lions it must procure by letting that amount of advances out, and not renewing them. Not only must it raise its rate of interest, but it must effect, by whatever means, a diminution of two millions in the total amount of its discounts: or it must sell securities to an equal amount. This violent action on the money market for the purpose of replenishing the Banking reserve, is wholly occasioned by the Act of 1844. If the restrictions of that Act did not exist, the Bank, instead of contracting its discounts, would simply transfer two millions, either in gold or in notes, from the Issue to the Banking Department; not in order to lend them to the public, but to secure the solvency of the Banking Department in the event of further unexpected demands by the depositors. And unless the drain continued, and reached so great an amount as to seem likely to exceed the whole of the gold in the reserves of both departments, the Bank would be under no necessity, while the pressure lasted, of withholding from commerce its accustomed amount of accommodation, at a rate of interest corresponding to the increased demand.[1]
I am aware it will be said that by allowing drains of this character to operate freely upon the Bank reserve until they cease of themselves, a contraction of the currency and of credit would not be prevented, but only postponed; since if a limitation of issues were not resorted to for the purpose of
- ↑ This, which I have called "the double action of drains," has been strangely understood as if I had asserted that the Bank is compelled to part with six millions' worth of property by a drain of three millions. Such an assertion would be too absurd to require any refutation. Drains have a double action, not upon the pecuniary position of the Bank itself, but upon the measures it is forced to take in order to stop the drain. Though the Bank itself is no poorer, its two reserves, the reserve in the banking department and the reserve in the issue department, have each been reduced three millions by a drain of only three. And as the separation of the departments renders it necessary that each of them separately should be kept as strong as the two together need be if they could help one another, the Bank's action on the money market must be as violent on a drain of three millions, as would have been required on the old system for one of six. The reserve in the banking
