2. Notes are created and issued on the security
of bills of exchange and on the cash balance, so that
a relation is established between the notes issued
and the discounts.
3. The notes issued are controlled by a fixed
ratio of gold to notes or of the cash balance to notes.
4. This fixed ratio may be lowered on payment
of a tax.
5. The notes should not exceed three times the
gold or cash balance.
By this revolution Sir Edward would abolish all legal restriction on
the issue of notes by the Bank of England. It would hold a certain
amount of gold or a certain amount of cash balance against its notes,
but in the "cash balance" Sir Edward apparently would include 11
millions odd of Government debt, or of Treasury notes. As long as its
notes were only three times the amount of the gold or of the "cash
balance," and were backed as to the other two-thirds by bills of
exchange, the situation would be regarded as normal, but if, owing to
abnormal circumstances, the Bank desired to increase the amount of
notes issued against bills of exchange only and to reduce the ratio of
its gold or its cash balance to its notes, it would, at any time, be
enabled to do so by the payment of a tax, without going through the
humiliating necessity for an appeal to the Treasury to allow it to
exceed the legal limit.
At the same time, by the abolition of Peel's Act the cumbrous methods
of stating the Bank's position, as published week by week in the Bank
Return, would be abolished. The two accounts would be put together,
with the result that the Bank's position would be apparently stronger
than it appears to be under the present system, which makes the
Banking Department's Return weak at the expense of the great strength
that it gives to the appearance of the Issue Department. This will be
shown from the following statement given by Sir Edward Holden of the
Return as issued on January 16th, and as amended according to his
ideas:--