THE THEORY AND PEACTICE OF BANKING. TIIK THEORY AND PEACTICE BANKING. HENRY DUNNING MACLEOD, Esq., M.A. OF TRINITY COLLEGE, CAMfiRIDGE, AND THE INNER TEMPLE; BARRISTER-AT-LAW ; FELLOW OF THE CAMBRIDGE PHILOSOPHICAL SOCIETY, AND OF THE STATISTICAL SOCIETY OF LONDON, Testimony is like the shot of a long bow, which owes its efficacy to the force of the shooter ; argument is lUve the shot of a cross bow, equally forcible whether discharged by a giant or a dwarf. — Botle. SECOND EDITION VOLUME I. LONDON; LONGMANS, GREEN, READER, & DYER. 1866. THE AUTHOR RESERVES THE RIGHT OF TRANSIwlTION. LONDON : JOHN KlN(i &, CO.Ml'ANV, LIJUTED, I'KINTERS, QUE1:;N STREET, CITY. PREFACE TO THE SECOND EDITION. f The earlier part of this Work has been entirely re- modelled. When the first edition was written, the Author found the fundamental principles of the current books on Political Economy so unsatisfactory, that he was oblio;ed to examine them at considerable leno;th. Since then he has published the Elements of Political Economy^ and especially the Dictionary of Political \' Economy^ in which the foundations of the Science are 1) thoroughly examined ; and, therefore, it is less neces- \ sary to do so in a Work specially devoted to Banking. In this edition, those fundamental conceptions and general laws only are investigated, which are exclu- si\'ely necessary for the Theory of Credit. Since the first edition was published, the doctrines established in it have constantly obtained increasing influence. After pointing out the arithmetical errors, and the unphilosophical conceptions upon which the Bank Act of 18-14 is founded, and also that the theory it seeks to enforce was expressly condemned by all the great Banking authorities of former times, the Author de- monstrated that the only true way of controlling the iSSObS VI. PREFACE. Paper Currency, or Credit, is by sedulously adjust- iug the Rate of Discount by the Bullion in the Bank, and the state of the Foreign Exchanges. This doctrme, but very imperfectly understood, and extremely unpopular at that time, is now universally acknowledged to be the true one, and is adopted by all the great Banks in Europe. The Usury Laws in France have been modified in order to enable the Bank of France to adopt it. An Imperial Commission was subsequently appointed to examine into the whole subject of the Usury Laws, with a view to their abolition, before which the Author was examined as a witness. In the former edition an attempt was made to in- vestigate the Theory of Accommodation Paper, and to point out exactly wherein its true danger consists. In 1861, the failure of Laurence^ Mortimer^ and Schrade)\ popularly known as the great leather fraud case, took place. In his very long and elaborate judgment in this most important commercial case, Mr. Commissioner Holroyd quoted the explanation given in this work at great length, thereby giving the sanction of his high authority to its correctness. In 1862, M. Michel Chevalier presented an elabo- rate report on the Author's Works to the ^Vcademy of Moral and Political Sciences of the Imperial Institute of France, in which he declared his unreserved adhe- sion to their principles. Tliis report was published at lengtli in the Joiu^nal des Econoniiste.'i for August, 1.S62. PREFACE. VII. In 1863, M. Henri Richelot, a gentleman holding a high position in the Ministere du Commerce, pub- lished a volume entitled " Une Revolution en Economie Politique : expose des Doctrines de M. Madeod^'' giving a full exposition of the doctrines maintained in tKe Author's Works. M. Rouher, then Minister of Commerce and Agriculture, ordered this Work to be officially distributed to all the Chambers of Commerce in the Empire. The subject of Credit and Banking has assumed such increased importance in recent years, that the Emperor has appointed an Imperial Commission to investigate it thoroughly. The Commission has drawn up an exhaustive series of questions, and requested the Author to send in an answer to them. There can be but little doubt that a similar course must before long be adopted in this country. Symp- toms are not wanting to warn us of the approach of one of those periodical monetary cataclysms which have always been attended with such terrible conse- quences. When that event occurs, if not before, a searching inquiry must be instituted into the whole subject, and then the Author hopes that it will be made manifest that the principles maintained in this Work, which are in strict accordance with, and a development of, those of the most celebrated authori- ties of former times, are proved to be true equally by Reason and Experience. Campden Hill, Maxj Mil, 1866. CONTENTS THE FIRST VOLUME. PAGE Introduction xxv CHAPTER I. DEFINITIONS AND ILLUSTRATIONS OP THE TERMS USED IN MONETARY SCIENCE. § 1. On the DEFrNiTiON op Wealth 3 Adam Smith's Definition of Wealth 3 Defects of this Definition 4 Inconsistencj' of Smith's Doctrines 5 2. Aristotle's Definition of Wealth 6 This the True Definition 7 3. On the Three Species op Wealth 7 Wealth is of Three Distinct Species 7 Quotation from ^Escliines Socraticus respecting Immaterial Wealth 8 Incorporeal Property 9 4. These Three Species of Wealth constantly exchanged . . 9 This gives rise to Srx Species of Exchanges . . . .10 5. On some Confusion in the expression National Wealth 10 6. On the Meaning of the Word Property. . . .11 Property is not a Tiling, but a Right residing in the person . 11 7. Two great divisions of Property 13 Property in a specific chattel already in existence . . .12 Property independent of any specific chattel, and to something which is not yet in existence 12 Varieties of this latter, or Incor^ioreal, Property . . .12 Credit is one species of this Incorporeal I^roperty . . .13 Each kind of Property the subject of Sale, or Exchange . 13 CONTENTS. PAGE 8. On the Depestition op Value 13 Tlie Value of any Economic Quantity is any otlier Economic Quantity for which it can be exchanged . . . .14 Value necessarily requires the concurrence of tir^o minds . 14 9. On Money, Currency, Credit, Circulating Medium, Circulation 14 On the want which gare rise to the use of Money . . .15 Money required to measure, record, and transfer the debt that would aiise from an unequal Exchange . . .15 Whence called Currency 16 10. Aristotle gave the true definition of Money . . . .16 Other writers have given the same definition . . . .17 Different substances used as Money by different Nations . 17 Metal the best substance 18 Definition of Credit. — Credit is anything icliich is of no direct use, but which is taken in exchange for something else, in the bdief or confidence that it can be exchanged away again 18 Money is the highest and most general form of Credit . . 19 Say calls a sale, half an exchange 19 Credit, or Debt, is the name of a certain species of Property . 20 There are shops and markets for the sale of Debts . . .20 Credit is the Present Right to a Future Payment . . .21 The Unit of Debt, or Credit 21 11. Of Currency or Circulating Medium . . . .21 Absm'dity of the name Currency 22 Circulating Medium more correct 22 Ideas involved in term Currency 23 Enumeration of different kinds of Currency . . . .23 12. The idea of Currency is distinct from that of Money . . 24 13. The quantity of money in any countiy bears no necessary relation whatever to the quantity of other goods, or to their price 24 14. On Circulation 25 Distin(;tion between Barter, Exchange, and Circulation 25 15. On Price, Discount, and Interest 27 Definition of Price 27 The Value of Money varies inversely as Price . . .27 Discoi:nt is the diiference between the price of a debt and its amount 27 The Value of IVIoncy varies directly as Discount . . .28 Definition of Ln'iji;i{kbt 28 Diseoiuil more [irolilalilc llian Interest 28 CONTENTS. XI. PAGE 10. On Securities for Money and Convertible Securities 28 Different kinds of Securities for Money 28 Different kinds of Convertible Securities . . . .29 17. On TnE Definition of Capital 29 Cajiital is any Economic Quantity used for the purpose of profit 29 Capital may increase in two distinct ways . . . .30 18. Capital may be used productively in three different ways — agriculture, manufactiux-s, and commerce . . .30 Exchange, or purchase, is one species of Production . . 31 Credit is used productively in the same way as Money . . 31 19. On Fixed and Floating Capital 32 Definition of Fixed Capital 32 Definition of Floating Capital 32 On the conversion of Floating into Fixed Capital . . .34 20. On Production and Consumption 35 Erroneous doctrines regarding Consumption . . . .36 Consumjition in Economics means purchase . . . .37 Confusion between Consommatioa and Consomption in French 37 Erroneous doctrines regarding Production . . . .38 Production in Economics means bringing forwai'd for sale . 38 Production in Economics is equivalent to Supply . . .39 But Consumption is not equivalent to Demand . . .39 Reciprocid Production and Consumption constitute Exchange 39 21. On Rate of Interest and Rate of Profit . . .39 Erroneous Definition of Rdie of Profit by Economists . . 40 Rectification of this error clears up difficulties . . .41 CHAPTER II. THE THEORY OF VALUE. 1. The complete Theory of Value comprises : the Definition, the Cause, and the General Law of Value . . .4} 2. On the Definition of Value 4o An}^ Economic Quantity may have Value in terms of the others 40 Confusion of ideas on Value 47 3. Error of the Expression Intrinsic Value . . .48 Money has not Intrinsic but General Value . . . .49 Bank Notes have value because they are exchangeable . 49 4. On the distinction between Depreciation .vnd Dimi- nution in Value 50 5. On tiie Origin, Source, or Cause of Value . . 52 6. Popular doctrine that L.vbour is the cause of Value . . 52 This shewn to be erroneous 53 I. CONTESTS. PAGE § 7. Say's doctrine that Utility is the cause of Value . . . 56 This sheAvn to be erroneous 56 8. Demakd is the sole cause of Value 57 Value originates solely in the Human Mind . . . .58 /;: is not Labour which is the cause of Value, but Value which is the cause of, or inducement to, Labour . . .58 9. On the General Law op Value 59 Fundamental defects of the Economical System of Ricardo and Mill 59 The true General Law of Value given by Lord Lauderdale . 60 10. A Standard of Value is impossible . . . .60 Great confusion of Adam Smith on Value . . . .61 Smith and Ricardo's errors about a Standard of Value . . 62 jVIr. Samuel Bailej^ points out the impossibility of there being a Standard of Value 64 CHAPTER III. THE THEORY OF CREDIT. § 1. Preliminary Observations 69 Section I. 2. In^vestigation of tiie Nature op Credit . . .72 ]\Iathematicians call Debts Negative Quantities . . .73 Meaning of this 73 A Release from a Debt is equivalent to a Payment in Money 75 A Mutual Release of Debts is equivalent to a reciprocal Pay- ment of Debts 75 3. On the Distinction between a Bailjient .\nd a Debt 76 Fundamental distinction between Instruments of Credit and Bills of Lading, Dock Warrants, &c 78 4. Ambiguous meaning op the word Lo.\n . . . .80 Causes of the confusion on the subject of Credit . . .81 Section II. § 5. Upon Instruments of Credit 82 Instruments of Credit of two sorts 82 6. Certain legal j)cculiarities regarding different kinds of Pro- perty 82 7. On Bills ok Exchange 84 8. Definition of a Chkquic 85 9. Origin of Bills of E.Kcliange 85 10. On Puomihhouv Notes 87 11. 'I'wo great divisions of the System of Credit . . . .88 CONTENTS. Xm. Section III. PAOB g 12. On Commercial Credit 89 On the System ok Credit Based upon Simultaneous Transfers op Commodities 89 Description of Commercial operations, giving rise to BiUs of Exchange 90 Traders who buy Commercial Debts 91 Exemplification of the distinction between Bills of Exchange and Bills of Lading 94 Meaning of Bankers " contracting their issues " . . .96 Explanation of a ' ' Pi'essure on the Money Market " . .97 13. On Credit created for the purpose op being applied to the FoRMiVTION OF NEW PRODUCTS . 99 Examples 100 Credit performs tlie same functions as Money . . . 102 Meaning of an Accommodation Bill 103 Erroneous notions regarding Real and Accommodation Bills 104 Commercial transactions on Credit are Sales .... 105 Mercantile Credit is Mercantile Capital 106 Section IV. § 14. The Theory of Banking 108 Period when Bills of Exchange became saleable . . . 108 15. Erroneous Notions prevalent as to the Nature of BjVnking 109 Bankers are not Agents between those who want to Lend and those who want to Borrow 109 Definition of a Banker 110 16. On the Meaning op the Word B^vnk .... 110 True meaning of the Italian word Banco . . . .111 Equivalent to Monte, a common Fund Ill Similar meaning of B^vnk, when introduced into England . 112 17. On the Currency Principle 113 Definition of the Currency Principle . . . .113 First Banks of Deposit 114 18. On the Mech.\nism of B.anking 116 Origin of Bankers in England 116 Their method of doing bu.siness 116 Examination of Mr. Thornton's opinion . . .118 Legal Description of Banking 119 Change in their method of doing business by Bankers : instead of issuing Notes they create Deposits .... 120 Origin of Cheques 121 Deposits and Cheques substitutes for B.\nk Notes . 122 Common misconception of the meaning of Deposit . . 122 XrV. CONTENTS. PAGE § 18. Erroneous notions derived from Banking Accounts . . 123 Methods of operating by means of Deposits .... 124 Explanation of ordinary phenomena 125 Bankin2: consists in the creation and exchange of instruments of Credit 126 Discounting bills is not borrowing money . . . .137 Banking Credit is Banking Capital 128 Erroneous notions of M'CuUoch, on Banks . . . .129 Great error of Mr. Mill, on Banking . . , . . 130 Error of those who suppose that the Bank Act of 1844. prevents Banks from creating Credit .... 131 Report of Mr. Hamilton, on Banking 131 Advantages of Cheques over Bank Notes .... 132 When too much Credit is offefed for sale. Bankers must raise the Rate of Discount 133 19. On Cash Credits 134 Origin of Cash Credits 134 Examples of their Utility 135 Cash Credits are Acconmiodation Paper . . . .138 20. On Open Credits 139 21. On the Transformation op Temporary Credit into Permanent Capital 139 The Bank of England augmented its Capital, by receiving its OAvn depreciated Notes as Specie .... 140 The Bank of Scotland did the same 140 This objected to, and the answer of the Bank . . .140 AH Joint Stock Banks increase their Capital by their own Credit 141 22. On Accom.modation Bills 142 On tlie nature of Accommodation Paper .... 148 Exaggerated idea of tlie security of Real Bills . . . 144 Explanation of the true difference between Real and Accom- modation Paper, and true danger of the latter . . 144 This cx] Sanation ((uotcd by Mr. Commissioner Holroyd, in his judgment in Lmirence, Mortimcfr and Schrader . 145 Exposition of that case . . 147 Impossibility of dealing legislatively witli Accommodation Pai)cr 149 Examination of some legal Doctrines 151 23. Ox TiiK Extinction of Ckkdit 152 DilTcrcnt methods by which Credit is extinguished . . 153 24. On the Limits of Ckkdit 154 Proportion of Credit to Money in Commercial Transactions 157 The true mode of curbing excessive Credit is by raising the Rale of Discount 158 CONTENTS XV. Section V. PAGE 25. Examination of the Opinions op Modern Economists ON Credit and Currency 159 Rise of difltrences of opinion on Credit 159 26. Economic Science originated from tlie disasters, &c., of the Mississippi Scheme of John Law 159 Law's writings on Paper Credit and Paper Money. . . 161 27. Erroneous conception of Turgot on Credit .... 163 28. Ad^vm Smith's opinion on Credit and Currency . .163 Smith included aU Credit under the title of Currency and Capital . . 164 29. Self-contradictions op J. B. Say on Credit . 167 Say enumerates Debts as Wealth 168 Say's self-contradictions on Value 169 Say's self-contradictions on Capital 170 Say expressly denominates Paper-Credit Capital . . . 172 30. Self-contradictions op Mr. Mill on Credit . . 176 Mr. Mill's definition of Wealth and Capital includes Credit . 177 . Mr. Mill expressly calls Bank Notes Capital . . . .179 Contradictory conceptions of Mr. Mill of the nature of Credit 180 Bastiat calls instruments of Credit Productive Capital . . 182 M'Culloch says that Credit is Capital 182 Gilbart says that Credit is Capital 183 32. On the common difficulty in understanding the subject of Credit 183 Common doctrine that NotJdng can come out of Nothing . 184 Doctrine of some Economists that all Wealth is formed out of the materials of the Globe 184 Knowledge is admitted to be Wealth 185 Is knowledge composed of indestructible primordial atoms? 186 Knowledge originates in the Mind ... . . 187 Hence the HtrNL\JS' Mind is a source of Wealth . . . 187 A thu-d species of Exchangeable Property, viz. : Incorporeal Property, such as Col\^T^ghts, Patents, Shares in Com- merciarCompanies, Public Debts, CrecUt, &c. . . . 188 This Property does not come from the earth, or from the mind, but from Consent 188 33. The Opinions of various Writers on the Nature and extent of the Currency 189 Till the beginning of this century all writers included all forms of Ci'edit under Currency 190 Mr. Boyd fii-st confined CuiTcncy to Monej' and Bank Notes 192 This opinion appeared more strongly before Committee of House of Commons in 1840 192 Mr. J. B. Smith considered Ciu-rency to include Deposits, but not Bills of Exchange 192 CONTENTS. § 33. Mr. Cobaeu's opinion on Currency . Mr. G. AY. Norman's opinion on Currency Lord Overstone's opinion on CiUTCUcy . ;Mr. Tooke's opinion on Cim-ency . Examination of these opinions Reply to Lord Overstone's doctrines True bearing of the case of MiUei- v. Ra^e M. Michel Chevalier's opinion Cuirency is the representative of transferable debt 194 195 196 200 203 205 206 208 209 CHAPTER IV. THE THEORY OF THE COINAGE. § 1. Definition of Bullion 21 Definition of a Coin 213 The Name of a Coin does not affect its Value. . . . 214 Any quantity of metal in the form of Bullion is of the same ' value as same quantity in Coin 215 2. On the Mint Pkice and ]\LvrivET Price of Gold and SiLA'ER 215 The Mint Pi-ice of Bullion is the number of coins it is cut into 215 To alter the Mint Price of Bullion is to alter the Standard Weight of the Coinage 215 The Market Price of Bullion 216 WJien the Market Price of BnUion rises above the Mint Price^ the €.rcess is the proof and the measure of the depreciation of the Coitiafje. A rise of the ]\rarket Price of BuUion above the Mint Price causes an export of BuUion 217 Oood and bad Coin cannot circulate together. Tlie bad Coin dnves out the good Coin 219 EiToneous notions regarding Mint Price .... 219 Means of testing whether a difTerence in the usual value of Gold and Silver Coin is due to a Diminntion in Value or a Depreciation of cither Coinage 220 To alter the Mint Price of Gold would be unjust to all existing contracts 221 Cases in wliich great diflTerences in Value between Coin and Bullion took place 222 3. What is a Pound ? 222 E.xplanafion of liow the Sovereign ciime to be called a Pound 223 4. On a 1)(»iiji,k Standard 224 Definition of ]\Ioney or Legal Tender .... 224 In8Ui)erablc objections to a Double Standard .... 225 Fii-st coinage of Guineas to represent 20/ . .225 Great depreciation of tlif C(jinage in 1090 .22(5 CONTENTS. JCVIL PAOB Guineas rise to 30/ : great fall in the Exchanges . . . 226 Mr. Fleetwood's Sermon in 1G94 226 Parliamentary proceedings to remedy the disorder . . 227 Statements shewing the state of the Coinage in 1695 . . 228 Report of Mr. Lowndes on the State of the Coin . . . 229 He proposes to alter the current rate of the Coins . . . 230 Reply of Locke 232 Locke demonstrates the futility of Lowndes's plan. . . 235 The Government restored the Coinage according to its ancient weight, tineness, and denomination .... 239 Derangement of the Coinage in 1708 239 Report of Sir Isaac Newton on the Coinage .... 239 Different values of Gold and Silver in different Countries . 240 Which causes a ch-ain of Silver from all Europe to the East . 240 And a flow of Gold to England and Spain .... 241 Newton shews that Guineas were only worth 20/8 . . 242 Guineas proclaimed to be cmTcnt at 21/ .... 243 Gold thus became the understood Commercial standaixl of payment dming the Eighteenth Century . . . 243 This custom adopted as Law in 1816 244 Regtilations of the English Coinage 244 CHAPTER V. THE THEORY OF THE EXCHANGES. 1. Definition of the " Exchanges " 247 2. Difference between Money Changing and Banking . . 248 Definition of Par op Exchange 249 Depreciation of the Coinage causes a fall in the Foreign Exchanges 249 This disturbance of the Exchange expressed in two different ways 250 3. No true Par of Exchange between Countries which use different standards ' . 250 On the Nominal Exchange and Real Exchange . . 251 Rule to ascertain the true state of the Exchange when the cmTcncy is depreciated 251 4. On the Nature op an Exchange 252 Example of an Exchange 253 Par time of Exchange 253 5. On Foreign Excilvnge 254 On Fixed and Variable Price 254 Table of Exchanges 255 6. On the Limits op the Variations of the Exchanges 2.56 XVIIT. CONTENTS. PAGE § 7. Effects op an Inconvektible Paper Currency on the Foreign Exchanges 357 A rise of t7ie pajKr jmce of gold obove the Mint Price, and a continuous state of the Foreign Exchanges below the limit of the real Exchange, is the proof and the measure of the depreciation of the Paper Currency 259 8. On Exchange Operations 260 Causes wliicli produce temporary fluctuations of the Ex- change beyond the specie points 261 Arbitration of Exchanges 363 London the Banking centre of the world .... 263 Arbitrated prices of Bullion 263 9. On the Eeal or Commercial Exchange. . . . 263 Two branches of trade in BulUon 263 1. With Bullion producing countries 264 2. With countries which do not produce Bulhon . . . 264 Movements of Bullion iniluenced by seven causes. . . 264 Ideas of the mercantile system 265 Doctrine of the Balance of Trade 266 Fallacy of this doctrine 267 Examples of trading 268 Causes of inflow or outflow of Bullion 272 Overtrading is a cause of a drain of Bullion .... 273 Example of the fallacy of Balance of Trade .... 375 Only two causes determine the Rate of Exchange . . . 377 10. On the Rate op Discount as affecting the Exchanges. 377 The Rate of Discount the most important cause that afi'ects the flow of Bullion 377 11. On Foreign Loans, Securities, and Remittances as affecting the exchanges 378 Mr. Boyd's negotiation of a Foreign Loan .... 378 Anotlier example 279 Importation of Foreign Secmlties 280 13. On Monetary and Political Convulsions as affecting THE Exchanges 280 13. On THE Means op correcting an Adverse Exchange. 281 A rise in the Rate of Discount the most powerful method of correcting an adverse Exchange 281 CHAPTER VI. ON THE RISE AND PROGRESS OF BANKING. § 1. Nec(!SHary to give an account of the History of Banking . 385 2. Banking was invented by tlie Romans 385 3. Greek Bankers invented Discount 287 4. Bank Notes invented by tlic Chinese 288 COKTENTS. 5. Rise of Bankiiiif in Italy Erroneous nulions of the dates of the Banks of Venice and St. George Banking first revived by the Florentines 6. The Bank op Venice 7. The Bank of St. George at Genoa 8. The Bank op Stockholm 9. The Bank op Ajisteruaji 10. History of B.vnking in Scotland Bank of Scotland founded in 1695 Its Constitution It issues £1 Notes Stops Payment in 1704 and 1715 Receives Payment for increase of Capital in its own Kotes . Outcry against this, and answer of the Bank . . . . Foundation of the Royal Bank in 1727 Opinion against monopoly in Banking The Royal Bank invents Cash Credits Great over-banking in Scotland, optional clauses . Fall in the Scotch Exchanges, and export of specie Act of 1765, to prohibit Notes under 20/; and the optional clause The British Linen Coaip^vntt, founded in 1747 Rise of AccoMJiODATioN Paper The AjT Bank Great Conunercial Crisis in 1793 Issue of Exchequer Bills Suspension of Cash Payments in 1797 Foundation of the Commercial Bank in 1810 Reports of Parliament in 1826, commendatory of Scottish Banking Sir Robert Peel's Scotch Banking Act of 1845. Great catasti'ophe of the AVestern Bank in 1857 Anal^-sis of this calamity Run for gold diminished not agr/ravated by the £1 Notes Erroneous course of the Edinburgh Banks Statement of present position of Scotch Banks TAGE 289 289 289 290 293 290 296 298 299 299 300 301 303 303 303 304 304 305 305 307 307 307 309 314 314 315 316 316 317 318 321 329 331 333 CHAPTER VII. ON THE RISE AND PROGRESS OF BANKING IN ENGLAND, TILL THE RENEWAL OF THE BANK CHARTER IN 1800. § 1. Banking did not exist in England ])efore 1G40 . . . 337 2. Circumstances from which it sprung — difficulties of King ChiU'les I. 337 XX. CONTENTS: PAGE 8 3 Dissolution of Parliament in 1640 338 4. Charles I. seizes the merchants' money in the Tower . . 339 5. The merchants obliged to keep their money at home . . 339 G. Afterwards they entrust it to the Goldsmiths .... 339 7. These Goldsmiths were then called Bankers .... 340 8. The Bankers lend money to Government .... 340 9. Their method of doing business with the Crown . . . 340 10. Much esteemed by the Government 341 11. The Dutch destroy Sheemess and Chatham . . . .341 13. Which causes a run upon the Bankers 343 1.3. The Treaty of Dover, 1670 343 14. Charles II. obtains £800,000 from Pai-liament. . . .343 15. He quan-els with the Dutch — pecuniary difficulties. . . 443 16. He shuts up the Exchequer, 2nd Jan., 1672, and seizes the Bankers' money in it 344 17. Great distress of the Bankers, Merchants, and others . . 344 18. Case of the Bankers in the Court of Exchequer, and the Ex- chequer Chamber— Judgment of Lord Somers . . 345 19. Reversed by the House of Lords in 1700 345 20. Many projects for Banks about this time, 1079 . . . 346 21. Great falling off in the revenue, after the Revolution . . 346 22. Plans for raising money to carry on the war with France . 347 23. Which do not succeed 347 24. Paterson's thi-ee plans for raising money to carry on the War 348 25. The third attempt succeeds, and an Act passed for the estab- lishment of the Bank of England 349 26. None but commercial states had hitherto been able to raise money l)y way of Perpetual Annuities .... 349 27. Chief ]n-ovisions in the Act relating to the Bank of England 349 28. Great hostility to its establishment 350 29. Mr. Micliael Godfrey's pamphlet about Ibe Bank . . . 351 ;>0. First outlu'cak of a speculative mania in 1094 . . . .352 31. Great derangement of the coinage in 1695 .... 353 32. Guineas passed at 30s. in 1095 353 33. Lord Romers proposes to make the coin curi'cnt, by weight, instead of by tale 355 34. Confusion aiuscd by the bad State of the coinage . . . 355 ;!5. (!()inmit1(!c appointed by the House of Connnons to consider the price of guineas^numerous petitions . . . .355 36. Resolutions of Parliament on the ]irice of guineas . . . 356 37. Partial suspension of pajmicnts by the Bank . . . .357 38. Extracts from Evelyn's J)iarya1)out the coinage . . .357 39. The reformation in tlie coinage restore the Exehaiigcs to par. 358 40. Projected La)id Bank— Bank Notes at 20 per cent, discount . 359 11. F'arlianient undertakes to restore the public credit, 1096. . 360 CONTENTS. XXI. I'ACE § 43. Act for increasin,osilion in it before any one could tell wliat they really meant, and all the pliilosophical world of tlie day was engaged in the wordy Avar to settle tlu'ir meaning, and obtain tru(^ delinitions, C^onse- qiieiitly, it is a?) entire error lo sup)>ose that controvei'Kies in Physical Science are not about words. On the contrary, INTRODUCTION. XXIX. it was in the true definitions of words that the wliole IVmndations of these sciences are laid. And it was just because all tlie great mathematicians of the day so thoroughly under- stood the supreme importance of ascertaining the true meaning of words, and sought out the meaning of each separate one with such perseverance, that they at length arrived at such unanimity of agreement, and these controversies have now been almost forgotten. Few persons are aware of the wrecks of the fierce con- troversies which lie buried beneath the calm and placid surface of modern science, like those of mighty armaments below the summer sea. And why has Political Economy not yet attained the same rank as mechanics as an exact science ? Because the same care has never yet been given to settle its definitions and axioms. Economic Science is noAV, like mechanics in its early stages, over- run and infested with Avords, whose meaning has never yet been settled on certain principles, and which are scarcely ever used l)y any two Avriters in the same sense, nay, few even of the best writers are consistent with themselves. The men who have cul- tivated Economic Science are ])robably of as great natural ability as those Avho have cultivated Physical Science ; of course, with the exception of certain unapproachable examples. Why then have they not come to the same unanimity as their brethren ? The simple reason is that they have not adojited the only means that could by any possibility ensure success, namely, a thorough discussion and settlement of the meanmgs of words, nay, they have systematically despised it. Now what the words momentum vis viva, &c., were to mechanics in its early stages, that v^ealth, vcdue, cm'i'ency, capital, &c., are at the present day to Economics. And yet there are Ava-iters, of no mean acquirements too, who entirely discourage such a course of proceedmg, who consider such a course jiedantic, and mere waste of time — who Avoidd admit that in every other branch of human knowledge clear and l>recise technical terms are absolutely indisi:)ensable, and yet, in Economics alone, think there is no need of anjlhing of the sort. Now Ave affirm that if Economics is e\'er to emerge fi-om the turbid regions of opinion into the serene atmosphere of demon- f^tration, it can only be done by Economists laying aside the mihaj^py idea that controversies about Avords are unimportant and sujjerfiuous, by following the example of their brethren the Physicists, Avho have cleared their path to such brilliant success, and, by bringing their Avhole force to discuss and settle the first elements of the subject, namely, its Definitions and Axioms ; and Avhen this is done it AAnll be found that Economics is a science as clear, as precise, as shar])ly defined, and as capable of being erected into an exact science as any other whatever. Let us giA'e an example or two of the supreme importance of settling the fundamental conceptions of Economics. Archbishop XXX. THEOEY AND PRACTICE OF BANKING. Whately says of the definition of Wealth: " It were well if the ambiguities of this word had done no more than puzzle jjliilo- sophers. One of them gaA-e birth to the mercantile system. * * The results have been fraud, punishment, and poverty at home, and discord and war Avithout. * * It has for centuries done more, and, perhaps, for centuries to come icill do more to retard the improvement of Europe than all other causes put together.'''' Is it of no importance to determine the true Definition of Wealth ? So, the same writer says of Value: " As value is the only relation with which Political Economy is conversant, we might expect aU Economists to be agreed as to its meaning. There is no subject as to which they are less agreed." Another doctrme, which was implicitly believed in for 200 years, by the most eminent statesmen, Avas the " Balance of Trade. " Now, J. B. Say says, that during the last 200 years, during which statesmen wei'e blinded by this strong dehision, no less than fifty Avere spent in commercial wars arising directly out of this stupendous folly. Fifty years of Avai', Avith its un- utterable horrors, AA^aged for a chimera — a fiction — a thing Avhich had absolutely no existence at all ! Are true views of Economics of no importance to mankind? Economics has turned the light of science on a single expression, and the result has been to destroy a fallacy which let loose upon the earth the demon of Avar for 50 years ! Again, the Bank Act of 1844, one of the most important Acts in the Statute book, is founded on a peculiar definition of the Avord CuKRENCY, and is for the express purpose of carrying out u peculiar Theory of Currency. The definition of currency u])on Avhich it is based is a modern innovation, quite contrary to the doctrines of the older Avriters ; and the Theory of Currency Avhich the Bank Act of 1844 Avas intended to carry out, has been repeatedly tried in practice, it has been foujid uniformly to fail, it Avas expressly condemned by the Bullion Report of 1810, and by all the great banking autho- rities of that age, by the framers of the Act of 1819, and by Sir Robert Peel liimself so late as 1833. Now, at certain periods of commercial ciisis, the Avliole fabric of British commerce is menaced Avith utter ruin, on account of a ])eculiar dejinition of Cuukency, and a peculiar theory of Currency. Is it not of the deej)est national importance to institute a Ihorough and .searching investigation as to the accuracy of that peculiar tlcfinition of currency, and the soundness of that peculiar 'i'lieory <>f Currency? 'I'hc great ioundcrs of Economic Science Avrote Avhen the iMiblic and the adniinistr.ition \v<'re infected with an immense INTRODUCTION XXXI. mass of noted projudices, ei-rors, and abuses. Their first efforts were, therefore, naturally directed to sweep tljese away. The early treatises were filled with long controversies and discus- sions, which, though of tlie greatest importance at that time, may now be dismissed in a few lines. But, as in all young and growing sciences, further experience and new ])henomena have shewn that many of the early opinions and doctrines require modification and correction. Many isolated doctrines have been established, and, on certain ]>ohils, a considerable amount of truth has been ascertained. ]>ut this has never hitherto been formed into a coherent system, based upon general conceptions, after the manner of a physical science. But the time lias now arrived when this must be done. During the last century vast masses of facts have been accumu- lated, on every single point the most conflicting opinions have been put forth, so that it is probably not possible to say anything nev^ upon any one of them. The time has now come to methodize, digest, and arrange this huge mass of materials ; to examine each fundamental conception and each generallaw, m succession; to bring together all conflicting opinions on eacli point seriatim, and to judge them by the established standards of reasoning in inductive philosoijhy, and then by thus obtaining true conceptions and axioms from reality itself by proper methods, and not by arbitrary dogmatism — by proceeding step by step, definition by definition, axiom by axiom, may be built up a great science of Political Economy on everlasting foundations. Now, adoptmg the general definition of Wealth in its widest signification as given by Aristotle, and which is now seen to be the true one, as being everything that is exchangeable, we have she-WTi tliat there are three tlistinct species of exchange- able quantities, each of which may be exchanged with each of the others, thereby giving rise to six distinct species of exchanges. The general science of Economics comprehends the Avhole of these six species of exchange ; and its general conceptions must grasp all the kinds of exchangeable quantities, and its general laws must grasp all the ditferent kinds of exchange. The subject matter of this work comprehends only two of the six species of exchange, namely, the exchange of money for debts, and that of debts for debts. This does not necessitate the investigation of all the flmda- mental conceptions of Economics, but only of some of them. However, siich as are necessary must be made general. This work, therefore, consists of three parts. In the first, the fundamental general conceptions which are necessary, such as Wealth, Value, Currency, Money, Credit, Capital, tfcc, are thoroughly investigated. Next the General Theory of Value is investigated so far as is necessary for this subject. An exposi- XXXU. THEORY AND PRACTICE OF BANKING. tiou is then given of the actual mechanism of Commercial Credit and Banking, whoUy independent of any particular application of it. Then conies an investigation of the Theory of the Coinage. An exiDOsition of the Theory of the Exchanges concludes this portion. Having thus investigated, the abstract and theoretical science, we trace its rise and progress in actual application in several coimtries, and give an authentic account of the great Economic phenomena, such as the great commercial crises, and so on, which actually took place ; the course of conduct of the Bank and the Government during each of them, and the diverse and conflicting theories which have been held. The reader himself, therefore, having all these facts and reasonings brought together into a comparatively small comjjass, can perfectly form his own judg- ment as to their merits, and which of them experience has proved to be true. The concluding part of the work is an exposition of the practical busmess of Banking, and of the Laws which at present affect it. CHAPTER I. DEFINITIONS AND ILLUSTRATIONS TERMS USED IN MONETARY SCIENCE. " KaXij /(£»' uvy tcm deta, tv laBi, >'/ opfi)), yr opfjii^Q eVI tovq XoyovQ' ikKvaor C£ cravTor /vCtt yv/naffut f.iuX\oj' Cia Tijg ^OKuvcTTjg a')^pi]aTOv tlrcii Kill KaXovi.i€i'ii]c vvrv ruir ttoWwi' ucoXEC^/ac, iojQ en rtoQ ti' el ^e fii), at: CLa(j)Ev^eTcii // c'tX/'/^fta." — Phlto. " Know well, then, that worthy and godlike is the zeal -n-ith which you rush upon definitions, Ap]jly yourself to it, and practise it, while yet you are a novice — all the more, because it seems useless, and is called trifling by the A'ulgar : for if you do not, the truth will escape you." CHAPTER I. DEFINITIONS AND ILLUSTRATIONS OF THE TERMS USED IN MONETARY SCIENCE. Wealth — Pkoperty — Value — Money, Currency, Credit, Circulating Medium, Circulation — Price and Discount — Securities for Money and Convertible Securities — Capital, Fixed and Floating — Production and Con- sumption, Supply and Dejsiand — Rate of Interest and Rate of Profit. On the Definition of Wealth. Economists are agreed that their Science treats about things so far as regards their l)eing Wealtli. Bnt Avhat is Wealth / And what is that quality of things -wliich constitutes them Wealth ? Adam Smith entitles his work " An Enquiry into the JVature and Causes of the Wealth of JV^ations,"" l)ut it is wholly impossible to discover from his work what he means by "Wealth." There is one ex2')ression, however, which he uses in his mtro- duction, which seems to give some mdication of what he meant. He says "the real wealth, the anmial 2)roduce of the land and labotir of the Society," and, from the number of times this phrase is repeated throughout the work, we shall not be far wrong, if we consider that as the nearest idea of what he meant. Now, on examining this phrase, it will at once be seen that it is ambiguous. It is not clear whether he means the annual produce of the land alone, and the produce of labour alone, or the produce of land and labour combined. It is probable that he meant the latter. Whichever way A\e take it, it is manifest that the expression is far too wide ; because if it be laid down absolutely that tlu- " produce of land and labour," either separately or combined, is Avealth, it follows that every useless product of the earth is wealth as well as the most useful, the tares as well as the wheat. Every useless work done would be wealth. Thus if a number of labourers were to raise a mound in Salisbury Plain, that would be wealth ; so children's mud pies are Avealth. In fact it is so clear as to require no further arginnent. On the other hand, the definition is far too narrow, for even Adam Smith acknowledges things to wealth which are certainly not the produce of land and labour. Thus mider the head of 4 THEORY AND PRACTICE OF BANKING. fixed Capital lie enumerates the useful and acquired abilities of the inhabitants, which he says are a capital fixed and realized in their persons, and which as they make a part of their fortune, so do they likewise of that of the Society to which they belong. It has often been said that Adam Smith confines his work to material wealth. But we see from the above j^assage that this is an error. He expressly enumerates the abilities of the in- habitants as part of the Avealth of the Society. Now, how are the abilities of the inlialutants the " produce of land and labour?" It is clear that abilities are not the produce of land, nor of land and labour combined ; and though abilities may certainly be improved by laboiir, still it is manifestly absurd to call abilities the produce of labour. These by subsequent writers, A\hom we shall mention afterwards, are called Moral or Immaterial "Wealth. Tliere are besides many other things which are " Wealth," which are clearly not the produce of land and labour. Thus cattle, timber trees, minerals in the earth, &c., &c. It is evidently quite incorrect to say that cattle, and trees, and domestic animals of all sorts, are the produce of land and labour. Labour may be employed in tending anmials, though many valuable animals are not tended by any labour at all, but certainly animals are not the produce of labour. Nor is it Cf)rrect to say that trees are the ]jroduce of lal)our. Furthermore, the land itself is valuable ; whenever ti country becomes populated, the land itself, tlie simj^le space iipon Avhich bouses are l)uilt is wealth. Now the land itself is certainly not the " ))roduce of land and labour." The notion is clearly absurd. Labour itself, as every one knoAvs, is a valuable commodity. We speak of the labour market as of any other market. Now labour itself is certamly not the "annual produce of land and labour." Hence, besides certain material products which are the produce of land and labour, we find enormous masses of Avealth, which can in no way be described as the produce of land and labour, and we have already observed that there are two distinct species of wealth — material and innnaterial. But we shall find that tliere is a third si)ecies quite difl'erent from the other two, which is acknowledged to be Avealth. Thus Smith says, J5. ii., c. ii., " Let us suppose that the whole circulating money of some particular country, at a particular tiiiu", amount to one million sterling, that sum being then siidicicnt for circulating the whole annual produce of their land and labour. lA't us su]i])ose too that some time there- alter (liderent banks and bankers issued promissory notes payablf to the bearer to the extent of one million, reserving in their different collers two hundred thousand pounds for answering oc(^asional demands. There would remain, therefore, in circula- tion eight hundred thousand pounds in gold and silver, and a DEFINITIONS OF TERMS WEALTH. 5 million of bank notes, or eighteen hundred thousand pounds of paper and money together." Now we see by tliis extract, among inmimerable others, that Sniitli fully recognizes the fact that these bank notes are exchangeable property, he puts the £1,000,000 of bank notes on exactly the same footing as the gold and the silver. lie admits that bankers, by issuing this million of notes, augment by that much the mass of exchange- able property. Now what are these bank notes'? They are simply so many circulating debts. They are a species of proj)erty which is also called Ckicdit, whose nature Ave shall have to investigate at great length hereafter. All that we wish to observe here is, that Smith treats a million of pa])er cun-eiicy exactly on the same footing, as a million of s])ecie, and that he admits that the creation of these debts augments the mass of exchangeable ])roi)erty. Now these circulating debts are certainly not the " ])roduce of land and labour." Here, therefore, is a thirel species of exchangeable property, of a totally different nature from the two preceding ones, of material and immaterial i)roducts. But there are enormous masses of property of a similar nature. A man who liad £1,000,000 in the funds M'ould be called a wealthy man. Arc the public funds the produce of land and labour ? ]3ut in fact these are only part of a gigantic species of valuable property, which includes coi)yright, shares in commercial comi)anies of all sorts, patents, the goodwill of a business, tolls, ferries, ground rents — which, in legal language, is termed incor- poreal ])roperty — which in this country is worth many thousands and thousands of millions of money, which can by no possibility be called the annual produce of land and labour, either separately or combined. Hence we see that Smith's definition of wealth — assuming that we have interpreted him rightly — entirely fails. It is at once far too wide and far too narrow. It includes a mass of things which can by no possibility be called wealth, and it excludes the immensely greater portion of what Smith himself admits to be wealth. But such a definition of wealth is open to many further serious objections, which are patent from his oa\ti Avork. If it be laid down absolutely that the produce of land and labour be Avealth, then it clearly folloAvs that if a thing be wealth at any time and in any place, it must be Avealth at all times and in all places. Noa\', there is nothing more notorious than that a thing may be Avealth at some times and in some j)laces, and not at other times and in other places. This requires no examples to prove it. But Smith, after tellmg us that the annual produce of land and labour is Avealth, says, B. ii., c. ii., " A guinea — Avhich may be considered the produce of land and labour — may be con- 6 THEORY AND PRACTICE OF BANKING. sidered as a bill for a certain quantity of necessaries and conveniences upon all the ti-adesmen in the neighbourhood. The revenue of the person to whom it is paid, does not so properly consist ui the piece of gold, as in what he can get for it, or in what he can exchange it for. If it could be exchanged for nothing, it would, like a bill upon a bankrupt, be of no more value than the most useless piece of paper." We see thus exemplified the utter incongruity of Smith's conceptions of the very fundamental word in the whole Science. He first tells us that the prodiice of land and labour is wealth, and then he says that unless it is exchangeable it is not wealth. Xow it is manifest that these two fundamental conceptions — produce of land and labour, and exchangeability — do not coincide, for we may have the produce of land and labour which is not exchangeable, and we have shown that there are stupendous masses of exchangeable property, — nay in this commercial country enormously the greater proportion — which are in no way whatever the jjroduce of land and labour. We may, therefore, without further discussion, dismiss the criterion of wealth as being the produce of land and labour, and adopt that o^ exchangcahiUty. 2. And this is, in fact, the eai'liest definition of wealth. Thus Aristotle says, Xicomachean Ethics, B. Iv., c. i. : — Xptjfiara ^e Xeyofiey ircwTa o(Twy ?/ dt,ia vofiianaTi /jierpelrai. " And we call Wealth everything whose value is measured hy money.'''' Or rather we might say everything which is exchangeable — money itself being an exchangeable quantity. The same idea appears in modern times, when Economics began to l)e studied as a science. Thus Bandeau, one of the most distinguished of the first school of Modern Economists, the Physiocrates, says, in his introduction to Economic Phi- losophy : — "Tlie objects pro])er for our enjoyment, either useful or agreeable, are called goods (hicns)^ because tliey conduce to the ] (reservation, the propagation, and the well-being of mankind on tlie earth. "But sf)me1imes these goods are not wealth, because they cannot be exchanged for otlier goods, or be used to procure other enjoyments. Natural ]»roductions or the works of art, the most necessary or the most agreeable, cease to be wealth when you l(jse the possibility of exchanging them and to {)rocure other enjoyments in exchange for them. One hundred thousand feet of the most beautiful wood in the world would not be wealth to you in the middle oC North America, where you could not divest yourself of its possession by means of an exchaiigc. DEFINITIONS OF TERMS WEALTH. 7 "The title of wealtli, tlierofore, incliules two things; iirst, the iisual (jUMlities wliicli reiuU'r tiie dlnjects useful and agreeable, and fit for our use, wliieh constitutes them f/oods ; secondly, tho 2)ossibility of exchanging thein, Avhich enables these goods to procure others for us, which is the thing which constitutes them Wkaltii. " This possibility of exchange supposes that there exist other goods for which they can be exchanged." So also J. B. Say says : — "The exclusive possession which, in the midst of a numerous society of men, clearly distinguishes the property of one person from the jtroperty of another, is that which in connnon usage causes this sort of goods to be the only one to which is given the title of Wealth. * * * * Thus among these are inclu(leK TERMS PROPERTY. 11 certain individuals who have done certain services to tlie nation, and they are similar to a debt created by an individual in ex- change for se^•^'ices. When wq say, therefore, that the funds are wealth, it means nothinerty m the book. And there can be no exchange without the Property passing from one to another. If a man merely lends his horse or his book to a friend that is no exchange or transfer of Property. 7. Property, then, being a Right residuig in a person, there are two grand divisions of Property, which are the subject of sale or exchange. I. Thei'e may be Property in a specific material chattel w liiih is already in existence. Thus we may have Property in a watch, 12 THEORY AND PRACTICE OF RANKING. or a house, a horso, or a carriage, or any other goods. These things are in a complete state of existence. This species of Property is termed in English law corporeal property, because it is the Property, or Right, to a certam specific eor])us. II. But there is also a second species of Property, Avhich is equally the subject of exchange. We may have a Property, or Right, wholly separate from and independent of any specific thing, and we may have a Property, or Right, to a thing, which is not even yet in existence. And this species of Property is tenned in English law. Incorporeal Property, because it is Property separated from any specific cor])us. Thus a Copyright is the exclusive Right to receive the profits to be made by the sale of works of literature and art. The Goodwill of a business is the Property, or Right, to receive the profits to be made by the business. A Patent is the Property, or Right, to receive the profits to be made by the sale of a mechanical invention. A Share in a Commercial Company is the Property, or Right, to share m the profits to be made by the trading of the Com])any. A Practice is the Property, or Right, to receive the profits of a professional business. Besides these there are other species of Incorporeal Pro]ierty which we need not mention here, as we merely wish to give a few examples. Thei-e is one species of Property to which we must specially advert, viz., the value of land. Suppose we purchase an estate in land for £1 00,000, where is the value for our money ? Does it consist in things Avliich have a i)resent existence? The veriest tyro would answer — certainly not. Where then is the equivalent for the purcliase-money ? Everyone knows that the purchaser of the land buys the right to receive the actually existing produce of the land together with the right to receive its annual produce for ever, say £3,000 a year. Now, though these actual i>rofits only come into existence at definite intervals of future time, yet the Proj)erty, or Right, to receive each auiuial jirofit when it does come into existence, is present, and may be l>ought and sold like the property in a table or chair. That is to say, that each of these annual future profits has a Pp.esent Value, and the purcliase-money of the land is siiiqily tlie sum of the i)resent value of tliis series of profits for ever. Hence the ])res('nt value of each of these future payments for ever is an actually existing article of Exchangeable Property, aTid, therefore, by our delinition — -Wealth. Now we may say that when a purchaser lias paid for the land, it owes him a scries of annual i)ayments for ever, and as he l)ought tlic land nu'rely on {\\v heUef tliat he would receive thcni, we may call this the credit of the land. DEFINITIONS OF TERMS VALUE. 13 Hence we see that tlio jn-ico, or value, of the land is made up of two distinct elements — the price, or value, of its past produce, and also the price, or present value, of its future produce. Now a nian exercising any i)rofitable business is an economic quantity which bears in many respects a strong analogy to land. He may have accumulated a quantity of money, the fruits of his past industry. But he also produces a series of profits in the future, and of course he has a Pro])erty in them. Thus the value of man as an economic quantity, like that of land, is the Property in the products of his past industry, together with the l*roperty in the jiroducts of his future industry. And there are two Avays in which he may trade. He may purchase goods, &c., with his money, the fruits of his past industry; or he may purchase goods, &c., by giving in exchange for them the right, or property, to share in the produce of hisfiiture industry. And when he does so this right, or property, which he gives to another person is a species of incorporeal Property Avhich is termed Ckedit, or a Dei?t. We must clearly understand that a Debt, or Credit, is not money owed by the debtor, but a Right, or Property, residing in the person of the Creditor to demand money at a certain ])eriod, and as it is a mere abstract right, whoUy severed from any particular sum of money, it is incorporeal Property, of the same nature as copyright, &c. This incorporeal Property called Credit or Debt, is of enormous niagnitude in this comitry, and its creation, sale, or exchange, and extuiction, is the great business of Banking, and the subject matter of this work. On the Definition of Value. 8. Economic or exchangeable quantities are, as we have seen, of three distinct species, corporeal or material, inmiaterial, and iucorpoi'cal, each of whicli naay be exchanged at any time for any of the others, giving rise, as we have she^vn above, to six distinct species of exchange. Now, if at any given instant, any economic quantity A be exchanged for any given economic quantity B, then the quantity A is termed the Value of the quantity B, and B is likewise termed the Value of A. Now as each of the three sj)ecies of economic quantities may be ex- changed for either of the others, any (juantity may have Value in terms of the others. Now suppose that at any given instant, 1 oz. of gold will exchange for 15 oz. of silver, then it is said that 1 oz. of gold is equal in value to, or of the value of, 15 oz. of silver, which is simply the following equation : — 1 oz. gold = 15 oz, silver, which is the following proportion: — Gold : silver : : 15 : 1. 14 THEORY AND PRACTICE OE BANKING. Hence we see at once that value is the sign uf equality between any two economic quantities, as Aristotle said long ago : — 'H 2' cd,la Xiyercu Trpog rii sktoq ayaOu. " JVoio the term Value is used in reference to External Goods." "We have then this definition — The Vedue of any economic quantity/ is any other economic quantity for which it can be excJianged. Hence any economic quantity has as many values as quan- tities it can be exchanged for, and, of course, if it can be ex- changed for nothing, it has no value. This shews that there is no such thing as absolute value, or universal value, because there is probably nothing which can be exchanged imiversally throughoiit the world. Now, without anticipating the general theory of value, which we shall have to discuss in the next chapter, we may observe that since a thing which cannot be exchanged has no value, the value of anything depends not upon the person who oflers it for sale, but upon the desire of the purchaser. However much a person may wish to sell any product of his own, yet if no one will buy it, it has no value. If an exchange takes place, it can only do so from the reciprocal desire of each for the pro- duct of the other. Hence it is clear that value necessarily requires the concurrence of two minds. Value, therefore, from the very definition, like distance, re- quires two objects. We cannot speak of absolute, or intrinsic, distance. An isolated object cannot have distance. If we are told a certain object is distant — we immediately ask — Distant from what ? So it is equally clear that a single object cannot have value. If we hear of an object having value, Ave must always enquire, Value in what ? And it is clear, that as it is absurd to speak of absolute, or intrhisic, distance, so it is equally absurd to speak of absolute, or intrinsic, value. On Money, Currency, Credit, Circidating Medium, Circulation. 0. We have shewn that the fundamental notion of the word Wealth, or of an economic quantity, is anything -which maybe exchanged, or bought and sold, whatever its nature l)e, and that there are three distinct s|)ecies of economic quantities. Tliere is one species of economic (|uaiitity, however, of such great importance, and which is so peculiaiiy the subject of this work, that we nuist devote special attention to it — and that is Money and (yPcdit. In the primitive ages of the world we have abundant evidence that there was no sucli thing as money. When persons traded they exchanged the in-oducts directly with one another. I'hus we have Iliad, vii., 4U8 : — DEFINITIONS OF TERMS — MONEY. 15 Nfjeg o €(.• Ai'ifit'oto Trapenraacip (hvop ayovnat ***** AWot fAfy ■^aKico), iiWoi c aiOwi't cnc)ipii), ' AXXoi ^e fuvo'ii;, liXXoi c' avrfjai ftotatriv, AXXoL c (ii'CfxmoCEfTffi. From Lemnos' isle a uumerous fleet had come Freighted with wine. * * * * * * * All the other Greeks Hastened to purchase, some with brass, and some With gleaming iron ; some with hides, Cattle or slaves. Lord Derby's translation. Tlie inconveniences of this method of trading arc palpable. What haggling and bargaining it wotxld reqnire, to determine how much leather should be given for how much wine; how many oxen for hoAv many slaves ! Some ingenious person would then discover that it would greatly facilitate traffic, if the things to be exchanged were referred to some common measttre. There are many passages ui the Iliad and Odyssey, which shew that even while traffic had not advanced beyond barter, such a standard of reference was used. We find that various things Avere frequently estimated as being worth so many oxen. Bitt it must be observed that these oxen did not pass from hand to hajid like money. The state of barter still continued, as it is quite common at the present day where the precious metals are used as a common measure. Such a state of things in no way implied money, or currency, or circulating medium. The necessity for money arose fi'om a somewhat different cause. So long as the things exchanged were equal in value there would be no need for money. If it hap])ened that when- ever one man required the services of another, that other at the same time required an equivalent amount of service to be rendered in return, such transactions could take place with great facility, and the amount of services on each side bemg equal there Avould be an end of the business. But it would often happen that when one man required the services of his neigh- bour, that neighbour would not require an equal amount of service at the same time, or even perhaps any at all. If then such a transaction took place between them, Avith such an unequal result, there Avould remain due a certain amount of difference, or amount of service due from the first to the second, and this would constitute a Debt — that is to say, a Right or Property would be created in the person of the creditor to demand something at some future tinie from the debtor. The second would, however, reqitire at some future time to have the balance of service due to him performed, and the debt discharged. Moreover, for his oavu security, he would like to 16 THEORY AND PRACTICE OF BANKING. have some evidence, or memorial, to prove the debt, and accord- ingly he might require the debtor to give him some sign or token of the fact. If A\Titmg had been knoA\Ti in these days, a state- ment in Avriting acknowledging the debt, and promising to render the service due whenever called upon to do so, would be a natural form of such evidence. "We may now suppose that the second person has dealings with a third, and requires his services, but that the third has no immediate use for the services of the second, but requires those of the first. Now if the parties were so circmnstanced, what would be more natural than for the second to transfer to the third the debt due to him from the first ? A similar operation might be repeated an indefinite number of times, and so this written obligation, or this evidence of a debt, enabling the possessor of it to demand some service to be rendered by the debtor, would pass fi*om hand to hand, or be current^ and from this use of it the thing itself has, by a confusion of ideas, come in recent times to be called a Currency. This currency is nothing more than the evidence of service having been rendered for which an equivalent has not been received, but which may at any time be demanded. It is obvious that as soon as it has been rendered, the evidence of its being due must be given up to the debtor to be destroyed, and it will be no longer current. And if any man can render services to his neighbours, he must in return receive either other services, or the evidence of their being due ; and if he renders more services than be immediately requires in return, he Avill accumulate a store of this evidence for his future Avants. These simple considerations at once shew the fundamental nature of a currency. It is quite clear that its use is to measure and record debts, and to facilitate their transfer from one person to another ; and whatever means be adopted for this purpose, whether it be gold, silver, paper, or anything else, is a currency. We may therefore lay doAvn as our fundamental conception that Currency and Transferable Debt are converti- ble terms; whatever rojiresents transferable debt of any sort is Currcnc]/, and whatever material the currency may consist of, it represents transferable debt and nothing else. 1 0. That this is the true nature of money has been seen by many writers. Thus Aristotle says, Nicomach. Ethics^ B. v., c. v.: — 'YfTtp he TTJij fieWovarfc aXXayj/C (ei i'vy fitj^ev ^eirai on earai, idi' ^tTfOiJ) TO rofiifTfui 0(0 J' 'I'^rrVHTHS earn' iif^ui'' ^ei yap tovto roperty, whereas it is very commonly sup])0sed to be the trarifffer of something. But Ave hope we have removed any doubt on that subject, if any remained. This species of property may be bought and sold exactly like any other, and is HO to tlie amount of many millions of money daily. There are shoj)S for the expjvss purpose of l)uying and selling this species of j)roperty. As thei-c are sIiojjs for dealing in bread, clotlies, furniture, tfec, so tliere are shops for the express purpose of buy- ing and selling debts, and these shops are called Baxks. And as there are fish markets, and corn markets, and many other sorts of markets, so also there is a market for buying and selling foreign debts, which is called the Royal Exciiangic. Tlius Banks are notliing but debt shops, and the Royal Exchange is tlie great del>t market of Euro})e. It is so important to grasj) the true conception of credit that we will pi-esent it in anothc )■ way. Suppose a man has a pay- DEFINITIONS OF TERMS CURRENCY. 