited the paper of the country in the manner which has been described, it follows that, supposing them after that event to have restrained their issues in like manner, though through a somewhat less urgent motive, the general effect must have been the same. There can, therefore, be no more reason to suppose a transfer to have lately taken place of London payments to the country, or of Bank of England notes circulating in the country to London, than there is to suppose the same transfer to have taken place in the time when the bank paid in gold. Both the nature of the pressure, and the principle on which our paper credit stood, were the same at both periods.
It remains for us to enquire, how far the payments of London are likely to have varied through any other cause. It is probable that, under ordinary circumstances, they do not fluctuate in any very considerable degree within a short distance of time. War seems likely, on the whole, to encrease them, both by the additional business in the stocks, and also by the other pecuniary transactions on the account of government (transactions generally carried on entirely in London), to which it gives occasion. It also encreases the payments of London, in common with those of the country, by contributing to a general rise in the price of articles. It is, however, necessary to guard this observation. In respect to the total quantity of consumable articles produced and sold in the kingdom, war, perhaps, may be considered as usually making little difference; for, while it gives a spur to some, it operates as a check to other branches of industry; and, while it encreases national consumption, it may possibly diminish, in an almost equal degree, that of individual. It raises, however, the price of commodities, and thus enlarges the general amount of payments, though it more particularly augments those payments which are made in the metropolis. This general augmentation, however, of the price of our articles, unattended by a similar rise in the price of the commodities of other countries, obstructs, as has been already shewn, the exportation of our goods; since it renders them less able to stand the competition to which they are subject in foreign markets, unless a compensation for the rise is afforded to the foreigner in the computation of the exchange between the two countries. The reader may, perhaps, be led here to imagine, that the bank ought to prevent this rise, according to the principles which it is the object of this Chapter to establish, a sufficiently considerable reduction of its paper being all that is necessary for the purpose. No doubt the fact is, that the tendency of goods to rise is continually restrained by the limitation of the paper of the Bank of England. And I apprehend that it is restrained just as much as it is proper, or, perhaps, practicable, to restrain it, if the paper of the bank is so far confined as to prevent an excess of the market price above the mint price of gold: for, in that case, it is restrained so far as still to afford to our goods the opportunity of sale in a foreign market, without giving to the foreigner that compensation in the exchange which leads to the exportation of the current coin of the country. To suppose the bank paper to be restrained much farther, is to suppose a profit on the importation of bullion; a profit, to which the continuance of the importations of that article must soon put a period. In saying, therefore, that war enhances the price of goods, and thus causes an encrease of payments, we ought here to bear in mind that it ought only to be allowed to lift them up to that point to which they can be raised consistently with the general maintenance of our exchanges; and that, so far as they permanently stand above that point, it is the enlarged and too great quantity of notes of the Bank of England which is to be considered as the cause of the high price of goods, rather than the high price of goods which is to be taken to be the cause of the enlarged quantity of notes of the Bank of England* . There is considerable danger, lest, in this respect, we should, in some degree, at least, mistake the effect for the cause; and should too much incline to consider an advanced price of commodities to be both the cause of an encreased issue of paper and the justification of it.
War, on the contrary, may be supposed to lessen the amount of general payments, or, at least, to check their growth, so far as it obstructs the accumulation of wealth and the natural progress of commerce. We know, however, that, during the late war, the amount of our exported and imported articles continued greatly to encrease. This happened partly, no doubt, through the general tendency of our trade to enlarge itself, partly through the advantages resulting from some new colonial acquisitions, and partly from the circumstance of the commerce of our competitors having been still more interrupted than our own. Our exports and imports, it is true, form no just measure of the total quantity either of our commercial transactions or of our general payments: they afford, however, some presumption of the enlargement of both. If we take into consideration all the points which have been touched upon, there will appear sufficient reason to believe, that, during the late war, a very considerable and progressive augmentation of the payments of the metropolis must have taken place.
It now remains only to consider, fourthly, how far circumstances may have been such as to have rendered the same quantity of Bank of England notes either more or less sufficient for effecting the same quantity of London payments.
