In such a disordered state of the circulation, all the inferior banks are naturally induced, from a pru dent regard to their own safety, to limit the issue of their notes, by which means the scarcity of cash is increased, and the evil greatly aggravated. But the Bank of-England cannot safely act on such a con tracted policy ; for it is evident, that the general dis credit of bank-notes is occasioned by the alarm pre vailing in the country, and that, while this alarm con tinues, the Bank may be drained of its specie by the most limited circulation of its notes, which will be returned upon it as fast as they are issued. In all such cases, therefore, the only safe course for the Bank to pursue, is rather to enlarge the circulation of its notes, that the alarm may be quieted, and that the supply of currency may be perfectly adeq,uate to effect the daily payments of London, of which the punctual discharge is necessary to the solvency of the country at large. It is not to be wondered at, however, if the Bank, while the nature of paper cir culation, and of the evils to which it is exposed, were but imperfectly known, should not always have un derstood its true interest, and should therefore have hesitated to embrace a policy so unusual, and appa rently so hazardous. In the course of the year 1798, the country was agitated by a sudden and general alarm. The scarcity of money was extreme, and paper was discredited. Numerous bankruptcies took place, and there was a great demand among the country banks for specie, which the Bank of Eng land was as usual ultimately called upon to supply. Embarrassed by the drain of its specie, the Directors of the Bank refused to accommodate several great and opulent country banks who applied for assistance, and they were also unwilling to augment the issue of their paper. Immediate and important failures en sued, and the increasing alarm and distress for money in London; plainly showed that the relief of the country was necessary to the solvency of the metropolis. It did not appear, that, at this period, the notes issued by the Bank of England were fewer than usual, but, owing to the failure of confidence among mercantile men, they circulated more slowly, and they became in this manner inadequate to trans act the immense payments of London, with the same . regularity as before.
The Bank of England, not deeming it expedient to enlarge the issue of its paper, a remedy of exactly the same nature was administered by Parliament. A loan of Exchequer bills, to the amount, if required, of L. 5,000,000, was directed to be made to as many merchants, giving proper security, as should apply. Such were the salutary effects of this measure, that the very expectation of a seasonable supply of what could be immediately converted into cash, diffused a general feeling of confidence.; the punctuality of the London payments was restored, and the credit of the country began to recover. Of the sum pro posed to be granted by Parliament, applications were made for L. 8,855,624, some of which being either re jected or withdrawn, the actual sum issued from the • Exchequer amounted to L. 2,202,000, which was punctually repaid without either apparent difficulty or distress. The effect of this measure was to supply the community with a temporary currency, in place of that which had fallen into discredit, or which had been withdrawn from circulation by the caution of the banks ; and its advantages were evinced by the speedy restoration of mercantile confidence, and by the increased facility of raising money, which was previously felt both in the metropolis and in the country at large. • This state of confidence continued, with little in terruption, until the year 1795. At this period, the
Bank,, in consequence of the large advances which it bad made to Government, was under the necessity of retrenching the sum usually allotted for the dis count of mercantile bills. A scarcity of cash was soon felt among the merchants and money-dealers of the metropolis, and the threatened invasion of the country, during the year 1796, concurred to spread a general alarm, which naturally gave rise to the dis credit of bank-notes, and to a demand for specie. About this period, several banks in the north of Eng - land were under the necessity of suspending their cash payments, and the Alarm of these failures soon reach ing the metropolis, the Bank of England was sub . jected, about the beginning of the year 1797, to an alarming drain of specie, partly to supply the de - mand of the country banks, and partly from the re turn of its own discredited notes. In order to check this increasing pressure, the Bank diminished the circulation of its notes, which having, for several years before, amounted to nearly L.11,000,000, and having been reduced, for some time, to between L.9,000,000and L.10,000,000, were, at this particular period, brought down to between L.8,000,000 and L.9,000,000. From a combination of all these cir cumstances, therefore, namely, the alarm in the coun try—the discredit of country bank-notes—the pressing ' demands of those banks for specie, all centering in the metropolis,—and, lastly, the undue restriction of its issues by the Bank, such a scarcity of cash was pro duced in London, and such an alarm followed, that the run upon the Bank of England for specie, so far from abating, continued to increase with an alarm• ing rapidity. In these circumstances, the Directors communicated to the Chancellor of the Exchequer an account of the precise reduction which had taken place in the amount of their cash, the consequence of which was, that an Order in Council was at length issued, on Sunday the 26th February, restraining the Bank from all further payments in specie. An act of Parliament was soon after passed, confirming the restriction on the cash payments of the Bank ; and this principle has been since continued, by suc cessive acts of Parliament. By the last act, passed in April 1816, it is continued for two years from that date.
An event so and unprecedented as a • stoppage of payments by the Bank of England, pro duced, at first, a general feeling of astonishment and alarm ; and as the executive government had inter fered, on its own discretion, to suspend the obliga tions of the Bank to its creditors, it was necessary that the sanction of the Legislature should be obtain ed for this extraordinary exercise of power. The whole matter being therefore referred to the consi deration of Parliament, long and anxious discussions took place, on the causes which had given rise to this great convulsion in the mercantile world, and on the policy to be pursued, in a state of things so wholly unexpected. Parliamentary committees were appointed, with power to examine the officers of the Bank, both as to the general state of its affairs, and as to the Circumstances which led to its present em barrassments ; and by the labour of these committees, joined to the able publications of individuals on the subject, such a precise and accurate account has been collected respecting all the facts of this extra ordinary case, that it has not only been made dear in itself, but a new and steady light has been thrown, by the information disclosed, on the general princi. pies of paper currency. We shall briefly consider, on these general principles, to what causes this me morable suspension of cash payments by the Bank of England was chiefly owing.