21 ment certain to be made to liini on a particular day. He lias the present right to that payment, which is liis property. lie may sell and transfer that right to any one else, and that riglit so transferred is Credit. And it is clear that the amount of the credit is the present value of the future payment. Now this abstract property may cflect exclianges just in the same way as money; and if the payment be fixed at some distant date, as three months, it may pass through a hundred hantls and effect a hundred exchanges, before it is j)aid and extinguished itself. Moreover the money itself, which will pay and extinguish the credit at some future time, may be cii-eulating and effectuig any number of exchanges during the .same interval. Consequently we have at the same time, both the money itself and the proniise to pay it cii'culating simultaneously and effectmg exchanges. Now what is true of one pajonent is true also of every other. Thus every future jxayment, or transfer of money, has a i)resent value, which may circulate m commerce. And this is Avhat is meant by the common ex])ression the magic of credit. It means that an abstract promise to ])ay produces exactly the same effects as money itself. But, like other potent magicians, it sometimes overmasters its creators. It is easy enough to call credit into existence, but not always so easy to extinguish it. The definition we have obtained above of credit, — that it is the present right to a future payment — at once points out the limits of credit. The debt is created with the intention of being extinguished, and so long as it is extinguished at the appointed period, the credit is not excessive. The various methods by which credit, or debt, are extinguished are fully explained in a subsequent chapter. Credit being an exchangeable merchandize must be measured in order to be brought into commerce. The miit of debt, or credit, is the riglit to demand £100 at one year after date, and it is always usual to refer all other debts to this measure. Of Currency or Circulating Mediimi. 11. Having thus examined the function of money and credit, and sheA\Ti that the latter is a species of exchangeable property of the same nature as, but inferior in degree to, money, we ha^■e now to consider the words " Currency" and " Circulating Medium " Avhich have given rise to protracted controversies in comparatively recent times, and we take them together, because all uTiters use them as absolutely equivalent. To a])ply the word currency to money is 6ne of the most extraordinary abuses of language that has ever occurred. In old times men used to speak of money being current, as it passed from hand to hand. Hence arose the expression, the currency of money. So late as the case of Miller v. Race, in 1750, Lord Mansfield says of money that it cannot be recovered after it has 22 THEORY AND PRACTICE OF BANKING. passed in cim'ency^ but before money has passed " in currency" an action migbt be brought for it. He says the same of a bank note. An action could not be brought for it after it was paid away in currency. Hence the word currency was manifestly applied to a certam action of money — namely, its passmg from hand to hand. But about the beginnmg of the last century, by a most extraordmary confusion of ideas, and, as far as we have been able to discover, it arose in our American colonies, the money itself was called currency. This name occurs but rarely in Adam Smith, but since then has become very common. To shew the extreme absurdity of this name we have only to consider a few similar cases. Nothing is more common than to say that such an opinion, or such a report is current, and we speak of the currency of such an opinion, or such a report. But who ever di*eamt of calling the opinion, or the report, itself currency? It is very common to speak of the currency of the Session of Parliament — but w ho ever dreamt of calling the Session itself currency ? Now how can it be more rational in a scientific sense to call money currency, than to caU a report, or an oj^iuion, or the Session of Parliament, currency ? Such as it is, however, this Yankeeism is far too firmly fixed in common use to be abolished ; and hence we mtist now accept it, and endeavour to ascertain in a scientific sense what it includes. The expression circulating medium came into use about the last decade of the last century, and is a far more correct ex- pression. The circulating medium is manifestly the medimn by which the circulation of commodities is efiected, and clearly, by the very force of the definition, includes money and credit of all sorts. The metallic cuiTcncy is termed money, and the paper currency of all sorts is termed security for money. These securities for money, or the paper currency, are divided into two general species, first, jyromises to pay mouey called Pro- •missory Notes, and secondly, orders to ])ay money, called Bills OF Exchange, Each of these general divisions has several varieties, which are treated of in a subsequent chapter. The i)a})cr curroncry re])resents a pledge for a future payment, exactly as money does. The latter, however, is always a pledge payable on demand. In tlie case of paper, this pledge is fre- quently not payable on demand, but at a fixed ]K'riod after its creation. Now, it is clear that, though the period of payment is deferred, it cannot alter the fundamental nature of the instru- ment. It may affect its value, and its negotiability, or facility of transfer, l)nt*it cannot affect its essence. A pledge to pay in three monllis' time is clearly of the same nature as a pledge to pay on demand, nor does it in any Avay signify whether it is recorded on ]>a])er, or exists merely in the abstract forin of a debt. Tlie word currency itself is a complex term involving two DEFINITIONS OK TERMS CURRENCY. 23 simi)le ideas. From its first representing a debt, its funda- mental idea was that it was Romctliing that denoted powei- of demanding services, and secondly, it also passed from liand to hand itself. Of these two ideas it must be especially observed that the former is tlie fundamental one, but it has received its naine from the latter. Resolved into these ideas it denotes — 1. That which circulates commodities, i. e., which causes commodities to circulate, where circulate is an active verb. 2. That which circulates itself, where circulates is a neuter \erh. From the first of these ideas is derived the term circtdating medium, and from the second cicrrenci/. The amount of the currency, or circulating medium, in any country is the aggregate amount of it belonging to every in- di\^dual. Now whatever rc])resents the amount of debt due to any individual, over and above his possessions in conmiodities, in whatever form that debt may be recorded, whether metal or paper, or whether it exists simply as a debt, is the amount of currency belonging to him. Adopting this definition, we may enumerate the different species of currency as follows : — 1. Coined money ; gold, silver, and copper. 2. The paper currency, i. coplc be active and industrious, it will pass frequently from hand to hand, and there will be a large circulation. On Price, DiseoKnt, and Interest. 15. When one economic quantity is exchanged for anotlier, each is termed the value of the other. But when one of the economic quantities exchanged is money or credit, the sum of money or credit receives a peculiar name. It is called the Pkice of the other. From the considerations presented in § 8, it ai:)pears that price is the same thing as value in money, or credit. But, as it is invariably the custom ui modem times to estimate the value of every conunodity by its value in money or credit only, or its price, and not by its value as regards other com- modities, the words value and price have become almost identical and interchangeable expressions, though no doul)t Ave must remember the technical ditference between them. The price of any conunodity is tlierefore the quantity of money, or credit, given m exchange for it, at any moment. Now, as the value of the money is the commodity received in exchange for it, it is manifest that tlie greater the quantity of the commodity received for it, the greater is the value of money. Or if the q\iantity of the commodity be fixed, the value of money is greater, as less money is given for the commodity. Hence it is clear that the value of money varies inversely as 2>riee. The value of the property called debt, or credit, is however estimated in a peculiar way. We have taken the sum of £100 payable one year hence as the unit of debt. The negotiation of debts is a branch of modern commerce of supreme importance. Now a debt of £100 })ayable one year hence, being a saleable commodity like a quarter of corn, the sum given for it is its price, just as Ave speak of the price of anything else. And of course the A'alue of money rises as the ])rice diminishes. Now as money naturally produces a profit, it is clear that the price given for a debt payable a year hence must be less than the amount of the debt. The difference betAveen the price of the debt and the amount of the debt is called Discount. Therefore, clearly the price together Avith the discomit equals the amount of the debt ; and as the price decreases the discount increases. Hence, as the dis- count increases, the value of money, or the price, increases also. NoAV, in estimating the A\alue of debts it is universally the custom in commerce to mention the discount, and not the price ; and to buy or purchase a debt is always in commence termed to discount it. Now, if a banker buys a debt of £]00 payable a year hence for .£95, it is manifest that the discount is £5, and he is said to discount it at 5 per cent, per annum. Should the price of debts fall, the discount rises ; and since the value of money varies inA'ersely as price, it varies directly as discount. 28 THEORY AND PRACTICE OF BANKING. Hence "O'e have this : — The Value of Money varies inversely as price, and directly as discount. To discount a bill of exchange at 5 per cent., means to give a i^rice for a debt m the proportion of .£95 for every £100 of its amount payable one year hence. The exj^ression, however, that the value of money varies directly as discoimt is sometimes misinterpreted. Thus it is often said that if the price of debts has fallen from £96 to £93, and therefore the discount rises from £3 to £6, the value of money has doubled. This, however, is erroneous. Debts which formerly sold for £96 now sell for £93; and, therefore, it is clear that the value of money has I'isen in the proportion only of 93 to 96, and not doubled. When a person advances money to another, and agrees to defer receiving the profit imtil the end of the year, the profit is termed Interest. If he lends, as it is called, £100 at 5 per cent, intei'est, he in fact pays £100 do^^^l for the purchase of a debt of £105, payable at the end of a year, and the £5 is the interest. This method of making profits, though not uncommon among private persons, is never used in banking. Bankers invariably subtract the profit agreed upon at the time of the advance. Thus they always make profits in advance. In this case the profit is termed Discount. Thus, if a banker discounts a bill of £100 at 5 per cent., he only pays his customer £95, and retains the £5 at the time of the advance, as profit. In reality he pays £95 down for the purchase of a debt of £100, payable a year after date; and the £5, or the difference between the price of the debt and its amount, is the discount, and his profit. It is manifest that this latter method of trading is the more profitable, because in the former case he makes £5 profit on the actual advance of £100, in the latter case he makes £5 profit on the actual advance of only £95 ; and besides that, he has the £5 in his hands to trade with immediately, instead of waiting till the end of the year. In the large amounts of money which banks deal witli, this makes a very sensible difference in then' profits, especially when the rate of discovmt is high. On Securities for Money and Convertible Securities. 16. The expressions Securities for Money and Convertible Securities are very frequent in banking business, and we must now explain them. A security for money always means an obligation, or security, for the payment of a definite sum of money from a definite person at a definite time. In a security for money, therefore, there is always some obligor, or some p(;rson who is ]>ound to pay it. There are different forms of such securities, such as l)ank notes, promissory notes, bills of e.Ychange, Exchequer l>ills. Navy bills, and debts of all sorts. DEFINITIONS OF TEKMS CAPITAL. 29 Convertible Securities mean securities which no particulai* ])er.son is bound to pay, but foi- which, under usual circumstances, a purchaser can readily be found in the ojten market. Thus any property which can be readily sold is called a convertible secu- rity. This species of property includes the Public Funds, shares in all sorts of commercial companies, and all title deeds to pro- ])erty of a moveable descrii)tion of which the i)roperty j^asses by simple delivery, such as dock warrants and bills of ladhig. The fundamental distuiction between these latter and instru- ments of credit of all sorts, will be clearly explained in a future chapter. Now, as convertible securities mean property which is readily convertible into money, of course there are all degrees of convertibility. There is no al)Solute distinction in principle between the different species of property. But of all species of l)roperty the Funds are the most readily convertible, and land, or real property, the least readily convertible, in consecpience of the artiticial difficulties thrown in the Avay of its transfer by our law. Thus securities for money never represent any specific money, but are always a claim on the person. Convertible securities are never a claim on the person, and certain kinds of them are alwarjs a title to certain specific goods. Sometimes a security for money may be changed into a convertible security. This is done in what is technically called funding the unfunded debt. The Government sometimes raises money on its bills like indi- viduals, and it is bound to pay those bills at maturity, like an hulividual. These Exchequer bills, therefore, as they are called, are like any other bills of exchange, securities for money. Sometimes Avhen these bills amount to a large sum, it is very inconvenient for the Exchequer to pay them in full, and it gets its creditors to agree not to demand the repayment of the whole debt, l)ut to receive only the interest on it in perpetuity. Wlien this is done the creditor loses the right to demand i)ayment of tiie i)rinci}nil sum from the Government, but he may sell this right to any one else in the open market. It then becomes a convertible security, and is called tlie Public Funds, or Stock. This operation is termed funding the unfunded debt. On the Definition of Capital. 17. Anyeconomicquantitywhatsoever,maybe employed in two difterent ways. The proprietor may either use it himself for his own personal enjopnent, oi* he may use it so as to produce a profit. When an economic quantity is thus used productively, i. e., so as to produce a profit, it is termed Capital. And also whatever produces a profit may be termed capital. Mr. Senior says very justly, "Economists are agreed \\\:ii lohatever gives a p)rofit is properly termed Capital." And Stei)hens, in his Thesaurus, defines the word thus : — " KE(/)aXaioj'. Caput unde fructus et reditus manat. Capital, the source whence any profit or rent flows." 30 THEORY AND PRACTICE OF BANKING. It is clearly to be understood that there is no such thing as absolute capital in a country. Whether any economic quantity is to be termed capital or not, in no way whatever depends upon the nature of the thmg itself, but exclusively on the method in which it is used. If I have a sum of money which I spend m purchasing things for my own use and enjoyment, it is not capital ; but if I use it so as to produce a profit in any way, it then becomes capital. Thus if I lend it out at interest ; or buy goods with it to sell again at a profit ; or invest it in a com- mercial enterprise of any sort ; or if I spend it in acquiring the knowledge necessary to exercise a profession; such money is capital. And the thmgs or commodities purchased, for the purpose of producing the profit, are termed capital as well; because, though the money was originally employed m acquiring them, they are again employed in purchasing money, and there is no profit unless they sell for a greater sum than is employed in purchasing them. Now there are two fundamentally distmct ways by wdiich capital may increase — I, By direct and actual increase of quantity. Thus, flocks and herds, cattle, corn, &c., increase by adding to their numbers or quantity. II. By exchange : that is, by exchanging something which has a low value in a place for something that has a liigher one. NoAV it is clear that money produces a profit, and therefore becomes capital, by the second of these metliods. We do not sow sovereigns in the ground like corn, nor do they produce a crop of half sovereigns. But money becomes cajiital by ex- changing it for some goods, &c,, Avhich may be sold or exchanged again for a greater sum than they cost. And it is also clear that any economic quantity whatever, which is used as a substitute for money to i)urc]iase goods and for a profit, is capital, as well as money, by the force of the very definition which Mr. Senior says all Economists are agreed ui)on. 18. Adam Smith says, "that cajiital maybe cm])loyed produc- tively in four ways : 1st. In procuring tlie rude produce annually requiied for the use and consumption of the society; 2ndly. In raanufaclining and preparing that rude produce for immediate use a7id consunq)tion ; 3rdly. In t)'<()\spoHlnrincii>le, and include the business of the foreign mercliant, the wholesale and tlie retail dealer — that is, tlie whole operations of commerce, or exclvange. Hence, we may say that Smitli enumerates three distinct metliods of employing a capital productively — agriculture, manufactures, DEFINITIONS OF TERMS CAPITAL. 31 aud commerce, or exchange. Now, without inquiiing yet, what the technical economic detinition of Productio)i is, which is done a little fm-ther on, we see at once that Smith enumerates ex- cliaiige, or purchase, as one s])ecies of production. Now Mr. JMiU says that " anything which is suscejjtible of being exchanged for other things, is cajjable of contributing to pro- duction in the same degree," and that " bank notes, bills of exchange and cheques, circulate as money, and perform all the functions of it." Now money becomes productive capital by being employed to purchase things to be sold again at a i)rofit. And if a man cau purchase things by means of his credit, that is, if he can purchase them by giving his promise to pay at a future time, and by so doing sells the goods at a higher price, and so has a profit, after paying and discharging his debt, it is quite clear tliat credit has been capital to him in exactly the same way that money would liave been. Let us take a very simple example. Suppose a tailor Avants to make clothes for a customer. He pays, say £10 in cash to the cloth merchant, and after making up the clothes he sells them, perhaps, for £15. Then he has iised this money as capital. He lias £10 at the beginnhig of the operation, and £15 at the end of it ; or, he has made a profit of £5. Suppose the tailor has no money to buy the cloth with, then, if he cannot buy it on credit, he cannot make the clothes, and he cannot have any i)rofit. Suppose, however, the cloth merchant, believing in his honesty and capacity to pay, sells him the cloth hi exchange for his promise to pay money three months after the tune. As the pay- ment is deferred, and as, of course, there is some risk of loss, he will, hy way of insurance, charge him a souiewhat higher price than the cash price. Sui)pose he sells his cloth in exchange for tlie tailor's promise to pay £11 three months after the time. Now this is as much a sale as if the price had been paid in money. The property in the cloth is gone to the tailor, and what the cloth merchant has received m exchange for it is the right, or property, to demand £11 three months after date. Now this property is called a debt, or credit. The tailor having purchased the cloth by creatmg a debt against himself of £11, jiayable in three months' time, makes up the clothes as before, and is paid £15 by his customer. At the end of the three months he pays £11 out of this to the cloth merchant, and has, of course, remaining for himself a profit of £4. Now by the cash operation he is better ofl^" at the end by £5, and by the credit operation he is better oft' by £4, than he was at the beginning. It is true he has not made so great a i)rofit by credit as by cash. But still he has made a profit by his credit, which he could not have made without it. Hence, by the 32 THEORY AND PRACTICE OF BANKING. very definition, his credit has been capital to him, and has pro- duced exactly the same circulation of commodities, and em- ployed the same quantity of labour that cash would have done. Hence we see that credit is productive capital in exactly the same way and in the same sense that money woiild have been. This very simple example must suffice here to illustrate the doctrine that credit is capital, which has been strenuously denied in recent years. As we msh at present simply to place ele- mentary ideas in a clear light, we shall not now discuss the views of those writers who ridicule the doctrme that credit is capital. That is done in a future chapter. On Fixed and Floating Capital. 1 9. The true definition of Capital, then, is any economic quantity whatsoever used for the purj^oses of profit. But capital itself may be used in two ditfereut ways so as to produce a profit. It may either remain in the owner's possession, — and then it is usually called Fixed Capital — or he may part with the pos- session of it, and it may be replaced to him with a profit ; in this case it is called Floating or Circulating Capital. Smith, B. ii., c. i., enumerates four species of fixed capital. 1st. Useful machines and instruments of trade ; 2ndly. Buildings used in all sorts of trade ; 3rdly. Ln])rovements of land ; 4thly. Tlie acquired and useful abilities of the members of the Society. He also enumerates four species of floating capital. 1st. The money by means of which the other three are circidated and distributed to tlieir proper consumers; 2ndly. The stock of provisions in the hands of various dealers ; Srdly. The materials in the hands of different M'ork-peojile to be made up ; 4thly. The same materials Avhen made up into finished i)roducts and ready for sale. It is clear that this enumeration is very far from being complete, because there are many species of property omitted, which yet ai'e capital. But under the term floating cajiital he enumerates money. And under tlie term money, he always includes paper money of all sorts and descriptions. Since Smitli's day a distinction lias arisen between " paper money" and " pai)er currency," but he always includes every species of paper under the term money, or the wheel of circulation, Avhich he terms floating capital. Now this paper currency is simply Ckedit. And lience we see that Smith expressly enumerates credit under tlie title of capital. It is clear that if tlie return be made in one operation, it must include the whole sum necessary to rei)lace the article, as well as the intended j»rofits. But if the return be made by instal- ments at fixed periods, say a year, each instalment nuist consist of a sum partly to rej)lac.e the deterioration ol" tlie article itself during tliat jn'iiod, and ](aitly to lonii the excess, oi- profit, of DEFINITIONS OF TERMS CAPITAL. 33 the capitalist, so at the end of the term, when the article is worn out, the sum of all these instalments should be sufficient to replace the original article together with the i)rofits. It is clearly to be understood, that it is according to the intention of the person who produces an article, and the purpose ibr which it is produced, that it receives either of these names, and not according to the nature of the article itself. The same article may receive different names, accordhig as it jjasses to diiferent owners, who produce it, or cause it to be produced for dift'erent pur])Oses. The same article may hajloatuif/ capital in the hands of one man, iin(] Jixed capital in the hands of its next possessor, if the first produces it for the purpose of selling it, and the second purchases it for the purpose of deriving an Income from its use. This distinction may also be stated thus. That if the whole price of the article is paid out of the current income of the country, it is floating ca2ntal; but if only the interest, or revenue derived from its use, then it is fixed capital. This distinction is often overlooked, and the tei'm fixed capital is applied to articles of a certain nature, and floating capital to articles of another nature. Thus, houses and lands, machinery, railways, and ships are frequently termed fixed capital. But this is extremely erroneous. If a person employs his capital in building- houses for the i)urpose of selling them immediately, they are floating ca])ital in his hands, for their price is paid in one opera- tion. But if another man buys them for the purpose of letting them out to tenants, and so only deriving a revenue from his capital, they become fixed capital in his hands. Many persons buy land on speoidation, for the piu'pose of selling it again at a profit. The land in the hands of these jobbers is floating capital, but if another buys that land for the purpose of letting it out to farmers, or cultivating it himself, and so only making a revenue of it, it becomes fixed capiUd to him. So with maclnnery ; to the machine maker, who makes it for the pur])Ose of selling it to the manufacturer, it is floating capital. In the hands of the manufacturer, who buys it for the purpose of increasing the quantity of his productions by its use, and so only makuig a profit of it, it becomes fixed cap>ital. Hence, ^\'Q may state generally, that all articles, whatever be their nature, while they are in the hands of a person who deals in them, that is who pro- duces or buys them for the purpose of selling them again, as soon as he can, arc floating capital. As soon as they pass into the hands of a i)erson who only makes a profit by interest derivable from their use, they are fixed capital. Tlie articles we have just mentioned are, it is true, generally produced with the intention of their ultimately becoming fixed capital, but we have shown that they may, or they may not, be fixed cajiital, when they are produced, according to diflerent 34 THEORY AND PRACTICE OF BANKING. circumstances; and, unless we knoAV what those circnnistanccs are, it is imi)ossil)le to decide which name is to be given to them. It may also be easily shown how articles which are usually classed as floating capital may become fixed capital. Furniture and clothes would usually be termed floating capital, because they are generally made for the purpose of being sold. But if a person made them for the purpose of only letting them out for hire, they would become fixed capital in his hands. An ordinary tailor usually makes clothes to be sold to his customers, so they are floating capital to him. But in the hands of Nathan, who lets out uniforms and dresses for particular occasions, they become fixed capital, just as much as a house or a mill. So, if a cabinet-maker makes furniture, for the purpose of letting it out for hire, that furnitm*e is as much fixed capital as any railway. We thus see how improper it is to apply the term either of floating or fixed capital to any object, whatever be its nature, unless we know the intention of its OAvner in using it. And unless an article is incapable of being applied to more than one of these i:)urposes, it is not correct to call it by either name. There are very few articles to which the name of fixed capital may be invariably applied, the only one to which it is necessarily a]iplied is the kuoAvledge, skill, and capacity of an individual. Those to which it may be applied with the least risk of error are Railways, Canals, Docks, and agricultural improvements. The instances are very rare in which sucli things as Railways, &c., are made for the purpose of l)eing sold. If that did happen, they would have to be called floating capital, in the hands of such a person, or company. So that we may safely say that there are no articles which are necessarily fixed capital. Nor are there any which are necessarily floating capital. The mode of expending capital, which is almost invariably floating capital, is the wages of labour. In all ordinary cases in this country, the wages of labour are floating capital. But in slave countries the case is difterent. There the slaves are fixed capital. The same thing occurs in this country, where people sometimes enter, as it were, into a species of modified servitude. Sometimes people hire themselves out to others for a certain period, who are al- lowed to let them out for jiarticular occasions, and receive the money for iheir ]H'rformances. Tims, it is not uiuisual for the most eminent singers and nuisicians to agree to serve the large music-sellers for a definite period, during which their emjdoyer has the right to let them out on occasions, just like instruments or ])l;ife. To the capitalist who lives merely on the i)rofits of his capital, it may make very little diflcrence whether lie reaps that profit in one operation or in many, as the result must always be the same to him in the end. But to the class of persons who live by their daily labour — -the worknirn in his business — the diflTerence ON I'KODUCTION AND CONSUMPTION. 6b ill the mode of emi)loyin<^ cai)ital is of vital importance. Thus, il'tlie builder of a ship means to sell it immediately, and be })aid the whole jirice of it at onee, he will enijiloy tliat money in buildinjj;- another ship, ami the full amount of tlie price of tho ship, deduct iiio- the part wliich roduction of Avealtli in their sense, it must ])rofess to treat of the Avhole business of farming, and all the ])rocesses in every species of manufacture. But every Economist Avould at once repudiate sucli a doctrine. He would at once say tliat all the processes in agriculture and manufactures are no part of his science. It has notliing to do with the arts and jtrocesses by which things are ])roduced, but only with their value, or exchangeable relations, when ofl'ered for sale. Again, with res])('ct to GonsiimpUon, it is manifestly erroneous to say that all things are produced for the ])urpose of being destroyed. It is true that some are, such as food, and destruction is incidental to the use of some, such as clothes. But Economic Science has nothing to do witl) that. If n man eats a dinner, or ON PUODLTCTION AND CONSUMPTION. 37 smokes a cigar, or wears out a pair of shoes, is that an ecoiioiuic phenomenon ? But there are multitutles of things produced which arc not destroyed at all. If a sculi)tor carves out a statue, is it made for the purpose of being destroyed? Is a picture painted for the i)urpose of being destroyed ? Are books priutetl for the purpose of being destroyed ? Many things, such as gems, medals, &c., are absolutely indestructible, except by violence. In many cases, such as houses, the greatest care is taken to preserve the products from destruction. If then consumption means destruction, it is clearly false to assert that consumption is the end of all production, and that whatever is produced is consumed, and all correlation between the terms is lost. Wliat then in commercial language is Consumption ? and who or what is the Consumer ? Now, A\dthout overloading our text with too many quotations, we will Uiake one from Adam Smith. Pie says, B. ii., c. ii. : — " Though we frequently, therefore, express a person's revenue by the metal pieces which are annually paid to him, it is because the amount of these pieces regulate the extent of his power of purchasing, or the value of the goods which he can annually afford to consume. We still consider his revenue as consistmg in this power oi purchasing or consuming, and not in the pieces which convey it." Here we see that Smith uses the word consume as synonymous with i)urchase, and, therefore, consumption as equivalent to purchase. And this is the true commercial meaning of the M'ord. The consumer is simply the purchaser or customer, and Economic Science has nothuig to do with what the purchaser docs with the product after he has bought it. So Dr. Johnson, ex])laining the first elements of trade to Dr. Wetherell, INIaster of University College, Oxford, says, " Here are three jirofits to be paid between the prhiter and the reader, or, in the srtyle of commerce, between the manufacturer and the consumer; and if any of these profits is too jienuriously dis- tributed the process of commerce is uiterrupted." Here we see again that the consumer means simply the pm'chaser. It may be obserAcd that the Latin word con^umere, besides meaning to destroy, also means to buy. The ambiguity has probably come from the French. In that language there are two words consom2)tion and conso)nmatloii, both in a certain way represented by our single word con- sumption. Co)tsom2)tio)i, in French, means destruction, but that is not the technical economic word in French. It is consoui/na tion, which is the Latin consutnmatio. Now it is clearly pohitcd out in the French dictionaries, that consommation means com- pletion or perfecting, as in English, consummation. Noa\ , who »iSB0i)5 38 THEORY AND PRACTICE OF BANKING. is the consumer ? He is the person who comi)letes, or brings to perfection, or consnnamates the work of the producer. The j^ro- ducer brings forward sometliing and oifers it for sale. But it is the purcliaser who gives vahie to it ; it is he wlio crowns the work, and consummates the desire of the producer, by purchasing it, and thereby giving it vahie. And the work is not consum- mated, or perfected, until it is sold, and the economic phenomenon is complete. Until the product is sold, the labour is not con- summated. And what is the meaning of producer and production ? To ascertain this, we have only to look at the genuine meaning of producere in Latin, which is to bring out, and to cause an increase of quantity is only the secondary meaning. It is the technical word used for exposing to sale. Thus Terence, JSimnchus I. ii. 55, says — " pretiiun sperans illico Producit; vendit." , " Hoping for a good price^ offers her there for sale; sells herP And in the Heauton timorumenos, I. i. 90 — Ancillas, sei'vos * * * Omncs produxi ac venclidi. " All the slaves, nude and female, I put up for sale and sold.'*'' So, to produce in English, is to draw forth — to cause to come 'near. To produce a thing is simply to place it where it is wanted. If a witness is told to produce a deed in court, it means that he is to bring it into court and to ])lace it there. So a gaoler is ordered to p>roduce the body of his prisoner in court, that is, to ]»lace him there. So in Isaiah xli., 21, it is said, " Produce your cause saith the Lord, bring forth your strong reasons saith the King of Jacob." And the marginal note says, "Produce — cause to come near." Thus the producer, in economic language, is the person who bt'iiigs forward some product for sale in a given place, no matter how he obtains it, whether by growing it, such as corn, or pur- chasing it as retail dealers do. Adam Smith calls a retailer a " ]>roductivelal)ourei,"and how is he so? ]>ecausehe purchases things which his customers want, and ])laces them where they will want them. The producer, then, is simply the ])erson Avho ofiers anytlnng f(»r sale, and the consumer is the ])urchaser or customer. And we now see liow consum])tion is correlative to production. Bastiat says, " We give and receive services ; we 8ui)})ly and we demand values; we make purchases and sales; we work for others, and others work for us ; in a word, we are Producers and This, then, is llic only sense in w hicli the doctrine that con- sumption is llie end di" all production is true, and in fact, it ON RATE OF IJNJTEllEST AKD RATE OF TROFIT. 6V bccoiues tautology, tor it is reduced to tliis, that jteojile oiler things for Kale tor the jjurpose of being sold. Two parties who wish to exchange their products, are each producers of their own, and consumers of each others' [jroiluct. And it is the reci})rocal consumption, or jmrchase, which gives value to the reciprocal ])roiUiction, and the complete transaction constitutes an exchange. The quantity produced or olFered for sale, is frequently calleil the Sui'PLY, and is equivalent to it. The person who pur- chases or consumes it, demands it. Consumption, therefore, in a certain way, may denote demand. But yet, these two words are not absolutely synonymous. The quantity actually sold is the consumption, but is by no means ec^uivaleut to the demand. Suj»})ose there is a limited quantity of an article iii a country place. All of a sudden a number of rich people tlock into the l)lace. They naturally bid against the inhabitants of it, and thus the demand is greater, and raises the price of the article, while the production or supply, is the same, and also the cousum.ption, or quantity sold. Although people are not divided mto producers and consumers generally, yet in respect to each particidar article they are. Nor is it any objection that some are both producers and consumers of the same article, as a farmer is of coi'n, and a cloth manufac- turer is of clothes, a baker of bread, &c. Nothing is more common than for a man to act in two capacities, apparently in- consistent with one another. Thus, a man may lend to himself, and borrow from himself. He may be the shareholder in a joint- stock bank, and also be a customer of that bank, and he may borrow money from that bank. He therefore both lends to ami borrows from himself. He is both his own banker, and his own customer. The series of persons who deal in any article of commerce are alternately consiuners and producers of that article. Thus, the foreign merchant or the importer is a consumer of that article as regards the foreigiier, he is then a i)roducer of that article as regards the wholesale dealer. The wholesale dealer is a con- sumer as regards the im})orter, but a producer as regards the retail dealer. The retail dealer is a consumer as regards the wholesale dealer, and a producer as regards his customer, who is the final consumer, and for whom all the series of previous operations took place. 0)1 Hate of Interest and Hate of Profit. 21. "We have now to call attention to the definition of an ex]n-es- sion which has been the cause of immense confusion in Economics. Every one knows what Hate of Interest means. When ])eoiile speak of interest at 5 i>er cent., they always mean that X'u is given for the use of £100 for some ii:iveu time — as a vear. It is 40 THEORY AND PKACTICE OF BANKING. 2)erfeetly clear that we can have no conce])tion of what rate interest is, unless Ave are told m what time it accrues. By a most extraordinary oversight, however, this has been quite overlooked in the definition of Mate of Profit. It will scarcely be beheved, that no Economist has seen that Tbne is a necessary element in the definition of rate of profit. Thus M'Culloch says, " The rate of profit is tlie proportion which the amount of profit derived from an midertaking bears to the capital em])loyed in it." The Avhole of Ricardo's doctrmes of wages and profits are full of fallacy arising from this obvious omis- sion. So INIalthus defines rate of profit to be the per-centage proportion which the value of the profits upon any capital bears to the value of such capital. Even Mr. Mill has not seen the defect in the definition. He says, B. ii., c. xv., " The cost of labour, then, is, in the language of mathematics, a function of three variables : the efiiciency of labour ; the wages of labour (meaning thereby the real reward of the labourer} ; and the greater or less cost at which the articles composing that real reward can be produced, or furnished. It is plain that the cost of laboiar to the capitalist must be influenced by each of these three circum- stances, and cannot be aftected by any other. These, therefore, are also the circumstances Avhich determine the rate of profit ; and it cannot be affected except through one or other of them." What? is not the rate of profit affected by the time in which it is made ? Suppose a given amomit of profit to be made on a given amount of capital, is it the same rate of profit Avhether it be made m a year or a day ? According to the definition in general use among Economists, a profit of £10 made upon £l 00, is exactly at the same rate if it be made in a year, a month, a week, or a day ! ! Nay, according to IVIr. Mill, the rate of profit cannot be affected by the time in which it is made ! ! This definition is so manifestly erroneous that it is only necessary to call attention to it to be at once admitted. It is quite clear that time is a necessary clement in the definition of rate of profit. In fact it is simply unintelligil>le witliout it. If we were told that a trader had made a ])rofit of £10 on £100, it Avouhl be as impossible to conjecture Avhat the rate of profit had been, as it would l)e to determine a horse's rate of speed if we were only tohl that it had gallojted 20 miles. It often liajipeiis that the rate of ]»roHt is the greatest when the actual profit is the least. If a trader were to make 50 ])er cent. ])rotit on one transaction, tliat would be a high profit; but if he only made one transaction in the year, lie would not increase fast in opulence. His rate of profit would be 50 i)er cent. But suppose that he only makes a profit of 5 ])er cent, on a transac- tion, but makes tliat ]»rofit in one day, then the rate of that profit is u|)wards of 1,500 ]»cr cent, per annum, and if he could make a transaction at that ]»ro(ll each day, his actual proHts ON RATE OV INTEREST AND RATE OF PROFIT. 41 would bu u]) wards of 1,500 per cent. Hence the rate of profit would be hit;]), wliile the actiuil profit is low. And if the trader reinvested the j)rofits as they occurred, as capital, his rate of profit on his original capital would increase at conijjound interest, and be enormously greater. Bacon saw clearly what has been far too much overlooked by Economical writers, that the frequency of retuni is of far more consequence than the magnitude of each case of i)rofit. He says, " The ]n-overb is true that light gains make heavy purses, for light gains come thick, whereas great come but now and then," and this is entirely in accordance M'ith what modern experience demonstrates as the true axiom of trade — s>iudl 2>voJits and quick retur/is. The ix'ctification of this error in the detinitiou of rate of profit, which must be admitted as soon as stated, clears up a vast deal of obscurity which involved the subject of profit. Thus, when profits are said to be reduced to 10 per cent, it seems somewhat paradoxical to say that interest can be paid at 15 per cent. It is, nevertheless, true, and constantly ha))pens ; the aj (parent paradox only arises from the diflxirence of estimating rate of interest and rate of profit in cojuraon language. When traders pay interest, it is always calculated at the rntej^er aiinum, but it is too common to measure profits by the actual transaction, without reference to the time. Thus, if a trader pays interest at the rate of 15 per cent, per annum, he makes profits, jjerhaps, at the rate of 10 per cent, per Aveek, or per day, which is at the rate of 520 or 3,130 per cent, per aimum, allowing for the number of working days in the yeai*. This at once dissii)ates the a])parent paradox, and ex])lains how trade can be carried on at rates of interest which Mould seem incredible. In ordinary times in London, the second class bill-brokers charge their customers one shilling in the ]jound on three months' bills, which is, in reality, discount at the rate of 20 jier cent., or interest at the rate of 25 per cent, per annum. In ancient times, and in the middle ages, and in America at the present day, the rate of interest is even higher than that. These rates are, however, as nothuig compared to the rates paid by petty provision dealers, and may serve to shew the utter al)surdity of the Usury Laws which were so long in force in England, and are so still in France, though they will probably be abolished there very shortly. Gerard INIalynes, a Avriter in the days of Charles I., observed that the petty provision trade of London Avas carried on with money borrowed at the rate of 400 per cent, per annum. In the days of Turgot penalties of the most terrible severity were enacted against the infringers of the Usury Laws. To shew their absurility, Turgot instances the advances which money lenders at Paris made to the i»etty dealers, who bought victuals hi the market, to retail them in dillerent 42 THEORY AND PRACTICE OF BANKING. parts of the capital. The charge was 2 sous a week for the loan of a cro^NTi of 3 fi-ancs, which was equal to interest at the rate of 173 per cent, per annum. The whole of the small provision trade of Paris was carried on by means of these loans. " Never- theless," says Turgot, "the borrowers do not complain of the tenus of this loan, without which they could not carry on the trade by which tliey live. And the lenders do not get very rich, because the exorbitant interest is only the compensation for the risk their capital runs. In fact, the insolvency of a single borrower sweejis away all the profit which the lender can make out of thu'ty of them." The idea that trade coidd flourish upon money borrowed at 173 per cent., seems somewhat startling, until we analyse the operation. No doubt the borrower paid two sous a week for the loan of a crown, but then the probability is that what he paid a crown for in the mornmg, he sold again the same afternoon for three francs and a half, or more. Now if he repeated this operation once every day, it is clear that he Avould have gained at the end of the year 3,130 sous, omitting Sundays. That is, with a capital at no time exceedmg 60 sous, he would gam a profit of 3,130 sous m the year, which would be at the rate of 5,216 per cent, per amiimi, and out of this he would only pay 173 sous for the loan of the money. M. Gustavo de Pu}Tiode, quoting from the speech of a Member of the last Legislative Assembly of France, gives an instance which is even more startling than the last. He said, " Every morning the small provision dealers received a 5-franc piece to buy the objects, wliich they resold with a profit of 3 or 4 francs. In the evening they repay the 5-franc piece, and give 25 centimes in addition. They make no complamt of interest, which is yet at the rate of 1,800 per cent." Nor had they any reason to do so, for by borrowing this 5-franc piece they made 8 francs of profit, out of which they only paid ^ for interest. If therefore the rate of interest was 1,800 per cent, per annum, the rate of profit, assuming the gain to be, as stated, 3 francs j)er day, was at the rate of 21,600 ])er cent, per annum. And tlie interest, which is only one-twelfth ])art of the ju'ofit, is not unreasonable. And yet by the* law of France it is still a crime to take more than 6 per cent. ! * * It may Ije stated that an Imperial Commission, before wliich the Author of this Work was examini'd as a witness, was some time ago appointed to inquire into the operftti(m of the Usui^ Laws in France; their report is not yet published. I'HAI'TEK II THE THEORY OF VALUE. " The Theory of Prices and their variations is the darkest part of our system. "A Statist does nothing for i)hilosophical economy, unless he ascertains and describes chanrjcs, and such relations among his details as are matter of fact." — Francis Horner. CHAPTER II. THE THEORY OF VALUE. Definition of Value — Depreciation and Diminution in Value — Error of Expression Intrinsic Value — ORiom, Source, or Cause op Value — The General Law of Value — Impossibility of a Standard of Value. 1. We have seen in the precedmg chapter that there are three species of Exchangeable Quantities, the various inter- changes of Avhich give rise to six diiferent kinds of exchange, which constitute the pure Science of Economics, or Political Economy, in its most modern definition. It has also been said that the Value of any Economic Quantity is any other one for which it can be exchanged. To examine these six species of exchange "wath all tlieir ramifications, would be a complete ' treatise on Economics, In the present work we have only to do with two out of the six species of exchange, viz., the exchange of money for debts, and of debts for debts, which constitutes the business of Banking. AVe must now examine the foundations of the Theory of Value, which must be equally applicable to all Economic Quantities, and to all the six species of exchange. It is the more necessary to do this, and to lay before the reader shortly the remarkable misconceptions and self-contradictions which are very prevalent among writers on the subject, as they have done so much to obscure the Theory of Credit in recent times. The complete Theory of Value comprises the follo^ving : — 1. The Definition of V^ahie. 2. The Ori(/in, Source, or Cause of Value. 3. The General Laxo of Value. We must now examine each of these sepai'atcly, and lay a solid foundation for our subse(paent investigations. On the Definition of Value. 2. In § 8 of the preceding cha]iter we have shortly defined the Value of an Economic Quantity to be any other Economic (Quan- tity it can bo exchanged for. Tims, let A and 1> bo any two 46 THEORY AND PRACTICE OF BANKING. Economic Quantities which are exchanged at any moment, then, A=B. Theii B is the Vahie of A, and similarly A is the Value of B, whatever be the nature of A and B. Now, suppose B is 1 guineas ; A may he any of the three species of Economic Quantities ; it may be a material product, as a watch ; or may be an immaterial product, as so much instruc- tion; or it may be a bill of exchange, i.e.^ a debt, or pTiblic stock ; or any other species of mcorporeal property. This furnishes a complete answer to those Economists like Malthus, who oppose the admission of immaterial products into Economics, alleging that they caimot be measured. The answer is plain, if a man can sell so much instrixction for 1 guineas, by the very definition its Value is as clearly defi-ued as if it were a watch. So also if so much public stock can be sold for 10 guineas, its Value is as clearly defined as in the other cases. If a man owes me a debt, /. e., if I have the right to demand 10 guineas from him, and I know that he can and wiU pay me that sum on demand, the Vahie of the debt is 10 guineas. But B may be either of the three species of Economic Quanti- ties as well as A. Tlierefore any Economic Quantity may have value in terms of the others. Thus A may be a debt, and B may be a debt as well. That is, debts may have value in terms of other debts. Th« business of Bankmg chiefly consists in buymg debts by creating other debts. And the variable relations of debts are subject to precisely the same general law of Value as • those of any material products. Moreover, it is perfectly clear that the Value of A increases and diminishes as B increases or diminishes, and the Value of B increases or diminishes as A increases or diminishes. It is also clear that if the exchangeable relation between A and B changes, the Value of both must have changed ; it is clearly absurd to sup})Ose tliat the Value of one remahis the same while tliat of the other changes. Tlius J. B. Say, whose doetrincs of Credit we shall have to investigate in a subsecjuent chapter, says that things cannot be valued excej>t by an exchange. That V.alue is always com])ara- tive; that the Value of a franc is the things which one can buy with this sum, and that gold and silver have no value except what they can buy. Ilencc we see that by its vei'y definition. Value requires two objects; the Value of a thing is always something external to itself It is absolutely im|»ossible to i)redicate that any (luantity has Value, without at the same time imj)lying that it can be exchanged for something, and of course everything it can be exchanged for will be its Value in that coinniodity. Moreover, it is as absurd to speak of a <|uantity changing its own Value, without stating tlu; article in lespccrt of which its Value has DEFINITION OF VALUE. 47 cliangod, as it would l)u to say that an object had changed its own distance, without statmg what otlier object it was distant from. Tlie Value of the goods in the merchants' and traders' ware- houses is the money in tke pockets of their customers. The Value of the money in tlie ]>ocke1s of the public, is whatever things they can buy Avith it. The Value of the professor's lectures is the fees paid by his scholars. The Value of an abstract right, or property, to demand a thing is the thing promised. Thus the Value of a £5 bank note is the 5 sovereigns. The Value of a jjostage stamp is the carriage of a letter. The Value of a pledge, or promise, to cut a man's hair is the cutting of the hair. Hence also it is quite clear that nothing can have a fixed or invariable Value, because however it may remain the same with regard to any one or more things, yet if it has changed its relation to any other things, its Value has changed. All this seems plain enough, but yet, with scarcely an exceji- tion, while Economists admit that the Value of a thing is somethmg external to it, they constantly consider Value to be some quality appertaining to the thing itself, and inherent in it, without, apparently, the least idea that these are two different conceptions. The extraordinary confusion of ideas of Smith and Ricardo are more fully shewni under the next section, and that of a /Standard of Value, biit we must just quote here a sentence or two from a few writers. Thus llicardo commences his work: — "The Value of a commodity, or the quantity of any other commodity, is tliat for which it will exchange." At p. 338 (3rd edit.) he says, " I cannot agree with Mr. Say in estimating the Value of a com- modity by the abimdance of other commodities for which it will exchange." A disciple of Kicardo, who is su])posed to have carried his docti'ines to an extreme, says, " There is no necessary connection at all, or of any kind, direct or inverse, between the quantity commanded, and the value commanding." And a little further on, " I ])resume that in your use, and in everybody's use of the Avord Value, a high value ought to purchase a high value, and that it will be very absurd if it should not. J3ut, as to purchasing a great quantity, that condition is swehj not included in any vuni's idea, of Value !! " — ( The Templar'' s Dicdogues by JJe Quincey.) Thus, also, an able Economical writer, Mr. Senior, says, " We have already stated that we use the word Value in its popular acceptation, as signifying that quality in anything tchichjits it to he gicen and received in exchange, or, in other words, to be lent or sold, hired or purchased. " So defined, Value denotes a relation reciprocally existing between two objects, &q. !! " 48 THEORY AND PRACTICE OF BANKING. Now, the quality of a melon whicli fits it to be sold is its agreeable flavour ; this, according to Mr. Senior, is its Value, and so defined, he says that means it costs 5s. ! That is, he defines the quality of a thing to be its price. On the Error of the Expression Intrinsic Value. 3. "We have now to caU attention to a phrase which has been the cause of an enormous amount of confusion m Economic Science, Say remarks on the difticiilty of divesting the mind of the influence of common language in Economics. Nothing has Ijeen more mischievous than the influence of the phrase we are going to notice, and to exterminate it is the first step in the improvement of the science, and the proper comprehension of the subject of credit. Many Economists haAong defined the value of a thing to be the things it would buy, began to confine their attention solely to tilings of value, the produce of labour, quite oblivious of the fact that there are multitudes of things of value, which are not the result of laboiu' at all. Then they began to consider that things would exchange in the proportion of the labour employed in producing them. Thus the value of a thing Avas considered to dej>end on the quantity of labour emj^loyed in producing it. Hence the quantity of labour embodied, as it were, in the thing, came be counted as its value, and thus Value came to be called Intrinsic. And in late times tlie constant idea is that Value is some inherent quality of a thing conferred by labour. This un- hapi)y phrase meets us at every turn in Economics, and yet tlie slightest reflection wiU show that to define Value to be some- thing external, and then to be coustautly speaking of Intrinsic Value, are utterly self-contradictory and inconsistent ideas. Thus over and over again it is repeated in Economical treatises that money has Intrinsic Value, but tliat a bill of exchange, or bank note, is only the 7'epresent((tive of Value. Money no doubt is the produce of labour, but, as Smith ob- served, if it would exchange for nothing it would have no value; so, Say says, tliat the value of gold and silver consists only in what tliey will buy. How then can its value be Intrinsic? How can anything have Intrinsic Value tinless it has the things it will exchange for inside itself? Money has IitrinsicYahie ! Has a piece of money got the merchandize, and all the other things it will ])urchasc inside itself? Money will exchange for anything — corn, houses, horses, carriages, books, tfec, and each of these is the Value of the money with res|)ect to that com- modity. Kut which of these is its Intrinsic Value ? The incongruity of these ideas is so glaring that it is only necessary to call attention to it, for it to be jierceived at once. Yet from the very begiiming of the science this phrase has infested it. So long ago as lOOfi, an excellent writer, IJarbon, remarked EUROR OF EXPRESSION INTRINSIC VALUE. 49 on the confusion it introduced into the subject. He says, " Tliere is notliing tliat troubles tliis controversy more than for want of distinguishing l)et\vcen Value and Mrtne. " Vahie is (jnly the jirice of things; that can never be certain, because it must be tlien at all times, and in all places, of the same value, therefore nothing can fnire an Intrinsic Value. " But things have an intrinsic virtue in themselves, which in all places have the same virtue ; as the loadstone to attract iron, and the several qualities that belong to herbs and drugs, some purg-ative, some cliuretic, &c. But these things, though they may have great virtue, may be of small ralue, or no price, according to the place where they are plentiful or scarce, as the red nettle, though it be of excellent virtue to stop bleeding, yet here it is a weed of no value fi-om its plenty. And so are spices and drugs in their o\ni native soil of no virtue, but as common shrubs and weeds ; but with us of great value, and yet in both places of the same excellent intrinsic virtue."" Again, " For things have no value in themselves, it is opinion and fashion brings them into use, and gives them a value." Barbon thus ])uts his finger on the very thing which is the curse and the liane of Economic Science to this very hour, and especially of the Theory of Credit. It is quite clear that money has not Intrinsic but General Yalue, because it is generally exchangeable throughout the country. But take it to a foreign country, or among a race of savages, and where would its value be ? What value would a bag of sovereigns have among the Red Indians? "We know that persons throughout a country will always be ready to give things in exchange for the money of the country, lience money has General and Permanent Value, but manifestly not Tntri/isic Value. A Bank Note, hoAve\er, wliich is payable on demand, is ad- mitted by all Economists to have the value of money. And why is this ? Simply because it is exchangeable for money. A bill of exchange on a solvent merchant has value, simply because at a certain time it avUI be exchanged for money : hence it is clear that bank notes and bills of exchange have value for precisely the same reason that money has, and no other, vi/., that they are exchangeable for something else. The notes of a great Bank may be exchangeable throughout the country as easily as money, and such notes will of course have the same value as money in such a case. The Value of a bin of exchange entirely depends upon the solvency of the merchants whose names it bears. These may not be generally known throughout the country, and they may fail : hence the ^•alue of such an instrument of credit is not general, and it is precarious, but it is, nevertheless, of the same nature as that of money. 50 THEORY AND PRACTICE OF BANKING. Hence we see that the Value of Money and Credit of all kinds is essentially of the same nature, though there may be different deo-rees of it. A piece of credit is an article of merchandize and an exchangeable commodity just as miich as money or any other goods. Moreover, we see, on considering the term Value, that it is nonsense to speak of the re^^resentative of Value, Value is a i-atio— an external relation ? What can be the representative of a ratio, or of an external relation ? To say that money, because it is material and the produce of labour, has intrinsic value, and that a bank note is only the repre- sentative of value, is just as absm'd as to say that a wooden yard measure is intrinsic distance, and that the space of 36 inches between two points is representative distance. It is of the fii-st importance to Economic Science to extermi- nate this unhappy phrase Intrinsic Value, which is clearly shewn to be a contradiction m terms, and the source of endless con- fusion, especially in the Theory of Credit. How many wi'iters acknowledge that bank notes, &c., if exchangeable for money, are of the same value as money, and perform all the functions of money, and in the next breath ridicule the notion that credit is capital ! How many laugh at the idea that bits of paper can be wealth ! And, in fact, it is not exactly these bits of paper that have value. Wliat is really of value is the Right, or Property, to demand money. These bits of paper only contain the evidence of this Right, or Property, as a matter of convenience, which would equally exist without them. This property, nevertheless, whose existence so many are unable to realize, is the most gigantic subject of commerce of any, and its creation, exchange, and extinction is the subject of this work. On the distinction between Depreciation and Diminution in Value. 4. We must now observe the difference between two expres- sions, which, though often used indiscriminately, are essentially distinct, viz., Diminvtion in Value and Depreciation. An alteration in vahie of any commodity means that the quantity of it which was considered as an equivalent for a certain amount of some other commodity with which it is conqiared, lias undergone a change. JJepreciation means tliat it is not really of the value it ])rofesses to be. Alteration in value of a commodity is always used in reference to some otlier commodity, with which it is cojuj tared ; Depreciation., in reference to itself. Thus, if at any iriven time an ounce of gold will exchange ibr fifteen ounces of f^ilver, and owing to any great and sudden increase of the qiiantity of silver, while the quantity of gold remains the same, one ounce of gold l)ecomes able to purchase twenty ounces of silver, tlien silver is s.'iid 1o have sustained a Diminution of ON DEPRECIATION AND DIMINUTION IN VALUE. 