3. The payment of debts in notes of the Bank of England was to be deemed payment in cash, if offered and accepted as such. 4. The notes were to be receivable at par by all public offices in payment of taxes.

5. The act was to continue in force until June 24, 1797.5

Excepting for a partial resumption in 1817, the notes of the Bank of England remained inconvertible from 1797 to 1821.6 The period of suspension lasting for twenty-four years may logically be divided into two parts: the first extending until 1809 and the second including the remaining twelve years.

Up to 1809 the Notes of the Bank of England Did Not Materially Depreciate. The notes of the Bank, as will be observed in the accompanying chart, increased but slightly from 1802 to 1809.7

CHART I: FLUCTUATIONS IN THE NOTE CIRCULATION, DISCOUNTS AND GOLD RESERVE OF THE BANK OF ENGLAND.

5 The restriction act was extended by additional acts passed on June 22, and November 30, 1797; July 5, 1816; and July 5, 1818; and by one passed during 1819; so that the Bank was not legally required to resume specie payments until 1823 although it actually did so in 1821.

6 Though they had been accorded a very privileged position by the act of 1797, the Bank notes were not given the legal tender quality.

7 Source of data for charts I and II: Silberling, British Financial Experience. 1790-1830, an article published in the Review of Economic Statistics (Harvard), for October, 1919, pp. 289, 291 and 293.

Explanation of the Moderate Issues. It was due to two factors that the notes of the Bank during this period were not issued in excess. In the first place, the Government radically changed its policy and refrained from using the Bank as a means of financing the war as had been the case from 1793 to 1797; and second, as the Bank rate ruled above the market rate through these years, merchants and bankers did not find it as profitable as they did later, to discount their bills at the Bank.

8

Pitt fortunately became fully conscious of the mistake he had made before 1797 in misusing the Bank's credit; and he no longer demanded that the printing presses pay for the war. "His was

not a nature to be obstinate when once he had realized a mistake, nor to profit by the Restriction Act to obtain artificial resources. He knew too much of the disadvantages of paper money to indulge in excessive issues and thus convert the Bank of England notes into common assignats."

In addition to the refusal of Pitt to use the Bank as a source of "revenue," the height of the Bank rate aided in saving England during the earlier period from the evils of inflation. Since May 1, 1746, the Bank rate had stood at 5% on first class bills founded on a real transaction. On such bills, 5% was a high rate of discount, and until 1809 well above the rates in the open market. The commercial classes, therefore, did not find it advantageous to discount their bills at the Bank, nor the general bankers to rediscount their portfolio and consequently the issues of the "Old Lady of Threadneedle Street" were quite moderate. It must not be thought that the directors of the Bank, foreseeing the effect of an overissue of notes on domestic prices and the foreign exchanges, purposely maintained a rate of discount above those prevailing in the open market. Such was not the case. They had the most hazy and inaccurate ideas of the relationships existing between money and prices. Inflation was prevented through their adherence to the age-long practice of discounting all bills at 5%, rather than through any knowledge of the principles by which the issues of the Bank should be regulated. 10 So long, then, as the market rate chanced to rule below the Bank rate, the Bank discounted but little for the commercial classes;

8 See Review of Economic Statistics (Harvard), for October, 1919, pp. 292-293.

9 Andréadès, p. 207.

10 This idea was expressed by Dr. Sivers in an article entitled, Beitrag zur Geschichte der Theorie des Disconts, published in Jahrbücher für National-ökonomie und Statistik, 1872, pp. 96 and 97.

later, during the second period, when the market rate had risen above the Bank rate, merchants did find it profitable to discount at the Bank and its issues became excessive.

The Depreciation of the Pound, 1809. Toward the close of 1808 and through 1809, the foreign exchanges fell rapidly and in terms of the paper money of England the price of bullion rose proportionately. The Bank had at last issued notes in excess of the legitimate needs of the country and the pound had depreciated. This marks the beginning of the second part of the period of suspension. A spirit of speculation had swept over England, brought about by a series of political and military events which forced the market rates above the Bank rate. The introduction of the Continental System by Napoleon,11 having as its object the closing of the ports of continental Europe to British commerce, was one of the factors responsible for this spirit, particularly as it concerned the products of Russia and the East of Europe.12 The occupation of Spain and Portugal by French troops in October of 1807, which opened the Spanish colonies in South America to the trade of the world, also stimulated the spirit of speculation, as British merchants hastened to form companies to trade with these new markets. With a rate of discount below that prevailing in the market, the Bank of England did its part in fanning the flame of speculation to an extent far beyond the bounds of ordinary rashness.13 Not only had the notes of the Bank of England appreciably increased, but the country banks which had increased in number from six hundred in 1808 to seven hundred twenty-one in 1810 had enlarged their circulation to £30,000,000,14

