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 had been the only, or even the predominant,
means of payment in England. But, as every office boy knows, it was
not. Legal tender--gold and Bank of England notes--was hardly ever
seen in commercial and financial transactions on a serious scale. We
paid, sometimes, our retail purchases of goods and services in gold;
and Bank notes were a popular mode of payment on racecourses and in
other places where transactions took place between people who were not
very certain of one another's standing or good faith. But the great
bulk of payments was made in the cheque currency which our bankers had
developed outside of the law and could create as fast as prudence--and
an eye to the supply of legal tender which every holder of a cheque
had a right to demand--allowed them to do so. While cheques provided
the currency of commerce, another form of "money" was produced, again
without any restriction by the Act, by the pleasant convention which
caused a credit in the Bank of England's books to be regarded as
"cash" for balance-sheet purposes by the banks. These advantages
gave the English system a freedom and elasticity, in spite of the
strictness of the law that regulated the issue of paper currency, that
enabled it to work in a manner that, judged by the test of practical
results, had one great advantage over that of any of the rival
centres. It alone in days before the war fulfilled the functions of an
international banker by being ready at all times and without question
to pay out the gold that was, in the last resort, the final means of
settling internatio