51 Value with respect to gold; or if, wliile silver remained the same, gold became very scarce, so tliat one ounce of gold would purchase twenty ounces of silver, then gold would be said to have risen in value ■\\ ith respect to silver. But if a bank note wliich professes to be of the value of five sovereigns, will only purchase four sovereigns, it is (le^jreclated / or if a guinea, which professes to contam a certain amount or fixed weight of pure gold, does not contain that amount, it is dejyt'eciated. The expression JJiminution in Yalue is applicable both to CQramodi- ties and money ; the word Depreciation is more properly restricted to currency ; when an analogous change takes place in connnodities, it is usually called deterioration. These distinctions are very necessary to be observed in all discussions regarding the value of couis which retain the same names during a long series of ages. The pound of money in the days of William the Conqueror really meant a pound weight of silver bullion ; and silver was the only money. Since then, silver has greatly increased in quantity, and other things are used as money, which have tended very greatly to diminish its value. It is said, though of course all such statements are extremely difficult to verify, that silver has fallen to a twelfth of its value in those times. Not only has the value of the metal greatly diminished, but the coinage is greatly deteriorated. By various diminutions effected by successive sovereigns, the shilling now is only the 66th part of a poimd weight, whereas it Avas formerly the 20th part. Hence it is said that a shilling will only command the 36th part of what it formerly would. Though, as great changes have taken place hi everything else as well, it Avould be difficult to prove tliis. These causes aftectmg the value of coins which retain their names through long periods, may act- in the same or ojjposite directions. It is quite easy to imagine that a coin, though greatly deteriorated, or diminished from its original weight, may, in consequence of the increased value of the material of which it is composed, be al)le to purchase as much as it Avould have done originally. It is alleged sometimes that this happened at Rome. The first coinage of Rome was coi)per, and this metal was found in great abundance for some time after the foundation of the city. The first measure of value was the as, Avhicli was a poimd weight of copper. The as W' as subsequently reduced to the twelfth part of its weight, and some writers say, that in consequence of the great scarcity of the metal, it had increased so much in value, that the deteriorated coinage would ]iurchase as much as the full pound would origuially. This may be so, or not, but it in no -svay aliects the argument. It might, very pos- sibly, have been so. These considerations greatly afiect the public in the matter of public debts. The State agrees at a particular time to pay a fixed E 2 52 THEORY AND PRACTICE OF BANKING. quantity of bullion, either for ever, or for a long period, to the public creditors. Now, even supposing all other thmgs to remain the same, the A-alue of the money may vary very gi-eatly during long periods, cither from the increased scarcity or the increased abundance of the metal; and either the State or the creditors may be grievously affected by these changes. In recent times, many able Economists have expected that the value of gold would be violently affected by the great discoveries in California and Australia. Some coimtries have taken such alarm at this as to abolish gold as the legal measure of value, and some writers have proposed that the weight of the sovereign should be increased in consequence. Even if the consequences expected did follow, which is extremely doubtful, it is not very likely that this would be done. Plowever, this is not the place to discuss this important question. On the Origin, Source, or Cause of Value. 5. We have seen that there are three species of Economic Quantities which may have value, and have decided that the definition of the value of a quantity is any other quantity it can be exchanged for. We now come to the second branch of our inquiry — What is the Cause, or Source, of Value, and whence does it origh]ate ? Now, when we are to search for the Cause, or Source, of Value, it may be as Avell to imderstand what it is we are searching for. We see that there are several species of quantities which all have value ; we must, thei'efore, manifestly search for some cause that is common to them all. We are not seeking for what may, in many cases, accompany Value, or what is the accident of Value, but we are to search for that general cause, Avhich being jiresent, Value is present, which being absent. Value is absent, which when it increases. Value increases, and which when it dimuiishes. Value diminishes. G. The first and most popular doctrine was, that the cause of Value was L/Vuoiik. Adam Smitli founded, or rather is sup|)osed to have founded, all his notions of Vahie upon l^abour. Tliis is so well knoAvn tliat we shall not here make any quotations to justify the assertion, more especially as we shall have to quote from him subsequently. Kicardo began his work by expressly limiting his doctrines to certain specific classes of articles; but lie soon lost sight of this liiiiitation, and lays down the broad principle, that labour is " really the foundation of the exchangeable value of all things, exce])ting those which camiot be increased by human industry." Again he says, " In speaking, however, of labour as being the foundation o^ all v;ilue;" and he considers the quantity of labour employed in obtnitiiiig c >nimo(liti(>s as their absolute value. ON THE CAUSE OF VALUE. f)3 Ricardo very soon lost sight of tlic limitation he had begun with, and, as is usual in such cases, his disciijles pushed the doctrine to its utmost extravagance. Thus JNl'CuUoch says (Introductory Discourse to Adam Smit/i, \\. xliii.), " In its natural state, matter is very rarely possessed of any immediate or direct utility, and is a/irai/s destitute of value. It is only through the labour expended on its ai)j)ropriation, and in fitting and preparing it for being used, that matter acquires exchange- able value, and becomes Wealth." Again, at p. xxxii. of the same discourse, he says, " Nature is not niggard or parsimonious. Her rude products, powers, and capacities, are all ottered gratuitously to man. She neither demands nor receives an e, and that there can be no Value Avithout Labour. Now we may lay do^m this pi-oposition — That if Lal)Our be the sole cause of Value, then whatever labour has been l)estowed upon must have value. For if there be two things produced with the same amount of labour, and the one has value and the other not, then there niust be some other cause of value besides Laboui', which is contrary to the hyi)0thesis. Moreover, all variations in Value nmst he due to variations in Labour. Now, this doctrine is contrary to all experience. Because there are many material things which have value upon which no labour was ever bestoAved — 1. As, for example, take the space upon which a large town stands. Land in the heart of London has been sold at the rate of £2,000,000 an acre, periectly exclusive of any l)uildiiiu> on il. 54 THEORY AND PRACTICE OF BANKING. Where is the labour that has been besto^\'ed upon it ? Again, as we recede from the centre, the vahie of land rapidly dimi- nishes. At Charmg Cross it may be worth £100,000 an acre; by the time we reach Kensington it has fallen to £10,000 an acre. Now, how can these variations in value be due to different quantities of labour, when, as we have seen, these spaces of groimd are not in any way whatever the result of labour at all ? The doctrme that no natural product has value unless labour has been bestowed upon it, is contrary to all experience. The proprietor of a coal mine, or a stone quarry, demands and receives a price for the coal, or the marble, or building stone, as it is placed m the mine, or the quarry, before a human bemg has touched it. Is any one so simple as to suppose that the owner of the marble quarries of Cai*rara would let any one take the marble without payment ? Does the value of these things come from labour ? 2. Take the case of timber trees. In the Midland Counties of England there are many oak trees Avhich would sell on the ground for £60 or more. They were perhaps self-sown. No human being, perhaps, ever bestowed so much labour upon them as to plant the acom from which they grew. Hence, we see that there are abundance of material things which have value, and upon which no labour was ever bestowed. Next, If Labour he the sole ccmse of Value, then all things produced by the same amount of labour must be of equal value. But this doctrine is also contrary to the most manifest ex- perience. P"'or, if it were true, a diamond and the rid)bish it is found in, ought to have the same value ! So should a pearl and its shell. If a sportsman Avere to shoot a pheasant with one barrel and a crow with tlie other, would they have the same value? Nowhere are products obtained by exactly the same quantity of labour, Avhich have very ditfercnt values. It is clear then, that there is some other cause of value l)esides labour. Again, if Labour he the cause of Vcdue, the value must he proportional to the labour. But this do(^trine is also contrary to the most manifest ex- perience. Sup])ose that by good luck a gold digger finds a nugget of gold lying on the surface of the ground. Another, perhaps, works hard for six months, and finds one exactly similar. Then according to this doctrine, the latter nugget ought to be immensely more vahiable than tlic other. Or suppose some gold Avas brouglit from diggings near the market, and that exactly an equal amoiuit were brought from digc^ings many hun- dred miles oiF. 'V\\v latter is oi" course ^troduced, /. c, ])lace(l in the market, at nuu;h greater (;ost and labour than the other. But would it be more valuable? The least exi)erience shews that if wouM not Ik- sr), but that tl)in<>s of exactlv the same ON THE CAUSE OF VALUE. 55 quality would be of exactly the same value at the same time in the same market. Again, if Labour be the sole cause of Value, a thing once produced by labour nuist always have value, and the same value. But this is notoriously contrary to experience, for it is noto- rious that a thing may have value in one ])lace and not in another; and also at one time and not at another. Take a bag of sovereigns among the lied Indians, and where would their value be ? A professor of Greek and Latin, or mathematics, may find his accpiirements of great value to him at the Universities, but of what value Avould they be to him in the Hebrides? A great lawyer finds his knowledge and abilities of great value to him in London, but of Avhat value would they be to him ui Timbuctoo ? Moreover, the same things are of very difl^erent values in the same place at difl:erent times. Thus, pictures by some masters constantly rise in value, and jjictures by others frequently diminish in value. Labour itself has Value. Now if Labour be the sole cause of Value, Avhat is the cause of the Value of Labour ? Some Economists are so entete of the doctrine that Labour is the sole cause of all Value, that when the plain case of inci'easod value by the simple operation of nature is put before them, they declare it is labour ! Thus, when beer or Avine is increased in value by fermentation, M'Culloch gravely maintains that is Labour ! ! Can the force of absurdity go further ? Suppose the beer tnorks a little more and turns sour ? He also mauitains that the growth of a tree is Labour. By the same rule, when a lamb grows np uito a sheep, a calf into a cow, or A\'hen an egg developes into a chicken, that is Labour ! If then a tree labours by growing, sup]>ose it lal)ours a little more and decays ? Sup)>ose the egg labours and turns rotten ? Kicardo maintains that natural agents, though they add greatly to value in use, never add an}^hing to exchangealjle value. But every merchant, every manuiacturer, every agriculturist in the world Avoidd at once say that such a doctrine is contrary to the plamest experience ; so plainly, indeed, that it is nseless to give examples to shew its fallacy. Now, when we see such doctruies as these maintained by Avriters who are reputed to be authorities, we can scarcely wonder at the low esteem in which the Science of Economics is too generally held. Lastly, if Labour is the sole cause of ^'alue, it is clear that Avhatever labour has been bestOAved upon must have A'alue. But this is dearly contrary to experience. If it Avere true, sui»]H)se AA'e began to dig a Avell, the rubbish got from the surface a\ (Mild have little value; but as avc went deeper and deeper, the rubbish 56 THEORY AMD PKACTIOE Ob' BANKING. brought up ought to have a constantly increasing value. But this is evidently contrary to fact. Hence we see that there are material products which have value, which are not in any way the product of labour — that labour may produce material products which have no value — that the same quantity of labour may produce ])roducts, one of which has value, and the other not — that quantities of things produced by varying quantities of labour have the same value — that things jjroduced by labour may have value in some places and at some times, and not in other places or at other times — and that things produced by less labour may have greater value than things produced by more labour — from which the indis- putable inference is, that Labour is in no way whatever the cause of, or even necessary to. Value ; and, in fact, in this com- mercial country, the enormously greater proportion of valuable things are not the produce of labour at all. It is thus seen that labour is only ofteu associated with Value, or that it is the accident of Value ; and we must entirely reject Labour as being the Cause, or Source of Value. 7. J. B. Say saw that the doctruie that Labour was the cause of Value was untenable, and he said that Value arose from Utility. This doctrine is considerably more specious than the former ojie, and yet reflection will shew that it is liable to the same fatal objections as that of Labour ; for it makes Value some quality of the thing itself, absolute and inherent, and therefore, of course, its value cannot vary so long as the quality remains the same. Many of the argumeiits which we applied to labour are also applicable to utility, and therefore we need not repeat them. The doctrine that utility is the cause of value is more specious in this respect, that for a thing to be useful, it must be useful to some person. But then there is this defect, that the same thing may be useful at some times and not at others, and in some places and not hi others, and to some ])ersons and not to others. As for instance, some peoi)le smoke and some do not. A box of cigars would have value among a society of smokers, Avhereas a society of non-smokers would consider them a nuisance, and they would linvo no value there. A tureen full of train oil would be a great (U'licacy and highly prized by the Esquimaux, but it would probably not have the same value at the Lord Mayor's dinner. It is notorious that merchants cannot sell tlieir goods to savage nations until they have been refined and taught to feel the want of them. And, in short, it is clear, that however useful a thing niay be, unless its qualities are known to, and wanted by, sonie one, it cannot have value. The (pialities of the cigars are abso- lutely the same; but oflered to those who want them, they have ufility; offered to those who do not w.nit them, they have none. ON THE CAUSE OF X'ALUE. 57 Not only is it ovidoiit that utility is so vague an expression that it cannot be made the ])asis of value, but there are also a great number of things whieli ha\'e value to whic-li it would be a great debasement of the word utility to apply it to them. The ilepraved tastes and licentious apj)etites of too large a por- tion of mankind confer a value upon things of the most mis- chievous and noxious nature. In former times, there was, un- doubteiUy, a large sale for low and licentious literature and pictures. It was impossible to deny that such things had value, but would any one debase the word utility by ai)plying it to them ? And yet, while such masses of abomination met a ready and large sale, no Economist could refuse to class them as wealth. 8. Seeing, then, that labour and utility altogether foil to stand the test of being the cause of value, what remains? The only thing Avhich Smith said long ago — Ex< iianoeajjility. And what does exchangeul)ility depend upon? If I have something to oifer for sale, what is necessary in order that it may be sold ? There must be some one else to Demand it. Aristotle said long ago that it was xp^'"? t>r demand, that bound society together. So Say speaks of the value which men attribute to things, that it is a moral quality. lie also says that demand is the first cause of their value, and that they can have no value unless they are de- manded. Here it is quite clear that we have now got the true source and cause of value. It is Demand. Value is not a quality of an object, but an affection of the mind. The sole source and origin of value is Imman desire. When there is a demand for things they have value, when the demand ceases they cease to have value, and (the sui)ply being the same) when the demand increases the value increases, and as demand diminishes value diminishes. It is demand Avhich discriminates between the pearl and the shell, the diamond and the rubbish. It is because some people demand cigars that among them cigars have value, and because others do not demand them, that among them they would have no value. It is the intensity of demand that confers such enormous value on the space in the heart of London, and the gradually dimmishing demand which makes land less valuable as the distance from the centre increases. What is it that gives value to the produce of the farmer ? It is the dem;uid of the people for food and clothing, and their readiness to give something in exchange for its products. These Avants are ))er- manent, and consccjuently, so long as they exist, the value of the land will be permanent. If it were possible to imagine tliat men would cease to require food or clothing, or should they change their tastes and ro(]uire such food and clothing as could not be produced in England, then the value of the land Mould immediately die off. 58 THEORY AND PRACTICE OF BANKING. The value of land, then, arises from the fact that it supplies something that is wanted by men. And men invest their money and theirlabour in cultivating land and rearing cattle, because they expect that they ^^oll continue to have a permanent value. So "m the same way, it is the wants and desires of men that caiise others to invest their money and labour in any pursuit whatever, and which gives value to that product. The continued desires and wants of men in law, medicine, engineering, literature, art, and science, cause other men to devote their money and their labour in becoming lawyers, physicians, engineers, authors, artists, &c., &c., and so on through the whole catalogue of trades and professions. It is the demand of the public, and that only, Avhich confers value on them. And if the demand of the public were to cease, the whole value of the labour of those who had devoted themselves to their acquisition would be lost. Hence we see how totally erroneous is the doctrine so common among writers that labour is the cause of, or even necessary to, Value. Archbishop Wliately remarked this : — " In this as in many other points in Political Economy men are prone to confound cause and ejfect. It is not that pearls fetch a high price heccmse men have dived for them ; but, on the contrary, men dive for them because they fetch a high price." The preceding observations seem to us to prove irrefragably that it is demand, or consum])tion, and not labour that gives value to production ; and that it is oiot labour which is the cause of Value, but Value which is the cause of, or inducement to. Labour. Value, therefore, in its true sense, signifies an aftectiou of the mind. The usual phrase is, "I value so and so " It is the force of attraction between the mind and some external object. But an impotent desire of the mind, not manifested by any overt act, is not an economical phenomenon. In order to come into that science somethmg must be done. But even then the desire of a single mind is not sufficient to produce an act. A man may have things he wants to sell, but if no one will buy them, they have no value. lie may wish to ]iossess things oil'cred for sale by others, but if they do not want, and will not take in exchange Avhat he offers, no exchange can take place. In order to consti- tute an excliange two persons must ])roduce something, and what each produces must be wanted by the other. Hence the concur- rence of two minds is essential to produce an exchange, or an economic ])heiiomenon. Each one will try to give as little as he can of his own i)roduct to obtain as much as he can of the other's. Hence, Avhen tlie exchange xdtimately takes place, the quantity exchanged by each measui'es the intensity of his desire to obtain possession of the ])rodiu^t of the other. And hence the quantity given by eacli is (-ailed the Value of the other. V.-ihic, then, resides exchisixcly in the mind. It is not the ON THE GENERAL LAW OF VALUE. 59 labour of the producer, but the desire, or the demand, of the consumer, or purchaser, that constitutes a tiling wealth. The cessation of demand causes a destruction of cai)ital and of wealth. The creation of a new desire causes the production of new wealth, and of new capital. Heavy taxes can only be borne by an in(histrious and Avealthy people. And no people can be Avealtliy Asho are not inspired by strong and various desires. Hence we may see m a piu'ely economical })oiut of view the enormous importance of an educated and an enlightened people. The multi]>lication of wants multiplies industry, multi2)lies ca])it:il, multiplies incomes, multiplies the persons to bear the burden of taxation, and renders the nation cajjable of great achievements, and of taking a leading position among the nations of the world. On the General Laio of Value. 9. Having thus given the Definition of Value, and found that its source, or origin, lies exclusively in the human mind, the last branch of our inquiry is to determine the General Law of Value, that is, to discover the causes which produce changes in the exchangeable relations of quantities, whatever their nature be. The commonest principles of science show us that there can be but one General Law of Value, There are six species of exchange, and the object before us is to discover a general law which shall govern them all. To develope the application of such a law in all the species of exchange would be a complete treatise on Economics. In the present work we are only dealing with two of the six species of exchange. But it is the funda- mental condition of the truth of the general law that it shall be applicable to all the six species indifferently. The law which governs the exchangeable relations of material products must equally govern the exchangeable relations of tlebts. It is on this point that the Economical system of Ricardo is contrary to aU the fundamental pruiciples of modern science. He begins his work by excluding from his inquiry all but a small class of objects, namely, material products which can be increased without limit l»y human exertion. He divides these into such things as manufactures, which can be indefinitely uicreased by equal quantities of labour, and such things as corn, minerals, &c., which can only be increased at a constantly increasing cost of production. Ricardo's system of Political Economy is nothing but a treatise on the price of manufactures, corn, minerals, and one or two other things. And for each of these he proposes a distinct law of value. Mr. JMill, who^ ardently admires Ricardo, has added other false distinctions of his own, thereby making the system still worse, INIoreover these writers have altogether omitted the greater ])ortion of things that have value," from their consideration. Such a system as 60 THEORY AND PliACTICE OF BANKING. this is utterly repugnant to the established laws of modern science. The only way to attain scientific truth is to embrace all sorts of things which have value in one definition, and all changes of value of all the quantities hi one general law. Lord Lauderdale long ago observed, as is indeed quoted by Kicardo — that of two quantities which may each vary, if we suppose the variation to take place in one of them first, the other remaining the same, its value would be influenced by four causes : — It would increase in value — (1) From a Diminution in Quantity. (2) From an Increase in Demand. It would diminish m value — (1) From an Increase in Quantity. (2) From a Diminution of Demand. Now as the variations of the other quantity Avill be influenced by the same four causes, it is quite clear that the variations of both quantities will be influenced by eight independent causes. Experience also proves that none other than these causes produce changes in value, and hence it is manifestly the great general law of which we were in search. Now Ricardo admits it to be true of all monopolized com- modities, and for all others during a limited period. But, in fact, it is not only true during a limited period, but it is true m all cases and in all times. It would be quite easy to reduce the separate cases treated by llicardo and Mr. Mill to this general law, and to aboUsh the false distinctions created by them, but that would be beyond the pur- pose of this work. Bacon truly says, " That which in Theory is the cause, m Practice is the rule." The practical meaning of which is this : that all changes iii value take place by or through changes in the suiyply or the demand of the quantities exchanged, and nothing else, and that if we wish to produce changes in value, the only way it can be done, is by causing some changes in the Supply or the Demand. A Standard of Value is impossible. 10. The imfortunate confusion of ideas between the Value of a quantit)' being any other quantity a thing will exchange for, and the (jnantity of labour as embodied in obtaining the ((uantity itself, has led not only to the mischievous expression. Intrinsic Vahic, the source of endless confusion, but also to tlie seareh for something wliich reflection Avould have shown to be im})0ssible, viz., an JnrariaMe /Sf<(nd(/rd (f Value. The great ditficulty in dealing with Economical writers and their oitinions is, that to collect tlieir o]>inioiis, it is oiten neces- sary to place licCore the reader long pMssages, anarison avc could institute, Avould not give us any relation bctAveen A in 100 and A in 1800: it Avould be sinq)ly a comparison of the relation belAveen A and B in each of these vcars. 66 THEORY AND PEACTICE OF BANKING. " It is impossible for a direct relation of Value to exist between A in 100 and A in 1800, just as it is impossible for the relation of distance to exist between the sun at the former period and the sun at the latter," It is obvious that all ^^e can do by a measure of Value is to ascertain in a convenient way the exchangeable relations existing between any quantities at any given time. And by a com- parison of prices at different epochs we can observe the diffei'- ences which have occurred in the exchangeable relations of these quantities between the different times. And this, though far from what is required by those writers, is all that we can have. The fundamental objection then to there being a Standard of Value is simply this, that Value is always a ratio, and a single quantity cannot be the measure of a ratio. And yet it is by no means uncommon to hear able men rise u]i at learned associations and demand that the Government should institute an inquiry to ascertain and fix an invariable Standard of Value, in the same way as they have bestowed great care and pains to fix the standard of length, and capacity, and weight. All they can do is to maintain a fixed weight and purity in the current coin of the realm; but they can no more control its variations in Value than they can regulate the motions of the stars by Act of Parliament. CHAPTER III. THE THEOIIY OF CREDIT. " Et ce TOVTO ayrotlc, on iriaTiQ a'popf^ii] Tuiv TzatriLv tari f^ityiari] TTpoc yprffiUTKr^orj Trdr uv ttyj o//(Tf trtc." — DemOStJienes. " If you were ignorant of this, tliat Credit is the greatest Capital of all towards the acquisition of Wealth, j^ou would be utterly ignorant." " Credit is the vital air of the system of Modern Commerce. It has done more a thousand times to enrich nations than all the mines of all the world. " Credit is to monej' what money is troinise, or obligation, might be transferred a hundred times before it was paid and extinguished. Mathematicians liave for many years been in the habit of calling debts neydtive (juantities. They say that if a man's property may be called 2>ositii'(\ his debts may be called nerjatlve. l>y which they mean tliat if we wish to estimate a man's fortime we must subtract his debts from his property, and the remainder will be his fortune. This mode of statement is sufficiently correct in some respects. If a man were going to retire from business, he would call in, and discharge his debts, and what remained afterwards would be his fortune. But such a mode of statement is quite unsuitable for Economic Science, because debts are a s])ecies of property of the most gigantic magnitude, which is a subject of commerce as much as any other merchandize, imtil they are extinguished, and Economic Science has only to do with them while they exist and are in commerce. When they are paid they cease to exist. Moreover it is contrary to law and fact to say that a man is in debt, untU the period of payment has arrived. Suppose a man rents a house or a farm, he promises to pay a definite sum as rent, at certahi fixed periods. But he does not owe the payment until the period arrives, A tenant is not in debt at the present moment for rent which will not be due for two months. Nevertheless tlie right to receive that rent when due is the property of the landlord, and he may sell and transfer it to any one else, and it may be sold or exchanged as distinct property, any number of times before it is due and is paid. It is exactly the same Avith a merchant who buys goods and gives his promise to pay for them three months after date. Such a transaction is a complete sale or exchange, just as much as if he had i)aid casli. The goods become his absolute \)\'0- perty, and the promise he has given is the absolute property of his creditor, which he may sell like any other merchandize. When the period of ]iayment arrives the merchant is bound to effect another exchange, and buy the debt Avith money, but mitil that is done, it exists as a distinct i)roperty. The fortune of the merchant might be stated thus — Pkoperty — Obligatioxs ; iVnd so far as he is concerned this would be substantially correct. The real subtlety in the case consists in this, that while the n\erchant's property is his own, which he may do Avhat he likes with, his debts, or obligations, are also exchangeable projierty \\liioh may circulate in commerce, and produce all the etfects of money. Moreover, if his croditors More to release him iVom anv of his 74 THEORY AND PKACTICE OF BANKING. obligations, it is evident that his fortune would be so much in- ci-eased. Hence we see, that to him, the release of a debt is auo-mentation of capital. The proper method of understanding the statement of this question is of such supreme importance m grasping the true Theory of Credit, that Ave must illustrate it a little more. The celebrated mathematician, Euler, says, " The manner in which we generally calculate a person's property is an apt illustration of what has just been said. We denote what a man really possesses by positive numbers, using or miderstanding the sign +, whereas his debts are represented by negative numbers, or by using the sign — . Thus, when it is said of any one, that he has 100 crowns, but he owes 50, this means that his real possessions amount to 100 — 50, or, which is the same thing, + 100 — 50, that is to say, 50. " As negative numbers may be considered as debts, because positive numbers represent real possessions, we may say that negative numbers are less than uothmg. Thus, when a man has nothing in the world, and even owes 50 croA\ais, it is certain that he has 50 crowns less than nothing ; for if any one were to make him a present of 50 crowns to pay his debts, he Avould still be only at the i)oint nothing, though really richer than before." It is quite easy to shcAV that the first paragraph is not a suit- able mode of stating the question in Economic Science. For suppose that a man has 100 crowns, but is boiind to pay 50 crowTis one year hence ; then his property Avould be correctly stated as 100 — 50 ; but it Avould be quite inaccurate to say that his property was only 50 croAAnis ; for this reason — he has the 100 crowns to trade with in the mean time to make a profit out of, and all he is bound to do is to have, on a certain day at the end of a year, 50 crowns to discliarge his debt. And the OAAaier of the debt may put it into circulation, and it may ])roduce all the effects of money until it is paid. So that there are the 100 crowns, and the debt of 50 crowns as Avell, circulating simulta- neously in commerce. Again, in the second paragraph, when Euler says that he has less than nothing, when he lias nothing and owes 50 crowns, this clearly means that he has not only sjjcnt the accumulation of his proj)e'ty is now only=0. Tliat is to say, that if some one gives a man enough money to p:iy his dcl)ts, he is by so much the richer, although he is only Avorth nothing. The sMiiic practic'il result may be ntlaiiKMl in n different Avay. ON TilE NATURE OF CKKOIT. 75 /Si'pj)Ose that his creditor releases him from the debt, he is then exactly in the same i)Ositiuu as if some one liad given liim 7noney to j)ay it with, — lie is by so nuicli the richer, though he is now worth nothing. Hence we liave in all cases this doctrine, whicli is the funda- mental one upon which the whole Theory of Credit is based — A release from a debt is absolutely equivalent to a payment in money. Also, a mutual release of debts is absolutely equivalejit to a reciprocal pay men t of debts. Supi)ose a banker has issued so many notes; these are circu- lating debts, and he is indebted to the holders of them. Suppose that a merchant has bought goods with liis bill at three months, and the banker has bought this debt, then, on the day of payment, the merchant is bound to pay his debt m money. The banker may present it for payment to the merchant, who may pay it in money. liut suppose he has become possessed of an equal number of the notes issued by the banker, then, of course, the banker is eciually indebted to him, and bomid to j^ayhim an equal amoimt of money. Thus the two parties, the merchant and the banker, are equally indebted to each other, and when the merchant is called upon by the banker to pay his bill, he may, instead of money, give him an equal amount of his own notes, the banker at the same time giving the merchant back his bill. Each of the parties has thus paid his own debt by releasing the other from his debt, and this mutual release of debts has been absolutely equivalent to a ])ayment in money. Of course if the two debts were not exactly equal, the diiiei'euce Mould have to be paid in money. This simple case is an exanq^le of the almost universal practice in this commercial comitry. The enormously greater proportion of modern commerce is carried on by means of credit, and not by cash, and the enormously greater proportion of «lebts are paid, not by cash, but by mutual releases of debts. We observed in the first chapter that the use of money Avas to preserve and record tiie debts that arose from the unequal exchanges. In modern commerce, credit is the merchandize with which operations are carried on, and money now only performs the very insignificant part of settUng une(]ual credits. The considerations in the preceding paragraphs Avill, we hope, be sufficient to cx])lain that seeming paradox, wliich so many find it so hard to understand, that Credit is Wealth and Pro- ductive Cai)ital. For we lun'e defined wealth to be sinqily exchangeable i)roperty, and we have shewn that any exchange- able property whatever may be employed as productive cajiital; since purchase, as all Economists allow, is one sjiecies of [)ro- dnction. In this couiitr\- the immense maiorilv of purchases are 76 THEORY AND PRACTICE OE BANKING. eftected by credit. Credit is productive capital in the same way that money is, and in no other. Smith, after saying that retailers are " productive " labourers, because they " produce " what is Avanted in their shops, and that capital so employed is " pi'oduc- tive," says that money " produces " nothmg, for which McCulloch justly censures him — " It is a caj^ital error to affirm that the gold and silver used as money, produce nothing ; on the contrary, it is quite obvious that, by facilitating exchanges, and enabling the division of labour to be carried to a much greater extent than it could be imder a system of barter, they are in no ordinary degree productive.'''' Now, credit performs exactly the same function as money in this respect, and to a far greater extent, and hence it is far more productive than money. Now, so far is it from being a jiaradox that debts, or credit, are wealth, that a little reflection will show that when a country employs credit, it is just so much the richer by an equal amount of the precious metals. Suppose a machine is required for a certain purpose, then if we can substitute a very cheap machine for a very expensive one, we are so much the richer by the dif- ference between the cost of the two. Now, as credit and specie perform exactly the same duty, if there were no credit it would I'equire an equal amount of specie, which could only be pur- chased by an equivalent amount of merchandize. Credit costs nothing, and hence the difference between that and an equal amomit of specie has been saved to the country. Hence, not only is the total cost of the machine saved by the country, but ex- clianges are enormously accelerated and increased. Therefore the comitry has not only gained the diflerence in the cost of the machine, but also all the profits generated by these exchanges, and, of course, it is impossible to calculate these accurately. On the Distinction hetioeen a Bailisient and a Debt. 3. The preceding remarks are sufficient to explain the funda- mental nature of credit. Before, however, we proceed to the exposition of the mechanism of tlie system, we must observe upon some confusion on the subject that has arisen among modern writers. It is a point of tlie greatest importance, and, in fact, may be called the 2)'»is asinorwn of Economic Science. It is, pei-haps, somewliat of a subtle nature, and would not be perceived by any one not conversant with law and commerce. But it is one of those delicate subtleties which occur in all sciences, upon which the most important consequences turn, and it is, in fact, a confusion on this point, which is at the root, of most of the ftilse theories of currency and credit, Avhich Juive produced such terrible catastroi»hes in the world. Tiiere are two species of ])aper docMunents which arc in general use in eommerce, and which have some superficial resemblances — that is, ihey both convey rights io certain ON HAILMENT AND DEBT. 77 things, and are similarly transferable, and are therefore con- sidered by many to bo of the same nature, but which are yet fiinilamentally distinct in their nature, and in this radical tlistinction is contained the basis of the Theory of Credit. These species of paper documents are — I. Bills of Lading, Dock Warrants, and all other titles to spt^cific things. II. Bank Notes, Bills of Exchange, and other forms of Credit. In order to show clearly the fundamental distinction between these two classes of paper documents, we will explain how each arises. Wlien a man ships goods on board a vessel, he receives from the cai)tain a paper document, acknowledging the receipt of the goods, and promising to deliver them to whomsoever shall be the owner of the paper. This document is called a Bill of Lading. The shipper of the goods sends the Bill of Lading to the con^ signee, Avho directly he receives it may negotiate it, /.ert)/ in the goods remains Avith the shipper or dej^ositor, and is transferred by him along with the Bill of Lading, or Dock "Warrant. The captain, or dock master, is the mere Bao^ee, or Trustee, of the goods, and not the Owner. He has no right to convert them to his own use, and if he did so, it would be a I'obberj/, and he would be liable to be punished as a t/iief. Thus the Bill of Lading and the Dock Warrant form one property with the goods, and cannot be separated from them. The goods travel with the paper document. Thus it may be said in this case that the paper document represents goods. Li this case there is no excheoige, and these documents have no value, i. c, they are not exchangeable separately. They are not exchange- able for goods generally, but are titles to certain specific goods and no others. No one ever spoke of the value of a Bill of Ladmg, or a Dock Warrant. Such documents are not credit, because the owner of them does not sim}ily believe that he can 78 THEORY AND PRACTICE OF BANKING. obtain goods in exchange for them, but lie k/ioics that he has become the ONViier of certain specific goods. Such a transaction is not an exchange, but is what is called in law a Bailment. So also a man may take a bag of money to his Banker, and may ask him to take care of that sj^ecific money, and give it back to him, or any one else he may name, on demand. In such a case, no Property in the money would pass to the Banker. He would have no right to use it for his own purposes, and if he did so, he would be guilty of theft. If he gave a receipt for it, promising to deliver it to Avhorasoever it might be transferred, that receipt and the money would be one property, as in the case of Bills of Lading and Dock Warrants. The money and the receipt could not be separated, and the j^ropert}' in that very money would always pass along ^-ith the receipt. The Banker in such a case would be merely the Bailee, or Trustee, of the money, and not its Ownee. In the cases of the captain, the dock master, and the banker above described, the relation of Debtor and Creditor does not arise between them and the owiiers of the paper documents. But this is not the ordinaiy case of a Banker and his customer. Wlien a customer pays in money to his account at his Banker's, the Property in the money p)ttsses absolutely to the PanK'er. He is not the Trustee, or Bailee, of the money, but he Ijecomes the Oicner of it, and is entitled to use it in any way he pleases, for his omi purposes. In exchange for this money, he creates a credit in his customer's favour, promising to deliver an equal amoimt of money on demand. This transaction is, in fact, an exchange, or a sale. The Banker buys the money from his customer, by selling him the right to demand an equal quantity of money at any time he pleases. Here, therefore, a JVew pro- perty is created. The customer may ti'ansfer this proj^erty to whomsoever he pleases, and it has rmlne, because the OAvner of it can exchange it for money, or anything else. It is called Credit, because the o^ATier of it only believes he can obtam money in exchange for it, l)ut it is not ajipropriated to any specific sum of money. The Banker is not the trustee of the money, but he becomes the debtor to his customer, and, if un- fortunately he should haj)))en to fail, his customers, or creditors, are only entitled to have his property divided among them, and they must take their chance of having their debts })aid in full. It is exactly the same in all cases of Credit. If a merchant sells goods on credit, it is absolutely essential to the nature of the transaction that he should ]iart with the ]iroperty in the goods to the buyer, and receive only tlie abstract right to demand payment. Witliout the cession of the Projierty there is no credit. Hence we see the radical and fundamental distinction between Bills of Lading and Dock Warrants on the one hand, and instru- ments of credit of all sorts on the other. ON BAILMENT, AND DEBT. 79 Bills of Lading and Dock Warrants are absolutely bound do>\'n and fixed to certain s[)ecitic goods, and cainiot be separated from them, and therefore they form only one [u-operty with them. They always arise out of a Bail:mknt, and never out of an ExcHANCiE, and they may justly be said to represent goods. They in themselves are nothing, and are no addition to the mass of other exchangeable property. On the other hand, it is the fundamental legal requisite of an instrument of credit, that it shall be absolutely severed from any specific sum of money. It is even forbidden to be made ])ayable out of any ]>articular fund. It is nothing but an abstract right against the peksox, and that is the very circumstance from which it takes it name, because it must be received on the simple belief that it can be exchanged for money. If any specific money was appropriated to it, it would not be credit. An instrument of credit always arises out of an Exchanao., and never out of a Bailment. Bills of Lading, nyable either to a third person, or to his order, or to himself, or to his own order. If it be made payable to a third person only, or to the drawer himself only, without inserting the words " or order," the bill can only be ]>aid to the person named, and cannot be transferred to any one else, or cannot be negotiated, as it is termed. If the words " or order" are inserted after the j^ayee's name, he can transfer it to any one else. This is done by writing his name on the back of the bill ; hence it is called an Indorsement : the person who does it is called the T/uhrser, and the person to whom it is delivered is called the Indorsee. The indorsee may, if he pleases, indorse it again to some one else, and if he make it payable to that person only, it is called a special indorsement, and can only be paid to him; but if he delivers it over with liis own name only Avritten on the back, it is calleinioii. It was to a certain 86 THEORY AND PRACTICE OF BANKING. extent customary for Roman bankers to give drafts on their foreign correspondents, but that was not the origin of the modern system of Bills of Exchange. The power and the arrogance of the Popes had long been increasiug, till, in the time of the crusades, they claimed the general power to tax all Christendom to support them, and in process of time they sent then* own agents to collect the money. These agents were correspondents of the Italian Cambitores, who were originally money dealers, who kept tables in the cathedrals, for the exchange of money of foreigners who came to worship. In the middle of the 12tli century, the Florentines took up the business of money dealing to a great extent, and their example was soon imitated by other Italian cities, siicli as Lucca, Sienna, Milan, Placentia, and Asti. Wherever the Poj^e's taxes were to be collected, these bankers sent their agents to collect them, and as soon as this was done, they sent di'afts on their principals to the Pope. These letters were called litter m CamhitoricB, or money dealers', or bankers' drafts. Thus, originally, a Bill of Exchange was a banker's draft, addressed from a person in one coimtry to some one in another, whose business it was to exchange foreign money. From these persons it naturally extended to commerce, but at what time does not appear. The oldest Bill of Exchange known to exist, is dated 1380. Another is quoted by Capmany, dated 1404, which was di-a^vn by a Lucchese merchant of Bruges on his correspondent at Barcelona, and negotiated by him in Bruges. Li neither of these bills are there any words of negotialjility, yet we find that one was negotiated, Avhence we may conclude that the practice of uegotiatmg them sprung up long before it was recognized on their face. For a long period Bills of Exchange were confined to what their name indicated, namely, bills drawn in one country to be paid in the money of another. The Common Law of England, which inflexiljly forbade the assigmnent of a debt, was, of course, a bar to their introduction in this country. But the custom with respect to foreign bills Avas adopted by it, to fiicilitate foreign trade. It was long before the transfer of Inland debts was attem]>ted. At last, it Avas adopted betAvecn London and York, and London and Bristol. Thus the custom of Inland Bills of Exchange began. But it was still confined to different towns, and for a long time it was essential that a bill should be drawn in one town u}>on another. At last, in consequence of the Common Law recognizing Bills of Exchange, as part of the Lex Mercatorld, tliey began to ))e drawn by persons in the same town upon their neigh1)ours, as between wholesale and retail dealers. TIius, by striking oil' one limitation after anotlier, they have come, after a lapse of several centuries, to be what they are now, simjily an order from one person to another, to pay a ON i'KOMlSSOJiV NOTES. 87 (lofiiiite sum of money, and they have thus lost all trace of their etymological origin. On Promissory Notes. 10. Thus, at last, the cojiveuience of trade overpowered tlie narrow rigour of the Common Law, and it became legal to transfer a debt m the form of a Bill of Exchange. Uut, so absurd and i)cdantic was the law, that it was not legal to do so in any other form, such as that of a sunple acknowledgement of the debt by the debtor. About the end of the Sixteenth Century, the merchants of Amsterdam, Middleburgh, Hamburgh, and some other places, began to use instruments of credit among themselves, and as they came into ijersonal contact, these documents naturally assumed the form of an acknowledgement of the debt by the debtor, with a promise to pay it to bearer on demand, at the time fixed. These documents were called bills obligatory, or of debt, or of credit, and were transferable by indorsement ui all respects like ]Jills of Exchange. These documents are now called Pkomissoky Notes, and an English Avriter in the time of Charles I., Gerard Malynes, strongly advocated their introduction into England, but he saw that the Common Law prohibiteil it. They first began to be used by the goldsmiths, who, as she^\'ii afterwards, originated the modern system of banking in England soon after 1 640. They were then cii\[c(\. goldsmiths' notes, but they Avere not recognised by law. The first pi'omissory notes recognised by law were those of the Bank of England in 1G94, which were, technically, bills obligatory, or of credit. By the Act founding the Bank, their notes were declared to be assignable by indorsement (Act, Statute 1C94, c. 20, s. 29). But this did not extend to other promissory notes. In 1701 and 1703 it was decided that pro- missory notes were not assignable, or indorsable over, within the custom of merchants. In consequence of these decisions, the Act, Statute 1704, c. 8, was passed, by which it M'as enactetl that promissory notes in writing, made and signed by any pei'son or persons, boily politic or cori)orate, or by the servant or agent of any coi'poration, banker, goldsmith, merchant, or trader, i)ro- mising to pay any other person, any sum of money, should be assignable and indorsable over in the same maimer as inland bills of exchange. These promissory notes, of all sorts, including Bank of Eng- land notes, as well as the notes of private bankers and merchants, were all placed exactly on the same footing as inland bills of exchange, that is, they were all made transferable by indorse- ment on each separate transfer. In the case however of bank notes (by which, in law, is always meant r>ank of England notes), as these were always payable on 88 THEORY AND PRACTICE OF BANKING. demand, and the payment was quite secure, the practice of in- dorsement soon fell into disuse, and they passed from hand to hand like money. In the case of private bankers of great name, the indorsement was often omitted. But, though the ceremony of indorsement was often dispensed with as super- fluous, it must be observed that in no way altered the character of the instrument, and the receiver of the note took it entirely at his own peril, and ran exactly the same risks as if he took any other instrument of credit without indorsement, A promissory note is usually expressed thus : — £143 : 4 : 9. London, May Ath, 1866. Three months after date, T promise to pay John Stiles, or order, the sum of One hundred and forty-three 2^oiinds four shillings and nine p)ence, for value received. TmoTHY Gibbons. In this case, Timothy Gibbons is called the Maker of the note, and John Stiles the Payee. 11. The system of credit forms two great divisions. The first is commercial credit, in Avhich traders of all sorts biiy com- modities by creating debts payable at some time after date. The second is hanking credit, in which bankers buy money and debts by creating other debts, usually payable on demand. Moreovei' the system of Credit may, in another Avay, be con- veniently divided mto two i)arts. Credit being exchangeable proj^erty may, like money, be used either to circulate existing products, or to call them into existence. That is, it may be based upon the simultaneous transfer of a commodity, or it may be created to produce one. It is by no means imcommonly supposed that the former is the only legitimate use of Credit, and that the latter is fraudulent. We shall see, hoAvever, that this doctrine is quite imfounded. Certain documents, however, of the second form having been very grossly misused for fraudulent purposes, it has brought the whole system into groundless ol)loquy. We shall endeavour, in explaining the system of this second form, to point out in Avhat the abuse of it and the danger really consist. SECTION III. ON COMMERCIAL CREDIT. On Credit based upon Simultaneous Transfers of Com- modities — Credit created for the purpose of forming A New Product. On the System, of Credit based upon Simultaneous Transfers of Commodities. 12. Goods, or commodities, in the ordinary course of business, pass through the following hands: — 1st, the foreign impox'ter ; 2ndly, the wholesale dealer; Srdly, the retail dealer; 4thh', the customer or consumer. To the lirst three of these persons these goods are capital; because they import, manufacture, or buy them, for the sake of selling them with a profit; the fourth buys them for the sake of use or enjoyment. The price the ultimate consumer must pay for them, must evidently be sufficient to reimburse the original expense of production, together with the profits of the three succeeding operations. Now, leaving out of the question at present, how the importer of the goods gains possession of them, which concenis the foreign trade of the comitry, which we do not touch upon here, — if he sells the goods to the wholesale dealer for ready money, he can, of course, immediately import, or jtroduce, a further sui)ply of goods in the room of those he has disposed of. In a similar way the wholesale dealer sells to the retail dealer, and if he were })aid in ready money, he might immediately effect further pur- chases from the merchant to supply the jilace of the goods he had sold. So also if the retail dealer were always paid m ready money by his customer, he might rei)lace the i)art of his stock that was sold ; and so if everybody had always ready money at command, the stream of circulation, or production, might go on uninterruptedly, as fast as consumijtion or demand might allow. This, however, is not the case. Fcav, or no persons have always ready money at command for what they require. Very few traders can commence with enough ready money to pay for all their purchases ; and if the stream of circulation, or produc- tion, Avere to stop until the customer liad i)aid for the goods in money, it would be vastly diminished. Now, let us su])pose that the merchant, having confidence in the character of the wholesale dealer, agrees to sell the goods to him, but not to demand money for them till a certain period afterwards. He acccn-diugly parts with the i)roperty of the goods to the wholesale dealer, exactly as if he had been paid in money, and receives in return the right to demand payment 90 THEORY AND PRACTICE OF BANKING. some time after date. Now the very same circulation of goods has taken place as wonld have been caused by money. The only diflerence is, that the actual payment is post})Oued, and for this the merchant charges a certam price. This debt may be recorded in two ways : it may either be simply recorded in the merchant's books, or else in a Bill of Exchange. But it is quite clear that the property is absolutely the same in whichever form it is, though one form may have more conveniences than the other. In a similar manner, the wholesale dealer may sell for Credit to the retail dealer, and this debt may be recorded in two forms, like the first, either as a book-debt or in a Bill of Exchange. As in the former case, the same circulation, or production, has been caused by Credit, as by money. Lastly, the retailer dealer may sell to his customer on Credit, and this debt may also be recorded in two forms, either a book debt or in a Bill of Ex- change. In this latter case the debt is very seldom embodied in a Bill of Exchange, it most frequently rests as a book-debt. But in this case, as well as in the former ones. Credit has had precisely the same efiect as money in circulating goods. Hence we see that Credit has had precisely the same effect as money in circulating the goods from the merchant to the consumer. Moreover, we see that the passage of the goods through these various hands has generated a debt at each transfer. Supposing the merchant sold the goods for a debt of £100 to the wholesale dealer, the wholesale dealer would probably sell them for a debt of £140 to the retail dealer, and the retail dealer would sell them to different customers for debts, not less probably in the Avhole than £200. Hence Ave see that tlic successive transfers of the same goods have generated debts to the amomat of £440 : thereby exemplifying the distinc- tion we have already pointed out between Credit and Bills of Lading; because, if the goods had passed through twenty liands, the same Bill of Lading woidd always have accompanied them. Now the debt for which the merchant sold the goods to the wholesale dealer is no doubt valuable property to him, because he knows it will be paid in time. > It may, moreover, be exchanged for anything else, like any other property, if any oiio will take it. But it is of no immediate use for what the mcrcliant or manufacturer probably wants at the time, namely, money to buy more goods, or to pay wages, &c. Moreover, thougli lie may be (juite satisfied as to tlie safety of tlie debt, from his knowledge of his customer, it does not follow that others who don't know him will. Consequently such a debt would n(^t be well adapted lor general circulalion, and therefore it would be f)f no use towards further i)roduclion. In a similar way, the debt for whi('h the wholesale dealer sokl the goods to the retail dealer, would not be well atance for tliein. In a similar maimer he Avishcs to sell this debt to his banker, and so convert it into productive capital. A similar ON COMMERCIAL CREDIT. 93 transaction takes place as in the former case. The wholesale dealer sells the debt of the retail dealer, and becomes himself surety for its payment to his banker. The banker also biiys this debt by creating another debt payable on demand, which is equivalent to ready money. The retail dealer may also draw upon his customers, though this is comparatively rare, because customers are generally beyond the i)ale of commercial law. By these means we see that the dead stock of commercial debts are converted into productive capital. The merchant and the wholesale dealer, have now the full command of ready money for any })urposes they require, and can continue the stream of production without interruption, and, as their bills fall due, all they have to do is to give an order on their banker. These are the fewest number of hands that goods in the ordinary course of business pass through, and it is clear that, in their passage from the manufacturer to the customer, they will give rise to at least two bills, and sometimes three. They are all regular business bills, they originate from real transactions, and they are what are called real, or value bills, and they are what arise out of the regular and legitimate course of busmess, and are the great staple of what bankers purchase. It is a very prevalent belief among commercial men, that business bills are essentially safe, because they are based upon real transactions, and always represent property. But the foregoing consider- ations Avili dispel at once a considerable amount of the security supposed to reside in commercial bills on that account, because Ave have seen that m the most legitimate course of business, there will generally be two bills atloat, origmating out of the transfers of any given amount of property, so that in the ordmary way there will be at least twice as many bills afloat as there is property to which they refer. "We must refer to the next section, for an exposition of the mechanism of bankmg, she^nng how the creation and exchange of debts is made in modern commerce to perforin the part of money. We will only observe here, that the manufacturer, the wholesale dealer, and the retail dealer, may all be customers of the same bank, and if they all have their bills discounted by it, it will purchase a whole series of debts arising out of the transfers of the same property. The above operations are only what arise in the ordinary course of business ; it may sometimes happen that property may change hands much more frequently, and at every transfer a bill may be created. Hence, when the credits are very long, and the transfers numerous, it is easy to imagine any number of bills being created by repeated transfers of the same property. In times of speculation, this is particularly the case. Now, all these bills are technically commercial, or real bills, but it is 94 THEORY AND PRACTICE OF BANKING. e^ddeutly a delusion to suppose there is any security in them on that account. The fact is, that the whole misconception arises from an error in the meaning of the woi'J "represent." A bill of lading does, as we have said above, represent jiroperty, and whoever has the bill of lading, actually has so much property. But a Bill of Exchange does not represent goods at aU. It rej)resents nothmg but deht^ not even any specific money. It is created as a substitute for money, to transfer property, but it does not I'epresent it any more than money represents it. This was long ago pointed out by Mr Thornton, in his Essay on Paper Credit : — " In order to justify the supposition that a real bill, as it is called, represents actual property, there ought to be some power m the bill-holder to prevent the property which the bill represents from being turned to other purposes than that of pajing the bill in question. No such power exists ; neither the man who holds the bill, nor the man who discounted it, has any pro- perty in the specific goods for which it was given. " This is l^erfectly manifest. It is both contrary to the law and the nature of Bills that they should be tied down to any specific goods. And it shews that the real security of the bill consists in the general ability of the parties to it to meet their engagements, and not in any specific goods it is supposed to rej^resent, the value of which is vague or illusory, and impossible to be ascertained by any one who holds or discounts it. The distmction between Bills of Lading and Bills of Exchange is of so subtle a nature, but is of such momentous consequence, that we may illustrate it still further. The preceding sections shew that any given amount of property may, by repeated transfers, give rise to any amoimt of bills, which are all hondfide^ just for the same reason that every transfer would require a quantity of money equal to the property itself to transfer it. Then, even supposing the price remained the same at each transfer, it would require twenty times £20 to circulate property to the value of £20 twenty times. But also £20 by twenty transfers may circulate property to the value of twenty times £>20. So also a Bill of Exchange may represent the transfers of many times the amount of property cx])ressed on the face of it. This is the case whenever the bill is indorsed, or passed away for value; and the bill represents as many additional values ex])ressed on the face of it as there are indorsements. Thus, let us supjiose a real transaction between A and B. A draws upon ]j. That shews tlie bill has efiected one transfer of property. A then buys something from C. It is clear tliat C might drawu]Hm A, in a similar way that A drew ujton IJ. ]jut instead of that, A may transfer the lUll on B, by indorsement. It has now effected two transfers of pro])erty. In a similar way, C may buy from D, and in payment of tlie projierty may indorse over the bill to D. The ])ill then represents three transfers of property. In a similar ON COMMERCIAL CREDIT. 