master-General or the Treasurer of the Navy, and payable at the Bank of England. When the bills arrived the Bank was expected to provide the money to pay them, and statutory authority had recently been obtained for the advances made by it for this purpose. The perpetual arrival of new bills, for the payment of which the Government had made no separate provision, was the cause of growing misgiving to the Bank, and led the Directors to make repeated protests to Pitt-protests which grew in urgency as the foreign exchanges became more adverse. The Directors urged him to keep down the advances for the purpose of meeting these bills to a maximum of £500,000 outstanding at any one time. In practice this was an ideal never attained; at times they exceeded £2,000,000.

At that period the most important of the London exchanges were those on Hamburg and Lisbon. Lisbon was important because most of the new supply of gold came from the mines of Brazil and travelled vid Portugal. Hamburg was important as being the great entrepôt for the trade of Northern Europe. In normal times the exchange on Paris was quite as important, but though war did not necessarily interrupt the quotation of the exchanges between the belligerents (and indeed the Paris exchange was regularly quoted in London from 1803 to 1815), this exchange was not quoted between October, 1793, and April, 1802.

Germany and the other countries of which Hamburg was the commercial centre had silver currencies, and the Bank of Hamburg only gave credit for silver, gold being bought in the Hamburg market as a commodity. There was, therefore, no real par of exchange with London. For the purpose of quotations there was an assumed par price of gold, six "marks banco" (or 96 stivers) to the gold ducat. This price, making the ratio of gold to silver 14'86 to 1, had become too low. In 1795 the ratio had reached that of 15 to 1, instituted in the French coinage by Calonne ten years before. The London exchange was quoted in schillings and grotes, banco, to the pound sterling (a schilling of 12 grotes being 6 stivers, or mark banco). At 96 stivers to the ducat, the gold in £1 was worth 34 3, banco. At the ratio of 15 it was worth 35'9. Allowing for interest for 2 months, a bill on Hamburg was at par when the exchange was about 36. In the years 1795 and 1796 the lowest price of gold quoted in Hamburg was 98 stivers, making the par 35. In the first quarter of 1795 the exchange averaged 35'7; in the second quarter it had fallen to 33:10, and in the third it was no more. than 32:54. In October the Lisbon exchange, of which the par

was 67 to the milreis, rose to 71, representing nearly as great a depreciation of sterling as in Hamburg.

At last, in self-defence, the Directors of the Bank, recognising that the needs of the Government must remain paramount, decided that they must restrict trade discounts, and on December 31st, 1795, they adopted a resolution limiting the total amount of bills. to be discounted each day for their customers other than the Government. If on any day the bills presented for discount in the aggregate exceeded the limit laid down, a proportion of the bills presented by each applicant were to be returned on his hands. Apart from the advances to the Government, this Procrustean reduction of discounts gave the Bank complete control over credit, and at the same time the advances to the Government (of which the obnoxious advances on Treasury bills in reality formed quite a moderate proportion) were themselves steadily reduced. Having exceeded £12,000,000 in December, 1795, they were reduced to less than £9,000,000 in September, 1796. But it was not till October, 1796, that the foreign exchanges were restored, and even then the Bank was not relieved from the drain of gold. At last in February, 1797, the signs of a crisis appeared. An invasion scare precipitated it, and the gold stock of the Bank, already seriously depleted by the strain of the preceding two years,1 began to melt away. The Government came to the conclusion that the Bank could not stand the strain, and they obtained an Act of Parliament stopping the payment of its notes in cash.

It might, perhaps, be thought that this crisis bears its explanation on its face. Did not the Bank Directors go to the root of the matter when they pressed Pitt again and again to keep down his demands for temporary advances? No doubt they were right in attaching so much importance to this, but a glance at the actual variations which occurred in these advances will show that the explanation of the crisis is not to be found in them. In 1793, the first year of the war, they averaged a little over £9,000,000. In 1794 they were lower, the average being about £7,500,000. At the beginning of 1795 they rose quickly and exceeded £11,000,000, and, except for a temporary rise to £12,800,000 in December, 1795, they varied between £8,700,000 and £11,500,000 until the suspension of cash payments in February, 1797. At the moment of the crisis the advances were £10,600,000. Now in 1791 and 1792, under peace conditions, the advances had exceeded £9,000,000, and it is perfectly obvious that they could be increased

It had been 63 millions in August, 1794; 24 millions in December, 1796; and fell to 1 millions on February 25th, 1797.

to 11 or 12 millions in time of war without threatening a financial cataclysm. Indeed, while the Bank Directors were right to insist on the limitation of advances, it may fairly be contended that Pitt in substance complied with their demands. Though the inconvenient bills drawn abroad were constantly above the stipulated limit of £500,000, the advances as a whole were not excessive.

