The fact is that there are two leaks to the ship. The framers of the Act could only perceive one: and they only provided against one: and they were utterly astonished to find the ship rapidly sinking from the other leak they had forgotten.

10. Now as the Act notoriously and manifestly failed in this most important point, which it was supposed to have rendered so secure, and which was fully and candidly admitted by Sir Robert Peel, it becomes a natural inquiry to ask why it failed. The reply to this is that the Act failed because it aimed at the wrong mark altogether. It wholly missed the true point in the case.

In former times it was a mercantile dogma that the Exchanges could only be against the country in consequence of its being indebted to other countries. Nothing can be more striking than the vicious circle in which the Commercial witnesses argued before the Bullion Committee of 1810. They maintained with unflinching perseverance that the Exchanges could only be adverse because the country was indebted: and as the Exchanges were adverse, they maintained that the country must be indebted (without the slightest inquiry into the fact) because the exchanges were adverse.

However the Bullion Committee completely disproved this Commercial dogma: and they demonstrated beyond dispute that the depreciated Paper Currency was the cause of the Exchanges being apparently adverse: but that when this depreciated Paper Currency was reduced to its true value in gold, the Exchanges were in reality in favour of the country.

The Commercial witnesses maintained that when the indebtedness was paid off, the drain of bullion would cease of itself. But the Bullion Committee proved that with a Paper Currency so depreciated as Bank Notes then were, the drain would not cease until all the specie in circulation had left the country; which was amply verified in England at that period, and has been fully verified in many countries since.

The Bullion Committee thus shewed that there are two causes of a drain of bullion - 1st, the indebtedness of the country : 2nd, a depreciated Paper Currency.

But in our Theory and Practice of Banking first published in 1856, we shewed that there is a third cause of a drain of Bullion, and an adverse Exchange, which, however it might be known among commercial men, had never yet, that we have seen, found its way into any commercial book whatever, and most certainly had never been brought prominently before the public in Currency discussions, as a cause of an adverse Exchange, wholly irrespective of any indebtedness of the country, or of the state of the Paper Currency.

The principle is this -

That when the Rate of Discount between any two places differs by more than sufficient to pay the cost of transmitting bullion from one place to the other, bullion will flow from where discount is lower to where it is higher.

We have fully explained this principle in the preceding chapter, so that we need not repeat the explanation here. Hence if such a state of things arises, the Bank must, as an indispensable measure to preserve its own security, raise its Rate of Discount so as to destroy these profits; and so arrest the drain, which is exclusively caused by the difference of the Rates of Discount in the two places.

Now when bullion dealers fabricate Bills for the purpose of buying gold for exportation, this practice causes no increase of the Bank Notes in circulation: on the contrary, they are not wanted : it is gold that is demanded and taken for export, and it steals out of the country noiselessly and unobserved. Also if bankers in this country will perversely maintain the Rate of Discount lower here than in neighbouring countries, and, therefore, lower than the natural Rate, persons in foreign countries send their debts or securities over here for sale, and the proceeds are remitted abroad. Consequently this practice causes an export of gold without diminishing the Notes in circulation. Of all species of property Debts are the most easily transportable. The charges on the transmission of gold even, are heavy compared to those on the transmission of Debts. Debts to any amount can be transmitted from one country to another at the mere expense of the postage. Consequently if the Americans can only get £85 per cent, for their Debts in their own country, and they can get £96 per cent, in England, of course, they will send them here in vast quantities for realisation. This was eminently and notoriously the case in 1839, when the Bank of England kept its Rate so perversely below the natural Rate, and it was the cause which aggravated the drain of bullion to so alarming an extent. Hence we have shewn that besides the causes universally known for a drain of bullion - the indebtedness of the country and a depreciated Paper Currency - there is another and most potent cause whose importance has only been recently sufficiently recognised, namely - an unnatural depression of the Bate of Discount below that of neighbouring countries.

Now this principle was not understood at the time the Bank Act of 1844 was passed: and in our work on Banking (1856) we stated this as a fundamental principle of the Currency -

An improperly low Rate of Discount is in its practical effects, a depreciation of the currency.

We therefore shewed that the only true method of striking at this demand for gold is by raising the Rate of Discount: and that the true supreme power of governing and controlling Credit, or the Paper Currency, is by carefully adjusting the Rate of Discount by the state of the Foreign Exchanges, and the state of the Bullion in the Bank.

The fact is that bullion dealers are the natural enemies of bankers, and they are constantly on the watch to take any advantage they can of the weakness of bankers, if they sell gold too cheaply: and they want this gold, not for the purpose of the internal commerce of the country, as other traders do, but for the express purpose of sending it to be sold in other countries where it has a higher value. They act exactly as people would do with corn dealers if they were so foolish as to sell their wheat at half the price it was selling at in neighbouring markets. If the farmers were to keep selling their wheat at 40s. a quarter in England, while the price was 80s. in Paris, of course corn dealers would buy up the wheat in England and export it to France.