95 way it may pass througli an unlimited numliov of liands, and will denote as many transfers of property. AVlien C indorsed over the l)ill to D, he merely sold to him the debt which A bad ])reviously sold to him. Now that might be done, either by drawing a fresh bill on ]>, cancelling the first, or simply indors- ing over the bill he received from A. ITence we see that every indorsement is equivalent to a fresh drawing. l)ut if he draws a fresh bill on B, it will represent nothing l)ut B's debt to him; whereas, if ho indorses over the bill he received, it will represent B's debt to A, A's debt to C, and C's debt to D, and, con- sequently, it will be much more desiraljle for D to receive a bill which represents the sum of so many previous transactions, and for the i)ayment of which so many parties are bound to the ^hole extent of their estates. Some thirty years ago, almost the entire circulating medimn of Lancashire consisted of Bills of Exchange, and they sometimes had as many as 150 indorsements upon them before they came to maturity. From this also we see that no true estimate can be formed of the eiFect of the bills of exchange in circulation, by the returns from the Stamp Office, as has some- times been attempted to be done, as every fresh indorsement is in etfect a new bill. So that the useful eifect of a bill of exchange is indicated by the number of indorsements upon it, supposing that every transfer is accompanied by an indorsement, which is not always the case. We see here the fmidamental diiference between Bills of Lading and Bills of Exchange, because the indorsements on the former denote the number of transfers of the same property ; the mdorsements on the latter denote the numljcr of transfers of different property. Ten indorsements on a Bill of Lading shew that the same property has been transferred ten times, but ten indorsements on a Bill of Exchange shew that ten times the aniomit of property has been transferred once. We have shewn that the prices of all commodities are uni- versally governed by the Law of Supi)ly and Demand at all times. If the supply be excessive, nothing can prevent the price from falling to any state of depression, until it becomes absolutely unsaleable. The commodity, therefore, will not ])ay the cost of its production, and unless those concerned in pro- ducing it have independent capital to enable them to hold on until the excessive supply is taken off, and save them from selling when the price is ruinously depressed, or to stand the losses, they >ftill all fail. Almost ad men in commerce are under obligations ; that is, they accept Bills of Exchange which must be paid at a fixed time, nnroduced by the quantity of produce which traders arc com])elled to sell to meet their en- gagements, when the negotiability of their debts receives a check, and of course similar circumstances not only compel traders to sell, but prevent others from buying. Consequently, the supply is greatly increased, and the demand greatly dimi- nished. If, however, the holders of one commodity are possessed of nnich independent CMj)ital, and are not compelled to realize to meet their engagements, a contraction of issues Avould not affect them nmch. On the olher hand, if the holders of another com- modity were in general men who dejiended chiefly on credit, and were compelled to sell at a sacrifice to meet their engagements, a sudden refusal to disc^ount for them would cause an extra- ordinary quantity of their produce to be thrown upon the market, and cause a ruinous depression of ])rice. It is the sudden failure of confidence and extinction of credit, which produces what is called in commercial language a ON COMjrERCIAL CREDIT. 97 " pressure on the money market," and which causes money to be " tiglit." When money is said to be scarce, it does not mean that there is a smaUer quantity of money actually in existence than before ; there may be more, or there may be less in the country, no one can tell what the amount of money in existence is ; but a great amount of credit, Avhich serves as a substitute, and was an equivalent for money, is either destroyed altogether, or is suddenly struck with paralysis, as it were, and deprived of its negotiable power, and, therefore, practically useless. A vast amount of pi'operty is expelled from circulation, and money is suddenly called on to fill the void. When a new field of commercial adventure is found by sagacious discoverers, or a new market is suddenly thrown open by a change in the commercial policy of foreign nations, the first adventurers usually reap enormous profits. As soon as this becomes kno^\^l, a multitude of other speculators rush into the same field, excited by the j^rofits reaped by the first. Xumbers of merchants and traders purchase conmiodities on credit, that is, they incur obligations which they must discharge at a future day, in the hope that the returns will come in before the day of p.ayment. But the immense quantity of goods poured in usually gluts the market in a short time, and, from the excess of supply, prices tumble down often to nothing, so that the goods become unsaleable, and either no i-eturns at all come in, or such as are quite inadequate to meet the outlay. When this occurs, it is called overtrading, and when this has been extensively practised, it is necessarily and mevitably followed by a great destruction of credit, and a great demand for cash. Thus, credit is destroyed faster than operations can be reduced in proportion. Those traders who have not i*eceived the returns they counted upon to meet their engagements, must raise money on any terms, and perhaps sell what property they have, at any sacrifice, to save themselves from ruin. The effect of this will be that money, for which there is an intense demand, will rise greatly in ^'alue, that is, discount will rise very high. But as a necessary con- comitant of such a state of things, a great quantity of goods will be throAvn upon the market, and their price Mill be enor- mously depressed. These circumstances will, therefore, jiroduce a very high rate of discount, and ruinously low jjrices, whic-h miist continue until the excessive supply of goods is exhausted, and confidence revived. In such cases as these, traders who have not sufticient capital of their oavu to meet their engage- ments, and hold on their goods until prices rise, Avill infallibly be ruined. Under such circumstances, the rate of discount bears no relation whatever to the rate of profit. The use of ready money to persons who have overtraded, is of infinitely more consequence than the price they have to pay for it. It may be well worth their while to pay 15, or 20, or even 50 per cent, for H y» THEORY AND PRACTICE OF BANKING. the use of money for a temporary emergency, wliicli may save tliem from ruin, and enable them to maintain their position. It is, therefore, not the scarcity of money, but the extinction of conhdence, Avhich produces a pressure on the money market ; and an examination of all the great commercial crises in this country, will show that they have always been preceded and produced by a destruction of this credit, which has usually been brought about by extravagant overtrading and wild speculation. The pruiciple that the relation between supply and demand is the sole regulator of value, combined with the action of the credit system, will explain all the phenomena witnessed during a pressure on the money market. The failure of credit m any one branch of business wUl produce its full effect on the general market rate of interest, because that is regulated by the mtensity of the demand for money from whatever quarter it conies ; but it will not necessarily follow that the market prices of all com- modities will be depressed. The market price for each commo- dity will be governed entirely by its o\n\ peculiar circumstances. If the holders of one commodity have independent capital, and have prudently abstained from overtrading, the price of such a commodity will not suffer much, because the ratio of supply and demand will not be altered to any great extent, but it cannot help sjuipathising to a certain extent Avith other conunodities. But if the holders of another Sjiecies of commodity have over- traded, and depended too much on credit, without sufHcient means, they Avill necessarily be obliged to throw a great quantity of their produce on the market to realize, and this excessive supply Avill depress the price. And this effect will be increased because such are the very times when persons who have ready money are particularly cautious in buying, partly because they always hope the market will fall still lower, and they hope to buy cheaper when prices have fallen to a minimum, and tliey will certainly not buy more of any counnodity than they can help, which is diminishing in value ; and ]).".rtly because they must kee]> tlieir ready money to maintain their oAvn position. From these causes, not only is the su])))ly iiu^reased, but the demand is diminished, so that the fall is doubly aggravated. Thus, M'e see at once, that a falling market will always be well supi)lied, because ]teoplc Avho must sell hasten to do so before the ])rice falls still lower, and buyers hold aloof, waiting as long as they can, to see the lowest. On the other hand, when markets are rising, the case is reversed. The sellers hold aloof, lioping tlic price will be still higher, and buyei's ci'pwd in, hastening to ])urcliase before the price rises more. A market that is desponding and inactive will usually continue so until ])eople are ])ersuaded that things are at the lowest, and are at the turn. It is evident tliat these considerations and observations a])ply to home produ(H', or at least to produce which is already CREDIT API'LIED TO FORM A NEW PRODUCT. 99 in this country, and wliicli can be thrown on the market iniinediutely. In order to attract foreis2;n pi'oduce, tlio market must rise lugli for a considerable time, with the appearance of continuing so. Considering tliat any bill whatever which is drawn against bond Jide produce is in commerce technically a real bill, it will be seen at once that their supposed security is greatly ex- aggerated, because any operatioji, however foolish and absurd, is a good basis for a real bill. In times of rapid changes in price, uiultitudes of bills will be generated by speciilative imrchasers, and when the price falls as rapidly as it rose, as it usually does, it is simply occuput extremwn scabies. Hence, losses, and very severe ones, too, ai'e sure to happen in such times. But there is always at least this certainty with I'eal Ijills. When persons have speculated unluckily and lost their fortunes, they are brought to a standstill. When a man has ruined himself by speculation, no banker out of Uedlam would advance him more money to speculate Avith. Hence, ill-judged speculation must stop a man's mischievous career in a comparatively short space of time, that is, whenever he has lost the value of the goods he has been speculating with. We shall find in the next section, unfortunately, that traders have devised a method to extract funds from bankers to speculate Avith, by which they can go on long after they have lost all they ever had, many times over, and adding loss to loss, until, perhaps, they may bring down their bankers, whom they duped and defrauded, as Avell as themselves. We have shewn, in the next section, that there are symptoms which will often indicate a commercial crisis. On Credit created for the purpose of being apjMed to the Formation of Neio Product. 13. Tlie operations on Credit, which we have hitherto been considering, Avere all l)ased on an anterior operation, or one in Avhich an exchange of commodities Avas affected by the creation and sale of the Credit, AA'hich Credit Avas afterAvai'ds sold or exchanged for another Credit. Such Credit is, therefore, mani- festly limited by operations Avhicli have been made, and by commercial exchanges. The number of bills created could by no possibility exceed the luunber of transfers of commodities, although they might be greatly less, because, as Ave have seen, a single bill miglit be used to effect many transfers of pro- ])erty. In all these cases, a debt has been created, which Avas expected to be paid out of the proceeds of the sale of existing pi'operty. But since Credit is, as Ave have shown, exchangeable |)roperty, and a substitute for money, it is clear that it nuiy be applied as Avell ;is money to bring new products into existence. Tlie limits of it in this case Avill be exactly the same as those in the former H 2 100 THEORY AND PRACTICE OF BANKING. case, namely, the power of the proceeds of the work to redeem the Credit. As an example of such a creation or formation of a product, we may take such a case as the folloAving : — Suppose the corpo- ration of a town wishes to build a market-hall, but has not the ready cash to buy the materials, and pay the builder's and work- men's wages. It may be a matter of certainty, that if the market wei"e once built, the stalls in it would be taken up imme- diately, and the rents received from them would liquidate the debt incurred in erectmg it. But, as the workmen cannot wait until that period, but require immediate cash to purchase neces- saries, it is clear that, unless there is some metliod of providing ready payment, they cannot be employed. In such a case, they might borrow money upon their own bonds, repayable at a future period. Now here we observe that these bonds are the creation of property. They are the right to demand a future payment, and are valuable exchangeable property, which may be bought and sold like anything else. In this case, we observe there is an exchange. But the corporation need not borrow money. They might make their own obligations payable at a future date. And if tliese were made small enough, and were readily received l)y the dealers m the town, they might be used in the payment of the Avorkmen's wages, and jierfoi'm all the functions of a currency, and be equivalent to money. Each of them is a new right created, and valuable property which is exchangeable, and, therefore, wealth, by the definition. They would be quite as efficacious in producing or forming the market- hall as real capital. And the market-hall itself would be capital, because it produces a profit. As the stalls Avere let and rent received for them, the bonds might be redeemed, and the debt cleared oflT. It is said that many market-places have been built by adopting such a plan. Tliis case shcAvs the utter futility of the notion that credit cannot be applied to the formation of products, and liere Ave sec it was not based on any anterioi* o])eration. This is an instance of the creation of a product l)y credit, and not merely tlie transfer of an existing })roduct. The result to the corporation Avould l)e i)recisely the same, Avhcther they accomplished their object by borroAving real ca])ital and paymg interest for it, or by issuing bonds, bearing interest, payable at fiixed periods. In tlie one case, they Avould be liable to the full extent of their pro))erty to the persons from Avhom they had borrowed the money ; in the other, to those Avho lield their bonds. If the operation Avas successful, its profits Avould in the first case i>ay the persons Avho had lent the money; in the second, the pnifits Avould pay the ])ersons Avho held the notes, and extinguish (lie liability of tlie corporation. If the operation were unsuccessful, the cor])oration Avould equally liave to make good the loss out of their general effects, either to the lenders of CREDIT APPLIED TO FORM A NEW PRODUCT. 10 1 the mouey, or to the holders of tlie notes. It woiilil, therefore, be a matter of no consequence whatever to tlie corj)oration which way they a(lo])te(l to acconi|»lisli llie work ; but it would be a matter of importance to the town at large, because, if they borrowed real capital to do it, that would by so much diminish the fund of moving power applicable to other species of inut such is iar from being the case. In both cases it resolves itself into the pi-esent value of a deferred payment. In the first instance, the obligation incurred by the corporation to the lenders of the money would not be limited to the specific ca]>ital they advanced, but would be a general charge on the whole property of the corporation. The bonds issued in the second case would be precisely the same ; they would confer upon the holders of them a general charge ujwn all the property of the corporation. The security to the holders of the corpora- tion's obligations would be absolutely identical in either case. If the corj (Oration sj)end the money, it is absolutely gone away from them for ever, and is no more a security to the holders of their notes than if it had never existed. In either case, then, it is the permanent ])roperty of the corporation Avhich is the real security of the holders of its notes; and they have the same general charge over it in both cases. It is, therefore, to the last degree inaccurate and imtrue to distinguish one case by the term real capital, and to brand the other as fictitious. There is absolutely no distinction at all between the two cases, as far as i-egards the corporation and the holders of its obligations; the profits and the losses are identical in their eftects in either case. The true difference is to the commimity at large, and the general fund of ca})ital available for its use, and its only ell'ect is to nuike cajiital somewhat chea[)er than it would otherwise be; and a judicious and successful employment of it eminently conduces to the national prosperity. The only advantage of the second method is that it makes capital more abundant, and sometimes might provide it when not otherwise ol)tainable. If it were scarce, or otherwise occujtieil, it might not always be possible to obtain it. If nobody hail money to lend, tlie seconil nu'llitxl might su|>iil\ the \\aiit, and 102 THEORY AND PRACTICE OF BANKING. SO long as it is practised by judicious persons, and used in pro- moting successful operations, it is a great blessing. But it is just on tliis very point that it is liable to the most dangerous abuse. If the corporation were limited to the use of real capital advanced by some independent person, he would probably take into consideration the purpose to which it was to be applied, as well as the solvency of the corporation, and if he thought it injudicious, he would probably not advance it. There would, therefore, be so far a check ujjon them ; but if they were totally destitute of control, and could embark in any operation, by siniply writing a few "jDromises to pay" upon bits of paper, they may be led away into wild and dangerous speculations, deceived by false expectations of profit, and involve themselves and all who trust them in ruinous losses. Because, though these promises to pay did not represent real advances, and are there- fore inaccurately called fictitious capital, if they get into circula- tion, and people give value for them in commodities or services, a disastrous operation based upon them is just as much loss of capital as if they had been real advances. We have thus she^^^l that in the production of commodities, which term must be held to include both the formation and the transfer of commodities, credit performs exactly the same fimctions as money ; so far, therefore, as production goes, credit is in all respects equivalent to money. And so long as the opera- tions are successful, everything goes well : money bemg, as we have laid down, the representative of the fruits of a man's past industry, and credit a pledge of his future industry. It is certam that "credit" exceeds "money" many times in this country, for Avhereas it is not supposed that the actual money exceeds £00,000,000, the credit in bills of exciiange, and which is only one form of it, exceeds £400,000,000; tliat is, the people of this country have always pledged tlieir future mdustry to the extent of four lumdrcd millions. And this £400,000,000 is equally capital, it is equally a real value as the £00,000,000, No doubt it is of a different description ; it is more perilous ; a por- tion of it may i)eris]i. But it is an undeniable fact that it has |)erformed tlie same functions, so far as regards ]»roduction, as money. It is a distinct and separate value over ami above com- modities, totally diiferent from bills of lading, which merely represent particular commodities. Bills of exchange are not a lien upon pro]»crty, but upon industry, and any property a man possesses is only a kind of collateral security to make good his engagements in case his industry is unsuccessful, in the case Ave examined of a bank discounting the bill of the manufacturer A, u|)on the dealer J>, the transaction was already ellected ujtoii wliich it was founded. A had rendered the service lo B for M'liicli lie was to be jtaid at a future day, before he drew tlie bill upon liiiii, ruid originally all l)i I Is of exchange represented CREDIT AlTLIEl) TO FORM A NEW I'RODUCT. 103 previously existing debts, niul they bore on the face of them tlie woi-(ls "for value received" to testify the fact. Consequently, when A discounts the bill, founded upon that transaction, Avith the bank, it must be carefully observed that he is simpli/ selling a debt winch is his existing property. And so long as Bills of Exchange are restricted to representing past transactions, their negotiation is not borrowing money, as is commonly understood. But the sliarpness of traders discovered that they might be apj)lied to future tnmsactiojis. In the case of a />r/s^ transaction, the bill was given by B, who had got the goods, to A, who had given them, and A had got the nu:)ney that would be payable to him at the maturity of the bill, advanced to him by the bank on the credit of B's reputation, as well as his own. If B, however, be a person of Avealth and rejjutation, he may lend the use of his name to A without :uiy real transaction having taken place between them. Thus, he may accept a bill of A's, and A, on the strength of his name, goes to his banker, and gets the money, with which he performs some operation, such as manufacturuig goods, and, having done so, he may sell them to C, and take C's bill in payment of them, which latter is a real transaction. Now the whole of this operation is based upon the credit of B's name, it is not based upon any- thing real, or upon any service i)revionsly rendered; consequently it is in itself a completely new transaction. Such a bill l)etween A and B is called an Accommodatigx Bill. This name is, how- ever, not confined to cases where the acceptor lends his name for the accommodation of the drawer, though that is the most usual form, but wherever an acceptor, drawer, or endorser }>uts his name upon the bill, and therefore renders himself liable to a holder for value to discharge it, Avithout, as the legal expression is, consideration moving to him, it is an accommoda- tion bill, and the party for whose acconunodation it is negotiated is bound by law to provide funds to discharge it at maturity, and also to indemnify the accommodation acceptor, drawer, or indorser, as the case may be, against the consequences of non- payment. The i)ractical effect of this transaction is simply that B stands security to the bank for the money advanced to A; and there is nothing in the nature of such a transaction worse than for one man to stand security for another in any other commercial trans- action. In some resi)ects it is much fairer to the person Avho i-uns the I'isk as security, because, in the ordhiary course, when one person becomes security for another, he does not receive any pecuniary recompense for the risk he runs, to which he was certainly most fairly entitled ; whereas, if it be done by way of accommodation bill, he generally receives sonie quhl pro 'l>io^ antl when a bank performs an operation of exactly the same nature, it alwaxs receives a high interest for the risk it runs. 104 THEORY AND PRACTICE OE BANKING. and, when judiciously done, is a very profitable source of income. From the extravagant abiise, however, of such methods of raising capital, accommodation bills have acquired a most dis- creditable reputation, and there is nothing which requires more vigilance in a bank than to guard against beuag iutrapped into making unwary pvu'chases of such securities. A great deal has been said and written about the diiference between real and accommodation bills, and while no terms of admiration are too strong for the first, no terms of vituperation are too severe for the latter. Thus, Mr. Bell says : " The difference between a genuine commercial bill and an accommo- dation one, is something similar to the difference betAveen a genuine coin and a counterfeit," as if the act of negotiating an accommodation bill were in itself one of moral turpitude. It is also generally assumed that real bills possess some sort of additional security, because it is supposed that there is property to re]n"esent them. We have already seen, however, the entire delusion of such an idea, and that it is a great mistake to suppose that commercial bills have any specific relation to the property from the transfer of which they originally sprung. In truth, both real and accommodation bills have precisely the same security — they constitute a general cliarge iipou the whole estates of all the obligants upon them. The objections to accommoda- tion bills, therefore, on that ground are perfectly futile. The essential distinction between real and acconmiodation bills is, that one represents njjast and the other a future trans- action. But even this is no ground for any preference of one over the other. A transaction that has been done may be just as wild, foolish, and absurd as the one that has to be done. The intention of engaging m any mercantile transaction is, that the result of it should repay all the outlay, with profit. There is no other test but this of its propriety, in a mercantile sense. Such things have been heard of in the mercantile world, as consign- ments of skates to tropical countries. Now, a bill drawn against such a shipment as this would pass muster, in technical language, as a 7'e(/l \n\\, while one drawn to forward some other o})eration, however sound and judicious it might be, if it were not yet accomjilished, would be an acconimodntion bill, and be branded as fictitious. Mr. Ik-U would call llie former genuine coin, the latter comitcrfeit. We see, therefore, that the common objections urged against accommodation bills are perlectly futile, and quite wide of the mark. Whether a bill be a gootl and sale bill, lias no reference to whether it represcuto a ])ast or future transaction, but whether it is a safe and judicious one itself, and tlie ])arties to it res])ect- able and of sufficient means to meet their liabilities. The whole cash credit system of Scotland, which has conduced so eminently to the ])rosperily of that country, is a system of acconmiodation CREDIT Ari'LIED TO FUKM A NEW PliODUCT. 105 paper, which is sufficient to disprove, iii the mind of any dis- j)assionate person, tliat the system is in itself necessarily tlangerous and }>eniicious, but is proof enough that, if it is judiciously numaged, it may be of great advantage. The true objection to acconnnodation paper is of a different nature. When the credit system is carried on duly and proi)erly, and within legitimate limits, it is the most ingenious method ever devised for promoting conunerce, and where it has been cautiously used, has marvellously succeeded m so doing. But it is a very trite remark, that the best things when corrupted become the worst. This is eminently true of paper credit. Universal experience i)roves that there is nothing so dangerons and pernicious as for individuals to have an luidue facility for obtaining credit. "When capital is to be liad on too easy terms, it fosters, to an extravagant extent, the fatal projiensity for em- barking in all sorts of Avild speculations, and pushing trade far beyond the })Ossibility of being remunerative. The considerations we presented shewed the exaggerated ideas of the security of real bills. But there is at least this security hi real bills, that as they only arise out of real transfers of ])roperty, their number must be limited, in the very nature of things. However bad or Avorthless they may be individually, they cannot be multi})lied beyond a certain extent. There is, therefore, a limit to the calamities they cause. But with accom- modation paper there is no limit. A beggar may Avrite upon bits of paper a miUion of " promises to pay " as easily as a Rothschild ; and it is far more probable that he will do so ; a man without a ftirthhig is proverbially the most reckless, because when the bubble bursts, it is a matter of no consequence to him, he has nothing to lose, the misery and the ruin fall upon his unfortunate dupes. A man of real capital will be cautious in his operations. A loss to him will be real, but a man who is not worth a sixjience is indifferent Avhether he loses a £1,000 or a i'1,000,000, This system of accommodation paper of different descriptions, is one of immense importance in modern commerce, and its abuse has led to some of the most terrible mercantile catastrophes on record. It is, however, so intimately interwoven with banking, that we shall defer any more mention of it till the next section, which treats of the operations of Banking. We have observed that so far as regards production, which, in a scientific sense, includes the formation and ti-ansfer of pro- ducts, credit, whenever it is applied, performs exactly the same function as money. As in this section we wish to avoid all controversy, and merely to state facts, we will only say that all commercial transactions on credit are sales. The absolute property of the article passes from the vendor to the purchaser, just exactly as if the price had been paid m money. The only 106 THEORY AND PKACTICE OF BANKING. difference to the purchaser is, that his profits are less, because the credit price is higher than the money price. So long as mattei's proceed smoothly, and transactions are profitable, the bills gene- rated by commerce are equivalent to so much money. The differ- ence arises when the sales are unprofitable, and losses ensue. If the wholesale dealer buys from the manufacturer for ready money, and the specidation is unfortunate, the whole loss falls u])on the dealer, the manufacturer does not lose, he has got his money. But if the speculation is unfortunate, and a loss ensues, or if the whole- sale dealer fails from other reasons, the loss may foil upon him. "When he has sold on credit to the dealer, his power over the goods is absolutely gone ; and if the bill is unpaid he cannot reclaim the goods, even if they are still hi the possession of the purchaser, he has no more claim to them than any other creditor. Consequently, if the dealer has not sufficient funds to pay his debts, the loss falls upon the original manufixcturer. In this, then, consists the whole difference between sales on credit and sales for money, that if losses ensue they may be diflerently distributed. No doubt the manufocturer finds that a bill of exchange is not so negotiable as a bank note or money, but it is of the same nature, and must be placed in the same category. The money is nothing but a bill on the whole community. Good bills of exchange do, to a certain extent, circulate in com- merce like money ; but the manutacturer generally finds it more convenient to sell the bill to his banker, and how the banker buys it will be explained in the next section. Now, we have shewn, in the first chapter of this work, that cai)ital, in its most general sense, is not any particular thing, but a particular method of emplopng an economic quantity, be it currency or anything else, in reproductive operations. In its general sense, it is the purchasing power of the merchant, or it is the moving power at his command to generate a circulation of commodities, out of which he reaps his profits ; it is the power Avliich draws the goods out of the possession of the manufacturer into the possession of the dealer, for him to make a profit. The money he has is the fruit of the services he has formerly done to the community. Credit is also the i)ower he has of drawing the goods from the possession of the manufacturer, and is the ))ledge of his skill in rendering future services to the community, by discerning their wauls and siqiplying them. The effect u])on the markets and u]>on the i)rices is exactly the same, Avhether [nuvliases, i. e,, circulation of commodilics, be generated by credit or real capital, and the profits and losses are exactly the same to the comniiinity, whcllier the o})erati()n be effected by credit, or by real capital. Jlence, we arrive at this conclusion, that MERCANTIl/E a('ity of the parties liable on them A new class of" traders sprung up Avhose business it was to ]»urchase these debts, and these were Bankers. The business of a inerclianl is to deal in conmiodities, tlie iMisiness of a banker is to deal in cui-rency. A merchant buys and sells connnodilies, a banker borrows, and buys, and sells ERRONEOUS NOTIONS ON BANKING. 109 currency — two species of biisiness which are essentially distinct from one another, and which can scldoni be undertaken on a hirge scale by the same ])erson or company, and the attempt to do so has in many cases led to the most disastrous results. Erroneous notions jorew«/en< as to the nature of Banking — Definition of a Hanker. 15, The popular notion is that the word Bank is derived from the Italian word banco, a bench or table, l)ecause the early Italian money dealers, or money changers, dis})layed their sj^ecie on a bench or tal)le. And it is said that the business of a banker is to borrow from one set of people to lend to others ; or that a banker is an mtermediary between those who want to lend and those who Avant to borrow. Nevertheless, both these notions are utterly erroneous, and it is of the greatest importance towards understanding the subject to pomt out their error. In the first place, the word " Bank" is not derived from the Italian word banco ; on the contrary, the Italian word banco is derived from the old Scandinavian, or Teutonic, word Banck. In the next place it is an entire misconception of the nature of banking to say that a banker is merely an intermediary between those who want to lend and those who want to borrow. In former times there were many persons who acted in that capacity, and they were called money scriveners. But nobody ever thought of callmg a money scrivener a banker. At the present day, a firm of Attorneys, or Solicitors, in large practice, may have some clients who wish to lend money on mortgage, and at the same time may have other clients who wish to borrow money on mortgage. The first set may entrust their money to the firm to lend to the second set. Tlius the firm would act as intermediaries between those who want to lend and those who want to borrow. But no one would call them " bankers " because they did this. They would merely act as Trustees of the money. They do not acquire any property in the money, so as to be able to appropriate it to their own pur- poses. On the contrary, it is only entrusted to their custody for the express purpose of being applied in a certain way. The actual property in the money passes direct from the lender to the borroAver, through the medium of the trustees, and if these latter appropriated it to their own purposes they would be liable to be punished for embezzlement. Neither are persons who lend out their own money bankers. Those who have cash at command may invest it in the piirchase of commercial bills, or in any other way. There are many who trade in this way, but they are called Bill Discounters, not "Bankers. The essential feature of a "Banker" is this, that when his 110 THEORY AND PRACTICE OF BANKING. customers, place money with him, it becomes his absolute pro- perty, to deal -^-ith as he pleases, and he is iu no way accoimtable to them for the purpose he a])plies the money to. The customers of a banker cede to him absolutely the property in their money, and receive, in exchange for it, only a right to demand an equal sum at a future time. Thus a " Banker" l^uys money Avith his Credit^' and, moreover, when he buys commercial debts, he always does it by his credit also, and not by cash. And this is the essential distinction between a Bill I)iscoi;nter and a Banker, that the former buys bills with cash, and the latter with his own credit. Hence, when a Bill Discounter has invested all the cash in his possession, either his o^vu or what others have placed with him, in this way, he is at the end of his resources. But a Hanker always buys commercial debts vnt\\ his own credit, or with his " promise to pay," and experience shows that his credit may exceed several times the cash in his possession. Authorities differ as to how many times the quantity of his credit may safely exceed the quantity of his cash, and it may differ in different localities, and methods of doing business ; but, at all events, it may do so several times. Thus, the business of banking is essentially to create CREDIT. This credit, of course, is made payable m money, but in practice it is very rarely actually paid in money. We have shown above that a nmtnal release of debts is ahsolutely equivalent to a reciprocal payment of debts ^ and, by the great modern banking system, the enormously greater proportion of banking credit is extuiguished by mutual releases of debts. The foUowdng is the true delinition of a "Banker": — A BzVNKER is a trader who buys money, or money and debts,^ by creating other debts. A banker may, it is true, add other species of money dealing to his business; but the above is the essential definition of " Banking." The first business of a banker is not to lend money to others, but to collect money from others. On the ineaniny of the word BA>av. 16. We shall find that it Avill greatly conduce to a clear under- standing of the suljiject to ascertain the true meaning of the word Bank and Bai^ker. As Ave have said al)Ove, it is jiopularly supposed that the word Bank comes from the Italian banco, a l)ench, or table, because the inoncy dealers, or money changers, ke])t their money piled on benches or tables, Avhcnce tliey were called banchieri. It is also said tliat Avheii tliey failed tlieir bench was broken up {banco rotto), hence our bankrupt. Nevertlieless, there can be no ])ossible doubt but that this derivation is a ])ure delusion. In the first place the money dealers, or money changers, as such, were never called banchieri ON THE MEANING OF BANK. Ill in tlie middle ages. They were called Qimhiatores^ Speciarii, Camjisorcft, Argenturii, JV'tn/inofldr/'f, Trapezito', and those who lent money were also called J)a)iistfp,Colh/hista', and 3h(tvatores, but not ba)irhieri, and their places of business were called casane, and not banchi. AYe shall shew what the real meaning of " Bank " is, not only i)i Italian, but as it was understood in English when it Avas first used, as ai)])lied to money dealing. INIuratori himself says, .that the Italian hanca, or banco, is derived from the Gothic or Scandinavian BancJc, a lieap or mound. The true original meaning of Banco is a heap, or moimd, and this word Avas metaphorically applied to a common fund, or joint-stock, formed by the contributions of a multitude of persons. As is explained in a subsequent chapter, the State of Venice being hard pressed in Avar in 1171, leA^ed a forced loan from its citizens, and promised them interest m perpetuity at 4 per cent. ; and this loan, or public debt, Avas called a Banco, or Monte. Certain commissioners were appointed to manage the loan, Avho Avere called the Camera degli Tniprestlti, or Chamber of Loans, and their ofiice, Avhere the interest was paid and the stock Avas transferred, was also called Banco, or Monte. The " Bank " of Venice Avas, therefore, nothing but a public debt, managed by commissioners. Two subsequent loans were made, called Monte JV'UOVO, and Monte JSFuovisshno, of the same nature, and it Avas not till 1587, that these commissioners Avere appointed to receive public cash on deposit, and became Avhat ti^e call a Bank. There is no doiibt whatever that the words Monte and Jlanco are cquiA'alent in Italian, and were first applied to a public debt, and then afterAvards to the ofiice in which it Avas managed. Thus, a recent eminent Italian Avriter, Cibrario, says {Delia Economica Politica del medio ewo, p. 580) : " Circa alia teoria del credito, die dissi inv^enzione di comuni Italiani, e noto che il primo Banco, o f?tf?v /to piibbllco, fu eretto a Venezia nel 1171. Nel secolo xiii A''ha memoria di cai'ta monetata in jNIilano. II credito fu rimborsato. Un Monte, o debito pubblico, fu stabilito in Firenze nel 13.36. ****** "A Genova, duranti le guerre del secolo xrv, fu stabilito il banco di St. Giorgio, composto di creditori dello stato." " Regarding the theory of credit, AA'hich I liaA'e said Avas invented by the Italian cities, it is knoAvn that the first Bank, or ^w5^/c debt, was erected at Venice in 1171. In the 13th century paper money is mentioned at Milan. The credit Avas paid off. A Monte, or 2'>f(blic debt, was established in Florence in 1336. ******* " At Genoa, during the wars of the 14th century, the Bank of St. George was established, composed of the creditors of the state." 112 THEORY AND PRACTICE OF BANKING. NoM', was the public debt of Venice a hench, or were the State creditors of Genoa a bench ? Thus, also, Benbrigge, a writer in 1646, further quoted below, si^eaks of the " three Bankes at Venice," meaning the three public loans, or 3IonU, mentioned above. We have said enough, we think, to shew that banco, in Italian, means a fund formed by several contributions ; we shall now shew that such was its meaning when first used in English, as applied to money dealings. Thus, Bacon says, " Let it be no bank, or common stock, but every man be master of his o^vn money." So Benbrigge, a writer in 1646, in his Usura Accommodata, or a ready way to rectify usnry, says, " for their rescue may be collected Moks Pletates slve Charitatls, a Banke of Piety or Charity, as they of Trent fitly call it." Again, " For borrowers in trade for tlieir supply, as their occasion shall require, may be erected Mons N'egotiationis, or Bajstke of 2\ader He also quotes from Tolet, another writer, who speaks of two kinds of banks, namely, " Mo:n^s fidei, or Bakke of Trust, which Clement XII. instituted at Rome — he that put his money into this Banke was never to take it out again" — for whicli the investor received 7 per cent, interest, like the original Bank of England stock. He also speaks of Mons Recuperationis, or Baxice of Recovery, of which the interest was 12 per cent. The ditference between these two was, that between perpetual and terminable annuities, where the higher interest of the latter is, in fact, repayment of the capital by instalments. In the time of the Pi'otector, some proposals were made for erecting public banks, Samuel Lambe, a London merchant in 1658, recommending these, says: — "A bank is a cei'tain number of sufficient men of estates and credit 'joined together in Joint Stock, being, as it Avere, the general cash-keepers, or treasurers, of that place where tliey are settled, letting out imaginary money at interest at £2^ or £3 per cent, to trades- men, or others that agree with them for the same, and making payment thereof by assignation, and passing each man's accoimt from one to another, with much fiicility and ease." So also, in a little tract, entitled "^1 Discourse concerning Banks,^'' IGOV, and known to be by a Director of the Bank of England, it says, there arc thi-ee knnds of Banks, the first for the mere deposit of money, the second for ]>rofit. "The banks of the second kind, called in Italy Monti, whicii are for the benefit of tlie income only, are tlie banks of Rome, Bolonia, and Milan. • These Banks were made up of a lunnber of persons, who, in time of war, or other exigencies of state, advanced sums of money upon fluids granted in perpelioim, but redeemable." " The third kind of ])anks, wliich are both for the convenience of the public, and the advantage of the undertakers, are tlie several banks of ON THE CURRENCY PRINCIPLE. 118 Naples, the Bank of St. George, at Genoa, antl one of the banks of Bolonia. These banks, having advanced sums of money at tlieir establishment, did not only agree for a fund of perpetual interest, but were allowed tlie privilege of keeping cash." The Bank of England -was of this last sort. So also Blackstone says : — " At Florence, in 1344, Government owed £00,000, and, being unable to pay it, formed the princijjal into an aggregate sum, called metaphorically a Mount, or li/i/il:'''' Banks hi this country have almost always received deposits in cash, but there was one formed soon after the Bank of England, called the " Million Bank," which Avas merely an association of l)ersons who adAanced a million to Govei'nment, Avho never kept cash. This company, wliich resembled the original Bank of Venice, existed till nearly the end of the last century. It was some time in the 12th or 13th century that the Florentine merchants, and probably there may have been many of the Cambitores among them, began to receive deposits from the general public, and then they were called lianchierl, and their houses called Hanehi, because they received deposits, in exchange for which they gave their own credit. We have now, we think, offered ample evidence to prove that the word "Bank" means a general contribution received from the public, in exchange for which credit is created, and that the business of a " Banker " is to create credit. On the Currency Principle. 1 v. The express function of a Bank being to create credit, a doctrine of considerable importance has been maintained by several writers of influence in recent times, to which M'e must now advert, as most discussions on banking for several years have been full of it. We have shown, in a subsequent chapter, that the Cliinese Avere the inventors of paper money, and that when the Govern- ment had brought the country to a state of the deepest distress by their extravagant issues of paper money, a writer sighed for the days when no paper was issued except in exchange for si)ecie, — "Then," says he, "it was ordered that at the othces of the rich merchants who managed the enterprise, M'hen the notes were paid in the money came out, when the bills came out the money went in. The money Avas the mother, the note was the son. The son and the mother were reciprocally exchanged for each other." This doctrine, put forth in the year 1 300 l)y a Chinese writer, is tlie Ctrrencv Pkixciplk. It is this — that when a Bank is })ermitted to issue Xotes, the Notes ought to be exactly equal to the specie paid in, and that the sole duty of the Bank in such a case is to exchange specie for paper, and pajier for specie ; and that the quantity of paper in circulation should always fluctuate 114 THEOEY AND PRACTICE OF BANKING. in quantity, exactly as specie would do if there were no paper. Those ^\Titers in recent times who maintain this doctrme aver that any paj)er issued in excess of this j^rinciple causes a depre- ciation of the currency. The next enunciation of it that we are aware of is in John Law's Money and Trade Considered, p. 73, edit. 1*755, where he says: — "Some are against all banks whei'e the money does not lie pledged equal to tlie credit." It "Nvas upon this principle that the Banks of Venice, Amster- dam, and Hamburg were constructed. These places were the centres of a great foreigii commerce, and, as a natural con- sequence, an immense quantity of coin of all sorts, of different countries and denominations, was brought by the foreigners who resorted to them. Tliese coins, were, moreover, greatly clipped, Avorn, and diminished. Tliis degraded state of the current coin produced intolerable inconA^enience, disorder, and confusion among mei'chants, who, when they had to make or receive pay- ment of their bills, had to offer or receive a bagful of all sorts of different coins. The settlement of these bills, therefore, involved perjDetual disputes, — which coins were to be received, and which were not, and how much each was to count for. In order to remedy this, it became absolutely necessary that some fixed imiform standard of payment sliould be devised, to insure I'egularity and a just discharge of debts. In order to do this, the magistrates of these cities instituted a Bank of Deposit, in which every merchant i)laced all his coins of different weights and nations. These were all weighed, and the bank gave him (M-edit, either in the form of notes, or an entry in their books, exactly corresponding to the real amount of the bullion de- posited. The owner of this credit was entitled to have a certain (|uantity of coin of full weight on demand. These ci'edits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon the respective cities, above a certain amount, should be paid in these credits, Avhich Avere called bank money. The consequence Avas evident : as this bank money Avas ahvays exchangeable for money of full Aveight on demand, it Avas always at a ]jremium, or af/io, as com|»ared Avith the current money. The difference Avas usually from 5 to per cent, in llic different cities. The expression, (kjIo, or premium, is likely to mislead, because it is evident that it Avas the bank money that was tlie true standard, and the current money that Avas at a discounl. "^riiose banks jirofessed to keep all this coin and l)nlli(»n in tlieir vaults, "^fliey made no use of them in the Avay of business, as l)y Avay of discounting bills. Thus the credit created was exactly (!(pial to the s])ecie dei)Osited, and their sole business was to exchange specie for paper, and i)aper for specie. They Avere examples of the C-ukktcnca' I*iaN('iJ'M!:, and they are the models to Aviiirli mnny jiersons Avould wish to see all banks rcfjuced, and wv shall mt that they maintain that paper ON THE CUKKENCV I'KlNCirLE. 115 should fluctuate in quantity exactly as a metallic currency Mould do if there were no paper; and that ifi)aper is substituted for specie, it can only maintain an equality of value with specie by being exactly equal in (piantity to what the specie would have been if there were no paper. These Banks were of no further use to commerce than that they served as a safe ])lace to keep money, and they hisured an uniform standard of payment. They made no profits by their business, but those Avho kept their accounts paid certain fees to maintain the establishment. We shall not here discuss the soundness of this currency princii^Ie, our only object is to state to our readers clearly what it is. Many writers of the greatest influence, such as Colonel Torrens, Lord Overstone, and others, maintain that this principle ought to be ajiplied to all Banks, and that they should not be permitted to create any notes in excess of their bullion. Mr. INIill says : — " Further consideration shewed that the uses of money are in no respect promoted by increasing the quantity which exists and circulates in a country, the service which it performs being as well rendered by a small as by a large ag- gregate amount." The slightest experience will show that this dogma is utterly unfomided. Does it never happen that an increased supply of money can benefit a country '? One of the acknowledged wants of Ireland at the jaresent day is want of capital ; every one admits that the introduction of fresh cajiital would be of the greatest service to Ireland. In B. iii., c. 13, § 5, he says: — "Another of the fallacies from which the advocates of an inconvertible currency derive support, is the notion that an increase of the currency quickens industry. This idea Avas set afloat by Hume, in his Essay on Money, and has had many devoted adherents since." Not only is the doctrin(! which ^Ir. ]\Iill here derides indubitably true, though it is not an argument in favour of an inconvertible ])aper money, but it had numy devoted adherents long before Hume was born, as every one acquainted Avith Economical literature knows well enough. He then says : — " The substitution of paper foi- metallic cur- rency is a national gain, any further ixorkask of papkk nEYOXD THIS IS BUT A FORM OF ROIiliERY. " An issue of notes is a manifest gain to tlie issuers, who, until the notes are returned for payment, obtahi the use of them as if they were real capital ; and so long as the notes are no permanent addition to the currency, but merely supersede gold or silver to the same amount, the gain of the issuer is a loss to no one ; it is obtained by saving the conununity the expense of the more costly material. But if there is no gold or silver to be superseded — if the notes are added to the currency, instead of behig substituted for the nu^tallic i»art of it— all holders of cur- 1 2 IK) THEORY AND PRACTICE OF BANKING. rency lose by the dejDreciation of its value, the exact equivalent of Avhat the issuer gains." Again in B. iii., c. 22, § 3, he says : — " When metallic money had been entirely superseded and expelled from circulation, by the substitution of an equal amount of bank notes, any attempt to keep a still further quantity of paper in circulation must, if the notes are convertible, be a complete failure. The new issue would again set in motion the same train of consequences by which the gold coin had already been expelled. The metals would, as before, be required for exportation, and would be for that purpose demanded from the banks to the full extent of the superfluous notes, which thus could not possibly be retained in circulation." We desire to call particular attention to these dogmatic assertions of Mr. Mill, and esjiecially to the fact that he brands as robbery any creation of notes beyond the quantity substituted for sj^ecie. We shall noAv give an actual exposition of the practice of banking, and, perhaps, Mr. Mill may be surprised to find what he brands as robbery, and whom he brands as robbers. On the Mechanism of Banking. 18. Banks of the nature of those of Venice, Amsterdam, and Hamburg, never existed in England, and we must now explain the mechanism of banking, as it has been carried on in this country. Dui-ing the civil war, the goldsmiths of London began to re- ceive cash of the merchants and country gentlemen, in exchange for which they gave their promissory notes payable to bearer on demand. In consequence of this they were called " bankers," and their notes were called " goldsmiths' notes," or " banker^' notes." But the goldsmiths did not charge anything to their customers for keeping their cash ; on tlie contrary, they agreed to pay six per cent, interest for the cash left with them. In order to ])ay this interest, they Avere obliged to trade with this money, and it is in regard to the method of this trading tliat so much misconception exists. Let us, for the ])res(.'nt, leave out of consideration any private jiro])erty the goldsmiths might have, and let us deal willi small (igures. Supj)Ose the baidcei- had i'l 0,000 deposited with him by his customers, then, as he created an efpial amount of debt .■igainst lumself in exchange for this money, his accounts would stand thus : — LlAHIMTIES. j ASSKTS. £10,000. I £10,000. We shall now see tlie extreme inq)orlance of accurately stating K(!onomi(' (|uestions. ^Vccording to the niclhoil of slaliiig lliis, given by Euk'i-, tlie banker possesses £10,0(11), and owes .L'lo,oiio. l^^ilci-, as well as ON TIIIC MKCHANISAr OF I'.AXKING, 117 :ill ninlhematiciivns, calls tlie money a positive quantity and the debt a negative (luantity, because, if tlie })anker's Ibrtiine were estimated, his debts would have to be subtracted from Ids money. In this case, tlie money and. the debts are equal, and, therefore, accordinsj to this mode of statement, the banker would be no riclier than before. Now, so far as the banker himself only is concerned, this view is sufficiently accurate. But it is easily seen that so far as regards Econoniic Science it is quite inaccurjite. For the baiiker has issued £10,000 in notes, and these circulate among the public and perform all the functions of money, until payment of them is demanded, and then, of course, they cease to exist. But the banker has the £'10,000 in cash, which has become his property, and, reserving a certain portion of it to meet the usual demand for i)ayment of his notes, he may trade with the remainder, and it is quite clear that, supposing the £10,000 of his notes to be in circulation, whatever portion of cash he also issues is by so much an addition to the previously existing currency. Now experience would soon shew him that, if some of his customers drew out their money from day to day, others would probably pay in about an equal sum, so that, at the end of the day, there would probably be not very much difference. From practical observation, we may state that, in ordinary times, a banker's balance in cash will seldom differ by more than a 36th part from day to day. So that, if he retains a tenth [)art in cash to meet demands for payment of his notes, that is ample and sufficient in all ordinary times. The goldsmiths, then, soon found that they had a large quantity of bullion on their hands, which was so much dead stock, and they were able to trade with it in order to make profits to pay the interest of the whole. The method of trading they adoi)ted Av^as to discount, or buy, commercial debts, in the form of Bills of Exchange. These bills being payable in two or three months, their money soon came back to them with a profit. It is commonly supposed that they advanced money on these bills. If they had done that, they could not have brought more than £9,000, as they ke]»t one-tenth hi their tills in cash. This, however, is an error. They did not buy the bills with cash, but with their o^^l "proimhsory notes, or their credit. And, as above stated, they soon found that their credit might safely exceed their cash several times. Hence they found that they could extend their credit safely very far beyond the limit of £9,000. They found that keeping the £9,000 in their coffers, they could safely buy at least £40,000 in bills Avith their own notes. Now, supposing the rate of discount was 8 ])er cent., and the bills were at three months, the discount on this sum m ouM be £800, 118 THEORY AND PRACTICE OF BANKING. and, consequently, in exchange for bills to the amount of £40,000, he would issue £39,200 in his o^vn notes, and his accounts would then stand thus : — LIABILITIES. • ASSETS. £49,200 £49,200 By Cash £10,000 By Bills of Exchange. . . £40,000 £50,000 Now, by this process, the Banker added £39,200 to the pre- viously existing currency, and his profit is cleai' — he pays six per cent, on £10,000, and he gams eight j^er cent, on £39,200. Now, this was the business of banking, and hence the correct- ness of the definition given above is manifest — a hanker is a trader who buys 'moyiey and debts (bills of exchange), by creating other debts (his oion notes). Thus we see that the distinctive function of a bank, and a banker, Avas to issue notes, payable to bearer on demand, which were to circulate as money. That is to create pa jyer currency, in some cases only equal to the amount of bullion they displaced, in others, greatly exceedmg it. And tlie meaning of the word *' to bank " was to buy money and bills of exchange with such notes, that is, to create instruments of credit. Towards the end of the 1 7th century contemporary writers tell us that some of the London bankers had upwards of a milhon of notes in circulation. We further see that as the banker had given an equal amount of notes for the cash he received, for which he paid interest, his only method of making profits was by augmenting the amount of previously existmg currency — that is, according to Mr. Mill, he was a robber! The relation in which the banker and the merchant stand to each other, after the bankin- has discounted the bill for the merchant by issuing liis notes, also shews how indispensably necessary an exact method of statement is re(|uired to appreciate the subject of credit coi'rectly. Some writers, wlio deny that credit is capital, say this — that if a person liolds a bill of ex- change, that is his property, and to be added to his other property, but that it is to be sid)tracted from the property of some one else, therefore, upon the whole, it is notliing. Thus, Mr. Tliornton says : — " Paper constitutes, it is true, an article on the credit side of the books of some men, but it forms an exactly equal item on the debit side of the books of others. It constitutes, therefore, on the Avhole, neither a debit nor a credit. The banker who issues £20,000 in notes, and lends, in consequence, £20,000 to the mer(;hant, on the security of bills accepted by them, states hiniself in his books, to be the debtor of the various holders of his notes to the extent of the sum in question ; and states liimself to be the creditor of the acceptors UN THE MECHANISM OF BANK IXC. 119 <)t the bills ill hia possession to the same amount. His valuation, therefore, of his own projierty, is the same as if neither the hills nor the bank notes had any existence. Again, the merchants, in making their estimate of property, deduct the bills payable by themselves, which are in the drawer of the banker, and add to their estimate the notes of the banker, which are in their own drawer; so that the valuation likewise of the cai)ital of the mer- chants is the same as if the ])aper had no existence. The use of paper does not, therefore, introduce any principal of delusion into that estimate of proi)erty which is made by individuals.'" Xow, in the above extract, Mr. Thornton has began by making a most extraordinary error for a banker. He su]»j)oses that the banker issues an amount of notes equal to the bills he discomits. That would be as much as saying that the banker charged no discount. But this is manifestly wrong. The banker retains the discomit at the time of the advance, and, consequently, his property and his debts are not equal, but his property exceeds his debts by the sum charged as discount. Again, though in a certain way, as regards the mdividuals themselves, this way of stating it has some plausibility, it is clearly quite incorrect as a scientific statement. The merchant acquires the Bill of Exchange as property given in exchange for some goods. He sells that property to his banker in exchange for the property created by his banker, viz., his notes. Now, it is clear that the banker may put this bill into circulation, and it may perform the same functions as money until the time for its ]ia)nnent comes, and also the merchant may buy with the banker's notes as money, and, conse([Ucntly, the bill and the notes are each of them exchangeable (]uantities, and may both be in circulation at the same time, and perform many exchanges before they are paid and extinguished. Hence each of them forms a part of the mighty mass of circulating credit. Such, then, was the business of banking. We need not here speak of the foundation of the Bank of England in 1694, but it is quite clear that the Legislature understood " banking " to mean issuing notes payable to bearer on demand. In 1*708 an attempt was made by some other companies to do banking business; and in 1*709,011 the renewal of the charter, I'arlia- ment meant to confer a mono})oly of banking on the Bank of England. In order to do that, there being at that time no legal deiinition of banking, the Act did not directly jjrohibit any " bank " with more than six partners being formed, but it described what was well understood to be banking business, and it prohibited any partnership of more than six j)ersons doing that. It Ibrbade them " to horrov^ oice, or take up any sum or sums of money ^ on their hills or notes, 2^0 yable at demand.''' Thus, at this period, banking was luiderstood to mean bor- roioing, or oxciyig^ money on notes payable on demand, and to 120 THEORY AND PRACTICE OF BANKING. forbid persons to do that was to prevent them from " banking." This Act was efiectual for some time, but, about 1740, some persons tried to evade the words of the Act, and, to put a stop to this, the Act of 1 742 is more explicit. It says : — " And to prevent any doubt that may arise concerning the privilege, or power, given by former Acts of Parliament to the said Governor and Company of exclusive hanl-ingj and also in regard to erectmg any other bank, or banks, by Parliament, or restraining other persons from banking.''