The Bullion Committee. The large increase in the amount of bank notes in England during 1808, 1809, and 1810 caused prices to rise and the foreign exchanges to fall rapidly.15 As Viscount Goschen would say, the decline in the purchasing power

11 By the Berlin decree (Nov. 21, 1806); and extended by other decrees issued at Warsaw (January, 1807); Milan (December, 1807); and Fontainbleau (October, 1810). See Hayes, A Political and Social History of Modern Europe, p. 548; and Sumner, A History of American Currency, pp. 230-309.

12 Macleod, Volume II, p. 136.

13 Ibid., p. 137.

14 Ibid., p. 138. The act of 1742 had conferred a monopoly of issue upon the Bank of England, the only banks not affected being those with less than six partners the so-called country banks.

15 In a recent article by Edwin R. A. Seligman, entitled Currency Inflation and Public Debts, published by the Equitable Trust Company of New York, the following statement appears on pages 19 and 20 regarding

parity of the pound had caused the fall in the foreign exchanges. Not knowing, then, the reasons for the rise in the price of bullion (the premium on gold) and for the unfavorable exchanges, the House of Commons on February 1, 1810, resolved that a Committee should be appointed, to make an inquiry into, and an explanation of these phenomena. After examining a great many witnesses including bankers, merchants and others, they submitted their report to the House on the 9th of June, together with the testimony of those examined. 16

the financial conditions of England at that time. "The inflation [before 1809] such as it was, was not primarily due, as yet, to the over-issue of paper. A few years later, however, the situation changed. By 180809 an era of speculation ensued and in the next few years the deficits were so great as to lead not only to a resort to fresh loans, with a consequent rise in prices, but also to an increase in the Bank of England note circulation, which soon amounted to more than double the original issue."

16 Macleod, Volume II, p. 165.

The Gold Bullion Report. In this famous report, the Bullion Committee 17 declared it to be their opinion that:

1) The depreciation of the Bank notes had been caused by their excessive issue. "Since the suspension of Cash payments in 1797, however, it is certain that, even if Gold is still our measure of value and standard of prices, it has been exposed to a new cause of variation, from the possible excess of that paper which is not convertible into Gold at will; and the limit of this new variation is as indefinite as the excess to which that paper may be issued." 18 2) The legal regulation limiting the rate of interest to 5% prevented the Bank from curbing the speculative spirit of the merchants (had it been willing), by raising the rate of discount, when necessary, above this figure. "It is necessary to observe, that the law which in this Country limits the rate of interest, and of course the rate at which the Bank can legally discount, exposes the Bank to still more extensive demands for commercial discounts. While the rate of commercial profit is very considerably higher than 5% as has lately been in many branches of our Foreign trade, there is in fact no limit to the demands which Merchants of perfectly good capital, and of the most prudent spirit of enterprise, may be tempted to make upon the Bank for accommodation and facilities by discount." 19

3) The fall in the foreign exchanges was caused by the excessive issues of Bank notes. "A general rise of all prices, a rise in the market price of Gold, and a fall of the Foreign Exchanges, will be the effect of an excessive quantity of circulating medium in a 17 The Bullion Report was drafted by Messrs, Horner, Huskisson and Thornton who drew largely from the conclusions reached by Ricardo in a pamphlet entitled, The High Price of Bullion-a Proof of the Depreciation of Bank Notes.

18 Report, together with Minutes of Evidence, and Accounts from the Select Committee on the High Price of Gold Bullion, p. 16. It is interesting to note that the report of the Bullion Committee of 1810 was identical in its findings with the report of the Committee of 1804 which investigated the reasons for the depreciation of the Irish currency. In 1804 and 1810, the doctrines and policies of the respective Bank directors were condemned vigorously.

19 Ibid., pp. 56 and 57. The excellence of the Gold Bullion Report is by no means universally accepted. Prof. H. S. Foxwell in a review of The Paper Pound of 1797-1821, by Edwin Cannan, in the Journal of the Royal Statistical Society for March, 1920, terms it a "much overrated document."

While the Bullion Report declared that the depreciation of a currency might be measured by the premium on gold, it is felt to-day that a better measure is the index number of prices in the nation concerned.