Several causes may have contributed to spare the use of notes. First, it is to be remembered, that a small extension of their quantity may be sufficient to effect a comparatively large number of additional payments; for the private bankers in London, who are the chief holders of Bank of England paper, by no means find it necessary to enlarge their stock of it in full proportion to the encreased number of their pecuniary transactions. The talent of œconomizing bank notes is also a continually improving one; and the very circumstance of the suspension of the cash payments of the bank, by serving to strengthen mercantile credit, has favoured the exercise of œconomy in the use of the paper of the Bank of England. When payments were currently made in gold, the country banks were subject to sudden demands for cash through temporary alarms among the holders of their notes. From these they have lately been more exempt, in consequence of no other option having been given to those who demanded payment of country bank paper than that of receiving Bank of England notes in return. Since the suspension of the cash payments of the bank, credit has been less subject to interruption, and the quantity both of country paper and of Bank of England notes has probably been less variable; or, if the fluctuations of the latter have been as considerable as before, they may have more nearly corresponded with the variations in the wants of the public* .
To sum up the observations which have now been made: it thus appears, that, since the suspension of the cash payments of the bank, the number of its notes has been the same, or nearly the same, as before that event, if those two millions of one and two pound notes, which have been a mere substitute for gold, are deducted; that the payments, however, of the metropolis have been much encreased; but that, on the other hand, the same number of notes has probably sufficed of late for more than the same number of payments.
It has not been the object of these remarks to found upon them any exact estimate of the effect which the quantity of Bank of England paper lately issued is likely to have had on the cost of commodities, or on the market price of bullion; but rather, on the contrary, to shew that no such estimate can with confidence be formed, on account of the number of circumstances, some of them very difficult to be appreciated, which affect the question. I believe the fact to be, that very little correspondence has subsisted between the fluctuation in the amount of Bank of England notes in circulation at different times, and the variations in the general price of articles at the same periods; and this want of a very discernible connexion between the cause and the effect, seems not unlikely to have led some persons too hastily to conclude, that the enlargement and diminution of Bank of England paper have not that influence on the exchanges or on the price of commodities which has been spoken of* .
Let it, therefore, be carefully remembered, that I by no means suppose a limitation of London paper to operate simply by causing an equal reduction of country paper, and then such a fall in the price of goods over the kingdom as is exactly commensurate with the general diminution of paper; and, finally, also such a variation in the exchange as is precisely proportionate to the reduction of paper, and to the fall in the price of goods. Counteracting circumstances of various kinds may prevent these proportions from being maintained: and the full effects may not follow their cause until after the lapse of some period of time.
It must, in particular, be borne in mind, that a limitation of Bank of England paper affects prices in a great measure by its operation on the state of commercial confidence; and this influence on the minds of men will be far from uniform. A small limitation of Bank of England paper may give a great shock to confidence, when the state of credit is delicate; and may, therefore, at such a time, much discourage speculation. The very same limitation, under other circumstances of the country, may be almost without effect.
But although there is so great difficulty in estimating the precise influence on the cost of articles, or on the market price of bullion, which each alternation in the quantity of Bank of England notes may produce, there is no reason, on that account, to doubt the general truth of the proposition which was laid down in the close of the former chapter, namely, that the restriction of the paper of the Bank of England is the means both of maintaining its own value, and of maintaining the value, as well as of limiting the quantity, of all the paper in the country. Although it should be difficult, or even impossible, to determine to what point the limitation must be carried in order to produce a given effect, it may be sufficiently clear that the tendency of the limitation is to secure the benefit in question.
The perplexities of this subject being such as I have now described, it naturally occurs to us to reason from the effect to the cause, and to infer a too great issue of paper when we perceive that there is an excess of the market price above the mint price of gold. But this inference is one which, for reasons formerly given, should always be very cautiously made; for it is to be borne in mind, that the excess may arise from other causes besides that of a too great emission of paper. Let the manner in which an extravagant issue of notes operates in producing the excess be recollected. It raises, and probably by slow degrees, the cost of British goods. It thus obstructs the export of them, unless a compensation for the high price is afforded to the foreign buyer in the rate of exchange; and the variation in our exchange produces a low valuation of our coin, compared with that of bullion. The state of the exchange, then, is the immediate cause of the evil in question. Now, a suspension of the foreign demand for British manufactures, or an encrease of the British demand for foreign articles, circumstances which may arise when there is no encrease of bank paper, are the much more frequent as well as the more obvious causes of a fall in our exchange, and, therefore, also of a high price of bullion.