^ It thus forbade, as before, any part- nership "io horroic, oioe,ortake iq) any sum or sums of money, on their bills or notes, payable at demand.''' So that the Bank of England might remain a corporation, " with the privilege of exclusive banking, as before recited." Still, we observe that the intention of Parliament was to confer on the Bank of England the exclusive monopoly of ]>anking. And this privilege of banking consisted in " borro^cing, owing, or taking up any sum, or sums, of money on their bills or notes, paycdyle at demandP Hence, we see, that " Banking " meant the creation and issumg of " Currency;" and to prohibit persons from creating currency was, in fact, to prohibit them from doing banking business. These words were devised with the utmost care, so as to prevent any other rival, in the most comprehensive mamier possible. It was supposed that no legal ingenuity could devise an expedient to evade so extensive a prohibition. The form of words adopted in this Act, was devised in reference to the methods of doing banking business at the time they were framed, and they were successful in preventing any rival bank being formed, so long as bankers atlhered to that particular method of doing business. But about 30 years afterwards, l)ankers adopted a change in the method of dohig their busmess, so simple, and ap]iarently so unimportant, as scarcely to deserve attention. And it Avas this mere change in the form of doing their bushiess, that is, of creating liabilities, or currency, in a form not provided for by the words of the Act, that cut away tlie ground from mider the Act, and Avas the means whereby tlie present Joint Stock Banks in London Avere founded, and thus destroyed the monopoly of the Bank of England, because, when this mode of evading the Act was discovered, and the Bank, in dismay, applied to Parliament to i>ut a stop to it, they Avere told tliat such nionoj)olies Avere out of fashion, and their demand Avas refused. Up till ;i1)()iit ihe year 1772, bankers adhered to the original metliod of issuing ])roinissory notes, ])ayable to bearer on de- mand. Jiut about tliis time, they cluniged tlie form of making the ])urchases of bills. When their customers brought tliem bills to discount, instead of giving them their promissory notes payable to liearei- on demand, lliey wrote down the value of the bill to the credit i)Osing that they denote the same 02:)eration — Old form of Bcuikbuj Accounts. Liabilities. Assets. To notes in circulation £49,200 By Cash £10,000 By Bills of Exchange 40,000 £49,200 Moder)i form of Banking Accounts. £50,000 Liabilities. Deposits £49,200 £49,200 Assets. By cash £10,000 By Bills of Exchange 40,000 £50,000 Now, in examining these two forms of accounts, though they are in reality two different methods of doing the same thing, a striking dilference is ap]iarent on the face of them. In the first it is manifest, on the face of it, that the banker thus created £49,200 of notes, or created that amount of lialiilities against himself. In the second form this does not appear at all, but this sum of £49,200 appears as a " deposit," or a " balance on drawing account," and to any one who is not conversant with the subject, it seems to be a deposit of actual cash, and many persons are apt to believe that a banker has that amount of cash to trade with. Thus, when the accounts of the great Joint Stock Banks in London are jniblished, and it appears that one has £20,000,000 of " deposits," and so on, it is almost luiiversally believed that it has twenty millions of actual money to trade Avith, or lend out, as it is erroneously called. And every half-year we see sum- maries in the newspapers shewing that all the Joint Stock Banks have, perhaps, an aggregate of £100,000,000 of " deposits," and it is generally believed that they have that sum of money to trade Avitli. But there never was a more complete and entire delusion. These £100,000,000 of " deposits " are not deposits in cash, but they represent the old hank note circulation. They are nothing but an enormous superstructure of Credit, built up on a comparatively small basis of bullion, exactly like the note circulation. These figures do not shew the quantity of cash at their command to trade with, but they shew the quantity of business they heing kept to meet them, and it nught very well happen, that while the " de|)osits " were a])parently mounting up, a!i(l might lead matiy ])('i-sons to l)cli('ve that the actual ON THE MECHANISM OF BANKING. 127 quantity of cash was increased, it might be nothing, perliaps, but a dangerous extension of credit. And if this were carried to too great a length, the bank niiglit be in the most dangerous position, just when it Avas ai)parently most flourisliing. A private banker on a large scale often has an ajiplication to place £10,000, or more, to the credit of a customer; if he does this, it immediately coimts as a " deposit " in banking accounts. Again, it is a very j)0ssible case, that a large railway company might request their banker to ]»lace £100,000 to their credit. Now, if the bank (h)cs this, such a transaction goes to swell up the figures of " de])Osits " in their published accounts, which may lead to very erroneous inferences by the public, who do not know the mode in which banking accounts are made iip. A consideration of this example also shows the very great misconce})tiou that is likely to be produced by an expression which is very often used regarding bankers, that they are merely agents between 2)ersons who want to lend, and those who Avant to borrow. This is not true in the ordinary sense of the words lending and borrowing, because, in ordinary cases of lending and borrowing, the lender deprives himself of the ixse of the cajiilal he lends. But, in ordinary banking, both parties ha\e the complete nse of the capital. The customer lends his money to the banker, and yet has the free use of it — the banker em])loys that money in jM-omoting trade ; upon the strength of its being deposited Avith him, he buys debts with his "promises to pay," and the person Avho sells the debt has the free use of the very coin Avhich the lender has the same right to demand. The common notion of banking is, that it consists in lending money upon the security of bUls of exchange. Such an idea, is profoundly erroneous, as it consists in buying debts Avith " i>romises to pay," or creating liabilities. And the contmgency is, that he may be called upon to pay them ; no doubt, theoreti- cally speaking, he is liable to be called upon to pay all those liabilities at a moment's notice, just in the same Avay as it is theoretically jiossible that all the lives insured in a life insurance company may drop at the same moment ; or, it is theoretically possible, that all the property insured in an office may be de- stroyed by lire at the same moment; but no one expects such a contingency to happen. Banking is like insurance, the sum in cash retained by the banker is Avhat his experience tells him is sutlicient to ensure his being able to meet any calls whieh are likely to be made upon him. In order to add further proof, if possible, of the utter fallacy of the common notion that discounting bills is borrowing moni'v, Ave may state, that Avhen a customer has discounted a bill Avith his banker, he has parted Avith all property in it, just as Avith any other article of sale. "^Flie bill becomes the absolute i>ro- perty of the banker, Avhich he may sell again, or jiledge, or deal 128 THEORY AND PRACTICE OF BANKING. with ill any innnner that suits his o^^^l interests best. Now, if it was a loan from the banker to his cnstonier, it would mani- festly be the duty of the customer to re])ay the loan in due time, and get back his bUl, which would be merely deposited with the banker as security, and should be restored when the loan was paid, and which the banker would have no right to part with. But this is not the case. The banker does not receive payment from his customer, but from the acceptor of the bill, aud he has a perfect right, if he pleases, to sell the debt to any one else. On the other liaud, in some few instances, a customer does sometimes borrow money on the security of bills, and in these cases, the customer repays the loan and receives back his bills. But such cases are comparatively rare, and to be dis- tinguished fi-om the ordinary business of discounting bills. From the foregoing considerations, we see that a merchant deals v:lth credit, and a banker deals in credit. A merchant brings him debts, payable some time after date, for sale, and, by a flourish of his pen, the banker transmutes them into debts payable instantly, which have precisely the same eft'ect in com- merce as so many sovereigns. Pie reaps exactly the same profit by creating a credit in favor of his customer, as if he gave him the actual cash. And the cheques drawn against these credits, so created by the banker, circulate commodities exactly in the same manner as bank notes do, Avhich circulate commodities exactly m the same manner that gold and silver money does. Consequently, these credits, so created by the banker, are Cur- REXCY, or Circulating Medium. From this it manifestly follows, that BanivIng Credit is Banking Capital. Now, in tlie preceding section, we have proved that mercantile credit is mercantile capital, and, consequently, as all credit is either bankino-, or mercantile, we arrive at this general conclusion, that CREDIT IS CAPITAL. The preceding details also show the prodigious error of those who think that banking does not add to capital, that it only distributes existing capital. It is miquestionably true that no mode of banking can create actual gold sovereigns. But if, by means of tlieir credit, bankers can circulate their promises to ])ay, and if tliese be voluntai-ily received and accepted by tlie community at large, at exactly the same value as if they were actual sovereigns, then just by so mucli as they exceed in number the (jiumtify ol" actual sovereigns in the 1)aiiker's possession, they are, to all intents and purj)oses, an (iddltion to existing caj)ital. For, not only does he save the use of the actual coin in an im- mense multitude of instances Avhere it would be required if banking did not exist, and liberates it, and enables it to be a])])lied to jiroinote commerce, which is in its practical effects identical witii an addition of actual coin to that extent, but, by tlie extra nniltipli(;ation ol" his promises to j)ay over and above ON THE .MECHANISM OF BANKING. 129 that, lie is enabled to make what is, to all intents and purposes, a further addition to the moving power of commerce to an enornious extent. Banking is, therefore, the most potent engine for the increase of the moving power of any given quantity of actual capital that it is 2)ossible to devise, consistently with keeping up the value of the currency at its level Avith bullion. John Law says, most justly: — "The introduction of credit by means of a bank, aug- ments the quantity of money more in one year than a prosperous commerce could do in ten." And just as banking spreads more extensively, does it multijily the producing power of the com- munity. Every one knows the great economising power of railroads in diminishh^g the (pumtity of ca|»ital required to sup])ly any given demand for commodities. Now, an extension of banking acts precisely in an analogous manner, but to a much greater degree ; for, not only does it economize the actual sub- stance to a very great extent, but it makes the " promise to pay " of equivalent value with the actual payment. And it is just in this multiplying power of capital that the principal danger of too rapid an extension of banking consists. The rate of discount always depends upon the proportion between actual capital and the demand for it, or on the debts offered for sale. A sudden change in the proportion of these, causes the most violent iiuc- tuations in the rate of discount. If an unusual quantity of capital is thro^ni too suddenly upon the market, the only result must be a rapid and extreme fall in the rate of discomit. Now, a too rapid extension of banking has precisely the same effect as throwing a vast quantity of capital suddenly on the market. For, not only do the actual operations of banking have all the practical effects of adding to the existing capital, but to that A\dll be added all the evil effects of over-competition, an unnaturally low^ rate of discount, thereby a depreciation of the cui-rency ; an export of bullion ; a joint-stock bubble mania, with all its rogueries ; then a collapse, and commercial ruin. Great and inestimable, therefore, as are the blessings and advantages of banking, there is no department of trade which is likely to produce more fatal consequences to the public by too rapid an extension of it, than too rapid a nudtiplication of banks. There is no mania which should be looked to with a more jealous eye by the public, or more carefully guarded against by the Legislature, than a bank mania. The precedhig details also show the entire fallacy of the almost universal o^tinion, that the London lianks, public and private, other than the Bank of England, are mere banks of deposit, and are not banks of issue. Thus, M'CuUoch says, {Dictionary of Commerce, Art. J^ank): — " Banks are commonly di\aded into two great classes of Banks of Deposit and Ji(niks of Issue. This, however, appears, at first sight, to be rather an K 130 THEORY AND PRACTICE OF BANKING. imperfect classification, inasmuch as almost all Banks of Deposit are at the same time Banks of Issue, and ahnost all Banks of Issue are also Banks of Deposit. But there is, in reality, no ambiguity ; for, by Banks of Deposit, are meant banks for the custody and emplopnent of the money deposited with them, or entrusted to their care by their customers, or by the public ; while by Banks of Issue are meant banks which, besides employ- ing or issuing the money entrusted by others, issue money of their own, or notes payable on demand. The Bank of England is our principal Bank of Issue, but it is, as well as the other banks in the different parts of the empire that issue notes, also a great Bank of DejDOsit. The private banking companies of London, and the various provincial banks that do not issue notes of their own, are strictly Banks of DeposiC This view is manifestly erroneous. A Bank of Deposit is one which, like those of Venice, Amsterdam, and Hamburg, is for the sole purpose of keeping the custody of money, and the credit it creates is exactly eqiial to the cash deposited. A " Bank of Issue " is one that, besides that, purchases bills by means of creating credit, in addition to the cash deposited, and th\TS adds to the quantity of the currency. Now, all banks in England, whether they issue notes or not, add to the currency by creating credit, and, therefore, they are all to be considered, in a scientific sense, as Hanks of Issue. To shoAv how completely at fault even the most eminent writers are on the nature and effects of banking, we shall quote an extract from Mr. Mill, B. iii., c. 24, § .'5. In treating of the regulation of a currency, and the effects of the Bank Act of 1844, he says, in a note : — " It would not be to the purpose to say, by way of objection, that the obstacle may be evaded by granting the increased advance in book credits without the aid of bank notes. Tliis is uideed possible, as Mr. FuUarton has remarked, and as I have myself said in a former chapter. But THIS SUHSTITUTE FOR BANK NOTE CURRENCY CERTAINLY HAS NOT YET BEEN ORGANIZED; and the Jaw havinrf dearly mani- fested its intention, that in the case supposed, increased credits should not be (jranted, it is yet a problem whether the law woidd not reach vshat miyht he reyarded as an evasion of its prohi- bitions, or whether deference to the laio woidd not produce {as it has hitherto done), on the part of banJciny establishments, confonnity to its spirit andpurpose, as well as to its mere letter.'''' We liave seen, in the ])receding exposition of the actual meclianism of l)anking, tliat what ]Mr. INIill says has never yet been orgaiii/cd, and whicli the law might possibly put down, is the very thing in whicli London banking has exclusively con- sisted for eighty years ! ! Moreover, the Bank Act of 1844 was passed for the express purpose of preventing l)anks from creating credit, and the ON TJIE iMKCIIANlSM OF BANKING. 131 almost universal opinion is, that it does so — that it makes the currency vary exactly as if it were so. The preceding details shew that the ordinary business of London bankers consists in the daily creation of niinhiis of promises to ]X(i/. The popular l)elief, that the IJank Act of 1844 prevents baidart of the circulating medium. Their being exchanged at tlie Clearing House can make no difference to what they would be if they were presented and paid by each banker; for they have all done their duty before they arrive at the Clear- ing House — they have caused commodities to circulate, perhaps many more times than once before they come to be discharged. We see, then, how utterly futile it is to attempt to form any estimate of tlie amount of paper currency in this country. Returns may be made of the stamps issued for bank notes, bills of exchange, and promissory notes ; but how is it possible ever to discover the amount of cheques in cii-culation? If this cannot be done, it is useless to try to estimate the amount of the paper currency ; and still more impossible is it to control the issue of paper, wliile the power of drawing cheques is un- restricted. The great and inq)ortant portion of tlie currency Avhich consists of che({ues lias not been sufficiently ap})reciated. Tlie attention of speakers, writers, and legislators, on the paper currency, lias been almost exclusively romote by means of bank notes which it cannot with equal efficacy perform by means of cluHjues. If it wishes to advance a speculation, instead of giving its customer so many of its notes, it ]>romises ON THE MECHANISM OF BANKING. 133 to honor his cheques to an equal amount. In Scotland the system of bank notes chiefly prevails ; and cheques are of more recent introduction, and more sparingly used than in England. In this country, cheques have very greatly superseded bank notes, and in many respects are far superior to them. Among other reasons, they are not such ready weajions against a bank in the hands of rivals and enemies. It has been by no means an unheard-of measure of hostility against a bank which issues notes, for its rivals to buy them up in all directions, and having accumulated a considerable amount of them, to present them for payment suddenly in a mass, in the hope that the bank may be unprepared to meet, on the instmit, so great a demand for gold, and be ruined. With chetpies this method of hostility is more dirticult. It is not easy to conceive that any person could go round to all the customers of a bank, and accumulate such an amount of cheques as to render a demand for papiient of them in gold formidable to the bank. At all events, it would require a much more elaborate and deep-laid plot to injure a bank by the method of cheques than of bank notes. Seeing, then, that the nature of discounting bills of exchange is buying debts, which are to be considered just like any other article of commerce, it follows that the same laws govern their exchangeable relations as those of any other quantities. The first duty of a banker is to maintain his own position, which he can only do by mamtaining certain proportions between his actual cash and his promises to pay, or his liabilities, and that proportion must vary from time to time, according to circum- stances. In times of a general failure of credit, he must maintain a very much larger portion of cash comi)ared to liabilities than in times of general contidtmce. Under such circumstances, his diity is to contract his liabilities, which he must do either by refusing to buy debts altogether, or else by giving a lower price for them, i. e., raising the rate of discount. And a general rise of the rate of discount has a tendency to discourage the oflering of debts for sale, just as low price of anything else discourages its being oflered for sale, except by those Avho positively require the cash. On the other hand, this lowering of the price of debts, ?. c, this increase in the value of money, or the raising of the rate of discount, has an inevitable tendency to attract l)ullion from where it is more abundant, /. e., where the rate of discount is lower. AVherever debts are to be bought cheap, thither will bullion fly to buy them; wherever debts are sold dear, that is, Avherever money is to be bought cheap, thither will delits fly to be sold, and there will competitors be to buy money. Conse- quently, it is an infalliltle law of nature, that whenever the price of debts difters in two markets hy more than sufficient to defray the expense of sending bullion, it will cause an innnediale flow 134 TllEOKY AND PRACTICE OF BANKING of bullion to that market where debts are to be bought cheapest, L €., Avhere the rate of discount is highest. That is to say, it the rate of discount at Paris is greater than at London by more than sufficient to coA'er the expense of sending bullion, debts Avill fly from Paris to London to buy bullion, and bullion Avill fly from London to Paris to buy debts. The exchangeable relations of money and debts will obey exactly the same laws as the exchangeable relations of money and Avheat. Consequently, ff left free and uncontrolled, the prices of debts have a natural tendency towards equilibrium in diflerent markets. On Cash Credits. 19. The credit created by the Bankers, in the operations just described, was employed to purchase commercial bills, which arose out of the transfer of commodities, and we have seen that they could create credit to several times the amount of cash in their possession. And, according to the notions of some writers, this was the limit of legitimate credit. We have now to describe a species of credit of a totally diflerent sort, invented in Scotland, and to which the marvellous progress and prosperity of that country is mainly due. The consideration of this, will sorely test the dogmatic assertions of literary dreamers. As stated in the History of Banking in Scotland, the Bank of Scotland began the issue of £\ notes about the begimiing of the last century. In 1727, a rival bank was founded, named the Royal Bank. In the very contracted sphere of Scotch commerce, at that period, there were not sufficient Commercial Bills to exhaust the credit of the Banks. They had, as it were, a superfluity of credit on hand, and the Royal Bank devised a new mea:is of getting it into circulation. It agreed, on receiving sufficient guarantees, to open, or create, credits in favour of respectable and trustworthy persons. A Cash Credit is, therefore, simply a drawing account, created in fivour of a customer, upon which he may oi)erate in precisely the same manner, as on a common drawing accoixnt. The only diflercncc being, that instead of receiving interest upon the daily balance at his credit, as is very connnonly the custom in Scotland, he ])ays interest u])on the daily balance at his debit. It is thus an inverse drawing account. All these iidvances were made exclusively in the Bank's own notes, and they were not issued on the basis of any previous transaction. Cash credits are applicable to a totally different class of trans- actions from those which give rise to 15ills of Exchange, and we will now exi)lMin Iheir nature more fully. Every man in business, however humble, or however extensive, must necessarily kee|> a certain portion of ready money by him, to answer iinniediiite demands for small daily expenses, wages, ON CASH CKEU1T8. 135 a,iul other tilings. This couUl, of course, be imich more i)rofil:iljIy employed in his business, Avhere it might produce a profit of 15 to 20 ])er cent., instead of lyhig idle. IJut, unless the tradi'r knew that he could command it at a moment's notice, he would always be obliged to keep a certain portion of ready money in his OAvn tillj or he must be able to comiuand the \ise of some one else's till. Now, one object of a cash credit is to supply this convenience to the trader, to enable him to uivest the whole of his capital in business, and, upon proper security being given, to furnish him with the accommodation of a till at a moment's notice, in such small sums as he may require, on his paying a moderate interest for the accommodation. Almost every young man commencing business in Scotland, does it by means of a cash credit. Thus, for instance, lawyers, or writers to the signet, commencing business, huAO occasion for ready money from day to day, before they can get in pay- ments from their clients. It is a great bar to any young man to connnence the business of a solicitor without capital, which must be either his own, or furnished him by his friends. It is an immense advantage to him and to them to have it sup- plied by a bank, on a guarantee, a mere contingency, which they ncA^er would give if they thought there was any danger of its bemg enforced. These credits ai'e granted to all classes of society, to the poor as freely as to the rich. Every thing depends u2:)on character. Yomig men in the humblest walks of life begin by making a trifle for themselves. This mspires their friends with confidence in their steadiness and judgment, and tliey become sureties for them on a cash credit. This is, in all resi)ects, of equal value to them as money, and thus they have the means placed within their reach, of risuig to any extent that their abilities and industry permit them. It is an undoubted fact, that nudtitudes of men who have raised themselves to enormous wealth, began life with nothhig but a cash credit. As one example among thousands, Mr. Monteith, M.P., told the Connnittee of the House of Commons, in 1826, that he Avas a mamifacturer, employing at that time 4,000 hands, and that, except with the merest trifle of capital, lent to him, and which he very soon paid otf", he began the Avorld with nothing but a cash credit ! The banks usually limit their advance to a certain moderate amount, varying from i'lOO to £1,000 in general, and they always take several sureties in each case, never less than two, and frequently many more, to cover any possible losses that might arise. These cautioners, as they are termed in Scotch law, kee]) a watchful eye on the proceedings of the customer, and have always the right of inspecting his accounts with the bank, anaus, hut tliey are 13G THEOKr AND PKACTiCE OF BANKING. required to be coustautly operated upon, by paying in and drawing out. The enormous amount of transactions carried on by this kind of accounts may be judged of by the evidence given before the Committee of the Commons in 1826. It was then stated that, on a credit of £1,000, operations to the extent of £50,000 took place in a single week. Its eiFects, therefore, Avere exactly the same as if there had been 50,000 sovereigns. Others stated that, on a cash credit of £500, operations to the amount of £70,000 took place in a year. One witness stated that during twenty-one years in a very moderately-sized countiy bank, operations had taken place to the amount of nearly £90,000,000, and that there had never been but one loss of £200 on one account, and that the whole loss of the bank during that period did not exceed £1,200, Xow, the whole of these gigantic operations were transacted by creations of jjiire credit. At that time it was conjectured that there were about 12,000 cash credits guaranteed to persons in Scotland, and that there were about 40,000 persons as sureties, who were interested in the integrity, prudence, and success of the others. The witnesses before the Lords declared that the effects of these were most remarkable on the morals of the peoj^le. But the operations of these casli credits was immensly ex- tended beyond mere commerce, and their advantages are more openly and strikingly displayed in the prodigious stimulus it gave to the agriculture of Scotland during the last century. They have, indeed, been the mam cause of making it what it is. In the Scottish system of farming, leases almost universally prevail, and a farm is not entrusted to a man who is not edu- cated to his business. lie usually enjoys nineteen years security of tenure ; or, Avhere leases are granted for the purpose of reclaimmg land, for much longer periods. Now, suppose a farmer is knoAvn to be active, skilful, and industrious, and obtains a farm upon lease, which is ca])able of great imj>rove- ment, he goes to the bank, and, uj)on the security of his lease and some friends, who be(!ome bound for him, the bank grants him a cash credit. With this advance — pure credit — he re- chiims the land, em]tloys the people, rea2>s the harvest, and, when that is gatliered, pays back the loan. It was in this manner that that prodigious progress in agricul- ture was made in Scotland. There were inunense quantities of re(;laintable land, and abundance of unemployed people, but no capital, or money, to set their industry in jnotion. Seeing this state of matters, tlie Edinburgh l)aiiks o])ened branches in numerous ))arts of the country, and sent down boxes full of £1 notes, and granted cash credits to the farnu>rs. These notes were universally received as readily as coin. '^^I'he fiirmers made their purchases and ]»ai(l wages with them; anendent nation, and partly owing to its position in the very outskirts of the civilized world, and far removed from the 138 THEORY AND TRACTICE OF BANKING. luiraauizing influence of commerce, divided, in fact, into two nations, aliens in blood and language, was the most utterly barbarous, savage, and lawless kingdom in Em'ope. And it is equallv mideniable that the two great causes of her rapid rise in civilization and Avealth, have been her systems of national educa- tion and banking. Her system of banking has been of infinitely o-reater service to her than mines of gold and silver. Mines of the precious metals would probably have demoralized her people. But her banking system has tendetl immensely to call forth every manly virtue. In the character of her ot^ti people, in their steadiness, their uitegrity, their honour, Scotland has found wealth infinitely more beneficial to her than the mines of Mexico and Peru. The express purpose of these banks was to create credit, incorporeal entities created out of nothing, for a transitory existence, and then, havmg performed their functions, vanishing again into the nothing from whence they came. And has not this credit been catital ? Will any one, with these results staring the world in the face, believe that it is maintamed by "writers, who are still considered as Economists, that the eflects of credit are purely imaginary ! — That credit conduces nothing to the increase of wealth ! — That credit conduces nothing to production ! — That credit only transfers existing capital ! — And that those who maintain that credit is productive capital, are such puzzle-headed dolts as to think tliat the same thing can be in two places at once ! ! NoAV, we observe, that these Cash Credits, which have pro- duced such marvellous results, are purely of the nature of what is called accomniodation pcq^er in England. They are not based upon any previous operations, nor upon the transfer of com- modities already in existence. They are created foi* the express puri)ose of creating or forming future products, Avhich would either have had no existence at all but for them, or, at all events, it would have been deferred for a very long period, until solid money could have been obtained to i)roduce them. Thus we have an enormous mass of exchangeable })roperty, created by the mere ^\■ill of the bank and its customers, wliich produces all the solid eflfects of gold and silver, and when it has done its Avork, it vanishes again into notlung, at the will of the same jtersons who called it into existence. Hence we see that the mere will of inan has created vast masses of wealth out of nothing, and then Dkchkatkd them into Nothing, which, havuig served tlieir purpose, after a time were " Melted into iiir, into thin air." But their solid results have by no means faded like the base- less fabric of a vision, leaving not a rack behind. On tlie conlrarv, their solid rcsuHs li.-ivc bciMi licr far-lniiicd aiiricuhiirc, CONVERSION OF CAPITAL INTO CREDIT. lo9 tlie manufactures of Glasgow and Paisley, the uiu-ivalled steam- ships of the Clyde, great public works of all sorts, canals, i-oads, bridges, and poor young men converted into princely merchants. What the Nile is to Egy])t, that has been her bankhig system to Scotland; and it was fortunate for her that the foundations of her prosperity were laid broad and deep before the gigantic fallacy was dreamt of, that the issues of banks should be inexorably restricted to the amount of gold they displace, and before Mr. Mill had proclaimed to the world that those who created paper beyond that are robbers ! On Open Credits. 20. We have seen that Cash Credits are always created to forward a future 0])eration, and are never founded on a past one. There is always, however, collateral security taken, so as to protect the Bank against loss. In the keen spirit of competition, however, a hazardous system has sjtrung up of granting these credits without collateral security. This system is a good deal l)ractised abi'oad, we believe, and is called Credit a JDecouvert, and, in this country, Oj^en Credits. It is manifestly far more hazardous than Cash Credits, or common discounting, because there are always two names at least in such cases. We believe that the Joint Stock Banks, ^diich failed a few years ago, indulged to a great extent in this dangerous system. On the Transformation of Temporary Credit into Permanent Capital. 2 1 . We have already seen that, in commerce, the release of a debt is in all cases whatever equivalent to a payment in money. We shall now give an application of this doctruie, Avhicli may startle some of our readers. We have observed that mathematicians denominate debts negative quantities, because, in estimating a man's fortune, they are to be subtracted from his property. Now, let us suppose that a trader has a certain amount of property, or trading capital, and has also a certain amount of obligations, or debts, in circulation. Then, if any one were to make him a present of some money, that, of course, would be an augmentation of his capital. And, as Algebraists call money a positive oint, for the i)ayments are many of them made in specie, and hank notes are justly reckoned the same as specie n^hen paid in on a call of stocky because^ v^Jten paid in, ^< lessens the demand on the Jianky Here we see that the Directors clearly understood, that the Release of a Debt, is in all respects equivnlciil to tlic Payment of Mn[ODATI()N BILLS. 145 nccomniodate him with their names, and discounts these bills at his banker's, it is A\ duty to provide funds to meet every one of these bills at maturity. There is, in fact, only one real j)rincii»al debtor, and ten sureties. Now, these ten accommodation acceptors are probably ignorant of each other's proceedintis. They only give their names on the express understanding that they are not to be called upon to meet the bill ; and, accordingly, they make no provision to do so. If any one of them is called upon to meet his bill, he immediately has a legal remedy against the drawer. In the case of real bills, then, the bank would have ten persons, who would each take care to be in a position to meet his oavu engagemcTit ; in the case of accommodation pa])er, there is only one person to meet the engagements of ten.. Furthermore, if one of ten real acceptors fails in his engagement, the bank can safely press the drawer ; but if the drawer of the accommodation bill fails to nxeet one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer, they dare not, for their oaati safety, press the acceptor, because he will, of course, have immediate recourse against his debtor, and the Avhole fiibric will probably tumble doAni like a house of cards. Hence the chances of disaster are much greater when there is only one person to meet so many engagements than when there are so many, each bound to meet his own. We see, then, that the real danger to a bank in being led into discounting accommodation paj^er is, that the position of prin- cipal and surety is reversed. They are deceived as to who the real debtor is, and who the real principal is, being precisely the reverse to what they appear to be, which makes a very great difi'erence in the secm-ity to the holder of the biUs. To advance money by way of cash credit, or by loan with security, is quite a dift'erent affair ; because the bank then knows exactly what it is doing, and, as soon as anything occurs amiss, it knows the remedyto be ado])ted. IVIoreover, it never permits the advance to exceed a certain definite limit, but it never can tell to what length it may be inveigled into discounting accommodation paper, imtil some commercial I'everse happens, when it may discover that its customer has been carrying on some great speculative operation, with capital borrowed froni it alone. Such aj^pears to us to be the true explanation of the real danger of accommodation paper, and which was given Ln the first edition of this work, and we may say that its correctness has received the sanction of the high authority of Mr. Commissioner Ilolroyd, Avho ractice which has caused incal- culable disasters in commerce, and, whUe it is held to be good, entirely precludes the possibility of dealing legislatively with so great a curse. On the Extinction of Credit. 23. In the preceding sections we have examined the various operations out of Avhich credit is generated, and the trans- cendent functions it perform^s in ]n-oduction — it being, in fact, the grand ]>roductive, or circulating ])Ower, of modern times. We have )iow to consider the various modes hi Avhich it is ex- tinguished. Because it is by its very nature, and as api)ears by its very name, ti-ansitory, and is created always with the express purpose of being destroyed. It is when it cannot be destroyed that it produces such dire eftects. It is Unextinguished CitEDiT which produces those terrible monetaiy cataclysms, which sliake natiojis to tlieir foundations, scattering ruin and misery among societies. The inability of credit-sho}>s to ex- tinguisli tlie credit they have created, connuonly called the failures of banks, are, perhaps, among the most terrible social calamities of inodeni times. We liave seen that, in commerce, bills are created by the transfer of conniiodilies, a fresh one being created ;it each transfer. And this debt becomes itself a transl'erable com- ON THE EXTINCTION OF CREDIT. 153 motUty, juul is capable of circulating- an indefinite number of times, like money. This debt, or promise to pay, might be made payable in anything the parties jjleased — coin, wine, oil, &c., &c. — and, in some countries, is so. But in this country instruments of credit are always expi-essed to be ])aya)jle in inoney. But we have already seen that a debt is only a lower form of money, and hence there are four dilierent ways in which credit may be extinguished — 1. By Payment in Money. 2. By Exchanging one Debt for another. 3. By the Creation of fresh Debt to discharge the old. 4. Where parties are mntually indebted to each other, each being Creditor of, and each Debtor to, the other, they may make a Mutual Release of Debts. The different ])roportions in which these various methods are employed to extinguish credit, have very great effect in deter- mining what quantity of specie is required to carry on the commerce of a country. Before the estal)lishment of banks, credit could only in general be extinguished by payment in money. But, of course, the same quantity of money would extinguish an inlinite series of bills ; in fact, it is always by the circulation of money that bills are extinguished. Bills are always generated by the circulation of commodities, and always extinguished by the circulation of money. Each manufacturer, or merchant, would sell to a number of wholesale dealers, who would each buy from a number of manufacturers, or merchants. They would then each sell to a number of customers, or consumers. Many of these customers would pay in ready money, or, at least, they must all do so ulti- mately, so that the retail dealers would always have a constant stream of ready money coming in to dischai'ge their bills, as they fell due in succession. Now, as each wholesale dealer sells to a number of retail dealers, who would always have a stix'nm of ready money coming in to jjay their bills, each wholesale dealer would always have a stream of ready money coming in from many sources to enable him to discharge his Aarioiis bills to the merchants and manu- facturers. In a similar manner, the merchants and manufactiirers would always have a stream of money coming in from a mul- titude of sources to discharge their bills to foreigners and producers of raw materials. But, of course, each of them would spend a certain portion of their profits as revenue, that is, they would be custonu'rs ot the retail dealers. And, consequently, by these means, the identical i)ieces of money would }»erfonn a pepetual circulation among the various classes of society. Each j)erson collecting a multitude of little sums into one reservoir, as it were, and then discharging the aggregate so collected into a multitude of other chamiels. xVnd so on ad in/initutn. 154 THEORY AND PEACTICE OF BANKING. Now, the least consideration will show that the quantity of money bemg exactly the same, its circulation may be extremely languid, moderately ra])id, or extremely rapid. And as in com- merce, assumed to be sound, profits arise out of exchanges, it is clear, that within certain limits, the greater the profits will be, according as the circulation of money is more rapid. Moreover, •we see this, that the quantity of credit generated, does not depend simply on the quantity of money, but on its quantity midtiplied into the velocity of its circulation. We thus see how the fundamental distinction between bills of ladhig and bills of exchange is illustrated, which is at the root of the currency question. The bill of lading is not generated by the transfer of the Property of the goods, but only by a transfer of JPossession / and, when the possession is given up, the bill of lading is cancelled. Thus, the bill of lading is only extinguished by the delivery of the very goods it represents. But bills of exchange are generated by the transfer of the pro2)erti/ of goods, and are absolutely severed from them, and circulate indepen- dently in commerce, and are exchangeable for money at a given time. BUls of Lading can never exceed in quantity the goods they represent ; instruments of Credit cannot exceed the quantity of the Circulation of Money. Be the circulation of goods fast or slow, the quantity of bills of lading cannot vary, but the quantity of credit varies with the circulation of money, so that if the cir- culation be increased tenfold, credit may always be, and is almost necessarily increased tenfold. The preceding considerations shew that Credit is limited by the Circulation of money. It is cleai', therefore, that if some Kul)stitute for money be invented, or, if by impi'oved methods, a less quantity of Money can do the same duty as a greater quantity, the limits of Credit may be pro])ortionably extended. And new methods of extinguishing credit Avould come into existence. This is done to an enormous extent by the institu- tion of Banks. We have fully described in this section, and that on the Clearing House, how debts are extinguished by the creation of new debts, and partly by the exchange, or cancel- raent, of debts by the Bankers inter se. The extension of busi- ness, by the means of erectuig a vast superstructure of credit upon a basis of bullion, is something almost incredible. It is probably quite safe to say, that not over five per cent, of com- mercial transactions are ever settled in money. Such is the proj)ortion of JJehts, or Neeiatire Quantities, to Money in Commerce. On the Limits of Credit. 24. In tlie preceding sections we have endeavoured to lay before our readers an exposition of the actual mechanism of the system of Credit, and shew its powerful ettects as a productive agent. ON THE LIMITS OF CliEDIT. 155 Credit, in fact, is to money wli.at steam is to water. And, like that power, while its use within proper limits is one of the most beneficent inventions ever devised l)y the ingenuity of man, its misuse by unskilful hands leads to the most fearful calamities. It is chiefly the abuse of credit by Avhicli that over-production is brought about, which causes those terrible catastroi)hes called Commercial Crises. It is, therefore, essential to ascertain its limits. The true limits of Credit may be seen from the etymology of the word. Because all Credit is a promise to pay somet/iing in future. And that " something," whatever it be, is the Value of the promise. That something need not necessarily be money. It is perfectly possible that it should be anything else. The practice of interest, or usury, was in force before the invention of money. It might be a promise to do something. As an ex- ample of this, Ave may take a postage stamp, whicli is a jiromise by the State to carry a letter. And this service is the value of the stani}). Now, it is quite clear, and, to shcAV it, Ave have only to appeal to every one's experience, that a postage stamp is a valuable thing. It passes currently as small change. Noav, people take postage stamps as equivalent to pence, because they often Avish to send letters by the post. The recent regulations that stamps shall be convertible into money at any post office, makes them hi all I'espects part of the currency of the country. They are, in fact. Id. notes. Now, the only real difficulty in the case, is to observe that the naked " ])romise to ])ay " is inde])endent exchangeable property, quite distinct from the thing itself, and it may circulate, in com- merce, just the same as the thing itself. This may surj)rise some readers at first, but, to shew its truth, they need only appeal to their own daily experience, Avhere they see bank notes, cheques, and bills of exchange, circulating to the extent of hundreds of millions, and performing all the functions of money. We shall see beloAV, that J. B. Say, whose doctrines of credit AA^e shall examine m the next section, fully acknoAvledges that an instru- ment of credit has an actual value, and may perform the duties of money. But, of course, it is quite manifest that the Value of the promise is the Thlng itself, and, consequently, if the thing itself fails, the promise has lost its value. This, consideration, there- fore, at once indicates the limit of credit. Assuming credit to be, Avhat it is in its best knoAvn form in this country, the promise to pay money, it is quite clear that every future i)ayment has a present value. Conseciucntly, Avhenever the possession of money at any time is actually certain, the Right to receive it is an exchangeable Property, Avhich may be bought and sold. Conunercial credit, however, does not rest upon so solid a basis as the rcrtaintj/ of being in possession of money, fof then 156 THEORY AND PKACTICE OF BANKING. it would be as safe as money itself, and losses would be unknown. It is based upon the expectation of receiving money at a certain time. A trader buys goods, and gives his promise to pay money, upon the reasonable expectation that he will be able to sell them for money before the bill becomes due ; or, at least, that he will be in the possession of money before that time. That is, he produces, or brings and offers them for sale, in the hope that they will be consumed, or bought. If he brings for- ward for sale more of any species of goods than is suitable to the circumstances of the time, so that they caimot be sold at all, or if they are obliged to be sold at a lower price than they cost, that is over-production. He must then pay his bills out of any other funds at his disposal, or sell other property to meet them, and, if he cannot do so, he is ruined. In times of great speculation and great fluctuations of prices, there is an exceeding danger of over-production by means of credit, especially by that abuse of it called Accommodation Paper, which we have described, A new channel of trade is opened, perhaps, and the first to take advantage of it, make great profits. Multitudes of others, hearing of these great profits, rush in, all dealing on credit. The market is overstocked, and prices tumble down, and the credit created to carry on these operations cannot be redeemed, Not only are the speculators in many cases ruined, but also frequently the banks which created credit by discounting these bills. The institution of Banks and Bankers, who create currency by means of their Credit, either in the form of notes, or deposits, gives a great extension to the limits of Credit, But, never- theless, the i^rinciple of the limit remains the same. The increased quantity of currency they can issue by means of their Credit, enables them to lower tlie rate of discount. These banking debts take the place of money, and serve the j)urposes of money for all internal transactions. When a banker lias created these debts by buying commercial debts, those who are indel^ted to the banker must obtain a sufliciency of money, or of other bankers' notes, or of the banker's o^vn notes, to discliarge their [)]>ortunities whicli are presented by Par- liamentary in(]niries into C-ommenjial Crises are very rarely maeration. To say that Credit is a loan^ is as gi'oss a misconception of the nature of the thing, as to say that a guinea is the transfer of a book ! Moreover, the Avord loan is ambiguous. We have fully explained the nature of this ambiguity in § 4, where we have shewn that in English there is but one word for the two Latm ones mutuuni and cornmodum, in the distinction between which lies one of the greatest subtleties in Political Economy. An operation on Credit is always an exchange, where the property of the thing "lent" always passes to the "borrower," and the "lender" receives in return the right, or property, to demand back an equivalent to the thuig " lent " at a future time. Tiu-got, rightly enough, says that every Credit imj)lies a future repayment. That is true; Credit means the Right to a future Payment. And it is precisely because this Right is exchangeable for some- thing at a future period, that it has value. And it may be bought and sold like any other species of property. We shall see afterwards that J. B. Say, whose doctrines Ave shall have to examine, fully acknowledges this. The Opinion of Adlaces a very ex])ensive instrument of com- merce with one very much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which it costs less Itoth to erec^t and to maintain than the old one. " There are several different sorts of pai)er money, but the SMITH ON CREDIT AND CURRENCY. 165 circulating notes of bunks and bankers are the species which is best known, and which seem best adapted for this purpose." Thus we see that Sniitli exi)ressly includes all forms of paper credit under the term money, or circulating power, which he lias already said is Capital. After saying that if people have confidence in a banker, his notes come to have the same currency as gold and silver, because peo]ile believe that money can always be had for them, he says : " When a particular banker lends among his customers his own promissory notes to the extent, we shall supj)Ose, of £100,000, as these notes serve all the jnirposes of money, his debtors pay him the same interest as if lie had lent them so much money. This interest is the source of his gain. Though some of these notes are continually coming back on him for payment, part of them continue to circulate for months and years together. Though he has generally in circulation, therefore, notes to the extent of £100,000, twenty thousand in gold and silver may frequently be a sufficient provision for answering occasional demands. By this ojieration, therefore, £20,000 in gold and silver perform all the functions which £100,000 could otherwise have ]:)erformed. The same exchanges may be made, the same quantity of consumable goods may be circulated and distributed to their proper consumers, by means of his promissory notes to the value of £100,000, as by an equal value of gold and silver money." Thus we see that Smith says that a banker may deriA'e exactly the same profit from the use of his credit that he would from actual money, and, therefore, it is capital to him. And he shews that it has exactly the same effects on the country as so much money, and, therefore, it is equally capital to the coiuitry. He also su|)poses a case in which the circulating money of a country should be £1,000,000 at any time. Difl:erent banks and bankers issued paper to an equal amount, reserving £200,000 to meet the demand for specie. " There would remain, therefore, in circulation £800,000 hi gold and silver, and £1,000,000 of bank notes, or £1,800,000 of paper and money together." Thus we see that Smith classes paper credit as independent exchange- able property, just on the same footing as gold and silvei*. He then says that such an emission of paper will release a quantity of the circulating money, and enable it to be exported to pur- chase foreign goods, and to be invested in foreign trade, and he says : — " Whatever profits they make will be an addition to the neat revenue of their ovn\ country. It is like a new fund created for carrying on a new trade, domestic business being now trans- acted with paper, and the gold and silver being converted into a fund for this new trade." He says, also, that it may be aj^plied to purchase an additional stock of materials, tools, and provi- sions, in order to maintain and employ an additional number of 166 THEORY AND PRACTICE OF BANKING. industrious people, who reproduce with a profit the value of their annual consumption. * * * * " When paper is substituted m the room of gold and silver money, the quantity of the materials, tools, and maintenance which the whole circulating capital can supply, may be increased by the whole value of gold and silver, which used to be emj)loyed in purchasing them. ***** " When, therefore, by the substitution of paper the gold and silver, necessary for circulation, is reduced to, perhaps, a fifth part of the former quantity, if the value only of the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry, it must make a very consider- able addition to the quantity of their industry, and, consequently, to the value of the annual produce of land and labour. In speaking of bankers, he says: — " It is chiefly by discounting bills of exchange, that is, by advancing money upon them before they are due, that the great part of banks and bankers issue their promissory notes. * * The banker who advances to the merchants, whose bill he discounts, not gold and silver, but his own promissory notes, has the advantage of being- able to discount to a greater amount, by the whole value of his promissory notes, which he finds by exj^erience are commonly in circulation, he is thereby enabled to make his clear gain of interest on so much a larger sum. * * * " The banks, when their customers apply to them for money, generally advance it to them iu their oavu ^>ro?«/ssor7/ notes. These the merchants i^ay aAvay to the manufacturers for goods, the manufacturers to the farmers for materials and provisions, the farmers to their landlords for rent, the landlords repay them to the merchants for the conveniences and luxuries with which tliey supply them, and the merchants again retin-n them to the bank in order to balance their cash accounts, or to rei)lace wliat they may have borrowed from them ; and thus almost the whole money business of the country is transacted by means of them." Thus Smith clearly ])laces Paper Credit on exactly the same footing as money. He shewed tliat traders made a profit by their credit, and in the last-mentioned passages he shcAVS how bankers make a ])rofit by tlieir credit, and how, in process of time, the greater part of the circulation of the country is carried on by Credit. In 15. ii., a iv., he says: — "The stock whicli is lent at interest is always considered as a Capital by tlie lender." Then a little after — "Ahnost all loans at interest are made in money, either of paper or of gold and silver." * * "The quantity of stocJc, tlierefore, or, as it is commonly expressed, of inoney, whicli can be lent at interest in any country, is not regulated by the value of" the money, \v\\i.'\\\ov paper or coin, etc." 'J'iius Smith ex]»r('ssly classes Paper Credit under the term Capital, and, therefore, it must be Productive. It lias puzzled say's self-contradictions on credit. 167 many persons, however, to conceive how Credit can ho. Productive. This, of course, manifestly turns on tlie meanint? of Productive. We have fully shewn, in the first chapter, that Smith says that there are four ways in Avhich Ca])ital may be eni])loycd product- ively (B. ii., c. V.) — 1st, in ])r()curii)f;- rude produce; 2ndly, in manufacturino- it; J^rdly, in transporting it frctm place to place; 4thly, in dividing it into small parcels to suit the convenience of customers. Hence we see that he says Cai)ital may be product- ively employed in Ijuying and selUng. Now, of course, it will be at once seen that Credit is emj^loyed in buying and selling. Smith says that the labour of wholesale and retail dealers is i)ro- duftive because it adds to the value of the commodities they deal in. But persons can buy and sell with Credit equally Avell as with money. Hence their labour is just as much productive in the one case as in the other. And here Ave see at last the root of the difficulty which many persons have in conceiving that Credit is productive capital, because they evidently mean by production an uicrease o\ quantity. But the fact is that circula- tion is one species of production, and hence the circulating power is Cai)ital. Now, the circulating medium, as every one knows, is Money and Credit. As Smith says (B. iii,, c. i.) : — "The great commerce of every civilized society is that cai-- ried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of pxiper which represents money." The extracts which we have laid before our readers are quite sufficient to shew that Adam Smith never committed the extraordinary error of supposing that Credit is the transfer of Capital, as is so connnon at j^resent. It is cpiite evident that he always knew that Credit is inde])endent, exchangeable property, and that it is PRODUCTIVE CAPITAL. Self-contradictions of J'ean Pctptiste Say, on the subject of Credit. 29. TVe now have to examme the opinions of J. B. Say respect- ing Credit, as it is he who, fullowing on the erroneous notion of Turgot, invented the jthrase which so many unthinking wiiters have echoed from that day to this, that those who consider Credit to be Capital, maintain that the same thing can be in two places at once ! Credit, as we have shewn in the preceding sections of this treatise, is a species of incori)oreal proi)erty, and was always well understood to be so, until Tin-got originated the erroneous notion that it was a loan, or the transfer of something. The question of Credit, therefore, involves that of the admission of incorporeal property into Political Economy. We shall find that all this confusion arises from Say ne\ er 168 THEORY AND PRACTICE OF BANKING. having carefully thought out the fundamental conceptions of the science, and his uicredible self-contradictions on almost every one. Say's name stands so high in the subject, and his doctrine has been chorused by such a multitude of writers, and the matter is in itself of really such transcendent importance, that we miist give some space to a thorough investigation of his views. We must, therefore, inquire into his notions of Wealth, Value, Capital, and Credit. On Say's definition of Wealth. It is veiy commonly supposed that Say was the first -writer to uitroduce immaterial products into Political Economy. This, however, we have shewn to be an error, as Adam Smith ex- pressly enumerates the " acqiiired and useful abilities of the inhabitants," as part of the AVealth of the society. We have also sliewn that Smith admits paper currency, or Credit, to be excliangeable property. Thus recognizing the existence of Three species of Wealth. Say does exactly the same, and he also enumerates several other species of incorporeal proj^erty besides credit. And in his Cours Complet d''Economie Politique, Part i., c. i., Vol., i., p. 67, he says: — "La possession exclusive qui, an milieii d'une nombreuse reunion d'hommes, distingue nettcment la propriete d'une autre personne, fait que dans I'usage commun, cette sorte de biens est la seiile a laquelle on donne le nom de RiCHESSE. * * C'est la que viennent se ranger non- seulement les choses capables de satisfaire directement les besoins de I'homme, tel que I'ont fait la nature et la societe, mais les choses que ne peuvent les satisfaire qu' indirectement en fouruissant des moyens de se procurer ce qui sert inimediate- ment, comme Fargent, les TITRES DE CREANCES, les con- trats de rente, etc." Thus we see that Say expressly enumerates Debts, or Ckedit, as Wealth. Again, in B. i., c. i., of his Traitc, after speaking of things of value, such as the earth, metals, money, corn, stutis, &c., he says : — "Si I'on domie aussi le nom de richesses a des contrats de rentes, k des e^'ets de commerce, il est evident que c'est jiai-ce qu'ils renferment mi engagement pris de livrer des choses qui ont unc valeur ])ar elles memcs." Again, in his Coi/rs, I'art i., c. i., he says : — " Vous voyez que la richessc ne depend pas de respece des clioses, ni de leur nature physique, mais d'une (jualite morale que chacun nomme leur valeur. La valeur seule transforme mie chose en ricliesse dans le sens oii ce mot est synonyme de biens, de proprietes. La richesse qui reside en une chose quelcoiupie, que ce soit une terre, un cIicvmI ou une Icftre de cha^if/e, est pro])ortionnee u sa valeur. Quiuid nous parlous des clioses comme elant des say's self-contradictions on credit. 