Such being the state of affairs—­a great mass of new credit and currency based on securities—­it is clear that our currency has been deprived for the time being of that direct relation with its gold basis that used in former time to regulate its volume according to world prices and our international trade position.  As the Committee says, “It is not possible to judge to what extent legal tender currency may in fact be depreciated in terms of bullion.  But it is practically certain that there has been some depreciation, and to this extent therefore the gold standard has ceased to be effective.”  Very well, then, what has to be done to get back to the old state of things under which there was a more or less automatic check on the creation of credit and the issue of currency?  This check worked by a system which was elastic and simple.  It was not entirely automatic, because its working had to be controlled by the Bank of England, which, by the action of its discount rate, could, more or less, quicken or check the working of the machine.  Legal tender currency could only be increased by imports of gold; and exports of gold reduced the available amount of legal tender currency; and since a stock of legal tender currency was essential to meet the demands upon them that bankers made possible by creating credits, there was thus an Indirect and variable connection between the country’s gold stock and the extent to which bankers would think it prudent to multiply credits.  If credits were multiplied too fast, our currency was depreciated in value as compared with those of other countries and the exchanges went against us and gold either was exported or began to look as if it might be exported.  If it was exported the legal tender basis of credit was reduced and the creation of credit was checked.  If the Directors of the Bank of England thought it inadvisable that gold should be exported they could, by raising the rate of discount and taking artificial measures to control the supply of credit, produce, without the actual loss of gold, the effects which that loss would have brought about.

The keystone of the system was the rigid link between legal tender currency and gold.  This was secured by the provisions of the Bank Act of 1844, which laid down that above a certain line—­which was before the war roughly L18-1/2 millions—­every Bank of England note issued should have gold behind it, pound for pound.  In other words, the Bank of England note was, for practical purposes, a bullion certificate.  The legal limit on the fiduciary issue (that is, the issue of L18-1/2 millions against securities, not gold) could only be exceeded by a breach of the law.  The many critics of our banking system seized on this hard-and-fast restriction and accused it of making our system inelastic as compared with the German arrangement, under which the legal limit could at any time be exceeded on payment of a tax or fine on any excess perpetrated.  These critics might have been right if legal tender currency