We are thus led back to the point which was dwelt upon some time since. Our two defective harvests, and the interruptions experienced in our export trade, very sufficiently account for the late fluctuation of our exchanges. In these respects there has evidently been much in our situation which has been remarkable; while, as has been proved in the present Chapter, there has been nothing which ought to be deemed extraordinary in the quantity of paper issued by the Bank of England.
It must, however, be admitted, that if an excessive issue of Bank of England notes produces, as it has been shewn to do, an unfavourable exchange; a reduction of them below the accustomed number must have a tendency to improve our exchange, by whatever means it may have been made to turn against us. But, after this admission, it may be remarked, that it may be necessary to encounter much evil in effecting the reduction. We have been lately placed between two dangers; between that of a depreciated paper currency on the one hand, and that of an interruption to our paper credit, and a consequent stagnation of our commerce and manufactures, on the other. And, on the whole, we have, perhaps, owed much to that liberal policy of the directors of the Bank of England, which has led them to maintain a quantity of notes in appearance encreased, and in reality not diminished, in spite of some political as well as popular prejudices on this subject; at a time, also, when their conduct was observed with particular jealousy, on account of the suspension of their cash payments, and even when the course of exchange was much against us. Whether the bank may have erred a little on the one side or on the other, is a point which it would be invidious very critically to examine, and difficult to determine with certainty. It seems sufficiently clear, that if, at the period of the late northern confederacy, when our exchanges were the least favourable, the bank had materially diminished its paper, the embarrassment of our manufacturers and merchants, which the state of the continent had begun to render great, would have immediately become far greater; and that manufacturing labour, which was then in some degree interrupted by a suspension of the demand for British goods on the continent, would have been likewise obstructed at the same season (a season of peculiar pressure on the common people, from the circumstance of the scarcity) by a more than ordinary difficulty which our manufacturers would have experienced in effecting their payments. The stock of goods in our warehouses, made ready for subsequent exportation, would, in this case, have been smaller; and we might, therefore, on the whole, have had to look forward to a less early rectification of our exchanges. The difficulties of 1793 might have been added to those of the spring of 1801; and if commercial confidence had failed, political credit might in consequence have been shaken at one of the most critical periods of our history.
From the principles recently laid down, some additional inferences may be deduced.
It was the object of several former Chapters to point out the evil of a too contracted issue of paper. The general tendency of the present, as well as of the preceding one, has been to shew the danger of a too extended emission. Two kinds of error on the subject of the affairs of the Bank of England have been prevalent. Some political persons have assumed it to be a principle, that in proportion as the gold of the bank lessens, its paper, or, as is sometimes said, its loans (for the amount of the one has been confounded with that of the other), ought to be reduced. It has been already shewn, that a maxim of this sort, if strictly followed up, would lead to universal failure. A sentiment has prevailed among other persons, which has bordered on a very different extreme. They have complained of nothing, except the too scanty liberality of the bank, and have seen no danger in almost any extension of its discounts, or profusion in the issue of its paper, provided only the bills discounted (that is, the bills received by the bank in return for its notes) were real bills, and were those also of sufficiently safe and responsible houses.
But it will appear from the principles laid down in this and the preceding Chapter, that there may be a disposition among very rich and punctual men to borrow a sum far exceeding that which it may be prudent in the bank to lend. Every additional loan obtained from the bank, if we suppose its gold to remain the same, implies an encreased issue of paper; but the measure of such issue has been shewn to be regulated by a principle which is not even connected with the question of the opulence of the borrowers at the bank, or of the nature of the bills discounted. The borrowers make a promise (and we will suppose that there is no reason to doubt the fulfilment of it) that the loan shall be repaid with punctuality. But in what manner is the payment to be effected? It will be made either in notes furnished by the Bank of England itself, or else in gold supplied by the same company, which notes and gold the bank must take care to render interchangeable for each other; and this is only to be done by keeping down their quantity, and thus maintaining their value.
Objections have been made by some to the monopoly of the bank. And its indisposition to lend to safe houses, on the security of real bills, to an extent which is deemed sufficient, has probably been the circumstance which has induced some mercantile persons to favour the idea of the establishment of a rival establishment. Competition, it is thought, would lead to greater liberality; and, in a variety of respects, would operate beneficially in this case, as it is known to do in many others.