1()9 richesses, nous ne parlous ])oint des autres qualitos qii'elles peuvent avoir ; nous ne i)arloiis que de leur valeur." These extracts are ([uite suHicient to prove that J. B. Say amply admits instruments of credit to be "wealth, Avhich Avill be much more fully exemplitied further on. O71 Say's Definition of Value. We shall noAv find exactly the same incongruity in Say's notions of value, as has been the ruin of so much of modern Economics, He over and over again says, that value is some- thing external to an object, for Avhich it can be exchanged, and then he repeatedly sj^eaks of Intrinsic value, without the least idea that these are contradictory conceptions ! To sheAv this, we can only quote a few passages out of many. Thus, Cours, Part i,, c. i., he says : — " La seconde circonstance a, remarquer relativement a la valeur des choses, est l'im])ossibilite d'apprccier sa grandeur ahsolue. EUe n'cst jamais que compara- tive. Quand je dis qu'ime maison qi;e je designe, vaut 50 mille francs ; je n'attirme autre chose sinon que la valeur de cette maison est cgale a, celle somme de 50 mille francs ; mais qii'est ce que la valeur de cette somme ? Ce n'est point une valeur existaute par elle meme, et absti'actiou faite de toute compa- raison. La valeiir d'mi iranc, de 5 francs, de 50 mille francs, se compose de toutes les choses que Ton peiit avoir pour ces differ- entes sommes. Si Ton pent, en les donnant en echange, avoir mie plus grande quantite de blc, de Sucre, rejudices of men ? These passages are sufficient to shew that Say admits that the source of Value lies in the human mind. On Sat/s definition of Capital. We shall see how self-contradictory Say is on the subject of Value hereafter, but his self-contradictions on the siibject of Capital are, if possible, still more astonisliing. They will appear more striking if avc place them in parallel columns. Say says that Immaterial Say says that Immaterial and Incorporeal Capital is no and Incorporeal Cap)ital is part of National Wealth. part of National Wealth. Cours. Considerations Generates. *' Dejniis qu'il a ete ])rouv6 que les proprict es immal erielles, tels que les talents et les facidtcs personelles acquises forment une partie intcgrante des ri- chesscs sociales." Cours. Part iv., c. v. " II faut comiirendre ]>armi les capitau.x plusieurs biens (|iii out une valeur quoiqu'ils no SAY S SELF-CONTRADICTIONS ON CREDIT. 171 Cours. Part i., c. x. La nature des capitaux, la nature ties fonctions, nouz de- couvrent des verites asscz im- portant es. L'lnie d'elles est que les capitaux productifs ne consistent point en valeurs fictives et de convention, raais seulenient en valeurs reelles et intrinscques que leurs posses- seursjugent li jiropos de con- sacrer li la production. En eifet, on ne pent acheter des services productifs, qu'avec des objets niateriels ayant une valeur intrinseque; on nepeiitamasser en capitaux et transniettre u une autre personnc, que des valeurs incorporees dans des objets inateriels. soient pas niateriels. Le cabinet d'un avocat, d'un not aire, la chalandise d'une boutique, la rejjutation d'une enseigne, le titre d'une ouvrage periodicjue, sent incontestablement des biens ; on pent les vend re, les acquerir, en fair I'objet d'un contrat , et ces sont des biens capitaux, ])arce que ces sont les fruits accumules d'une Indus- trie. Un avocat par la sagesse de ses avis, par son assiduite et ses autres qualitcs a fait con- cevoir au public une bonne opinion de son cabinet; cette opinion favorable lui donne droit a de plus forts honoraires; ce supplement de profit est le revenue d'lm capital appele reputation; et ce capital est le fruit des soins et des peines que I'avocat a pris jsendant plusieurs aionees. In a note to this j^assage he says :— II y a des capitaux qui ne sont pas incorpores dans les choses materielles, comme la clientelle d'un notaire, d'une entreprise commerciale ; mais cette portion de capital est une valeur tres reelle, et non pas seulemcnt un signe comme ceux qui selon certaines per- sonnes peuvent remplaces les capitaux. So also just afterwards — Les seuls capitaux que je saclie etre immateriels, sont la clientelle, la chalandise d'un magasin, d'lm cabinet, d'un journal. On pent aliener, on pent vendre un capital de cette espece. 172 THEORY AND PRACTICE OF BANKING. Traite. B. i., c. xiii. De la nature des produits iramateriels, il resulte qu'on ne saurait les accumiiler, et qu'ils ne servent point a aug- menter le capital national. Une nation ou il se trouvait une foule de miisiciens, de pretres d'employes pourrait etre nne nation fort divertie, bien endoctrinee, et admirable- ment bien administree ; niais voila tout. Son capital ne re- cevrait de tout le travail de ces homines industrieux aucun accroissement direct, ])arceque leurs produits seraient con- sommes a mesure qu'ils seraient crees. Definitions at end of same. Tout capital transmissible est compose des 2^^'oduits nia- terielsj car rien ne peut passer d'une main dans une autre, si non des niatieres visibles. Cours. Part iv., c. iii. Sans une classification des choses possedees qui les em- brasse toutes, en fesant une evaluation des biens d'une nation, d'une communante, d'un particulier, nous ne serious jamais certains de la faire complete * * * Nos proprietes composantde nos biens quels qu'ils soient, comprennent nos biens naturels, en uieme temps que nos richesses sociales." And after going tlirougli several descriptions of personal talent, he says : — " Ce que je vous ai dit suflit je pense i^our vous convaincre, messieurs, que les facultcs in- dustrielles sont des jiroprietes du meme genre que toutes les autres, et que ce n'est qu'en les respectant a I'cgal de toutes les autres qu'on obticnt tons les avantages sociaux attaches au droits de propriete. Par la meme raison cette espece de propriete, quoiqu'elle puisse difKcilement se traduire en chiftres fait neanmoins partie des richesses gem'rales d'une nation. Une nation ou les capacites indnstrielles sont plus nombreuses plus eminentes qu' ailleurs, est une nation plus riche." It is only requisite to read over these extracts, to see Say's self-contradictions on the subject of Capital. On Sai/s Ojnnion on Instruments of Credit. Wc sliall now bo ;ililc lo sliew liow Say's doctrines on in- struments of credit is in direct contradiction to some of these opinions on caj>ital. We have already shewn that he expressly classes debts under tlic title of Avcnitli. say's self-contkadictions on credit. 173 Afi^ain, he says, TrmU', B. i., e. 30 : — " tine Ijillet a ordi'c, \ino lettre de change, sont cles obligations contractees de i)ayer, ou de faiiv payer, une somrae soit dans mi autre tenijjs, soit dans un autre lieu. "Le droit attache a ce niandat (quoicjue sa valeur ne soit ])as exigible a Finstant et au lieu oCi Ton est), lui donne ncannioins une Valeur Actuelle, plus ou moins forte. Aijisi un effet de commerce de cent francs, payable a Paris dans deux mois, se negociera, ou, si Ton vent, se vendra i)our le ])rix de 99 trancs ; une lettre de change de pareille somme, payable a Marseille au bout du meme espace de temps, vaudra actueileraent a Paris peut-etre 98 francs. " Des-lors qu'une lettre de change ou x;n billet, en vertu de leur valeur future, ont une Valeur Actuelle, ils peuvent etre eni])loyes en guise de monnaie dans toute espece d'achats, aussi la plu]iart des grandes transactions du commerce, se reglent-elles avec des lettres de change." Thus Ave see in this passage that Say maintains exactly the same doctrine as we have set forth in the i)receding sections, that an instrument of Credit is a jwesent right to a futvre payment, and that it is separate and independent exchangeable pro])erty. That is, that Credit, or Debts, are WEALTH. We may also quote another passage from his Cows (Part iii., division iii., c. 27, p. 461, vol. i.) : — " H y a neamnoins une observation import ante a fiiire relativement aux signes repre- sentatifs des monnaies. C'est qu'ils sont capables de rendre un service exactement pareil au service que peuvent rendre les monnaies qu'ils representent. Si quelqu'un souscrivait un en- gagement i)ar lequel il s'obligerait a livrer, a une epoque de- signrc, un manteau fait de telle ou telle fa$on, cette promesse, quoiqu'elle fut en ([uel(|ue sorte mi sigue, un gage dela possession du manteau, ne saui-ait en tenir lieu ; car mie feuille de papier ne garantit pas du froid, comme fait un manteau ; tandis que les signes qui re})resenteut la monnaie, peuvent la remplacer com- pietement, et rendre tons les services que Ton pent attendre d'elle. En eftet, les qualites qui font qu\in sac d'argent nous sert dans nos echanges, peuvent toutes se trouver dans ime billet. Ces qualites, vous le rai)pelez, consistent : " D'abord dans la Valuer qu'il a. On 2)^ut donner a un billet exnctment la meme valeur qiCa une somme (Targent, en donnant au porteur le droit de toucher la somme, de mahiere a lui oter toute inquietude sur ce remboursement ; c'est ainsi qu'un billet de banque pent circuler dix ans en conservant xme valeur de niille francs sans qu'il soit reml)ourse, seulement parce qu'on est convaincu qu'il le sera du moment que le porteur le voudra. ***** " Vous voyez. Messieurs, que toutes les qualites utiles de la monnaie peuvent se retrouver dans un signe representatif, qui n'a 17-1 THEORY AND PRACTICE OF BANKING. aucvine valeur par lui-meme, et tii'e cle la momiaie meuie, toiite celle que I'on veut bien lui accorder." Hence we see that these passages assert as clearly and explicitly as it is jjossible that language can do, that Credit may be in all respects equivalent to money, and, therefore, that it may be Capital, just as money may. Having thus laid before our readers these exjilicit declarations of Say, that Credit is Wealth, we will now place before them the passage which has been the foundation of such an immense amount of misconception. He says Traltc^ B. ii., c. 8 : — " On s'imagine quelquefois que le Credit multiplie les capitaux. Cette erreur qui se trouve frequemment reproduite dans une foule d'ouvrages, dont quelques unes sont memes ecrits ex 2))'ofesso sur I'economie politique, suppose une ignorance absolue de la nature et des fonctions des capitaux. TJn capital est toujours tme valeur tres-reelle, etjixee dans line niatlere/ car les j^roduits immateriels ne sont pas suscejMlbles cPacciimidatlon. Or un produit materiel ne saurait etre en deux endroits a la fois, et servlr a deux personnes en meme temps. Les constructions, les machines, les pro\'isions, les marchandises qui composent nion capital, peuvent en totalite etre des valeurs que j'ai empruntees ; dans ce cas, j'exerce une Industrie avec un capital qui ne m'appartient pas, et que je loue ; mais, a coup sur, ce capital que j'em])loie n'est pas employe par un autre. Celui qui me le prete s'est interdit le pouvoir de le faire travailler ailleurs. Cent personnes peuvent meriter la meme confiance que moi ; mais ce Credit, cette confiance meritee ne multiplie pas la somme des capitaux disponibles ; elle foit seulement qu'on garde moins de capitaux sans le faire valoir." lie also says in his Cours (Part i., c. 9): — "Le manufacturier (\\\i achete a Credit des matieres premieres, emprunte a son vendeur la valeur de ces merchandises pour tout le temps oil ce dernier lui fait Credit ; et cette valeur qu'on lui prete, lui est fournie en marchandises qui sont des valeurs materielles. " Or, si Ton ne pent preter et emprunter une portion de Cai)ital qu'en objets effectifs et materiels, que devient cette maxime (pie le Credit multiplie les capitaux? Mon Credit pent bien faire queje dispose d'une valeur materielle qu'un ca)»italiste a mise en reserve ; mais s'il me la 2>i'ete, il faut (|u'il denieure prive ; il ne pent pas en m^me temps la preter a, une autre personne ; la meme valeur ne saurait scrvir deux fois en meme tem])s ; I'entrepreneur qui eniploi cette valeur, qui la consomme \iO\XY accomplir son oj)eratioji ]iroductive, empeclie qu'aucun autre entrepreneur ])uisse I'employer dans la sienne." We have now to remark upon the extraordinai-y self-contra- dictions of Say. He tells us expressly that instruments of Credit have an actual value in respect of their future payment, and that they may be made to have precisely the same value as say's self-contradictions on credit. 175 money itself, and may bo employed in purchases iii all respects exactly in the sanie manner that money may. Now this, of course, hy implication, admits that they may be Capital, because money is only used as Ca})ital, by being employed iu buying and selling. Having laid this down as clearly as can be, we have now to see how Say proceeds to contradict himself. He says, in the passages last cpioted, that Caytital is always a very real value fixed in a matter ! Why, he himself has told us that there is incoi'poreal Ca})ital not fixed in any matter whatever, such as C^)i)yright, the goodwill of a business, &,c., &c. He then says that immaterial products are not capable of accumulation! What! Camaot a man be jjossessed of £100,000 of Funded Property? And of the Copyrights of Books, tfcc, and of a number of Bills of Exchange? He then says that a material product cannot be in two j)laces at once. But who said it could — except Sir Boyle Roche, the famous Hibernian, — and even he limited this ])Ower to birds? Neither, howevei', can an im- material proe, is Wealth. Consequently, if bank notes, bills of exchange, &G. — or Credit — can be bought and sold, they are Wealth, by the very force of the definition. Let us now turn to Mr. jMilfs definition of Capital. He tells us, ]>. i., c. iv., that money may be productive capital by being exchanged for other things, and that anything which is sus- ceptible of being exchanged for other things is capable of con- tril>uting to production in the same degree. That is to say, without inquiring here what is meant by production, he says that money may be productive capital by being used iii a certain way, and that anything which may be used in a similar way may be productive capital as nuich as money. Now, it is perfectly well known that bank notes, bills of exchange, &c. — or Credit — may be, and are exchanged for other things just as money is. Hence this sentence ex]:)ressly imi^lies that Credit may be pro- ductive Capital just as much as money. Thus Ave see that Mr. Mill has ali'eady, by implication, admitted that credit may be capital. And this doctrine Ave shall find he still more explicitly states Avhen he s])eaks of credit itself, J3. iii., c. xi., is headed, " Of Ci'edit, as a substitute for money." Noav, Ave observe that if one thing is to be a substitute for another, it must be of the same general nature. Not so high, or excellent in degree, ])erhaps, but still it must be of the same kind. Things of totally difierent natures cannot be substituted for each other. Thus, for instance, if a man camiot get xxx ale, he may have to put up Avith swipes as a substitute. But a pair of shoes could never be a substitnte for a glass of ale. If, therefore, credit is to be a substitute for money, it must be of the same general nature as money. Xoav money, as every one knoAvs, is separate and inde- pendent exchangeable property, and, consequently, credit must be so also. Money, if used in a certain Avay, is capital ; credit must 178 THEORY AND rRAOTICE OF BANKING. also be capable of being used as capital as well. If money, tlierefore, is capable of being productive capital, credit must be so likcAvise. Passing over the beginning of this chapter, to which we shall revert, Mr. Mill says, in § 3 : — " For Credit, though it is not jyroductive power, is 2^urchasing power." Now, here is a strik- ing contradiction already to what he had said Ijefore. For, in B. i., as we have already shcAvn, he says that anything which has power of purchase is Wealth. Here he admits that credit is purchasing power, and, therefore, by his own shewing, if it is purchasing power, it is Wealth ; and if it is Wealth, it may, by his o^vn admission, be productive capital. In § 5, he says, that a form " in which credit is employed as a substitute for currency is that of promissory notes." In § 6, he says, another mode " of making credit answer the purposes of money, by which, when carried far enough, money may be very completely superseded, consists in making payments by cheques." Here we see that he expressly calls the Promissory Note and the Cheque, the Credit. In the next chapter, xii., we shall see that he expressly allows that these instnmients of Credit are independent exchangeable property, and valuable thmgs. He says, § 1 : — " An order, or note of hand, or bill ^>«y«5/e at sight, for an ounce of gold, while the credit is rmimpaired, is worth neither more nor less than the gold itself;" and, " But we have now found that there are other things, such as bank notes, bills of exchange, and cheques, which circulate as money, and perform all the functions of it." Now here is an exjilicit declaration that Credit performs ALL the functions of money, and, therefore, as one of the functions of money is to be productive Capital, it follows that Credit may also be productive Capital. In § 2 of the same chapter, he saj's, that a man "may make purchases Avitli money which he only expects to have, or even only ])retends to expect. He may obtain goods in return for his acceptance payable at a future time, or on his note of hand, or on a simply book credit, that is, on a mere i)romise to pay. All these purchases have exactly the same efTect on })rice, as if they were made with ready money. The amount of ]iurchasing power wliich a person can exercise, is composed of all the money in his possession, and due to him, ani") of all ins Ckedit." " He creates a demand for the article to the full amount of his money and Ck7':i)it tnhen together, and raises the price pro])or- tionably to both." In § 3, he says : — " The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purcliasing power." In § 4: — "The banker's (-redit Avith the public at large, coined into notes, as bullion is coined into pieces of money to make it [)orta1)le and divisible, is »o miirh pvrchasvng power super- MR. mill's self-contradictions on credit. 179 ADDED, in the liaiids of every successive holder, to that which lie may derive from his o^^^l credit. * * Credit, in short, has exactly the same purcliasing power with money; and, as money tells nj)on prices not simply in proportion to its amount, but to its amount multiplied by the number of times it changes hands, so also does credit ; and credit, transferable from hand to hand, is in that ])roporti()n more potent than credit which only per- forms one purchase." In § 5, he says : — " Since, then, credit in the form of bank notes is a more ])Otent instrument for raising prices than book credits — * * If we consider the proportion which the utmost increase of bank notes in a i)eriod of speculation bears, I do not say to the whole mass of credit in the country, but to the bills of exchange alone, the average amount of bills in existence at any one time is su])posed considerably to exceed a hundred millions sterling. The Bank Note circulation of Great Britain and Ireland is less than thirty-five millions, and the increase in speculative periods, at most, two or three." And, as a note to this passage, Mr. Mill gives a table of the bills sup2:)0sed to be created in several years, the last of which is 1830, when the bills supposed to be created amounted to £528,493,842. In c. xiii., he says: — "After experience had shewai that pieces of jiaper of no intrinsic value, by merely bearing upon them the written j)rofession of being equivalent to a cei'tain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the issuers which could have been produced by the coins Avhich they purported to represent — " Now, from these extracts from Mv. Mill's Avork, our readers will clearly perceive that he expressly asserts, as positiA^ely as it is possible that language can do, that Credit is indejiendent, exchangeable property, like any other. That it is cumulative property to money and commodities, and that it may be dealt with precisely in the same manner as money, and may produce all the etfects of money. Now, as this Credit is nothing but circulating debts, it follows clearly from Mi". Mill's own admission, that Dehts are Wealth. All this is in exact accordance with the ital V The very object of the whole of tile preceding extracts is to shew that Credit is Capital !] It seems strange that there should be any need to MR. mill's SKLK-CoN'rUADICTIONS ON CREDIT. 181 point out that ermission to use the cajntnl of another jyei'soii ! ! the means of ])roduction cannot be incroasecl hy it, but only transferred. If tlie borrower's means of ]M-o(biction, and of emi)lf)ying labour are increased by the credit given him, the lender's are as much diminished. The same sum cannot be used as capital, both by the owner and also by the person to whom it is lent, it cannot supply its full value as wages, tools, and materials, to two sets of labourers at once. It is true that the Capital which A has borrowed from B, and makes \ise of in his business, still forms part of the wealth of ]>, for other purposes; he can enter into engagements in reliance on it, and can even borrow, when needful, an equivalent sum on the security of it ; so that, to a superficial eye, it nught seem as if both B and A had the use of it at once. But the smallest con- sideration will shew that when B has i)arted Avith his cajiital to A, the use of it as cajjital rests with A alone, and that B has no other service from it tlian in so far as his xiltimate claim ui)on it serves him to obtain another capital from a third person C. All capital (not his own) of whicli any person has really the use, is and must be, so much subtracted from some one else. " But though Credit is never anything more than a Transfer of Capital from hand to hand^ Our readers cannot fail to see the astonishing confusion of ideas, on the sul)ject of Credit, in the above extracts. In the first set, Mr. Mill sees clearly Credit is the Promise to jviy, which he over and over again says is independent, exchangeable property, of the value of money, which may be used in all resj)ccts like money, and perform all its functions. And, there- fore, it may be Capital as Avell as money. j\Ir. Mill says that the Capital {i. e., the goods) whicli A has sold on credit to B, are so much subtracted from his property, and cannot be used by him as well as by B. But he wholly forgets that, in exchange for those goods, A receives B's " pro- mise to pay," which is a debt, and, in fact, is the credit. And this debt is exchangeable property, with which he can either purchase new goods to replace those he has sold to B, or he can sell it to his banker, and receive a bank ci-edit, with which he can })urchase fresh goods, just the same as he could with money. In the second extract VLw Mill has changed his conception of Credit from being a Promise to pay, or a Debt, to its being the Transfer of Cajntal ! ! Now, we ask — Is a Bank Note the transfer of a commodity ? Is a guinea the sale of a book ? Is a piece of independent pro- perty the transfer of something else? Is a table the transfer of a chair? Is an independent quantity of any sort whatever an o2yeration ? Mr. INlill informs us (hat Credit cannot make something out of nothing. Who said it coulil ? Can a guinea make somftliiiig 182 THEORY AND PRACTICE OF BANKING. out of nothinq; ? It is not Credit that makes somethinsf out of nothing ; but it is Credit itself which is a vahiable pi'operty, Avhich is created out of nothing by the consent of the Avills of persons, and which, by the reiterated acknowledgments of Say and JVIill, is capable of performing all the functions of money. NoAv, money becomes Capital, by their own admission, by being exchanged for other things, or by circulating other things. Credit may be Capital in precisely the same way. Moreover, we see how completely Mr. Mill is in error when he says that Credit is never anything more than the transfer of CapitaL It is wliolly untrue that Credit is always created in exchange for commodities. As we have shewn in the preceding section, all profitable bankuig business consists in bupng debts by creating other debts. Tlaat is, Credit is created to purchase Credit. After this exposition, our readers will, perhaps, think that Mr. Mill is not exactly the person to sneer at others for their confused notions about Credit, though his oAvn work is a striking example of the misunderstanding and confusion of ideas which he says prevail upon the subject. And many may wonder, perhaps, at a logician who is unable to perceive the difference between an indejDendent quantity and a sale of goods. Opinions of some other Writer's. 31. We have sufficiently shewn, we hope, the inconsistency of the doctrines of Say and Mr. Mill on credit. We may give a quotation from a few other well-known Avriters. Thus, Bastiat says {Harmonies IiJconomiques, Art. Capital, Vol. vi., p. 219., edit. 1855) : — " Ce qui est i)lus snrprenant encore, c'est que nous pouvons faire I'opcration INVERSE, quelque impossible qu'elle semble au premier coup d'oeil. Nous pouvons convertir en instrument de travail, en chemin de fer, en maisons, un cajiital qui n'est pas encore ne, utilisant ainsi des services, qui ne seront rendus qu'au xx^ siecle. II y a des ban(puers qui en font I'avance sur la foi que les travailleurs et les voyageurs de la troisienae ou quatrieme generation i)Ourvoirent au i)ayment; et ces titres sur Vavenir {i. e., instruments of Credit), se transniettent de main en maui sans rester jamais I]V11*R0- DUCTIFS." This is exactly tlie very doctrine we liave been endeavoiu'ing to explain. In commerce, tliese titres snr Vavenir, or instru- ments of Credit, are not drawn u])on the third and fourth gene- ration, but they are drawn ])ayable tln-ee or four months lience, and are ex(^liangeable pro]»erty, and made productive cai)ital by circulating merchandize. Mr. IM'Culloc;]i says, in his Dictionary of Commere, Art. liankinij : — " Those who issue such notes, coin as it were their credit. They derive the same revenue from the loan of their DIFFICULTIES OF CREDIT. 183 written promises to pay certain snnis, that tliey would derive from tlie loan of the sums themselves ; and, while they thus increase their own income, they at the same time contribute to increase the wealth of the soeiety." Therefore, Mr. M'Culloeh clearly asserts that Credit is pro- ductive capital. Mr. Gilbart says [Logic of J)ility of all things. IIow seeming destruction is merely the dissolution of atoms imder their ])resent com- bituitions, to reai)pear in new forms and new combinations in perpetual succession. IJut Political Economy confounds the best settled doctrines of the sages of eld. It is true tliat many Economists have declared that man can call nothing into existence, that all wealth comes from the earth. That Avealth is but the particles of matter, and tliaf all that man can do is to re-arrange them, and either ]>lace them in a new position, and let nature do the rest. But their own doctrines, their own books, their own oioer — it is far inore certainly Wealth. Asia IVIinor, Syria, Egyi)t, and the Northern Coast of Africa, were once among the richest, and are now among the most miserable countries in the world, simply because they have fallen into the hands of a people without a sufficiency of the immaterial sources of wealth to keep up the material ones." Knowledge, therefore, by the very generality of the definition, and the consent of nearly every Economist of note — is Wealth, And where does Knowledge come from ? And what is it formed out of? Does it come from the eartli ? and is it formed out of the materials of tlie globe ? We should fimcy that few would maintain that. All that we know is that Knowledge originates in the mind. Knowknlgc is formed i)i the mind, but is it formed oat of the materials of the mind? And if so, wliat is tlic composition of the mind? Does it come from the earth? Are we to liave an Atomic theory of Knowledge, or of the Mind? Will some metaphysical Dalton tell us that knowledge, or the human mind, is composed of indestructible i)rimordial Atoms ? IloWa ra ^eii'u, Kov^ey ay- OfnuTTOu (jtiuorefxiu 7rc\et DIFFICULTIES OF CREDIT. 187 But this same knowledge — Whence cometh it? W/mt is it? Whither goeth it? We know not — Do our readers ? Nevertheless, it is Wkat.tii ; and, therefore, it is within the domain of the Economist. It may be bought and sold ; it may be valued ; it may be accumulated ; it may be handed down from age to age, like any material product whatever. The acquisition of knowledge is the acquisition of Wealth ; and the loss of knowledge is the destruction of Wealth. And is the loss or destruction of knoAvledge the dissolution of indestructible primordial atoms ? Here, then, are vast masses of Wealth, and the question is where it comes from, and what is it composed of? And there are but two solutions of the question. Either knowledge is composed of indestructible atoms, or it is not. If it be so, then, of course, the formation of knowledge is not the Creation of Wealth out of Nothing. But, unless we are ]H-epared to admit that — and who is ? — the formation of knowledge must be creation of Wealth out of Nothing. And the loss or destruc- tion of Knowledge must be the Decreation, or the return, of Wealth into Nothing ! As one example of this out of thousands, we may take a case that was not very long ago before the Scotch Courts. In the beginnmg of the iVth century, a man named Anderson dis- covered a way of making pills, which soon became very popular. The secret of making these pills has been handed dowai from generation to generation, and has been a constant source of Wealth to the owner of it. Very recently, the possessor of it became bankrupt, and his creditors claimed the right of havmg it given up to them, as part of the bankrupt's property. The pills have been analysed in vain by chemists, and the secret of their composition has never been able to be discovered. Now, here is a manifest case of a trade secret — knowledge, — being Wealth, — and where did this Wealth come from ? and Avhat is it composed of? Did it come from the earth ? and is it com- posed of the materials of the globe? And yet it has been handed do^\^l as an heirloom from age to age. Suppose the present ])Ossessor of the secret dies A\ithout divulging it, there is a manifest loss of Wealth. And what Avould become of it in such a case ? And this is clearly only a particular example out of countless others. Here, therefore, Ave have enormous masses of what every Economist, with scarcely an exception, admits to be wealth, which shakes the doctrhies of the Physical Philosophers. But also, the doctrines of many Economists are equally ovei'thrown, because they say that all wealth comes from the earth. But here we have great masses of Avealth Avhich do not come from the earth. Hence it is manifest that there is another source of wealth besides the Earth, namely, the Human Mind. 188 THEORY AND PRACTICE OF BANKING. But even this does not exhaust the list of Economic Quanti- ties, though Economists have scarcely noticed any other. 'When we adopt the definition of Wealth as everytliing that can be exchanged, or whose value may be measured, we very soon find that there is yet another species of exchangeable quantities, which do not origmate in the earth, nor yet in the mind. And here again we may observe that Lucretius is at fault. P^'or he says that there is nothing, besides the void, which is separated from somethmg corporeal. I. 420 : — Omnis, ut est, igitur, per se, Natura, duabus Consistit rebus; nam Coiu'gra sunt, et Inane. ^ ^ ^ ^ ^ Pra3terea nihil est, quod possis dicere ab omni Corpore sejuuctum, secretumqe esse ab INANI. SjC JjC ^ ^ ^ Et facere et fungi sine COKronE nulla potest res. ^ ^ ^ :i: ^ Ergo prffiter Inane et Corpora, tertia per se Nulla potest rerum in numero natura relinqui. From these lines it is clear that Lucretius did not live in the days of Public Debts, Bills of Exchange and Bank Notes, Bank Shares, Copyrights and other incorporeal propei'ty, or he would have modified this part of his Philosophy. Modern ingenuity has reduced what Lucretius declared an im})Ossil)ility into reality. There are enormoiis masses of ex- changeable incorporeal property, for which there are express shoi)S for creating, and there are special markets for trafficing in, namely, the Royal Exchange and the Stock Exchange. Mr, Mill, we have seen, defines Wealth to be anything which has power of j^urchasing, and he says that productive labour is labour which is productive of Wealth. Hence manifestly labour Avhich produces anything which is exchangeable is j)roducing Wealth. In Book iii., c. xii., § 5, he gives a table shewing that the Bills created in a single year amounted to .-£528,493,842, and these, after all, Avere but a fractional i)art of the total (juantity of credit. Li B. iii., c. xx., § 2, ho expressly calls ]>ank Notes " Productive Capital," and Smith enumerates jjaper credit cumu- latively to gold and silver money. Now, we observe, that every one alloAvs Bank Notes, Bills of Exchange, &c., to be sei)arate, independent, exchangeable ])ro- perty, and, therefore, ex vi termhd — AVealth. And what are they ? Simply Credit — Deists. Now, where do these debts conK^from'i' Do they come from the materials of the globe ? Are tliey, too, formed of indesti'uctible ])riniordial atoms? AVlien a del)t is extinguished, is it a mere dissolution of certain material particles to reappear under another form '? Are they even the produ(^ts of Labour and the human mind? How iw a debt created ? By the mutual eo?isait of two minds. DIFFICULTIES OF CIIEDIT. 181) By the mere fiat of the IIu]\rAJs Will. And how is a debt extinguislied ? By the mere Fiat of the Human Will. Now, we anaiii ask — we need scarcely repeat tliat a debt is ])ro])erty — Whence does it come? When two persons liave Whj.kd to create a debt — wlicnce docs it come ? From tlie materials of tlie globe? Does it come even from the mind? No ! it is notliing bnt a valnable })roduct, crcaled ont of Absolute Nothing, by the mere Fiat of the IFuman Will. And when it is extinguished, it is a valuable })roduct Deckeated into Notuing by the mere Fiat of the Human Will. But, besides debts, there is an enormous mass of valuable property of a similar nature created by the mere Will of the Legislature, such as Co])yrights. It is true, that the Legislature cannot make a Co))yright a valuable thing; but it can prevent it from being destroyed. Now, we ask — Are not the Copp'ights held by a ])ublisher part of his fixed Capital ? Part of his Wealth ? Just as much as so much land ? Wlience come they ? From the materials of the Globe ? or even from the Human Mhid ? It is (piite clear that Copyrights are the ])ure creation of the Will of the Legislature. Suppose that the Legislature were to abolish Copyrights, would not that be an actual annihilation of Wealth, and not merely the Dissolution of material atoms? What, again, are the Funds ? Nothing but valuable Eights created by the Will of the Legislature. Suppose Parliament were to abolish the Funds. Would not that be the annihilation of a vast amount of property ? Precisely the same considerations apply to vast amomits of property of a similar nature. Such as i)olicies of insurance, leases, and annuities of all sorts. They are all property created by the mere Fiat of the Human Will. And who can form the most distant conce))tion of tlie value of all the Incorporeal pro})erty of this nature in Great Britain ? In the species of private credit alone, which is the subject of this cliapter, it is probably not far short of the value of the land of the coimtry. The Ojnnions of various Writers on the Nature and Extent of the Currency. 33. Within the last thirty or forty years strong differences of opinion have manifested themselves among Economists as to the nature and extent of the currency. It may be said, Ave thmk, that these discordances have arisen from writers not well ascertaining the true philosophical import of the terms they use. We shall now place before our readers the opinions of vai'ious persons of eminence on the subject. Whenever we clearly understand that the true function of the currency, or circulating medium, is to circulate commodities, &c., /. e., to obviate the necessity of barter, or exchange, by substituting a ])ledge of 190 THEORY AND PRACTICE OF BANKING. future papnent of some sort in place of an actual equivalent, there can be no reasonable doubt but that currency must include money and Credit in all its shapes and foi-ms ; and such was the opinion of speakers and writers until a comparatively recent period, when an influential sect sprung up, who restricted the term currency to money and bank notes payable to bearer on demand, and excluded all other forms of credit from it. We shall first place before our readers the opinions of several writers Avho held the former opinion, and then examuie the opinions of those who hold the latter view, and the reasons they allege in support of it. The discussions on the nature of currency had not arisen in Smith's time. The name itself was new. What we call paper currency, he usually calls paper money, which is an error, the two being very diflerent. But it is manifest that he includes all forms of credit under the title of money, or currency. We have already shown that Adam Smith includes credit under the title of capital. He specifies money as one form of circulating capital, and under the title of money he includes all forms of paper credit. Thus he says, B. ii., c. ii. : — " Money, therefore, the great wheel of circulation, the great instrument of commerce, like all other instruments of trade, though it make a part, and a very valuable part of the capital." He then speaks of the substitution of paj^er for specie, and says : — " There are several different sorts of paper money [currency] ; but the circulating notes of banks and bankers are the species which is best known, and Avhich seem best adapted for this purpose." Now, what can the other species of paper currency be, except bills of exchange, &c. ? Cheqvies had only just begun to be used in London a few years before the publication of the Wealth of JVations, and the probability is that Adam Smith had never seen a cheque wlien he wrote his work, but manifestly they are included under his designation. In B. iii., c. i., he says: — "The great commerce of every civilised society is that carried on between tlie inhabitants of the town and those of the country. It consists in the exchange of rude for mamifacturcd produce, either immediately, or by the intervention of money, or of some sort of pa]»er which represents money." Now, what sort of paper, besides bank-notes, does this mean, but bills of exchange and checpu's? The controversies about the meaning of currency, the circu- lating medium, seem to have begun about the time of the Bank TIcstriction Act, in iVfi*/, In the debate on that measure (Purl. J/f'fit., vol. xxxiii., p. '}40), Mr. Fox said that he wished " that gentlemen, instead of amusing themselves Avith new terms of circulatlnfi tnedimn and the like." In his re])ly, Mr. Pitt said : — " As so much had been said on the nature of a circulating medium, he thought it necessary to notice that he did not, for DIFFICULTIES OF CREDIT. 191 his own part, take it to be of that empirical kind wliich had been generally described. It appeared to hiiii to consist in anything that answered the great pnrposes of trade and commerce, lohether in specie, paper, or any other term that mvjht be used.'''' Hence we see tliat Mr. Pitt expressly included all forms of Credit imder the term Circulating JNIodium. The next writer we may cite is Mr. Henry Thornton, one ot the authors of the Bullion Ke})ort. In his Inquiry into the Nature and Ejfects of the Paper Credit of Great Britain, he says, p. 40 : — " A multitude of bills pass between trader and trader in the country in the manner that has been described ; and they evidently form, in the strictest sense, a part of the circulating medium of tlio country," And, in a note on this passage, he says: — " Mr. Boyd, in liis publication addressed to Mr. Pitt on the subject of the Bank of England issues, jjropa- gates tlie same error into which many others have fallen, of con- sidering bills as no part of the circulating medium of the country." After quoting a passage from IVIr. Boyd, which is given below, he says : — " It will be seen, in the progress of this work, that it was necessary to clear away much confusion which has arisen from the want of a sufficiently full acquaintance with the several kmds of paper credit, and, in particular, to remove, by a considerable detail, the prevailing errors re- specting the nature of bills, before it could be possible to reason properly upon the eifects of paper credit." We may next quote from a speech of the Marquis of Titchfield, in 1822, on Mr. Western's motion regarding the Act of 1819. He said : — " Economy of money was, by contrivances to spare the use of it, according to the desci'iption of his right honourable friend, by substitutions for the precious metals in the shape of voluntary credit. Every new contrivance of this kind, and every one improved, had that tendency. When it was considered to how great an extent these contrivances had been practised, in the various modes of verbal, book, and circulating credits, it ^oas easy to see that the country had received a great addition to its currency. This addition to the currency icoidd, of course, have the same effect as if gold had been increased from the mines.'''' Hei*e, therefore, we see it explicitly stated that credit in all its shapes and forms was independent, exchangeable pro])erty, of the value of, and producing the same effects as, gold. We may now consider the opinions of those writers who have taken a different view of the matter. Mr. Walter Boyd is the first that we are aware of who con- fined the term currency to money and bank notes. He says {Letter to Mr. Pitt, p. 2) : — " By the words ' means of circulation,' ' circulating medium,' and ' currency,' Avhich are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of bank notes or specie, in contra- 192 THEOKY AND PRACTICE OF BANKING. distinction to bills of exchange, Navy bills, Exchequer bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood the term. The latter is the circulator j the former are merely objects of circulation^'' A few traces of this opinion may be discovered in cei'tain wi'iters after this period ; but, as this view was most prominently brought forward before the Committee of 1840, we may pass at once to that. Mr. J. B. Smith, President of the Chamber of Commerce of Manchester, said that he thought circulation and currency were the same (Q. 40) ; that deposits were currency, which was, in fact, another word for liabilities. Q. VO. Mr. G' Gonnell — "There is another description of paper in circulation, namely, bills of exchange ; do you include those also in your description of the currency ? — I do not con- sider bills of exchange as currency. Q. 71. " "What is the dilFerence between a bill of exchange which is passing from hand to hand and commanding property in return for it, and a bank note which is performing the same functions, supposing each to be for £100? — I consider a bill of exchange to be a debt. Q. 72. " Is not a bank note a debt? — The difference between a bill of exchange and currency would be this, that currency would discharge the debt ; the payment of a bill of exchange is not the discharge of a debt till it is due. Q. 78. Mr. Smith — " Supposing this case to happen, that the same bill of exchange passed through a banker's hands six times in one day on the account of different persons having accounts with this bank, should you not say that that bill of exchange discharged the functions of currency ? — It is a mere transfer, after all, from hand to hand, with, every time it is indorsed, an additional security. Q. 79. " Supposuig it not to be indorsed, can you jjoint out the difference between that and a Bank of England note? — The difference between a Bill of Exchange and a ]>ank of England note in any transaction, is that a Bill of Exchange is a debt, and it contiiuics a debt till it is discharged by a Bank of England note, o)' by some other currency, which is a full discharge of the debt. Q. 80. Sir li. Peel — " What does a Bank of England note profess upon the face of it; is it not ' I promise to l>ay?' — Precisely so. Q. 81. " Is not that evidence of a debt? — Certainly, but it is legal tender. Q. 82. "Sup))Osing a law were passed ])ermittmg a gold circulation to continue, and j)i-()]iil)iting the issue of notes by the Bank, do you not think the measure which traders would resort OPINIONS ON CURRENCY. 19.j to, would bo to supply the deficiency by Bills of Exchange ? — It is probable ; it iniii^ht be so. Q. 83. " Would not they answer the i)urposes of Currency ? — Bills of Exchange do not ])erform the functions of Currency, but they are instruments by which commodities are exchanged, equally with every other mode of Credit, but requiring money for their discharge. Q. 84, " Though there is a difterence in the nature of the transactions between the issue of a note, payable on demand, and passing of a bill of exchange, is there any substantial dif- ference in their sensilile eftect on the currency of the country ? — I do not think that Bills of Exchange affect the Currency, though the Currency has a very important intiuence on Bills of Exchange. Q. 87. "Do not you recollect, that during the Bank restriction law, there did not remain a circulation of Bank of England notes in parts of Lancashire for the discharge of small payments, but that, in point of fact, the great commercial transactions of Lancashire were carried on by the intervention of Bills of Exchange, performing the ordinary functions of currency by means of promissory notes? — Unquestionably, and a very large amount of these payments are still in existence. Q. 88. " When payments do take place by these means, do not bills of exchange answer, in a great measure, the functions of promissoiy notes, though there is a difference in the character of the transaction between a bill of exchange and a promissory note? — Yes, they are a medium for the exchange and distribu- tion of commodities, no doubt. Q. 89. "They are the representatives of commodities? — Yes; they are representatives of transactions in commodities. Q. 90. "Then are they not currency? — No, I do not think that follows. Q. 91. Mr. 0"* Connell — " What is currency but an instrument of exchange? — It is an instrument of exchange, but it is an equivalent also for commodities. Q. 92. A bill of exchange performs that function, it assists to exchange commodities? — Yes, a bill of exchange assists in the exchange and distribution of commodities. Q. 93. "Then it has that function of currency? — Yes, it has. Q. 94. "Then, having that function of currency, which, per- haps, is the only function, can you distinguish that from cur- rency? What is there in your mind to induce you to say that that is not currency Avhich jierfornis the functions of currency? — I have already explained that the difference between a bill of exchange and currency is this, that the one discharges a debt and the other does not. Q. 95. Mr. Warhiirton — " If a party receiving a bill of ex- change indorsed, were you to give a receipt in full for the \^n\- 194 THEORY AND PRACTICE OF BANKING. nieiit of the debt, would not that bill of exchange perform precisely the same functions as a bank note does? — Yes, bnt it -\vonld be merely a party consenting to accept a debt dne from another person in fnll discharge of the debt due to himself. Q. 96. Mr. Hevries — " Is not that a very common proceedmg in trade? — I am not aware of that. If I am asked whether parties accept bills of exchange for debts, that is a fact, but whether they accept them in full discharge of a debt contracted, I am' not aware. Q. 97. Mr. Gishorne — "Do you consider a £10 note of a country bank, a joint stock bank, to rank xmder currency, or to rank under bUls of exchange ? — Under currency, Q. 98. Mr. Grote — " Suppose there was a seven-day post bill issued by a banker, would you consider that a part of the currency ? — No. Q. 99. Mr. Lahouchere — " Suppose it was a seven-day i^ost bill issued by the Bank of England? — No, not untU dis- chai'ged. Q." 100, Mr. O'Connell — "A cheque on the Bank is currency in London, is it not ? — It performs the function of ciirrency ; it is a transfer of currency from one to another. Q, il8, Mr. Wood — " Wih you define what you mean as constituting the entire currency of the country? — I should define currency to be gold and silver, or the promises of bankers to pay on demand, which either constitute a legal tender, or which the public are willing to accept in lieu of coin in discliarge of debts. I consider the currency in this comitry to consist first of coin in circulation ; secondly, of Bank of England notes issued against bullion, and of Bank of England notes issued against securities ; thirdly, of deposits in the Bank of England, payable on demand, the same as bank notes ; fourthly, of notes issued by the Country Banks; and fifthly, of deposits in country banks in their own notes, which are of the same character as deposits in the Bank of England." As to the meaning of deposits, and the general confusion as to the A\'ay in wltich thoy arise, we may refer to the exposition of the IMechanism of Thinking given in the ])receding section. The witness was further examined at imniense lengtli, but the above gives the substance of liis o])inions. Mr. CoiiDKX was of oj)inion tliat no inflation of the currency would arise from bills of excliange, ]MT)vi(led the money of the comitry were not i)revious]y inflated. There is a great distinc- tion between a bill of exchange and a bank note. A bill of excliange follows the trading transaction, and is merely a voucher for the transaction, in the shape of a transfer of the debt, or an acknowledgment of the debt ; but a bank note put into circulation either in the ])urchase of ])ublic securities or in a loan, or in any other way, goes to the artificial creation of com- OPINIONS ON CURRENCY. 195 mcrcial transactions, and is not itself necessarily originated l)y the transaction. Bills of exchange can multiply only in pro- portion to conimercial transactions, provided the currency be kept as a metallic currency. Mr. Cobden said that, with a metallic currency, there would be no risk of any great extent of accommodation bills ; an opinion which we think is scarcely warranted by the reality. Q. 572. Mr. SinWi — " Inasmuch as bills of exchange are used at Manchester as an instrument of exchange, do they not form part of the currency ? — No ; I have defined currency to be money. I cannot call a bill of exchange money. It is a promise to pay money at a certain time, and it is a security only for a certain time, after which all securities are forfeited." Mr. AV. 1\. Ward (Q. 074) considered currency to be coined gold, silver, and copper, and notes payable on demand, issued by the Bank of England and country banks. ]\[r. RiciiAKD Page understood currency to mean the current money of a country, in which debts are discharged and commo- dities purchased and sold, and consisting of Bank of England notes and gold and silver. Country bank notes he considered only to be money by courtesy. He included deposits in the Bank of England ; but, as he gave to the word " deposit " an inaccui'ate meaning, we do not know what he would have done if he had understood the real meaning. Mr. George Warde Norman, a Director of the Bank of England, was asked : — Q. 1691. "Are there any grovmds for considering the deposits of the Bank of England as currency ? — No, I think not. Q. 1692. " Do you consider that any deposits, merely in their character of deposits, can be considered as currency ? — No, I do not. Q. 1693. "Will you state what, in your opinion, forms the distinction between currency and deposits? — I consider that, looking broadly at deposits and currency they are quite distinct ; they have little to do with each other. But I conceive that the use of deposits is one of the l>anking ex])edients, which is avail- able for economising currency, along with a great many others. I do not consider them as currency or money. I ought to observe, perhaps, to the Committee, that I employ the words 'money' and ' currency ' as spionymous. Deposits are used by means of transfers made in the books of bankers ; and these aflbrd the means of adjusting and settling transactions, and ^>?*o tanto dis- pense with a certain quantity of money ; or they may be set off against each other, from one banker to anotlier, to a certain extent, and thus produce the same effect. Still they possess the essential qualities of money in a very low degree. Q. 1G94. "Do you entertain a similar opinion as to bills of exchange ? — Yes, exactly ; I flunk they are also used to 196 THEORY AND PRACTICE OF BANKING. economise currency. I look upon them as banking expedients for that purpose ; but they do not possess fully the qualities which I consider money to possess. Q. 1695. " Will you explain the diiference between the func- tions which money will perform and those which bills of exchange or deposits will perform ? — To answer that question fully, one must, I am afraid, take rather a wide view ; but I look upon it that the three most essential qualities money should possess are, that it should be in universal demand by everybody, in all times and all places ; that it should possess fixed value ; and that it should be a perfect numerator. There are other qualities ; but I think these are the most essential. Now, when I look at all banking expedients, I find they do not possess these qualities fully. They possess them in a very low degree ; and, therefore, as we see took place in the Autumn of 1835, with a very large increase of the deposits of the Bank, the circulation diminished, and there was every appearance of the effects of contraction : there was an increased influx of treasure ; and I conceive from that there were lower prices. By a numerator I mean that which measures the value of other commodities with tlie greatest possible facility. If we look at all these banking expedients, we see that they ]:)ossess the three qualities Avhich I have mentioned in a very much lower degree. Q. 1696. " Will you state in what respect? — I can only take them one by one. A bill of exchange is an instrument commonly payable at some future time, at a certain place, and to some particular individual ; it is of no use to any other mdividual, except it is indorsed to him, A man cannot go into a shop with a bill of exchange and buy what he wants ; he could not pay his labourers with a bill of exchange. Tlie same witli a banker's de})osit, he can do nothing of tliat sort with that ; he can do with less money than he would otherwise employ, if he has bills of exchange, or bankers' deposits ; but he cannot, Avith hills of exchange or bankers' deposits, do whatever he could with fiovereigns and shillings. By a banker's dejjosit, T mean a credit in a banker's l)Ooks ; nothing more nor less than that." Mr. Samuel Jones Loyd, now Lord Ovekstone, was asked : — Q. 2655. "What is it tliat you include in the term circula- tion ? — I include in the term circulation, metallic coin, and paper notes promising to pay the metallic coin to bearer on demand. Q, 266 1. "In your definition, then, of the word circulation, you do not include deposits? — No, I do not. Q. 2662. " Do you hidudc bills of exchange ? — No, I do not. il. 2G63. " Why do you not include deposits in your definition of circulation ? — To answer that, question, I believe I must be allowed to revert to first })ri]ici])les. The precious metals are distributed to the different countries of the world by the opera- LORD OVEKSTONE's DEFINITION OF CURRENCY. 197 tion of ])articul:ir I;iws, which liuve been investigated and are now well recognised. These laws allot to each country a certain j)ortion of the precious metals, which, while other things remain unchanged, remains itself unchanged. The precious metals, con- verted into coin, constitute the money of each country. That coin circulates sometimes in kind ; but, in highly advanced countries, it is rci)resented to a certain extent by paper notes, promising to pay the coin to bearer on demand ; these notes being of such a nature in principle that the increase of them supplants coin to an equal amount. Where those notes are in use, the metallic coin, together with those notes, constitute the money or currency of that country. Now, this money is marked by certain distinguishing characteristics ; first of all, that its amount is determined by the laws which apportion the precious metals to the dilferent countries of the world ; secondly, that it is in every country the common measure of the value of all othei* commodities, tlie standard, by reference to Avhich the value of every other commodity is ascertained, and every contract ful- filled; and, thirdly, it becomes the common medium of exchange for the adjustment of all transactions equally at all times, between all persons, and in all places. It has, further, the quality of dis- charging these functions in endless succession. Now, I conceive that neither deposits nor bills of exchange, in any way whatever, |>ossess these qualities. In the first place, the amount of them is not determined by the laws which determine the amount of the precious metals in each country ; in the second place, they will in no respect serve as a common measure of value, or a standard, by reference to which we can measure the relative value of all other commodities ; and, in the next place, they do not jiossess that power of universal exchangeability which belongs to the money of the country. If the Committee will allow me to refer to it, there is a passage in the report of the French Chambers which has recently been ap])ointed to uiquire into a subject very similar to that which this Committee is now investigating, Avhich seems to me to put the point of the uni- versal exchangeability of money in a very sti-iking way : — ' Si Ton reflechit en effet aux innombrables transactions commerciales qui s'operent chaque jour, depuis celles qui doivent fournir aux plus modestes consommations jusqu'a celles qui multiiilient les si)ecu- lations, les plus entre])renantes du connnerce international, on s'aper(;oit aiscraent qu'elles no s'accompliraicnt pas sans le secours d'une valeur intermediaire qui puisse etre mise suc- cessivement en ra])port avee toutes les autres valeurs, et servir entre elles de moyen d'estimalion et d'cchange.' Q. 2664. " Why do you not include bills of exchange in cir- culation "? — I exclude bills of exchange for precisely the same reasons that I have stated in my former answer for excluding deposits. There is another passage in the same report which 198 THEORY AND PRACTICE OF BANKING. appears to me to shew very clearly that the French Chamber have fully aj)preciated the distinction between bills of exchange and money : — ' Tout engagement par ccrit de payer une somme due a pu devenir ce signe du numeraire; le signe a acquis quelques-un des avantages de la monnaie circulante, lorsque, comme le billet a ordre et la lettre de change, il a pu etre transmis par la voie facile et prompte de I'endossement. Mais que d'entraves encore ! II ne represente pas li tout moments pour son detenteur la somme pour laquelle il a ete souscrit, elle pent n'etre payable qu' a un terme eloign e, j)our le realiser immediatement il serait necessaire de la ceder, Trouvera-t-on quelqu'mi qui soit assez confiant pour I'accepter? On ne le transmettra qu'en le garantissant de sa signature; c'est une obligation eventuelle que I'on contracte soi-meme, et sous le poids de laquelle jusqu'au jour de I'echeance, on sentira son credit gone. On n'est pas toujours dis2:»ose a reveler la nature de ses affaires par les signatures que I'on met en circulation ces inconvenients devaient conduire a trouver un signe de numeraire plus actif encore et plus commode, qui parti- cipat, conime la lettre de change et billet a ordre, des qualites de numeraire metallique, puisqu'il n'a d'antre merite que de le repre- senter, mais qui permit de s'en procurer a tout moment ; qui, comme la piece de monnaie se transmit de main en main, sans avoir besoin d'etre garanti, sans laisser de traces de son passage. Le billet an porteur et a vue, eniis jjar des associations puissantes, formes sous I'autorisation et agissant sous la surveillance con- tinuelle des gouvernements a p;iru presenter ces avantages. De la les l)an(iues de circulation.' Q. 2665. "Under similar circumstances, wiU the aggregate amomit credited to depositors in bankers' books bear some relation to the quantity of money bi the country? — During tem})orary fluctuations in the amount of circulation, all other thhigs remaining unchanged, I conceive the amount of deposits will be affected by sucli fluctuations. Q. 2666. "Is the amount of biUs of exchange dependent in some degree on the quantity of money? — I apprehend tluit it is dependent in a very great degree. I consider the money of the country to be the foundation, and the bills of exchange to be the superstructure, raised upon it. I conceive that bills of exchange are an important form of banking operations, and the circulation of the country is the money in which these oj)erations are to be adjusted; any contraction of the circulation of the country will, of course, act u])()n credit; bills of exchange, being an important form of credit, will feel the ettect of that con- traction in a very powei'fid degree ; they will, in fact, be con- tracted in a nuK'h greater degree than the i)aper circulation. Q. 2667. )Sir liohcrt Peel—'-'- What are the elements which constitute money in the sense in which you use the expi'ession LORD OVERSTONE's DEFINITION OF CURRENCY. 