But what specially agitated the Bank Directors at the time was that so large a part of the money raised by the Government was spent abroad, either on subsidies to our allies or on the maintenance of our own forces. The amount so spent in 1794 was £8,336,000, in 1795 (besides a guaranteed loan of £4,600,000 for the Austrian Emperor) £11,040,000, and in 1796 £10,650,000. Undeniably these large remittances would have an unfavourable effect on the exchanges. But it must be remembered that this effect would be no greater than that of the investment of the same amount abroad in peace time. And any curtailing of the amounts annually invested or lent abroad, and any additional sums borrowed abroad during the war, must be set off against it. The operations of 1794 do not seem to have had much effect on the exchanges, which did not become seriously unfavourable till the spring of 1795. The large remittances of that year must, of course, have been an important contributory cause of the drain. of specie that then set in. But so long as war expenditure is financed with genuine money, provided by a diminution of private expenditure, and not with inflated bank credits, the effect of even large remittances abroad will be moderate.

Sir Francis Baring, writing in 1797, stated that the war loan of 1796 had been taken by subscribers of insufficient financial standing, who "had recourse to circulations, operations on foreign places, and other expedients to enable them to make good their payments, which produced some effect on the course of exchange, but still more on the rate of interest in the country, which was soon pushed beyond what is allowed by law to be received." In so far as loans were raised from people who could not pay for them without borrowing, there would, of course, be a tendency towards unsound conditions. But if the subscribers succeeded in obtaining credits abroad, as Sir F. Baring suggested, the effect on the exchanges would be favourable-at any rate, so long as the foreign credits were not called in. And in any case the disturbance of the exchanges occurred long before the war loan of 1796 was issued.

The critics of the Bank blamed the Directors for restricting discounts. The Bank restricted discounts in order to keep down

its note issue. Some of the witnesses before the Secret Committee of the House of Lords, appointed immediately after the crisis, argued that the demand for guineas was due to this cause. Trade must have some means of payment; bank-notes will do, but if they are not forthcoming the only alternative is to ask for guineas. The country banks, it was said, restricted their issues in sympathy with the Bank of England, and hence the drain of gold. This argument is palpably wrong. The guineas were drawn out in exchange for bank-notes. It is true that a curtailment of borrowing facilities leads traders to hold larger balances, but those balances may just as well be in credit as in money. The demand for gold in exchange for credit must have been due to one or all of three causes-a need for gold for export, a need for gold as a means of small payments, especially payments of wages, or a loss of confidence in the banks. A loss of confidence in some of the country banks there may well have been; failures among them were frequent enough. Bank of England notes did not circulate much outside London, and such loss of confidence in the local banks would probably lead to a demand for guineas. But this loss of confidence itself calls for explanation.

Why, then, should the banks have been in difficulties? Why should gold have been exported? Why should guineas have been in demand for internal circulation? No petty little movements will be enough to explain so great a crisis.

The fact is that the financial situation in England, even in 1797, cannot be adequately studied in isolation from the financial situation on the Continent. For the first two years of the war the foreign exchanges were highly favourable to London. This was the period of the Terror in France, when the assignats were forced into circulation by all the rigours of the Committee of Public Safety, when the possession of a hidden hoard of gold or silver was a criminal offence, when everyone who had wealth in France was anxious to send it abroad. The countries adjacent to France were soon saturated with specie, and England got her share, as is shown by the exceptionally heavy purchases of foreign gold for the Mint in 1793 and 1794. The total for those two years was 3 millions, as compared with a normal average of about £650,000 a year. And, of course, more foreign gold was imported than was brought to the Mint.

The fall in the exchanges began in the spring of 1795. The exchange on Hamburg, which was above 36 at the end of March, fell in six weeks to 336, and in August to 31 10. Even at 336 it was already profitable to send specie thither, and in

August it was profitable also to send it to Lisbon. This is just the time at which France was returning to a metallic currency. The Law of the Maximum, the foundation of the whole system of assignats under the Terror, was repealed on December 24th, 1794. In January, 1795, a difference began to be made (contrary to law) between specie prices and paper prices, and soon there followed ever-growing complaints that farmers or merchants, first of all in the provinces and afterwards in Paris, refused to accept assignats at all. The laws limiting dealings in gold and silver were partly abrogated, partly ignored. By the end of the year the hopelessly discredited assignat had become an object of speculation rather than a means of payment. In the course of 1796 the Revolutionary paper-money was practically demonetised. In July, 1796, it was stated that specie, though scarce, was sufficient to meet the requirements of the markets, and specie prices were beginning to rise.

How intense was the pressure to send gold to France during this period of return to a metallic currency is proved by the quotations of the foreign exchanges on the Paris Bourse. For the period from August 23rd, 1795, to February 22nd, 1796 (except for an interval from December 14th, 1795, to January 13th, 1796, when the Bourse was closed), the pages of the Moniteur give us an almost complete series of daily quotations of the prices of gold and silver and of the exchange on Hamburg and some other places. The following table shows the monthly averages. The assignat being then in its death-agony, and valued at only a small fraction of its face value, each quotation is given at so many times the par value:

When it is remembered that throughout these months the Hamburg Exchange was from 8 to 10 per cent. against London, it will be seen how enormous was the profit to be made by importing guineas from London to Paris. It was possible on September 20th, for example, for a man who wanted gold coin in Paris either to buy it at 4,650 livres per French ounce (472} grains English), or to buy a bill on Hamburg at 7,350 livres per 100 marks banco, to sell the bill in London for guineas at about