It has been evinced, however, in the present Chapter, that we derive a material advantage from the power enjoyed by the Bank of England of exclusively furnishing the paper circulation of the metropolis. To this very circumstance the bank stands indebted for its faculty of regulating all the paper of the kingdom. On the bank is devolved the task of providing guineas for the whole country: with the bank is lodged the power of so restricting the general paper, as to render bullion purchasable, except in some extraordinary cases of alarm or difficulty. If these excepted cases should arise, and the cash payments of the bank should be suspended, an event of the possible recurrence of which we must not altogether exclude the idea; then the same circumstance of the monopoly of the bank affords to it the means of still sustaining the value both of its own paper and of that of the whole island. It serves also to impose upon the directors of this powerful company a complete responsibility. If a rival institution to the Bank of England were established, both the power and the responsibility would be divided; and, through the additional temptation to exercise that liberality in lending, which it is the object of competition to promote, the London notes, and also the country bills and notes, would be more liable to become excessive. Our paper credit would, therefore, stand in every respect on a less safe foundation.
[* ]Some Bank of England notes have also been recently employed in the place of small bills on London, the use of which has been discouraged by the late additional duty on bills and notes.
[† ]This account of the comparative quantities of the Bank of England notes circulating before, and of those circulating after the suspension of the cash payments of the bank, differs greatly from that of Mr. Boyd, who has, in his pamphlet, minutely investigated the same subject. The causes of this disagreement are the following.
Their notes, also, immediately after they were at that lowest sum of 8,640,250l., with which Mr. Boyd forms the first of his comparisons, were encreased considerably: they were, on the 4th March, that is, one week after, 10,416,520l., and they were gradually raised still higher.
[* ]It was observed in a former place, that this difficult and disputable point would be again adverted to in the progress of the present Work. The fairest mode, as it appears to me, of determining which ought to be deemed the cause and which the effect, is that which has been adopted in the text; namely, to charge too much paper with being the cause when the price of bullion is rendered permanently higher than that of coin, and, when otherwise, to consider it rather as an effect. By the term “permanently,” I, however, mean such a degree of permanence as may serve to shew that the fall of our exchanges, and the rise in the price of bullion, are not referable to any extraordinary and passing event, such as that of one or even of two particularly bad harvests; for these may not unfairly be termed temporary circumstances, though their influence may extend over a period of one or two years. In general it may, perhaps, also be assumed, that an excessive issue of paper has not been the leading cause of a fall in the exchange, if it afterwards turns out that the exchange is able to recover itself without any material reduction of the quantity of paper.
[* ]Immediately after the payment of the quarterly dividends on the public funds, the amount of Bank of England paper in circulation is considerably encreased; but the expectation that the plenty of it will soon cease, disposes bankers and others to hold for a time a superfluous quantity. In consequence of the additions to the public debt made during the war, the occasional enlargements of the quantity of bank paper, arising from this cause, have become much more considerable. A diminution of notes, if known to be temporary, and if also moderate, produces, on the other hand, little pressure; for the expectation of returning abundance serves to maintain confidence, and to dispose the bankers to deem a somewhat reduced stock of bank paper for the time sufficient. The chief occasion of a diminution of the number of bank notes has been, that of the payment of the instalments on the public loans. The government, during the latter years of the war, issued from week to week a species of exchequer bills, which they received back in part of the payments on the loans. By thus lessening the quantity of paper taken out of circulation at the time of each instalment, they gave new facility to the operation of raising the public money; an operation which, however great, has in itself no other difficulty than that which arises from the too sudden diminution of London paper to which it is apt to lead. It can scarcely be necessary to add, that a great loan may, nevertheless, portend difficulty in other quarters, and that the degree of ease with which the payment of our loans may be accomplished, is, therefore, no true criterion of the state of the public resources.
[* ]It is not long since the Bank of England first adopted the custom of issuing notes for five pounds. These have circulated for some years in the place partly of gold, partly of country bank notes, and partly also, though it is impossible to say in what degree, in the place of ten pound Bank of England notes. There is, therefore, an unknown number of notes for five pounds which has formed that sort of addition to the Bank of England paper, which has no influence in raising the price of articles. This is only one of many circumstances, some operating in one direction, and some in the contrary, which render it difficult to draw a correct inference from those accounts of the quantity of Bank of England notes circulating at a variety of periods, which have been lately laid before parliament.