199 ' quantity of money ? ' What is the exact meaning you attach to tlie words ' quantity of money — quantity of metallic currency ? ' — WlienI use the words quantity of money, I mean the quantity of metallic coin and of paper notes, promising to pay the coin on demand, which are in circulation in this country. Q. 2G6S. " Paper notes payable by com ? — Yes. Q. 2G69. " By whomsoever issued ? — Yes. Q. 2670. "By country banks as well as other banks? — Yes. Q. 2671. Ghairmmi — "Would this superstructure, consisting of sums credited to depositors in bankers' books and l)ills of ex- change, equally exist, although no notes payable in coin on demand existed in the country? — Yes; I apprehend that every question with respect to deposits, and with respect to bills of exchange, is totally distinct from the question Avliich has refer- ence to the nature of the process of substituting promissory notes in lieu of coin, and of the laws by which that process ought to be governed. If the promissory notes be properly regulated, so as to be at all times of the amount which the coin would have been, deposits and bills of exchange, whatever changes they may undergo, would sustain those changes equally, either with a metallic currency, or with a paper currency pro- perly regulated ; consequently, every investigation respecting their character or amomit, is a distinct question from that which has reference only to the substitution of the paper notes for coin. Q. 2672. "There would be no reason why, if there were no notes payable in coin on demand, the amount of this suj^er- structure should be less than it now is, with a mixed circulation of specie and of notes payable on demand? — None Avhate\'er. I ap2)rehend that, upon the su])position that the pa})er notes are kept of the same amount as the metallic money, the question of the superstructure, Avhether of deposits or of bills of exchange, remains precisely the same. Q. 2673. "That answer takes for granted that, in the first case, the metaUic currency, and, in the second case, the luetallio currency, plus the notes payable on demand, are the same in quantity ? — Yes. Q. 2674. Sir Robert Peel — "You suppose the notes payable on demand to displace an amount of coin precisely equal to those notes ? — They ought to do so imder a proper regulation of the paper money, otherwise they are not kept at the same value as coin. Q. 2675. Mr. AUxcood — " Would you consider that the snjier- structure of bills of exchange, founded entirely iq)on a metallic currency, might, at particular times, become unduly expanded? — The answer to that (picstion depends entirely upon the ])recise meaning of the word ' unduly.' I apprehend, undoul)tedly, tliat it is perfectly possible that 'credit, and the consequences wiiich sometimes result from credit, viz., over-banking in all its forms, 200 THEORY AND PRACTICE OF BANKING. and the over-issue of bills of exchange, which is one important form of over-banking, may arise "with a purely metallic currency ; and it may also arise with a currency consisting jointly of metallic money and paper notes promising to pay in coin ; and I conceive, further, that if the notes be j^roperly regulated, that is, if they be kept at the amount which the coin otherwise would be, whatever over-banking Avould have arisen mth a metallic currency, would arise and to the same extent, neither more or less, with money consisting of metallic coin and paper notes jointly. Q. 2676. "May not over-banking and over-issue of bills of exchange, forming a superstructure based upon money composed of metal and paper notes, derange the certainty of the notes being duly paid in gold ? —I apprehend that if the paper notes be properly regulated, according to the sense which I have already attributed to that expression, and if a ])roper proportion of gold be held in reserve, the solidity of the basis cannot be disturbed ; that is, that if there be a proper contraction of the paper notes as gold goes out, the convertibility of the paper system will be eftectually preserved by the continually increasing value of the remammg quantity of the currency, as the con- traction proceeds. IVIi-. TooKE was asked — "In using the term 'circulation' of the Bank of England, what do you include in that term ? — I include hi that term only the Bank notes hi the hands of tlie public. In order to avoid confusion, perhaps the Committee would allow me to state the meaning which I attach to the different terms ' currency ' and ' circulating medium.' The currency I consider to be, in strictness of language, according to tlie apparent derivation of the term, that part of the circulating medium, such as the coin of the realm, and Bank of England notes and country bank notes (although not a legal tender), which pass current from hand to hand, without hulividual sigiiatiii'c, such as ap|)ears on drafts or indorsements. I am doubtful whether cheques on l)aiikers might not be included, from tlieir perfect similarity to Bank notes, in many of the pur])Oses for which they are em]>]()yed ; at the same time, there is the feature of distinction which I have mentioned, viz., that cheques require the signature of the party passing the draft, and that tliey do not pass from hand to hand. Bills of exchange I consider as a ))art of the general means of distributing the pro(lu<;tions and revenues of the country, and, therefore, as con- stituting a part of the circulating medium. I consider, also, that the sinq)le credit by which goods are, in many instances, bought and sold, come likewise uiuler the general descri])tion of tlie circulating nu'asses or not, is commonly entered in the MK. TOOKB ON CUKKENCY. 2Ui price currents without distinctions from those for which any actual payment is made. I cainiot consider that transferable debts constitute circulating medium, but only tlie actual trans- fers. Q. 3279, " What do you mean by transferable debts'? — The deposits in the hands of bankers, against which the depositors are entitled to pass their drafts. Q. 3280. Mr. Grote — " You include, not simply transfers of deposits in the hands of the Bank of England, l)ut also transfers of deposits in the hands of other bankers'? — Yes; transfers of deposits generally. Q. 3281. Chairman — " Do you then consider a deposit to be a transferable debt owing by the banker to the depositor '? — Yes. Q. 3282. " In the use of the term ' currency' in your future examination, do you propose, in addition to coin. Bank of Eng- land notes, and country bank notes, to include cheques upon bankers ? — Yes ; I think upon the whole the distinction I have mentioned is not sufficient to exchule them, and, therefore, I shall propose to consider them as included. Q. 3283. Mr. Warhurton, — " By cheques, you mean cheques actually dra^vn, and passing from one person to another? — Yes; that which is current, in fact. Q. 3284. " Will you be good enough to state what you propose to include in the word ' circulation ' in the course of your future examination? — I proj^ose to include in the term ' circulation' the notes of the Bank of England, and of country banks, payable on demand. Q. 3285. "What do you mean by ' circulathig medium' ?— I mean all instruments of interchange by which the productions and the revenue of the country are distributed ; everything which serves and is received as a mode of papnent, or which constitutes nominal money-price which appears in price currents, Q. 328G. "J/r. Grote — There is the currency, and there are also certain expedients for economizing the use of the currency ; you would call both one and the other of those portions of the circulating medium ? — Precisely. Q. 3287. " Do you include, in the word ' currency,' bills of exchange ? — No. Q. 3288. "If you include, in the term ' currency,' a crossed cheque payable at a banker's, to be presented, therefore, at the Clearing House, and having, therefore, before presentation not more than seven or eight hours to run, Avhy is it that you do not include in the term ' currency' a bill of exchange payable also at a banker's, falling due to-morrow, and having, prol)al)ly, not more than about 24 hours to run ? — It is only a question of the general accei>tation of the term ; there is no essential distinction in the particular case. I may, perhaps, be allowed to say, that the only question as to the employment of different descriptions 202 THEORY AND PRACTICE OF BANKING. of circulating medium is referable to the combined considerations of economy, convenience, and security. Q. 3289, "If the cheque, accordmg to the supposition in the former question, be included in the term ' currency,' will not a bill of exchange, due to-day, payable at a banker's, be entitled also to be included in that term '? — It is only a question of con- venience in the classification; I am not aware that it is of any importance in practical o])eration. Q. 3290. "Bills of Exchange having, previous to maturity, one, two, three, four, or more days to run, diifer in character by insensible degi'ees from a crossed cheque, a crossed cheque being that bill which has the shortest time to run ? — They differ in character by insensible degrees, and likewise in the trilling diflerence of convenience from their not being used till maturity, miless under a calculation of discount. Mr. Tooke then started a theory which, like many others, is true in some cases, and which, we believe, he was the first to notice ; but wliich he pushed to an extreme, winch drew out some just strictures from Colonel Torrens. Q. 3292. Mr. Hume — " Will you state what part of the currency, or circulating medium, affects prices, under the defini- tions wliich you have now given ? — IsTo one part of them affects the prices of commodities more than any of the other parts. Q. 3293. Mr. Grote — " Do you mean not more in degree, or not in any different way ? — Not more in degree. Q. 3294. " You mean that every portion of that which you have described imder the name ' circulating medium ' is per- fectly equal to every other portion in the effect which it produces upon j)rices ? — Perfectly so. CJ. 3295. 3fr. JIume — "Do you mean that every transaction of i)urchase or sale by any of the means which you have men- tioned, as included in tlie circulating medium, equally affects prices? — Yes; and that was my reason for caring so little about making a disthiction among them. I doubt whether they operate upon prices at all. Q. 3296. 3fr. Grote — "You mean that none of these items whicli you have enumerated under the genenil term 'circulating medium' have in your oi)inion any effect upon prices? — Yes; I mean that tliey are not operative causes of prices. Q. 3297. 3Ir. Hume — "Wluxt is it, then, wliicli does affect prices? — The cost of ])roduction limiting the sui)ply on the one hand, and the ])ecuniary means of the consumer limiting the demand on the other. (2- 3298. " Will not tlie variations in the quantity of tlie cir- culating medium affect ])ri{'es? — No. (J. 3299. "Will it Tiot, ii"al)un(lant, be more at the disi)osal of individuals for purchases than when it is scrarce? — It will be more easily disposable, but it will not be necessarily so disposed ANSWER TO LOUD OVERSTONE. 203 of. I believe that the auiouut of the circulating medium is the effect, and not tlie cause, of variations in ])rices." Sucli are the various opinions and arguments brought forward to draw a distinction between bills and notes as currency, and we may now exanmie them seriatim. I. Tlmt Bills of JExchanrje are only the Evidence of a Debt. This is equally true of Bank Notes, and we have seen that money itself, by the acknowledgement of a long series of ■writers, is itself nothing- more than the evidence of debt. It is a general Bill of Exchange upon all the commercial connnunity; and is only the highest and most general form of credit. The payment of a liill in money is only the exchange of a particular and precarious instrument of credit for a general and permanent one. II. That Bills of Exchange do not discharge Debts, but they require to be 2^ttid in Currency. It is a veiy great error, indeed, to say that Bills of Exchange do not discharge debts. We have said something more below about the effect of taking Bills of Exchange for debts. But Bills of Excliange, the day they become payable, are payable on de- mand like cheques and bank notes, and they are set off against each other among bankers, and at the Clearing House in London, to the amount of several millions daily. They dis- charge each other by mutual set off, just in the same way that notes and cheques do. Tliere are, besides, other ways in which Bills are paiJ, as is fully she^\^l in the preceding section, explainhig the mechanism of banking. A trader, when his bills become due, discounts fresh bills witli his banker, who creates fresh credit, and bills are paid by giving cheques on this credit. ]Mr. NoKMAN said that money, or currency, should possess fixed value, and be a jjerfect numerator. But how can money, or any thing, possess fixed value, when its value is changing from hour to hour ? — An instrument of credit may preserve an e(]uality of value with respect to money, but not with res2:>ect to anything else, unless it is expressed to be payable in it. He said that he meant by a numerator that which measured the value of other commodities with the greatest facility. Why does a promise to pay £50 measure the value of things with less facility than £50 itself? It is not a little amusing to find the celebrated phrase of the Roman Catholic Church — Quod setnjyer, quod ubique, quod ab o)n)u'bus, starting up and meeting us in a discussion on currency. In Lord Overstone's ojjinion money and currency are identical, and include the coineil metallic money, and the paper notes promising to pay the bearer coin on demand ; and, he says, that 204 THEORY AND PRACTICE OF BANKING. the chai'acteristic of theii" being money is, tliat they are received equally at " all times, heticeen all persons, and in all jjlaces.'''' For the sake of shortness, let us designate this phrase by 3A, from the three alls in it. He excludes Bills of Exchange from the designation of currency, because " they do not possess that power of universal exchangeability which belongs to the money of the country." This definition is fotal to Lord Overstone's o\Ml1 view. In fact, if it be true, there is no such thing as money or currency at all. In the first place, it at once excludes the whole of bank notes. The notes of a bank in the remote dis- trict of Cumberland, would not be current in Cornwall, therefore they are not 3A, therefore they are not currency. Again, the notes of a bank in Cornwall would not be current in Ciunber- land, therefore they ai"e not currency. Similarly there are no coiintry bank notes which have a general currency throughout England, therefore no country bank notes are 3A, therefore no country bank notes are currency. Till within the last thirty years or so, Bank of England notes had scarcely any currency beyond London and Lancashire ; in country districts a preference was universally given to local notes, therefore Bank of England notes w^ere not 3 A, they had not a power of " universal exchange- ability,'' therefore they were not currency. Bank of England notes would, even now, not pass throughout the greater part of Scotland. If, therefore, the test of 3 A and "universal exchange- ability," be applied, the claims of aU bank notes to be considered as currency are annihilated at once. The acceptance of a Baring, or a Rothschild, would be received in j^aymeut of a debt by a far larger circle of persons than the notes of an obscure and remote country bank. But the universality of Lord Overstone's assertion is fatal to his argument in other ways. On the Continent, silver is the legal standard of value ; in England, silver, like copper, is mei'cly coined into small tokens, called shillings, ttc, which are made to })ass current above their natural value, and are only legal tender for a very trifling amount, hence it cannot be used in the adjustment of all transactions, therefore it is not 3 A, therefore it is not ciirrency. There are otlier countries where gold is not a legal tender, therefore it fails to satisfy Lord Overstone's test, tlierefore it is not cun-ency. If, then, the test ])roi)Osed by Lord Overstone be considered as correct, it is easy to see that there is no substance or material whatever that will not fail under it, and, therefore, there is 7io such thing as currency. The fact is, that tlie only ditterence between a Bill of Exchange and a Bank Note is, that the former is a ])romise of a defeiTed payment, and the latter that of an immediate one, and there is less risk in taking the latter than the former. From these cir- cumstances, a Bank Note possesses a greater decree of circulating power than a Bill of Exchange. But, in the Midland Counties ANSWER TO LORD OVERSTONE. 205 of Enirlancl, it used' to be quite commou for the banks to issue the Bills of Exchange they had discounted with their own indorsement upon them. In which respect tliey were in every way equivalent to Bank Notes ; moreover, there is not the same inducement to put a bill into circulation as a Bank Note, because the former increases in value as the day of payment approaches. But it is unprofitable to keep a note idle. But it is to the last degree unphilosophical to maiutaui that these two obligations are of different natures, because they are adapted in diftereut degrees. We may quote from Colonel Torrens, as he ex])resses a view that is by no means uncommon, but which is quite erroneous. He says ( The Princijyles and Practical Operation of Sir Itohert Peers Act of 1844 ex2:)lalned and defended^ p. 79) : — " The term money and currency have hitherto been employed to denote those instruments of exchange which possess intrinsic or deriva- tive value, and by which, from law or cv/5to/H, debts are discharged and transactions finally closed. Bank Notes, payable in specie on demand, have been included under these terms as well as com, because, by law and custom, the acceptance of the notes of a solvent bank, no less than the accei)tance of coin, liquidates debts and closes transactions ; while bills of exchange, bank credits, cheques, and other instruments by which the use of money is economised, have not been included under the terms money and currency, because the acceptance of such instruments does not liquidate debts and finally close transactions." It is upon such views as these that the opinion of those rests who maintain that bills of exchange are not currency or circu- lating medium. They suppose that bank notes pass without indorsement, and that bills of exchange do not. Even if that were true, it would not be any valid ground for the distinction, because such a tiling would in no way affect the nature of the instrument. It is wliolly unti-ue to siqjpose that bank notes and money are the only things M'hich close transactions. By the table given above, it is seen that upwards of 95 per cent, of commercial payments and receipts were made, by Messrs. Morrison and Co. in instruments of credit, other than bank notes. But it is a very great mistake to say that bank notes pass without indorsement and bills of exchange do not. At the time the Bank of England was founded, it was quite illegal for any such thmg as promissory notes to .pass by assignment. The negotiability of ])auk notes had to be provided for by the Act. It was enacted, that all the Bank's bills, obligatory and of credit, made or given to any person, might, l>y Indorsement of such person, be freely assigned to any person who should vohmtarily accept them, and so by such assignees totles quotlcs by indorse- ment thereon, and all such assignees might sue thereon in their own names. 206 THEORY AND PRACTICE OF BANKING. The assignment of the Goldsmiths' notes, or the private banker's note, "vras hehl to be illegal much later than tliis. In 1703 it was clecicled that no promissory notes were assignable or indorsable over within the custom of merchants. In 1704, the Act was passed which allowed promissory notes to be assigned by indorsement like Bills of Exchange. It is true that the custom of indorsing Bank of England Notes, and, it is probable, coiintry bank notes too, soon fell mto disuse, but that makes no difference in the law of the subject. The case of Miller v. Race has often been quoted in support of the docti'ine, that Bank Notes are money or currency, to the exclusion of Bills of Exchange, but the true bearings of that case have been completely mismiderstood. In that case, the whole point turned on how the ])ropert}^ in a stolen note would pass, and it was held that it would jjass like that of a stolen Bill of Exchange. It had long been held that, for the con- venience of commerce, the innocent holder for value of a stolen Bill should be able to retain it against the former owner, just as if it were money, to which this principle had long been applied. By the case of Miller v. Race, this principle was extended to Bank Notes, and it has been confirmed l)y numerous cases since. The only effect of this case was, that the prhiciple which Bills had in common with money was now helcl to extend to notes, 80 that, if there be any force whatever in it, it proves that BUls were held to be currency long before notes. It is also an error to suppose that Bills of Exchange require an indorsement at each transfer. A Bill of Exchange may be made ]:)ayal)le to bearer, and then it requires no indorsement at all. Bills, however, are generally di-awn payable to order, and tlien they require that the payee should indorse them ; but he may do that without making liimself liable on them, as is done in many cases. After the first indorsement in blank, the Bill is payable to bearer, and may be passed by mere delivery, in all respects like a Bank Note. " And," says ]\Ir. Justice I\yles (A I'reatise-on the Lew) of Bills of E.vchange^ arty transferring it, and a purchase of the instrument, with all risks, by the transferee. ' It is extremely clear,' says Lord Kenyon, ' that if the holder of a bill send it to market Avithout indorsing his name upon it, neither morality, nor the law of this country, will compel him to refund the money for which he sold it, if he did not know at the time that it was not a good bill.' So, when A gave a bankrupt, before his bankruptcy, cash for a bill, but refused to allow the bankrupt to indorse it, thinking it better without his name, and afterwards, on dishonor of the bill, proved the amount under the commission, the Lord Chancellor ordered the debt to be expmiged, observing, that this was a sale of the bill. So, if a party discounts bills with a banker, and receives, in part of the discount, other bills, but not indorsed by the banker, which bills turn out to be bad, the banker is not liable. 'Having taken them with- out indorsement,' says Lord Kenyon, ' he has taken the risk on himself The bankers were the holders of the bills, and, l)y not indorsing them, have refused to pledge their credit to their validity ; and the transferee must be taken to have received them on their own credit only.' So where, in the morning, A sold B a quantity of corn, and, at three o'clock in the afternoon of the same day, B delivered to A, in payment, certain pi-o- missory notes of the Bank of C, which had then stopped payment, but Avhich circumstance Avas not at the time knoAvn to either i)arty, Bayley, J., said, ' If the notes had been given to A at the time when the corn Avas sold, he could have no renu'dy upon them against B. A might have insisted on payment in money, but, if he consented to receive the notes as money, they Avould have been taken by him at his peril.' Such seems the general rule governing the transfer by delivery, not only of ordinary Bills of Exchange and Promissory Notes, but also of Bank Notes. Nor is there any hardship in such a rule, for the remedy against the transferor may always be preserved by in- dorsement, or by special contract." While it has ahvays been acknoAvledged that the delivery of a bill Avithout indorsement, in exchange for a valuable considera- tion, is a sale of it, it has frequently Ijeen said that, if the bill be indorsed, it is only a loan. We have pointed out the am- biguity of the Avord loan already mider § 4. It is often said that a banker lends his customer money on the security of bills. But this is an inaccurate mode of statement. What the banker does is to buy a debt due to his customer, and, Avhen he indorses the bill, his customer gives him a limited Avarranty of its sound- 208 THEORY AND PRACTICE OF BANKING. ness. If the banker lent his customer the money, it would be his duty to repay it. But that is not so. It is the acceptor's business to pay the bill, and, if he do not do so, the banker may, by giving his customer immediate notice, and making a demand, make his customer take back the bill, and repay the money. But if the banker fail in giving immediate notice his remedy against his customer is gone. But the Law of Continuity shews the fallacy of the doctrine that Bank Xotes payable to bearer on demand alone are cur- rency. Lord Overstone rigorously restricts the term to such notes. But woiild not notes payable one minute after demand be currency ? or one hour ? or tv\'o, or three, or four hours ? Would not notes payable one day after demand be currency ? or two or three days? Lord Overstone denied that Bank post bills, which are issued payable seven days after sight, are currency. According to this doctrine, if a man deposits money in the Bank and receives in exchange for it a bank note j^ayable on demaud — that is currency; but if he ask, for his own convenience, for a note payable seven days after sight — that is not currency ! But the note becomes payable on demand on the seventh day after sight, and then, by their own definition, it is currency. What was it before ? It used formerly to be the custom for banks in the coimtry to issue notes payable 20 days after de- mand. These notes circulated and produced all the eflects of money. Wliat were they, if they were not currency ? Chetiues are jiayable on demand. How are they not currency as much as notes ? How are Bills of Exchange not currency on the day they become payable? And, if they are so then, what were they before? It is quite plain that there can be but one answer. They are all species of currency, though differing in degree, and the distinction between them is untenable. It would be too long to mention the host of -writers who have expressly included all forms of paper credit under the title of currency. Mr. Mill truly says there is no generic distinction between bills and notes. We rejoice to say that M. Michel Chevalier is entirely of the same opinion as ourselves. In his treatise JLa Monnaie, sect. 3, c. v., after shewing the imtenable nature of the distinction set up between Bank Notes and Bills of Exchange, he says : — " La languc Anglaiso a un mot generi(iue qui enibrasse la monnaie, le billet de banquc, le papier-monuaie ou assignat non conversible en especes, et tout autre espcce de titre qu'on pent mettre dans la circulation et qu'acce})te })lus ou moins le commun des homines : c'est le mot de currency. Notre langue n'cn ottre ])a8 rccjuivalent jiarl'ait. Cependant le terme de numeraire pourrait etre pris dans le meme sens, et je Temploierai ainsi dans la suite de cet 6crit." And in the number of the tTournfil dea J'Jconomistes, for August, 18G2, in which the same distinguished writer has j)ublis]i('(l the substance of a Report to ANSWER TO LORD OVERSTONE. 209 the Imperial Institute of France on owr ElemenU and Dictionary, he re-affirnis the same opinion. After explaining the ideas con- tained in the former part of this work, lie says : — " A ce meme point de vue, et sous le benefice de ce commentau-e, la relation intime qu'ctablit M. Macleod ontre la notion de la currency, et I'idee d'uue dette ou d'une obligation serieuse et positive a un merite incontestable." ]5Ut, while we contend that Lord Ovcrstone's criterion of a currency is latal to his own view, we are quite willing to accept it. P^'or what is it that exists in all places, in all times, and among almost all persons'? Debt, or Services due. And what is it that is universally required to measure, record, and transfer them ? Some material. But we see that all currencies are more or less local, none are imiversal. The idea, or the want alone, is imiversal. The notes of a country banker, only cir- culating in his owai neighbourliood, are like a country joato/.s, each district has its o^\•Tl. A national currency rises to the dignity of a language. But evei^ that is only local, on a larger scale. The ideas only expressed in the language are universal. We are, therefore, strengthened in our conviction, that the only true idea of a currency is, that it is the Representative of Transferable Debt, and that tohatever represents Transferable Debt is Currency. I CHAPTER IV. TIE THEOEY OE THE COINAGE. P 2 CHAPTEll IV. THE THEORY OF THE COINAGE. Meaning of Bullion — Coin — Mint Piticji: and Market Peice — What is a Pound? — On a Double Standard. 1. Most nations, even the i-udest, have felt tlie advantage of employing some substance to perform the functions of a currency. We have noticed, in the first chapter, most of the substances which have been used for this purpose by different nations. A metal, however, of some sort has been found to possess the greatest advantages, and of these, gold, silver, and copper, have been chietly preferi-ed. Gold and silver, however, in a perfectly pure state are too soft to be used for this purpose, and it is necessaiy to mix some other metal with them to harden them, which is called alloy. By a chemical law, whenever two metals are mixed together, the compound is liarder than either of them in a pure state. When gold and silver are in the mass, they are called Bullion, which, of course, may be of different degrees of fineness. But as the laws of all countries in which bullion is coined into money define the quantity of alloy to be mixed Avith the pure metal, wo shall use the word Bullion to mean gold, or silver, in the mass, mixed with such a })ro])ortion of alloy as is ordered by law, so as to be fit to be coined. Some nations have used Bullion as a circulating medium; luit the merchants of those nations were obliged to carry about with them scales and- weights to weigh out the bullion on each occasion. This was usual among the Jews. In some countries it is necessary both to weigh and assay the bullion at each operation, which, of course, is a great impediment to commerce. Other nations adopt a more convenient practice. They divide the bullion into pieces of a certain definite weight, and affix some public stamp u})on it to certify to the public that these pieces are of a certain fixed weight and fineness, and they give them cei'tain names, by which they are commonly known. These pieces of bullion, with a piiblic stamp upon then^i to certify their weight and fineness, and called by a publicly-recog- nized name, and intcnresent bullion and demand to have it stam])ed, and also Avithout any delay, the value of the metal as bullion must be exactly the same as the value of the metal as coin. If, hoAvever, a charge is made for the workmanship, or if any tax is levied on changing the metal from one form into the other, or if a delay takes place in doing so, there will be a difference between the value of the metal as bullion and as coin, and this difference will manifestly be the charge for the' workmanshij), the amount of the tax, and the quantity of interest accruing during the period of delay. These, however, are all fixed, or constant (piantities, wliich may be ascertained, and they form the limits of the variation of the metal in (jne form from its value in the other. In the following rcmai'ks we shall assume that there is no charge for the workmanship of coining, no tax upon it, anressed in an anonymous pam]>hlet, A reply to the Defence of the Jiank, settiny forth the unrcas<»i,ahleness of their sloio ^^aymew^s, London, 169G. " When tino sorts of com are current in tJie same nation of like value by denomination^ but not intrinsically, that xohich has the least value will be current, and the other as much as possible will be hoarded^'' or exported, Ave may add. The fact of tlie disapj)earance of good coin in the presence of bad, Avas noticed by Aristoplianes ; and Avas long the puzzle of financiers and statesnven, who continued to issue good coin from the Mint, and were greatly perplexed by its COMMON EKllOli ABOUT MINT TRICE. 219 immediate disappearance, till Sir Thomas Gresham ex])lained tlie cause, whence we have called it Gresham's Law of the Currency. This law is of such fundamental importance in Political Economy, viz.. That resent twenty shillings in silver, and that it is either misrated, or the market \'alue of the metals has so changed from the Mint value, that it ought in reality to exchange for twenty-one shillings, it is clear that merchants will then discharge their debts in silver. All the gold coin will be melted down, and exported to where it can buy twenty-one shillings m silver, and thus, in a very short space of time, it will disappear from circulation. This is what has repeatedly happened in the coinage of this country, and, from the cause not being understood, it was for many ages a source of great perjilexity to financiers. It would be too long to enumerate these instances here, to establish the truth of tlie doctrine, but they will be found in our Dictionary of Political Economy., Art. Coinaye of England. And we will only confine our attention here to a late example. At the begin- ning of the last century, gold and silver were legal standards within England and France, and it was from the misrating of the value of the coins by the two Mints, that gold came to be considered as the legal standard of England, and silver the legal standard of France. In 16G3, Charles II, issued a splendid gold coinage of £5, £2, and 20s. pieces. The latter were called guineas, as they were made of gold brought home by the African Company. They wei'e struck to be equivalent to twenty shillings in silver, and thus to represent the i", in gold. The pound weight of crown gold was ordered to be cut into 44^ guhieas, and continued to be so as long as they were coined. From some fatality they seemed to be always incapable at the English Mint of ascertaiuing the true value of gold and silver 226 THEORY AND PRACTICE OF BANKING. according to their market rates. The guinea was soon found to be imderrated, and, accordingly, the old practices of clipping, melting, and exporting were soon in full operation, and the scarcity of money was complained of in Parliament. In April, 1690, the great scarcity of silver coins occasioned great pviblic inconvenience. The goldsmiths complained to the House of Commons, that they had ascertained that immense quantities of sUver bullion and dollars had been exported. That tnany Jews and merchants had recently bought up vast quan- tities of silver to carry out of the kingdom, and had given three half-pence an ounce above its regulated value. That this had encouraged the melting do^m of much plate and milled money, whereby for six months past no bullion had been brought to the jNlint to be coined. The House appointed a Committee, who verified these allegations. It was shewn that the profit of melting down the milled money for exportation was above £25 per £1,000, and that the Mint price of silver was 5s. 2d. per ounce, but it was generally sold for 5s. 3^d. The House, in consequence, passed one of their useless laws against exporting bullion. The state of the currency now became every day more dis- graceful. Quantities of base and counterfeit coin were throA\'n into circulation. The House of Commons addressed the King to abolish the right of private coinage of half-pence and farthings. The current coins had been for many years clipped and adulterated, which in 1694 reached such a height, that tlie silver coins current had lost nearly half their value, while a great part of the current money was only iron, brass, or coj^per plated. As this state of matters gave rise to the first great currency debate of modern times, and l)rought about a great monetary crisis, we may dwell upon it rather fully. During 1694, the silver coinage became worse daily, and by the end of the year, guhicas, which had originally been coined to represent 20s., gradually rose, till they reached 30s. The exchange with Holland fell 25 ])er cent., and it would have fallen still lower, only it was shewn that the real exchange was in favor of England. The exchange with Ireland fell so much that £70 there was worth £100 in England. The evils of clipping the coin reached so great a height at the end of 1694, that Mr. Fleetwood, the Chai)lain-in-Ordinary to the King and Queen, l)eing selected to])reach before the Lord Mayor and Alilermcn on the 16th December, 1694, made it the subject of his sermon on the text, Gen. xxiii., 16. In an admirable sermon, or rather jtolitico-economical discourse, he denounced the i'raud and Avickedness of clipping and debasing the coinage. He said (j». 19), that the money was clipped down nearly one half. He shewed that he understood the subject a ON A DOUBLE STA.NUAKD. 227 great deal better than many men a century later. He shewed that, if the money generally were clipped, ail the good and weighty money that remamed must be exported. " The merchant that exports more goods from home than he imports from abroad, must unavoidably discharge the overbalance with good money ; this he can never do with clipped, for it is not Cmscir''s face and titles^ but weight and goodness that procure credit. And, if a foreigner import more of his coimtry's goods than he carries away of ours, the overbalance must be paid in weighty money, for the clip})ed will not go abroad. Now, if the ex])ortation of our weighty money (which is only now the milled) be a mischief to the nation, we see it is occasioned chiefly by the clipping." The disgracefid state of the coinage could no longer be over- looked by I'arliament. On the 8th of January, 1695, a Committee Avas appomted to consider the subject. At this time, says the Parliamentary History, Vol. v., p. 955 : — " The difiiculty lay so lieaA^^ \ipon the Government, that a stop was almost put to trade and taxes. The current silver coin had for many years begun to be clipped and adulterated ; and the mischief of late had been so secretly carried on by a combination of all people concerned in the receipt of money, and so industriously promoted by the enemies of the Government, that all pieces were so far dimhiished .and debased, as that five pounds in silver sj^ecie was scarce worth 40s., according to the standard ; besides an infinite deal of iron, brass, or copper washed over or plated." The Committee recommended that the money should be recoined into milled money. It estimated the exi^ense at one million. That the new money should be of the same weight and fineness as the old. That the crown piece should be current at 5s. 6d. That various penalties should be imjiosed for oflences against the coins. An Act was j)assed, statute 1095, c. 17, to prevent counterfeiting and clipping the coin of the kingdom. This statute averred that it was notorious that the current coin had been greatly diminished by clipping, rounding, filing, and melting, and that many false and counterfeit coins had been clipped, for the better disguising thereof, and that these practices had been much occasioned by those who drove a trade of exchanging broad money for clipped money, and other arts and devices. It, therefore, prohibited any person from exchanging, lending, selling, l)orrowing, buying, receiving, or paying any broad or uncli])]jed silver money for more in tale, benefit, profit, or advantage than the same M'as coined for, and ought by law to pass for, under a penalty of 10s. for every 20s. so illegally trafiicked with. It also enacted that whoever should buy or sell, or knowingly have in his possession, any clippings or lilings of the coin should forfeit them, as well as a penalty of £500, and be branded on the right cheek with a hot iron. It forbade any one but a trading gold- o 2 228 • THEORY AND PRACTICE OF BANKING. smith, or refiner of silver, to buy or sell biiUion, under pain of imiDrisonment, and enacted numerous other vexatious penalties and regulations respecting the export of bullion. All these absurd cruelties were wholly inefl:ectual, and, while multitudes of miserable wretches were dangling on the gibbets, clipping and counterfeiting were as rife as ever. Guineas, which had originally been coined to be equal to 20s., had progressively risen as the silver got worse, till at this time they were current at 30s. of the base trash, which passed by the name of silver coin. In February, 1696, several petitions were presented to the Hoiise of Commons ( Commons tTournals, Vol. xi., p. 445). The graziers, butchers, and others comiected with Smithfield Market, said that £40,000 a week passed through their hands for cattle, which for almost twelve months past had been paid in guineas at 30s. a piece, for want of current silver. There are besides, abundance of pamphlets in existence which j^rove that guineas were commonly current for 30s. in the spring of 1695. The frightful disorder of the currency may be judged of by the following facts. In the months of May, June, and July, 1695, 572 bags of silver coin, each of £100, were brought into the Exchequer, whose aggregate weight, according to the stand- ard, ought to have been 18,451 lbs., 5 oz., 16 dwts., 8 grs. :' their actual weight was 9,480 lbs., 11 oz., 5 dwts., making a deficiency of 8,970 lbs., 7 oz,, 11 dwts., 8 grs., shewing a deficiency in the weight of the current coins in the ratio of 10 to 22. One writer says {An Essay for regidating of the coin. By A. T"., Sept. 2, 1695) : — " Upon trial, I have found that 5s. of milled money hath weighed 8s. of the present current money, and 3s. of the 8s. was not clipped, only worn. Again, I have found 10s. in milled money to weigh 21s. of the clipped money. Again, 20s. of milled money to weigh 43s. of our now current money. " I have gone to several goldsmiths in London, and have got them to take out of their counters a bag of £100 as came to hand, which, upon trial, I have found at one place to weigh : — Oz. Dwt. Gr. A bag of £100 230 13 6 Another i)lace £100 Weighed 222 15 Another place 198 17 Another ])lace 190 Another place 182 3 Another place 174 1120 1,198 5 17 "The £000 weighing in all 1,198 oz., 5 dwts., 17 grs., and is no more tlian wliat £310 in milled money will weigli. " I am informed the money paid into the Exchequer doth weigh from 15 (and seldom the £l00 reacheth) to 20 lbs. weight, ON A DOUBLE STANDARD. 229 so that the very best brought in there cloth not weigh two-thirds of what it ought to do, and the money paid into the Exchequer is supposed, a great \rdvt of it, to come from the country. " But, as it's believed that tlie money in the country is generally not the one-half so bad as it's in and near London, I have procured an account to be sent me from the following cities, from whence I ain informed that £'100 doth weigh on trial of tico bags in each j)lace, to be viz. : — Oz. Dwt. Gr. In the City of Bristol, one bag of £100 weighed 240 Another weighed 227 15 In the City of Cambridge, a bag of £'100 weighed 203 5 1 Another weighed 211 019 In the City of Exon, one bag of £100 weighed 180 7 Another weighed 192 3 In the City of Oxford, £100 in half-crowns weighed 216 10 £100 in shillings 198 15 1,669 1 20 " The £800 weighing not more than £431 15s. of milled money will weigh, and but a very small difference between the weight of the money in London and the country." This disgraceful state of the money gave rise to the greatest public confusion and distress, and a Avarm controversy arose whether the new money which should be coined should be of the old standard in Aveight, fineness, and denomination, or whether it should be depreciated, or raised in value, as it was absui'dly called. This controversy was keenly disputed then, and we may pay some considerable attention to it, because it was revived under another form 116 years later, when the notes of the Bank of England Avere depreciated, and a strong party maintained that the standard of the coin should be depreciated to the level of the depreciated notes. Mr. William LoAvndes, the Secretary to the Ti-easury, was ordered by them to make a Report on the subject of the coin. This he did in A Report containing an Essay for the Amend- ment of the Silver Coins. London, 1695. In this he enters into a long, and at that time, valuable investigation of the history of the coinage, and its successive depreciations in Aveight and fineness. After giving the details of every Mint indenture for four hundred years, he says, p. 56 : — " By the careful observing of which deduction here made, from the indenture of the JMint for above 400 years past (many of Avhich are yet extant, and have been seen and examined by me), it doth evidently appear that it has been a policy constantly practised in the Mints in England (the like having indeed been done in all Foreign Mints belonging 230 THEORY AND PRACTICE OF BANKING. to Other Governments), to raise the vahie of the coin in its extrinsic denomination from time to time, as any exigence or occasion required ; and more especially to encourage the bring- ing in of bullion into the realm to be coined (though sometimes, when the desired end was obtained, the value has been suffered to fall again), so that, in the whole number of years from the 28th Edward I. until this time, the extrinsic value or denomination of the silver is raised in about a triple proportion." Here we cannot fail to observe the utter confusion of idea that Mr. Lowndes, and too many after his time, labour under. They manifestly suppose that, by raising the name of the coin they raise its value. The exti-insic value of the coin can by no possibility mean anythmg else but the quantity of things it ^viIl exchange for. And to call the quantity of things it ^"ill exchange for its denomination is a most pitiable confusion of ideas. Mr. Lo-\vndes then says : — " The which being premised, and every project for debasing the money (by the reason before given) being rejected as dangerous, dishonourable, and heedless, it remains that our nation in its present exigence, may avail itself, by raising the value of its coins, and this may be effected either by making the respective pieces called crowns, half-crowns, shillings, and to be lesser in weight, or by continuing the same weight or bigness, which is at present, in the undipped moneys, and ordaining at the same time that every such piece shall be current at a higher price in tale. " But, before I proceed to give my opinion on this subject, it seems necessary for me to assert and prove an hypothesis, which is this, namely, That making the pieces less, or ordaining the resj^ective 2^ieces (of the j^i'esent loeight) to he cia'rent at a higher rate, may equally raise the Value of Silver in our Coins." Mr. Lowndes then enters into an argument to prove that sixty pence are equal to seventy-five pence — a wUd goose chase in Avhich Ave decline to follow him. His proposal Avas, then, that all the existing undipped silver money should be raised in denomination to Gs. 3d. the crown, and other coins in proportion, so that tlie shilling Avould pass for fifteen pence instead of twelve. That new coins should be struck at the increased denominations. These couis ho proposed to christen by new names. The reasons he alleges for this proceed- ing are — " 1. Tlie value of the silver in the coin ought to be raised to the foot of Gs. 3d. in every crown, because tlie price of standard silver in bullion is risen (from divers necessary and un- necessary causes, producing at lengtli a great scarcity thereof in England) to Cs. od. an ounce. This reason (which I humbly conceive will ajtpear irrefi'agable) is gi'ounded chiefly upon a truth so ap])arent, that it may Avell be compared to an axiom, even in mathematical reasoning, to wit, — Tliat whensoever the extrinsic value of silver in the coin lialh been, or shall be, less ON A DOUBLE STANDARD. 231 than the price of silver in bullion, the coin linth been, and will be, melted do\\ii." lie then enters into some objections against tliis proposal, and says, p. 70 : — " That everything having any value or worth what- soever, wlien it becomes scarce, grows dear, or (which is the same thmg) it riseth in price, and, consequently, it will serve to pay more debts, or it will buy greater quantities of other goods of value, or in anything else it will go further than it did before. That silver in England being grown scarce as aforesaitl, is conse- quently grown dearer. That it is risen in price from 5s. 2d. to Gs. 5d. an ounce ; and, l)y daily experience, 19 3-10 dwts. in sterling silver (equal to the weight of a crown piece) in England, doth and will purchase more coined money than 5s. l)y tale (though the latter be delivered bona fide in undipped shillings, or in a good bill), and, consequently, doth and will purchase and acquire more goods, or necessaries, or pay more debts in England, or (being delivered here) it fetches more money in any foreign parts by way of exchange, than 5s. by tale, or the sixth part of a guinea by tale, or goods to the value of 5s, in tale only, do or can fetch, purchase, or acqiiire. That this advanced price of the silver has been growing for some tune, and is originally caused by the balance, excess, or difference above mentioned, which naturally and rationally produces such an effect * * * That the raising the value of the silver in our coins to make it equal to silver in mass, can in no sense be imderstood to be a cause of making silver scarce. That there can never be proposed any just or reasonable foot upon which the coin should be current, save only the very price of the silver thereof, in case it may be molten in the same place where the coins are made current, or an extrinsic denomination very near that price. It being most evident that if the value of the silver in the coins should (by any extrinsic denomination) be raised above the value or mai'ket price of the same silver reduced to bullion, the subject would be propoi'tionably injured and de- fi-auded, as they were formerly in the case of the base monies coined by public authority." He then says the value of the silver in the coin ought to bo raised, to encourage the bringing of bullion to the INlint to lie coined. That this had been repeatedly done both in the English and Foreign Mints. That raismg the value of silver in coin would increase the whole species in tale, and thereby make it more commensurate to the need for it for carrying on the common traffic and commerce of the nation, and to answer the payments on the numerous contracts, securities, and other daily occasions, requiring a large supply of money for that piu'pose. He says that at that time gumeas passed current for 30s. He then gives some details of the state of the coinage, by 232 THEORY AND PRACTICE OF BANKING. which he shewed that they were diminished by about half their usual weight. We have said, that when coins were struck out of bullion, that the value, or purchasing power of the money depended upon the actual quantity of bullion in it, and not at all on the name of the coin. A most extraordinaiy delusion, however, began to prevail in early times, of which we have the first notice in Plutarch. It was this, that Avhen coins were once called and recognized by a certain name, that their value depended upon the name, and did not depend on the quantity of metal in them. About the end of the iVth century this in- credible heresy began to find adherents in this country, and this notion long infested the notions of many financiers, and, we shall see hereafter, was stoutly maintained by the Government party in the great currency debates in 1811, and was the cause of great mischief to this country. The extraordinary doctrines of LoAvndes called forth a worthy antagonist, and were the origin of some of his most admirable writmgs, and they are of so mi;ch importance that we shall make some extracts from them, as there is no doubt that the fallacies he combated are even yet not entirely eradicated. Locke had in 1691 published a treatise, in which he shelved the utter futility of interfering with the rate of interest by law, and combated the idea that Avas then becoming prevalent, that the value (as it was called) of the coin should be raised in order to keep it in the country, lie shewed that the persons Avho supported such a plan were confounding the denomination Avith the value, its name with the purchasing power, and that all such ideas proceeded from a confusion of terms, and would have no real efi^ect. The arguments of Locke, though by no means absolutely novel, had never been j^ut before so luminously and fully. The proposal of LoAAaides, coming from a man holding his official position, demanded a prompt notice and exposure. Tills Locke did, in Further Considerations concerning liaising the Value of Money, in A\'hich he exposed the fallacy of Lowndes's arguments : — "Raising of coin is but a specious Avord to deceive the unwary. It only gi\'es the usual denomination of a greater quantity of silver to a less (?'. g., calling four grains of silver a penny to-day, Avhen five grains of silver nuide a |)enny yesterday), but adds no Avorlli, or real value, to the silver cohi, to make amends for its Avant of silver. That is impossible to be done, for it is only the quantity of silver in it, tliat is, and eternally will be, the measure of its A^•^lue, and to convince any one of this, I ask Avhellier lie that is forced to receive but 320 ounces of silver under the denomination of £100 (for 400 ounces of silver Avhich he lent mider the like denomination of £100) will think these 320 ounces of silver, however denominated, Avorth those 400 ounces he lent? If any one can be supposed so silly, LOCKE ON THE COINAGE. 233 he need but go to the next market, or shop, to be convinced that men vahie not inonoy by the denomination, but by the quantity of the silver there is in it. One may as rationally hope to lengthen a foot, by dividing it into 15 parts, instt-ad of 12, and calling them inches, as to increase the value of the silver that is in a shilling, by dividing it into 15 parts instead of 12, and calling them pence. This is all that is done when a shilling is raised from 12 to 15 pence, " Clipi)ing of money is raising without public authority, the same denomination remaining to the piece, that hath now less silver in it than it had before. " Altering the standard, by coining pieces under the same denomination with less silver in them than they formerly had, is doing the same thing by public authority. The only odds is that, by clipping, the loss is not forced on any one (for nobody is obliged to receive clipped money) ; by altering the standard it is. " Altermg the standard by raising the money, will not get to the public, or bring to the Mint to be coined, one ounce of silver ; but will defraud the king, the church, the universities and liospitals, and of so much of their settled revenue as the money is raised, v. g., twenty per cent, of the money (as is proposed), be raised one-fifth. It will weaken, if not totally destroy, the public faith, when all that have trusted the public, and assisted our present necessities, upon Acts of Parliament, in the million lottery. Bank Act, and other loans, should be defrauded of twenty per cent, of what those Acts of Parliament were security for. iVnd quantity of silver has a less value ; and an equal quantity an e(pial value. " 4. That money ditfers from uncoined silver only in this, that the quantity of silver in each piece of money is ascertauaed by the stamp it bears ; which is set there to be a public voucher of its weight and fineness. " 5. That gold is treasure, as well as silver, because it decays not in keeping, and never sinks much in value. " 6. That gold is fit to be coined, as well as silver ; to ascer- tain its quantity to those who have a mind to traftic in it ; but not to be joined with silver as a measure of commerce." Locke then examines LoAvmdes's doctrine, that the value (or denomination) of the silver coin should be raised to Gs. 3d. the ounce, because the price of standard silver had risen to Os. 5d. the pimce — " This reason seems to me to labour under several mistakes ; as " 1. That standard silver can rise in respect of itself. " 2. That staiuhird bullion is now, or ever was, Avorth or sold to the traders in it for Gs. 5d. the ounce, of lawful money of England. For, if that matter of fact holds not to be so, that an ounce of sterling Imllion is worth 6s. 5d. of our milled weighty money, this reason ceases ; and our weighty crown pieces ought 234 THEORY AND PRACTICE OF BANKING. not to be raised to 6s. 3d., because our light clij^ped money will not purchase an ounce of standard bullion, under the rate of 6s. 5d. of that light money. And, let me add here, nor for that rate neither. If, therefore, the author means here, that an ounce of standard silver is risen to 6s. 5d, of our clipped money, I grant it him, and higher too. But, then, that has nothing to do with the raising our lawful coin, which remains undipped ; unless he will say, too, that standard bullion is so risen, as to be worth, and actually to sell for, 6s. 5d. the omice of our weighty milled money. This I not only deny, but fui-ther add, that it is im- possible to be so. For 6s. 5d. of milled money weighs an ounce and a quarter near. Can it, therefore, be possible that one ounce of any commodity should be worth an ounce and a quarter of the self-same commodity, and of exactly the same goodness ? for so is standard silver to standard silver. Indeed, one has a mark upon it which the other has not ; but it is a mark that makes it rather more than less valuable, or, if the mark, by hindering its exportation, makes it less valuable for that purpose, the melting pot can easily take it off. * * * " Those who say bullion is risen, I desire to tell me what they mean by risen ? Any commodity, I think, is properly said to be risen, when the same quantity will exchange for a greater quantity of another thing ; but more particularly of that thing, which is the measure of commerce in the country. And thus corn is said to be risen among the English in Virginia, when a bushel of it wiU sell or exchange for more pounds of tobacco ; among the Indians, when it will sell for more yards of wampom- peak, which is their money ; and among the English here, when it "^viU exchange for a greater quantity of silver than it would before. Rising and falling of commodities ai-e always between several commodities of distinct worths. But nobody can say that tobacco (of the same goodness) is risen in respect of itself. One pound of the same goodness will never exchange for a pound and a (juarter of the same goodness. And so it is in silver : an ounce of silver Avill always be of equal value to an ounce of silver : nor can it ever rise or fall, in res})cct of itself: an otmce of standard silver can never be worth an ounce and a quarter of standard silver: nor one ounce of inicoined silver exchange for an omice and a quarter of coined silver : tlie stamp camiot so nmch debase its value. Indeed, the stamp, hindering its free exjjortation, may make the goldsmith (who profits by the return of his money) give one 120th, or one 60th, or perhaps sometimes one 30th more, that is 5s. 2^d., 5s. 3d. or 5s. 4d. the ounce of coined silver for imcoined, wlicn there is need of Bending silvcM- beyond seas; as there always is, wlien the balance of ti'a'. From this, it is seen that three parties are in(lis])ensal>le to an excliange. We may observe tliat a consideration of this transaction is sufficient to disprove the popular account that Bills of Exchange and exchange op(;rations were invented by the Jews. A crowd of wi'itei-s have said that the Jews, having undergone a terrible persecution in Frajicc towards the end of the 12th century, invented Bills of Exchange in order to transmit their eifects from France to foreign countries. This account, however Avidely received, is imjiossiblc, because it is clear that exchange opera- tions can only arise out of reciprocal debts being due between NATURE OF AN EXCHANGE. 253 two places, as they cannot take i^lace unless debtors and creditors of the one reside in the otlier. To sup])Ose that people covdd simply remit their money Ijy means of Bills of Exchange, is as absurd as to suppose that a man could send his luggage by the electric telegraj)!). All that he could do in either case would be to send an order to deliver his money, or his luggage, to some one else. Now, when the debts between London and Edinburgh are equal, it is evident that they may all be discharged by means of such an exchange, without remitting any specie. The exchanges are then said to be at Pak. Supposing, however, that the debts arc unequal, and Edinburgh wishes to send more money to London than it has to receive, it is clear that the demand for bills is greater than the supply, and, as eveiy one would rather send a bill than cash, as it is cheaper to do so, those who had money to send Avould bid against each other for the bills in the market as for any other merchandize, and the price of them would rise, or a premium would have to be paid for a bill on London. Now, London is the great centre of commerce. It supplies the rest of the country with foreign merchandize : it is the seat of Govermnent, to which the revenue is remitted from all parts of the country : the great families from all parts of the country go to reside there, and their incomes must be remitted to them there : hence there is almost always a much greater quantity of money seeking to flow from the country to London than the contrary : consequently, the demand for bills on London in the country is greater than the supply, and, therefore, inland bills upon London are always at a premium. This premium is computed by time. Thus, if a person paid a sum of money into a bank in Edinburgh, in former times, he got a bill payable at 60 days' date in London ; or, if he wanted it payable at sight, he had to pay GO days' interest. This was afterwards reduced to 40 days, and was estimated at about ^ per cent. As commmiications improved, this was reduced to 20 days, or 5s. per cent. But, in consequence of the still further facilities afforded by railways, the premium is now reduced to Is. per cent. Hence, if a person in Edinburgh wishes to have a bill at sight on London, he must pay Is. per cent., or four days' interest, on it. And this time is also called the Par of Exchange betAveen London and Edinburgh. There is a similar premium on bills, or par of exchange, between all other cities in the country on London. This is called Inland Exchange. The Exchange of the country upon London is said to be against the country and in favour of London. But it must be observed that it is only unfavourable to the buyers of bills, or those who wish to send money. It is equally favourable to the sellers of bills, or those who have to receive money. 254 THEORY AND PRACTICE OF BANKIXG. The exchange is called unfavourable, because, after the settle- ment of the whole debts between the two places, there remains a sum in cash to be remitted. It appears from this, that when in any place the demand for bills is greater than the supply, the Exchanges are adverse to that place, because it has more money to pay than to receive : when the supply is greater than the demand, the Exchanges are favourable to it, because it has more money to receive than to pay. On Foreign Exchange. 5. The principle of Foreign Exchange is exactly the same as that of Inland Exchange. But there is somewhat more com- plication in the detail, on account of the different moneys of different countries. In Exchange between two foreign places and of different moneys, the money of one place is always taken as fixed, and the Exchange is reckoned in the variable quantities of the money of the other given for it. The former is called the fixed or certain price, and the latter the variahle or uncertain price. Thus, between London and Paris, tlie Exchange is always reckoned by the variahle sum in francs and cents given for the fixed £. On the contrary, between London and Spain, the Exchange is always reckoned by the variable sum in pence given for the fixed dollar of Exchange, When a certain place is taken as a centre, if the fixed price is the money of that place, it is said to receive the variable price : on the contrary, when the money of that place is the variable price, it is said to give the variable price. Thus, at any time, London receives from Paris so many francs and cents for the £l sterling ; and London gives Spain so many pence for the dollar. In the quotations of the Rates of Exchange, it is usual to omit the fixed j)rice and name only the variable price, and then that is called the Hate or Course of Exchange. One source of per])lexity in the Foreign l^^xchange arises from the circumstance that, in consequence of London giving the variable price to some ])laces, and receiving it from others, the same state of the exchanges will have to be expressed in opposite language, as we have observed above, in speaking of the expressions used regarding the Foreign Exchanges rising or falling in consequence of a depreciated curi-cncy. According to Tate's Modern Canihist, the following are the present Rates of Exchanges between London and the principal Foreign Cities: — ON FOREIGN EXCHANGE. 255 London receives from Amsterdam . 12 ?, Florins and Stivers for £l Hamburg . 13 12 Marks and Stivers — Paris . . . 25 50 F'rancs and Cents — Frankfort . . 121 Z. V. Florins^ 10 Vienna . . 13 70 Florins and Ki •euzers 1 Genoa . . 25 35 Ijire and Centesimi — Berlin . . 6 25 Dollars and Silver Gros — Milan . . 25 40 Lire and Cent — Leghorn . . . 25 50 Do. — London gives to Lisbon . . . 52\ pence sterling for 1 Milreis Madrid . . . 50i 1 Hard Dollar. Gibraltar . . 48^ 1 do. Naples . . . 39f 1 Ducat Palermo . . 119^ 1 Onza Venice . . . 47^ 6 Lire Austriache St. Petersbiu'g. 38^ 1 Silver Pvuble Rio Janeiro 30 1 Milreis NeAV York . . 4H 1 U. S. Dollar Calcutta . . 23 1 Comp. Rupee. Now, if the exchange of London on Paris is against London, or the demand in London for bills on Paris is greater than the supply, it is clear that the £ sterling will purchase fewer francs. Hence, between London and Paris, when the exchange is adverse to London, the rate or course of exchange wiWfall belovi par. On the contrary, when the exchange is favourable to London, that is, the supply is greater than the demand, the rate of ex- change will rise above par. And the same is manifestly true with respect to all other places from xohich London receives the variable price. But, siippose the Exchange between London and Madrid is against London, or the demand in London for Bills on Madrid is greater than the supply, then London will have to give more pence to purchase the Spanish dollar. Hence, between London and Madrid, when the exchange is against London, the Rate, or Course of Exchange, will rise above par. On the contrary, when the exchange is favourable to London, she Avill have to give fewer pence to purchase the Spanish dollar, and,conseq\iently,the Rate of Exchange will /«// bdow par. And the same is manifestly true, with respect to all other places to xcliich London gives the variable price. Hence, when the Exchange between London and any other place, varies from par, we must always consider whether London gives the variable price to, or receives it from, that place. 256 THEORY AND PRACTICE OF BANKING. The interests also, of the buyers and sellers of bills are always opposite. If the Rate of Exchange is favourable to the one, it is equally unfavourable to the other. The buyers of bills are also called remitters, and the sellers are also called drawers. On the Limits of the Variations of the Exchanges. 6. Supposing that while the Exchange between any two places — say London and Paris — is in a state of equilibrium, that is, when the demand and sup])ly of bills in each city is exactly equal, so that they would each have to receive and send the same sum, it should happen that from any cause whatever, no matter what, there should be a desire on any particular day to send more money from one side than it has to receive. Suppose more money has to be sent from London than it has to receive, then those merchants who want to remit money from London will strive to buy bills on Paris in the London market. But, as the demand is greater than the supjily, a competition Avill spring np to buy the bills that are in the market, and hence the price of them will rise. It is their dx;ty to place the bullion in Paris at their own expense and risk, and, consequently, tliey would rather give somewdiat more for a bill than its par price, to save them- selves that expense. But they will not give more than the cost of transmitting the bullion itself, because, if the price rose higher than that they Avould sooner send the money. Thus, when the Exchange in London rises against London, or, in the case of Paris, falls below par, it shows that London wishes to send to Paris more than it has to receive, and the exchange is said to be against London, but it is clear that it cannot continue at a greater rate against London than the cost of transmitthig bullion. Hence this is manifestly a superior limit to the variation of the Real Exchange. But the reverse case may also happen. The sui)ply of bills in London on Paris may exceed the demand. The price of them will, therefore, manifestly fall. But for similar reasons the cost of transmitting bullion will be an inferior limit below which the price will not fall. We tlius see that the state of the exchanges arising out of the cross remittances of money is a simple exanqile of the general law of supply and denjand, with the exception that the varia- tion in the rates of exchanges cannot exceed a certain definite sum, namely, twice the cost of sending bullion from one place to the other. These limits of the Rate of Exchange are called specie points, because, A\'hen the Exchanges reach them, bullion may be expected to flow in, or out, as the case may be. It is to be ol)served, however, that these limits of the variations of the Exchange, or specie points, only apply to bills payable at once, nnd fo long ])eriods. During short AN INCONVERTIBLE PAPER CURRENCY. 257 periods, and for bills which have some time to run, temporary causes may produce fluctuations in the Exchanges greatly ex- ceeding these limits. We shall consider these cases iully after- wards. On the Effects of an Incoiii'crtible Paper Currency on the Foreign Exchanges. 1. We must now consider what the effect of an inconvertible paper currency will be on the foreign exchanges, and the market price of bullion. So long as paper is convertible, that is, the holder of it has the power to demand pajnrient in gold for it at sight, it is very clear that it cannot circulate at a discount, because, if it fell to a discount, every person who held it would immediately go and demand gold for it. But, if while it enjoys considerable circulation, the power of convertibility is suddenly taken away, then it becomes, in all respects, equivalent to a new standard, just as much as gold or silver, and its value will be affected by the same principles as these two, viz., by the sole question of the quantity of it in circulation, compared to the operations it represents. Under the old system of making an attempt to fix the value of silver and gold relatively to each other, there was no power of convertibility of one into the other similar to the convertibility of the note. If silver fell to a discount, as compared with gold, no persons could demand, as a right, to have their silver ex- changed for gold, consequently, the inevitable result of a con- siderable change in the quantity of either metal was a change in their market values. Thus, in 1794, gold rose to 84s. if pnrchase4 with silver bullion ; now, if, speaking by analogy, the silver coin had been convertible into gold, the difference never could have arisen, any more than a bank note, convertible at the will of the holder of it, could circulate at a discoimt. Now, paper, when issued as a substantive standard of value, follows exactly the same rule^ ; if only the usual (quantity of it be issued, i. e., no greater quantity than would have been issued if it were con- vertible into specie, it will continue to circulate at its par value ; but, if these issues be continued, and if it be deprived of the natural corrector of an over-issue, viz., payment on demand, it is maintained in circulation, and exactly the same result follows as attends an excessive issue of silver, — it falls to a discount. Now, the silver coin may fall to a discount from two circumstances, either if silver be coined with too great profuseness, the excessive quantity of it will diminish its value, even though the coin be of full weight ; or, if the silver coin be suffered to fall into a degraded state by clipping and wearing, so that it does not contain the full legal weight of bullion, it then becomes depre- ciated. The apparent result in figures will be just the same in either case, guineas will rise to 24s. or 30s. But, as silver has 258 THEORY AND PRACTICE OF BANKING. general value, and is, from its qualities, a recognised measure ol value, it is not correct to apply the term depreciation to it as long as the coin contains its full legal weight of biiUion. But the case is different with paper ; it is only received on account of bearing a promise to pay a certain quantity of bullion on the face of it, and if it is not able to fulfil that promise, it is depreciated. Now if, for the public convenience, it be deemed advisable to issue an inconvertible paper currency, the only way of main- taining its currency at par is by limiting its quantity. We do not mean by this, limiting its quantity to an absolute fixed amount, but by devising some means whereby a greater quantity of it shall not he issued than if it loere convertible into gold. If more than this be issued, it will be followed by the same result as attends an excessive issue of silver, it will fall to a discomit, which, in this case, is depreciation, and the necessary consequences of a dei^reciated curi'ency will follow, viz., the market price (or paper price) of bullion will rise above the mint price, and the foreign exchanges will fall. Now, if such a state of things happens, the proper remedy is to diminish the quantity of the paper in circulation until the market price of bullion is reduced to the level of the mint price. If the direct power of demanding five sovereigns be taken away fi'om the holder of a £5 note, still, if he can purchase bullion with it in the market to the amount of five sovereigns, it is an infallible proof that the note is current at par ; and the limi- tation need not proceed beyond that. But, if this be not done, . the next best thing is to allow all persons to receive the notes at whatever value they choose to put upon them, and let them make a difterence, if they choose, between the prices of articles when paid in gold, or in paper. If this be allowed, no very great inconvenience will take place in the internal trade of the country beyond a certain loss of prestige which must happen to an institution whose paper circulates at a discount. . But suppose the law, with more zeal for the honor of the paper currency than discretion, declares it to be a crime to make a difference between paper and gold, and a jnmisliable offence to give twenty sovereigns in gold for twenty-one pounds in paper — what will be the consequence '? Exactly tlie same as we have seen happened when the silver and gold coins were impro])erly rated, the one vJuch was tmdcrrated disappeared from circulation. We have seen this happen both in the case of the gold coin and the silver coin. Now, when the incon- vertible paper currency is issued in too great abundance, and has a tendency to overflow the channels of circulation, its natural effect is to raise prices when ])aid in it. If people Avere free in th(;ir transactions, they would gradually make a diflerence in price between ])aymcntK in paper and payments in bullion ; AN INCONVERTIBLE PAPER CURRENCY. 259 but if tlie owners of tlie coui are prevented by law from receiving more for it tlian tlie same nominal sum in paper, they will do exactly the same thing as is invariably done Avhen, in a metallic currency, ])art is dei)reciated and jiart is of full weight, they will either hoard or export it. At all events, it Avill dis- appear from circulation. Now, as the gold gradually disappears, and paper issues multii)ly, people begin to estimate all i)rices by transferring their ideas from the gold to the })aper, and the paper ends by finally displacing the entire gold coinage. The stamp on the coin is similar to the banker's " promise to pay " on a note. The stamp is the guarantee of the State, that the coin does actually contahi a given amomit of bullion ; the "promise to pay" is the banker's guarantee that he can j^ay so much coin if required. The convertibility of the coin into the legal amount of bullion, is the test of the depreciation of the metallic currency ; so the convertibility of the note into coin is the test of the depreciation of the note. If the power of demanding coin be taken away by the State, the power of com- manding a certain quantity of bullion in the market still equally remains as the only test of its value. The Mhit price of bullion is the price paid in coins of the fuU legal weight, the market price means its price paid in the current coins, and a difference between the two is the proof and measure of the depreciation of the current coin. When paper became the standard currency the market price of bullion meant the price of it when paitl in the paper currency, or the paper i)rice of it ; and, by a parity of reasoning, if the paper ]>rice of gold bullion rose above the Mint price, it was the proof and the measure of the depreciation of the jxqyer currency. Whenever the currency of a country'- becomes redundant, that is to say, that jirices rise so much higher in one country than m its neighbours, that the value of money sensibly diminishes, the natural corrective for such a thing is to take a certain portion of it out of circulation, so that, by diminishing the quantity of it, its value may be raised. Wlien people find that the same quan- tity of gold will not purchase an ecpial amount of commodities in this country, as they will in another, their own natural instincts will lead them to purchase commodities abroad where they are cheap, and bring them for sale here where they are dear. The natural instincts of trade will, therefore, produce an equilibrium in value, in the currency of neighbouring comitries. Now, when the currency of a country consists partly of paper and ]>artly of gold and silver, it is quite clear that only the metallic ])ortion of it can be exported in payment of foreign commodities. The ])aper portion of it, which has no value abroad, must remain at home. If the issues of the paper l)e continued, so as to prevent the currency from recovering its value, the process of the exportation of the metallic portion will 260 THEORY AND PRACTICE OF BANKING. go on until it is entirely exhausted. If this be the case, the only method of restoring the currency to its former value is by diminishing the quantity of the paper, until the drain is stopped by the enhancement of the value of the whole currency. There is, however, a School of Doctrines that maintains that, as the gold goes out, paper should be issued to supply the vacuum until the gold comes back. But it requires little sagacity to see that if that be done, the gold never will come hack again, and the drain Avill not cease until it is totally exhausted, and the only way to bring it back again, is to raise its value at home, which can be done only by removing the plethora of paper. AVhen the currency is in its healthy state, the oscillations of the exchange may be compared to those of a tight, staunch ship, which has alway a natural tendency to recover itself; but when there is an excessive quantity of paper, it is like the same ship waterlogged, when she once heels over she never can recover herself until the water is pumped out. The doctrine that the rise of the paper price of bullion above the Mint 2)rice, and a contifiicous state of the Foreign Exchanges beloxo the limits of the real exchange, are the p)roof and the measure of the depreciation of an inconvertible ^Mper currency ^ may be called Lord King's laAv of the currency, because he bore the most conspicuous part in establishing it. The rise of the paper price of bullion attracted great attention soon after the beginning of this century, when Lord King and some others published pamphlets to demonstrate the above proposition. However, the price of bullion fell, and the subject slept till 1809, when the extraordinai'y rise of the paper price of bullion began again to be seriously felt, Ricardo then appeared as a writer for the first time, and a pamphlet he published to prove Lord King's doctrine, was the foundation of his fame as an Economist. This controversy gave rise to the famous Bullion Report, and the great currency debates in 1811, when the House of Commons solemnly repudiated the doctrine. These debates are narrated at great length in a subsequent chapter. This doctrine is now universally admitted, so that it is needless to say much more about it. On Exchange Operations. 8, Exchange operations consist in buying, selling, importing and ex))orting bullion, called " liulliou Oj)erations," and buying and selling Bills, called " Banking Operations." The calculations necessary to ascertain the profit and loss on Buch operations, are given at length in various technical works on the subject. Our object only is to examine the general causes which produce these movements of bullion, Avhich so Korely vex the banking and commercial world. Exchange operations of both sorts may be either direct or ON EXCHANGE OPERATIONS- 261 indirect, that is, they may take place directly between the two countries, or the final operations may be ell'ected through the medium of one or more intermediate countries. We have observed that for bills payable at sight the limits of the variations of the exchange caimot exceed the cost of the trans- mission of bullion, which are called the specie points, because, when they are reached, bullion may be expected to flow in or out. When the bills, however, have a considerable time, such as three months, or more, to run, before they are payable, causes may operate Avhich may produce temporary fluctuations of the exchange considerably beyond these limits. These are chiefly — 1. The necessity that the holders of these long-dated bills may have to realize them, even at a considerable sacrifice, to maintain their own position. 2. The doubtful position of the acceptors, or the genei'al dis- credit of the place they are dra^Ti upon. 3. The diftering relative values of the precious metals which are the standards of payment at each place. 4. The respective rates of discoimt at each jjlace. Now, it may very often happen that, from these combined causes, it may be considerably more profitable to possess bullion at one place than another. Whenever this is the case, exchange operators export bullion from one place to another for the sake of this profit. They create bills upon such a place, they draw upon their correspondents, discount their bills, and remit the proceeds to meet their drafts when due. It used to be the dogma of many commercial writers that bullion was only exported to discharge a previous state of indebtedness, and that consequently a drain of bullion came to a natural end, Avhcn the indebtedness was discharged. But this is a most grievous error. The sufticient diflerence of profit in possessing bullion at two places Avill cause a fabrication of bills for the purpose of exporting bullion, Avathout any previous indebtedness, and, of course, this Avill continue so long as this possibility of profit exists. Consequently, unless this profit is destroyed, the drain of bullion will not cease. The effectual way of annihi- lating this profit is by raising the rate of discount. It is manifest that in such operations, the difference of profit between the two places must exceed twice the cost of trans- mitting bullion, because, in such cases, the cost of transmitting the bullion both ways will fall on those who originate them. Between countries in which thei'e are no restraints upon trade, the exchanges Avill never vary much, exce])t on some sudden emergency ; but there are countries with which, owing to the prohibitive laws which still infest their commercial codes, the exchanges are permanently unfavourable, because they will take nothhig bxit bullion for their commodities. Russia is one of 262 THEORY AND PRACTICE OF BANKING. these countries, and hence, if not modified by other circum- stances, bills upon Russia would always be at a premium ; but here again the effect of trafficking steps in, which always has a tendency to eqiialise prices. The merchant (if we may call him so) who deals in bills, acts upon the same principles as the dealer in any other commodities, he buys them where they are cheapest, and sells them where they are dearest. Hence, he "will try to buy up Russian biUs cheap in other exchanges, or debt markets, and sell them in the London debt market. On the other hand, from the course of trade between England and Italy, the debt which Italy owes to England is usually greater than the con- trary ; hence, Italian bills will usually be at a discount, or cheap, in the London debt market. So the bill merchant buys them up cheap here, and sends them to some other market—Paris, for mstance — where they may be at a premium. By these means, the price of bills is raised where they are cheapest, and depressed where they are dearest ; and the general result will be to melt all the differences between separate coimtries into one general result, so that the exchanges will not be favourable with one country and adverse with another, but they will be generally adverse or favourable with all the rest of the Avorld. Supposing, however, a merchant has to remit money to Paris while the exchange with Paris is imfavourable to England, he may possibly discover a more advantageous way of remitting it than by bupng a bill on Paris directly. Thus, for instance, while bills on Paris are at a premium in London, those on Hamburg may be at a discount, and bills on Paris may be at a discomit in Ilumburg. So, if the merchant buys a bill on Ham- burg and sends it to his agent there, and directs him to pur- chase a bill on Paris with the proceeds, he may be able to discharge his debt in Paris at a less sum than he would have to pay for a Paris bill in London. This circuitous way of settling his debt involves additional charges for brokerage, coinmis- sion, postage, &c., but the efl'ect of it is still further to equalize the exchanges between London and all other coun- tries. This circuitous method is called the arbitration of exchanges, and the sum which is given in London for the ultimate price it realizes in Paris is called its arbitrated price. When only three places are used in the operation as above, it is called simple arbit7'atlo7i. When more than three are employed, it is called cofiqwund ((rhitroiion. The ])ractix)al rules for working out these results are very simple, and will be found in any technical book on the subject, IJut it is very evident, that the (piicker, safer, and cheaper the connnunication between countries become, the less room will there be for such oi)erations, because the limits of the variation of the real exchangc^'^, which arc the margin which renders such transactions possible, will (constantly diminish. ON THE KEAh EXCHANGE. 263 The scale on which these indirect operations of exchange is carried on is immense, and peculiarly aifects the London exchange. Tiiere is no exchange between places to and from which reniit- ances have not constantly to be made. Consequently, when such places trade, their accounts must be settled by means of drafts upon some third recognised centre. Now,*^^ London is the banking centre of the world. From the enormous exports of England to all quarters of the globe, remittances have to be made to London from every part of tlie world. There is, therefore, a constant demand for bills upon London to discharge the debts incurred for these commodities. Hence, although the exporters may send their goods to difterent countries, yet if they can draw upon London their l)ills will be sure to find some purchasers somewhere to be remitted to England. Hence Bills upon Lon- don beai* a liiglier price and meet with a readier sale than those upon other places. One country A may import from another B less than she exports, and, consequently, a debt is due from A to B. Also, B exports to another comitry C more than she imports ; and, con- sequently, a debt is due from C to B, and A may discharge its debt to 13 by transferring to it its claim against C. As many countries trade with one another, between which there is no exchange, their claims are mutually adjusted by drafts upon London, the commercial centre. Hence, the London exchange is the most important in the world, and requires tlie greatest attention to be jjaid to it. In the same way that there are arbitrated rates of exchange, there are arbitrated prices of bullion, but we need not enter into them here. On the Meal or Commercial Exchange. 9. We must now consider the causes that affect the Real Exchange, or the true Conunercial one, which arises out of the transactions between this and other countries. As the British Islands do not produce the precious metals to any extent worth considering, they are only to be obtahied in this comitry by importation, and we must now consider the various sources from which they come, and the different causes that produce an hitlux, or efilux, of them. They are to be treated in every other respect like any other foreign commodity, and are obtained by the same means as any other one that we require for domestic consumption which is not a native product. The trade in bullion may be divided into tAvo distinct brandies : the one where it is carried on directly with the countries in which gold and silver are native products, and the other with tliose covmtries Avhich do not produce it, but Avhich,like our own, Iiave no means of supplying themselves with it except by foreign commerce. 264 THEORY AND PRACTICE OF BANKING. I. With bidlion-jyrochiclng countries. Before the late dis- coveries in California and Australia, the chief bullion-producing countries were Mexico and Peru, We need not specify others, because the same principle applies to them all, and to describe them all would rather belong to a work on commerce generally. British merchants have establishments, or correspondents, in these countries to whom they consign their goods, and their agents exchange them for the bullion brought down by the natives, and which is collected in large quantities, and usually brought home by men-of-war for the sake of security. Most of the men-of-war on the Pacific and West India stations make a voyage along the coast before they return home to collect bullion from the merchants, and the captain receives a commission on the freight. In these countries bullion is treated exactly like any other commodity, such as tea, or wool, or wine, and the British goods of all kinds are exported to them for the express purpose of being exchanged for bullion to be remitted home. The limits of this exportation are precisely similar to the limits of the exportation to any other country. It is clear, that by the time the bullion reaches this country, it ought to be suflicient to cover the original price of the goods, and all the charges on them on their way out, as well as the agent's commission "there, the charges for freight, insurance, and commission for bringing it home, and a fair mercantile profit over and above all these expenses. Unless it does that, the commerce is not profitable. If too many goods are exported to these bullion-producing countries, their exchangeable value with bullion falls, and they will not purchase a sutficient quantity of bullion to afford this profit, and the further exportation of such goods to these markets must be discontinued until the goods first sent out are consumed and fresh ones required. The purchase of bullion, then, in these countries, is a very simple affair, and requires no further notice. II. With cov7itries which do not produce hidlion. The causes which produce an inflow or outflow of bullion, between this and other countries like it, which do not produce bullion, are much more intricate, and have excited long and keen controversies. Taking this coimtry as the centre, we may consider that the transmission of bullion to or from it, is influenced by the seven following causes : — 1. The balance of payments to be made 1o or by it. 2. By the state of the foreign exchanges. 3. By the state of the currency. 4. By remittances made to this country, as the commercial centre^ of Europe, to meet |)ayments due to other countries, 5. By the political sccnirity of this and neighbouring countries, fi. ^^■y the st;i)c r)f the money market, or the comparative rates of interest in this and neighbouring countries. ON THE REAL EXCHANGE. 265 7. By the free or prohibitive commercial tariffs of this and foreign countries, as they permit or forbid our manufactures to be imported into them. There are, then, seven different causes which act upon the movements of bullion, and, in any case, it is necessary to ascertain to which of these causes it is due. The inveterate error of mer- cantile opinion for a long time was, that there was only one cause which caused an exj^ort of bullion, namely, a balance of payments to be made. We have already shewn that a degraded state of the cur- rency has the inevitable effect of driving away bullion from here. As we may fairly hope that our currency will never again be allowed to fall into such a disgraceful condition as it was till 1816, we may consider that this cause is not likely to operate again on the bullion market; and we may now proceed to develope the system of the Foreign Exchanges. According to the crude ideas that were generally received about a century ago, gold and silver were almost universally considered to be nearly the only species of wealth, and it was considered to be the true policy of e^•ery comitry to encourage by every means in its power, the influx of bullion, and to dis- courage its export ; and most, if not all, of the European nations have gone so far, at one time or another, as to prohibit its export. The profit of foreign commerce was estimated solely by the quantity of gold and silver it brought into the country ; and the Theory of Commerce seemed to be reduced to a general scramble among all nations, to see which could draw to itself most gold and silver from the others. According to this theory, the gain of one party was the loss of the other ; every article produced in another country, and unported into this one, was considered to be a direct loss to the country. This was what was called the mercantile or commercial system. According to this theory, the leading maxim which governed the Legislature was, to make the exports to exceed the imports ; and the con- clusion dra^\^l was, that the diflerence, or balance, must be paid for in cash by the debtor nation. When two nations traded with one another, the difference of debts between them Avas called the " balance of trade," and, when this was in favour of England, the exchange was said to be lavourable, because bullion had to be paid to her ; on the contrary, when, on the result of trade, payments had to be made to her, the balance of trade was said to be against her, and the exchiuige unfavourable, and then gold was sent out of the country. According to this theory, the prosperity, or the contrary, of the comitry, and the profit, or loss, of foreign commerce was exactly measured, according as gold had to be received or paid, or as the exchange was favourable or the reverse. The admirable chapter of Adam Smith on the Principle of 266 THEORY AND FRACTICE OF BANKING. Mercantile System, is a masterly exposition of the fallacy of this theory, and is certainly one of the soundest and best written in his whole work, from the more than usual consistency of its ideas, and the lucidity of its style. There are, however, some things relating to the subject which require further enforcement and illustration. So for from the principle of the mercantile theory being true, that gold and silver are the most profitable and desirable objects of import, the direct reverse is unquestionably true, that gold and silver, are of all objects of commerce, the most unprofitable ; and it is a certain axiom of commerce in a state of freedom, that hulllon loill not he imported until it has become uyiprofitablc to import any other article. There are no class of traders who derive so little profit, in proportion to the capital invested in their business, as dealers in bullion and money of all sorts, whether they be bullion merchants or bankers. Although the opinions Ave have alluded to above were the prevalent ideas of the age, there were not wanting a few sagacious thinkers, who discovered the truth of what we have last said, and maintained the xmprofitable nature of gold and silver; but, like others who are before their age, their voice was itnheeded, and the general object of commercial ambition and legislation was to accumulate treasures of gold and silver. There is no expression in commerce of more frequent occur- rence than the "balance of trade," and it may be as Avell to give the interpretation of it generally received during the last century, and which is not yet wdiolly extinguished. Mr. Irving, Inspector-General of Imports and Exports in 1797, defined it thus: — "The common mode of considering that question has been to set oflT the value of the imports, as stated in "tlie public accounts, against the value of the exports, and the difference between the one and the other has been considered the measure of the increase or decrease of the national profit." And Mr. Hoare, a banker of eminence for twenty-two years, said : — "I con- sider the only proper means of bringing gold and silver into this country to ai'ise from the sur])lus of our exj)orts over our imports, and that ratio or proportion Avhich is not inq)(>rted in goods must be paid for in bullion. In the year I'/OO, tlie imports of this country a]>pear to be £19,788,923, and the exports appear to be £.3.'5, 4.04,583, whicli ought to have brouglit to this country bullion to the amount of tliat difierence, or £10,005,600." We have made these extracts because they convey, in the fewest words possible, the whole ideas on the subject, and they are maritish Colonics, expressly states that the aj)|)lication f)f this principle fo the whole of the British trade ON THE REAL EXCHANGE. 267 would, ill his judsjinont, be extremely eiToneous. We, there- fore, do not briuti; ]iim fcjrward an ajtprovimj ot" the theory ; but only as stating distinctly and autlioritatively what it Avas. But Mr. Iloare, a banker of eniinenci' and long experience, adopted it; and Ave believe that this theory of the balance of trade still retains a hold on the minds of great numbers of persons Avho do not give themselves the trouble to sift it thorougldy. Never- theless, there never existed a more com])lete chimera and pernicious delusion than this said doctrine of the balance of trade, nor one Avhich has exercised so disastrous an iuflueuce on commercial legislation. It appears that the simplest Avay of arriving at an accurate conclusion on the subject is, to consider that the dealings betAveen nation and nation are only made up of the aggregate of dealings betAveen individuals of the nations, and we have only to consider the A'ariety of methods in Avhich an indiAidual mer- chant may trade, to have an accurate and com])rehensive idea of the conmierce of the nation. Instead of dealing Avith figures of vast amount, which make no definite impression on the mind, and Avliich are produced by a number of comjjlex causes, Ave shall now proceed to consider in hoAV many different Avays an individual merchant may trade Avith foreign countries, and Ave shall sheAV, by considering the dealings of an individual, how utterly erroneous it is to su^)pose that an influx of bullion is, ipso facto, a proof that commerce is flourishing and profitable to the country, and that Avhether it is so or not depends A^ery much as to Avhere it comes from, as Avell as a number of other circum- stances. With respect to those countries in Avhich bullion is a native product, and to Avhich Ave trade for the express purpose of obtaining it, Ave have already shcAvn, that unless the quantity obtained in exchange for our goods exceeds a certain amount, the commerce is not a profitable one, and that the simple fact of bullion being remitted from them, and, therefore, though the exchanges Avith them must ahvays be in our favour, it is no proof Avhatever of prosperity or profit. Next, Avith respect to countries Avhich do not produce bullion, it is easy to sliow the extreme fallacy of the oi)inion that our exports should exceed our imports, and that the dij^'erence Avill be the profit of the country ; in many cases the precise reverse is true, that our imports should exceed our exports, and the profits are measured by the exact sum by Avhich the imports exceed the exports, or the excess of what Ave receive over what we give. To prove this, let itS take a simple case. Suppose a merchant in London sends out £1,000 of goods to Bordeaux, by the time they arrive there, the mere addition of freight, insurance, and other charges, Avill })robably have increased their cost of produc- 268 THEORY AND PRACTICE OF BANKING. tion, or the expense of placing them where they are, to £1,050, siipposing them to be sold without any profit at all. But, as the merchant would never have sent them to that market unless he expected to realize a good profit, we may assume that the market is favourable, and that they sell for £1,500, and he would probably draw against his agent for £1,200. His correspondent at Bordeaux, instead of remitting the money to England, would find it far more profitable to invest the proceeds of the goods in some native pi'oduct, which would fetch a good price in England. The chief native product of that country is wme, so the agent would invest the proceeds of the goods, after deducting all charges for freight, commission, &c., in Bordeaux wine, and send it to England, This wine would pro- bably be sold at a considerable profit in the English market, say it would fetch £2,000 ; and, after deducting all the charges of every description on the cargoes both ways, the diflerence would be the merchant's profit. In this case it is quite clear that no bullion would pass between the countries, and the merchant would apparently import more than he exported, and it is also clear that his profits are exactly estimated by the excess of the value of the inward cargo above that of the outward one, after deducting all the charges both ways, and just as this difference is the greater so his gain is greater. In this case, as no bullion would pass from either country to the other, there would be no question of exchanges. It is clear that the London merchant's agent at Bordeaux would be governed by several considerations as to whether he would remit specie or Avine to London, and he would be chiefly governed by the state of the wine markets, both at Bordeaux and London. For, supposing the goods to be sold at a good profit at Bordeaux, he must next consider the price of tlie wine at Bordeaux, and also what it might be expected to fetch in London. If some great disaster had happened to the vines so that there w^as a failure of the crops, the price of wine at Bor- deaux might rule excessively high, but at the same time there might be a large stock of Avino in London, and the price might not be unusually high ; so that if he were to purchase wine at Bordeaux, and send it to London, it might be a loss. In such a case as this, if there were no other native product to send, he would find it most advantageous to remit specie, whatever he could sell the goods for, and then the exchange would be in favour of London ; l)ut, before the London merchant could reckon his profits, he would have to deduct the freight, insur- ance, &c,, on the specie. Whether the transaction was profitabl(?'or not to the London merchant would entirely depend on the amount of specie he received after deducting all charges ; and if he had purchased the goods he sent out from England cheap, aiul there was a ON THE REAL EXCHANGE. 269 scarcity of thein at Bordeaux, lie might realize high prices there, which might leave him a good profit. It would be very im- probable that he could realize so much profit on that single operation, as in the double one of exj)orting goods and import- ing wine. So that the import of the specie would be less profitable to him, and the nation at large, than the import of the wine. The reasons which caused the export of specie from Bordeaux, and the imj)ort of it into England, in this case, are very plain, they were the scarcity and dearness of the native products at Bordeaux, and the abundant supijly of them already in tlie London market. Hence, we gather that the scarcity and dear- ness of native products is an infallible cause of the export of specie from a country ; on the contrary, an already existing abundant supply of foreign products of all sorts, is a certain cause of its import into a country. On the contrary, when native products are cheap and abundant, it will cause an importation of bullion, and when foreign products are scarce and dear, it will cause an export of bullion. We have before observed that the exchange being in favor of a country means nothing more than that bullion has to be remitted to it. In the case above described, the exchange at Bordeaux would be in favor of London ; but this simple case is as good as a thousand to shew the extreme and dangerous fallacy of drawing any conclusion as to the advantage of the trade to England, from the simple fact of the exchange being favourable to her, and an inflow of bullion taking place. The example given above is of the simplest description, and a merchant of eminence, who had correspondents in several dif- ferent parts of the world, might easily multiply these operations, so as to visit many markets before the returns of his cargo were brought home. Thus, instead of having the wine sent home from Bordeaux, his correspondent might find it more profitable to send it to Buenos Ayres, and dispose of it there. The chief native product of that place is hides, and we may suppose that his correspondent there might invest the proceeds of the cai-go of wine in hides, which there might be a favourable oppor- tunity of selling in the West Indies. When the cargo arrived in the West Indies, instead of remitting the proceeds directly home, it might very well happen that, owing to a scarcity of corn at home, it might be very high there, and cheap in Canada, so he would invest the proceeds of the hides in sugar, and despatch that to Canada, where the merchant's correspondent there would dispose of it, and purchase corn, which he would send to Eng- land. In the case Just described, we observe that there are five distinct operations, and, as Ave may suppose that there is a profit upon each of them, by the time the returns for the goods, which 270 THEORY AND PRACTICE OF BANKING. originally cost £1,000, are brought to England, it may very well be, that the corn, which forms the ultimate i>apnent of them, may be several times as valuable as the original cargo ; and, as we have supposed the charges on each operation to be deducted before investing the proceeds in other articles, it is clear that the merchant's profit upon the whole is exactly the differ- ence in value in England between the articles last purchased and Bent home and the original cargo ; after deducting all the expenses of sendmg home the last cargo, and we also observe that no specie has been sent from one country to the other in the Avhole course of the extended ojDeration. This example is sufficient to demonstrate the utter fallacy of the old idea, which is even yet not extinguished, of the balance of trade. Nothing can be more clear, that \inless the value of the cargo which comes into England, in pajonent of the cargo that was sent out, is sufficient, not only to defray the cost of the original cargo, as well as all charges upon it and the return cargo, and leave a profit besides, the commerce could not be carried on. No English merchant could export goods unless he receives in return otliers of much greater value ; and the obvious consideration, that the more he gets for what he sends out, the more profitable it is to himself and the nation, is sufficient by itself to explode the old fallacy of the balance of trade. One obvious source of ei'ror is, that the value of the exports from this country is estimated at the time of their leaving the country, and before the charges for freight, &c., are incurred, which must necessarily raise their selling price in the foreign market, if they are not sold at a loss, and their value in that market is expected to be considerably higher than that. On the other hand, the value of the imports is estimated, not according to their value when they left the foreign country, but Avliat it is upon their arrival here, including all their charges upon them. If we suppose that Bordeaux had but one native product — wine, the chances of finding the markets, both at Boi'deaux and London, in a favourable state for imjiorting produce instead of specie, would be limited to that single article. But if it had other products, such as olive oil, the chances would be increased of finding articles to suit the market, and the chances Avould evidently be multiplied acxiording to the number and variety of its ])roducts. Let us take another example, and let New York be the start- ing place. The staple products of America are breadstuffs and ])rovisions. A merchant of New York sends a cargo of corn to Liverpool, and his correspondent there will endeavour to invest the ])roceeds of that in British goods, if he finds the state of the mai-kets in England and New York will make such an o]»eration profitable. Suppose that the price of corn is very high here, and l^ritish goods are also very high here, and very I ON THE REAL EXCHANGE. 271 low in America, it is clear that r.othing but specie will l)e sent. In cases where a great and unexpected dearth of corn occurs in England, and its price rises enormously high, the infallible result is to cause a great drain of specie for the time l)eing, because our necessity for food is much more pressing and immediate than their necessity or ca{)ubility of consuming our cotton or woollen goods. And the only way to arrest such a drain is to effect such a reduction in the prices of British goods as shall make it more profitable to export goods than specie. In the cases we have been hitherto considering, we have described the operations as if merchants Avere left perfectly free to carry their goods whither they pleased, and were not met and obstructed by artificial obstacles purposely devised for inter- fering with their business, by the laws of different nations. But there are few nations, and our own among the rest, which have not habitually discouraged the im])ortation of foreign goods, and imposed heavy duties for the s])ecific purpose of excluding them, as they conceived the extraordinary idea that all foreign goods brought into the country were so much loss to it. Thus, the statute of William III. (1688, c. 24) says : — " It hath been found by long experience that the importing of French commodities of all sorts " (enumerating them) " hath much exhausted the treasure of this nation, lessened the value of the native com- modities and manufiictures thereof, and greatly imj)Overished the English artificers and handicrafts, and caused great detriment to the kingdom m general." If we consider the eflect of these laws in one place, it will equally apply to every other; thus, in the first instance, suppose that there are very high protecting duties at Bordeaux against British goods, as the consumer must ultimately pay all the expenses and charges on the goods, it will have the ett'ect of greatly raising the mai'ket price there, and diminishing the nund)er of persons who can afibrd to buy them, and hence, as the market is so limited, a smaller quantity of goods will overstock it than if it were much extended. This Avill cause a much less quantity of goods to be sent from London, and it will cause a much larger proportion of specie to be remitted to pay for the productions of Bordeaux. This example shews that the inevitable ettect of high protecting duties between country and coimtry is to cause a much more frequent transmission of V)ullion from one to the other than would be the case in an xmfettered state of commerce ; unless, indeed, the smuggler steps in, Avho is the corrector provided by nature against this commercial insanity. The eftect, then, of prohibitive duties is to cause an inflow of bullion ; but we must carefully guard against su])posing that this inrtow is a favourable sign, as it is certainly the least profitable import a merchant can receive for his goods ; and there is tliis very marked diflerence between an inflow of bullion under the Protectionist svstem and 272 THEORY AND PRACTICE OF BANKING. under a Free Trade system, that tlie former is accompanied with a great dearth of foreign commodities, but the latter is an infallible sign of a great abundance of them, as bullion is never imported when men are allowed to follow their own interests, until our markets are already so overstocked that every other article has ceased to be profitable. The foregoing cases comprehend the different varieties of com- mercial transactions between this and any other country, and we gather from them the following results respecting the inflow or outflow of bullion : — I. The cause of bullion being imported is either when the price of goods is so loic in England, and so high in the foreign market, as to tempt foreigners to send here to buy goods, or the price of goods is so high in the foreign market, and so low ui England, that nothing but specie can be sent in payment of goods exported from England. II. The cause of bullion being exported from England is that there is some great and pressing demand for some article in this country, and other commodities are so scarce and dear that they cannot be exported with a profit, or that the article is required in such great quantities that the foreigner cannot consume our goods which we should prefer to send in jjayment fast enough, and so specie must be sent, and the greater the difference in price the greater M'ill be the drain of bullion ; or that other mar- kets are already overstocked with our productions, which are depressed below their usual market value there. This is what is meant by overtrading ; and, from this circumstance, we see that overtrading is a sure precursor of a drain of bullion from the country. When there has been a great failure in the crops in this country, so as to cause a famine price, the demand for corn is so immediate and urgent that it necessarily causes a great drain of specie, and it is then of the greatest possible conse- quence that the prices of other commodities should be as low as possible, to enable them to be sent in payment of the neces- sary supplies of food, and prevent such a drain of bullion as may disturb the whole monetary system of the country. Overti-ading, and a failure of the cereal crops of this country, are each of them sure causes of a drain of bullion. The most disastrous event for the commerce of tliis country is when both these circumstances liappen concurrently. It is like a spring tide of disaster. The most terribly disastrous commercial crisis this country ever exj)erienced was pi-eceded by some years of overtrading, I'oilowed by successive failures in the staple support of the peoj)le of England and Ireland. These two adverse events togetlier produced the calamities of 1847. We shall see that the intended eft'ect of the Bank Act of 1844 is to provide a remedy for such a state of things, by causing such a reduction in the price of home commodities, in the event of a drain of ON THE REAL EXCHANGE. 273 specie taking i)lace, as to render it more profita1>le to export them than bullion, and so stop the drain. Whether the Act is effective for this i)urpose is another question, which it is not the . proper place to discuss here. Tliere are some countries from which we draw articles of great necessity, but to which, from different circumstances, we do not expect to remit goods in jiayment. Russia was the great source of our supply of hemp, tallow, and flax, and we used to import these products to the value of £12,000,000 yearly, but, owing to the prohibitive character of her tariff, we Avere unable to send our ovn\ products in i)ayment of these goods to any- thing like a similar amount in value. To such a country the difference must be remitted in cash, to the mutual loss of both parties, and, unless there Avere other means of equalizing the exchanges with different countries, the exchange with Kussia would always be unfavourable to England. The chief export trade from Ireland to England Avas hi articles of food — ]iigs, cattle, oats, butter. Great (juantities of these came from Ireland, but the inhabitants of that country were miich too poor to be able to consume an eqiiivalent amount of English goods ; in consequence of which the difference had to be remitted in specie, and so the exchanges between England and Ireland Avere almost uniformly favourable to Ireland. Noaa^, if Ireland liad been sufiiciently Avealthy to have consumed English goods instead of specie, it is evident that it Avould haA^e been far more advantageous for both countries; for English industry Avould haA'e been promoted, and Ireland would haA^e gained a more valuable import. These two exanqiles offer a further illustration of Avhat Ave said before, that the frequent trans- mission of bullion betAveen countries AAdiich do not produce it, is a system of a less profitable trade than it Avould be if goods Avere transmitted. In the operation first described above, Ave have supposed it to originate Avith the English merchant Avho remits his goods to his correspondent abroad, and Avho reaps the profits, and the proceeds must be remitted to him after deducting the freight, charges, and commission, of the agent there. But it is also pro- bable that there will be native merchants at Bordeaux, Avho Avill send Avine to England on their owii account, to their correspon- dents here, and then tlie Avhole transaction Avill be reversed. The English correspondent will endeavour to purchase English goods as loAV as he can, and if he can get them Ioaa' enough to realise a profit in the Bordeaux market, he Avill send goods out; but if the English goods are too high for that purpose, he must send specie. It is also evident that, CA-en if the goods be at no unusual height in England, still, if the market at Bordeaux be already overstocked Avith them, or, as it is called, "glutted," it Avould be \iseless to send more goods, to force the pi'ice dowu 274: THEORY AND PRACTICE OF BANKING. Still further, and the consequence must be that nothhig but specie will go. From this we see, that if specie be coining in from a country, it is a proof that we have already got so many of their goods, that it will not pay to imj^ort any more, and if specie be going out to a country, it shows that we have already sent out so many of our goods to that market that it is already overstocked. The different barbarous laws which every country has enacted under the erroneous appellation of protection, by aggravating the price, limit the markets in every covmtry for the products of other countries, and cause much fewer commodities to pass between nations than otherwise -would, and cause the markets of any comitry to be much sooner overstocked than they would otherwise be. By preventing this interchange of commodities which every nation M^ould naturally prefer, it necessitates payments in specie to a much larger extent than would be tlie case if conmierce were free, to the common impo^'erishlnent of all parties. The foregoing considerations shew that it is possible to carry on any amount of foreign trade without the necessity of any remittances being made in specie. In the instance above taken, the English merchant jnirchases goods and sends them to his correspondent abroad, who realizes them and invests the proceeds in that market, and sends tliem to England, and the English merchant disposes of them in England, and gains the profits there, and no specie is sent from one country to the other. Similarly the foreign merchant sends his goods to his corespon- dent in England, who disposes of them there, and invests the proceeds of them in England in English commodities, and sends them to his foreign correspondent, Avho gains his ]irofits, either by selling them in his own country, or by sending them to some other market where he may make a higher return, and, as in the former case, no s]>ecie passes between the two. Nor is the result in any way different, if the trade be conducted by the more circuitous inethod of three or more transactions. Hence, in a healthy state of the markets of different countries, scarcely any specie will })ass between them, and the very fact of there being a necessity for making fivquent and large remittances of sj)ecie from one country to another, is in itself a j)roof of there being sometliing in-egular and unhealtliy in the state of commerce in general, and in the state of the markets of one country or the other, either that they are overstocked or understocked, or that there is some legislative interference with the natural course of trade betweeu nation and nation. Nothing can be more certain than that bullion is the least profitable of any article of commerce, e,\ce]>t from bullioii-itruducing countries, and that when meichaiits have I'ecourse to it, it is because some disturbance lias takeii jtlace in the profitable relations between Hiipply and demand of other coniinodities. ON THE KKAL EXCHANGE. 275 Now, supposing commerce to be in tliat desirable and bcalthy state in wliich no specie passes between iionbullion-protbicing countries, who could tell how what is called the balance ol" trade is inclined ? Who can tell what the balance of trade is V Each country would shew a favoural)le balance, taking the values of the exports and the imports at their market ])rices hi each country. Each country would shew that their imports exceeded tlieir ex- ports in value, that is, eacli would shew tliat they had gained by their commerce, for the very simple reason that the value of the article they received would be greater in their own market than the value of the one they gave ; and, unless it was so, it is mani- fest that trade could not be carried on, because all the expenses and profits of trade are provided for, by the difference in value between what they give and what they receive. Hence, unless both parties gahi by the transaction, commerce cannot be carried on. But this shews that the expression of the " balance of trade " is a gigantic delusion, and it is greatly to be wished that it should be for ever exploded and laid aside, as the fountain and oi'igm of incalcxilable mischief to the Avorld, in the suicidal efforts every nation has made to secure to itself that great chimera — a favourable balance. Tlie mistake of unreflecting writers, who think that the price of foreign goods sold in this country goes into the pocket of the foreigner, consists in this, that the probability is, that the English merchant who imports these goods has already purchased them with English goods, so that their money price goes into the pocket of the English merchant, and not that of the foreign one, and is, probably, re-invested in English goods, if there is a pi'ospect of a favourable opening for them. The fundamental fallacy about the balance of trade, which seems to have taken possession of the Legislature, was, that the interests of tlie State were diflcrent and opposite to the interests of individuals. They seem to have entertained the idea that every merchant had entered into a consi)iracy to ruin the counti-y, which he tried to carry into effect by becoming as prosperous himself as he could. It seems most miaccountablo how long they missed the obvious truism, that the prosperity of the State was made up of the prc5si)erity of the individuals comi)osing it, and that every one was far keener in discerning what conduced to his own prosperity than the State could be, and that if private merchants found it to be to their individual advantage to import commodities rather than .bullion, it could not be beneficial to the State to force trade into a contrary direction. Wlien our ships first traded with the South Sea Islanders, they took out with them axes, beads, and other trifles, which had very little value in this country, and bartered them fur all sorts of curiosities, shells, etc., Avhich were very valuable in England. A pair of fine shells from the South Seas in many T 2 276 THEORY AND PRACTICE OF BANKING. cases is worth ten guineas in England, which perhajis an English sailor obtained in exchange for an axe worth 2s. Gd. The English sailors thought the natives very simple to give away so many valuable curiosities for such common things. We cannot doubt that the natives had exactly the same opinion of the English sailors ; they thought them great simpletons to give away such valuable things as axes, beads, &c., for so common things as a few shells. Each party, however, exchanged what was common and cheap in his own country for what was scarce and valuable. The axes were infuiitely more valuable in Feejee than the shells : the shells were many times more valu- able in London than the axes. Thus, an English sailor, by giving perhaps 2s. 6d., gamed in Exchange what was Avorth ten guineas and the difference was his ])rofit. Now, this was the genuine spirit of commerce. The coloured beads were just as valuable to the poor untutored savages, as diamonds to civilized Euroj)eans, The commerce between all nations is exactly siniilar in principle to that between the sailors and the savages. But, according to the old doctrine of the balance of trade, this difference between the value of the axe and the shells in England, ought to have been paid in bullion. This simple case is quite sufficient to explode the whole fallacy. Notwithstanding the jH-evalent idea that foreign trade was profitable just in proportion to the money it brought into the kingdom, and that this was indicated by the so-called l)alance of trade, there were a few enlightened persons who saw througli the fallacy, and combated it. In reference to a certain "balance" which occurred in the trade between Holland and England, and which was a subject of much gratulation, Craik well observes that it would be as irrational to sup])ose that the English must necessarily l)e the chief gainers by this trade, as it would be to maintain that the productive labourer must always be a greater gainer on tlie article he produces than the capitalist Avho employs him. That the Dutch were in the position of the capitalist, and the English of the labourer, and that while the Dutcli had the goods the English had the money; just as, while the master has the goods tlie workman has his wages. But that the excess of profit, or real advantage, should be with the labourer rather than Avitli the ca]iitalist, may fairly be presumed to be as unusual, and as little likely in tlie nature of things, in the case of nations as of individuals. An attentive consideration of lliesc various methods of trading will shew what a complete phantasy the old, and still too common, idea of the "balance of trade" is; and, as nothing more conduces to error and coiifusion in any science than a nomenclature and tec'linical phrases which are founded u]K)n misconce}»tions of the principles of that science, so nothing has exerciHed a more nuUignant influence upon legislation, and RATE OF DISCOUNT. 277 popular ideas genevally, than this phrase ; and it would be very desirable if some means could be taken to discontinue its use altogether. But, as it does occur in the course of trade that transactions between nations have to be settled in specie, we must now consider the operations of the foreign exchanges. The course of the foreign exchanges, then, entirely depends upon the fact of persons ui one country having to make pay- ments to persons in another country, from whatever causes these payments have to be made. And there are but two causes which influence their rates: first, the depreciation of one or both of the currencies which have to be exchanged ; secondly, the relative amounts of money that have to be remitted from one country to the other. On the Rate of Discount as influencing the Exchanges. 10. We have now to treat of a cause of the movement of bullion which has acquired an importance in modern times, far exceeding Avhat it ever did before ; in fact, it is now prol)ably more im})ortant than any other, viz., a difierence in the rate of interest or discount between two countries. In former times, when the communication between different places was sloAV and expensi^'e, before the days of railroads and steamers, a con- siderable difference might exist in the rates of interest in two places, without causing a movement of bullion from one place to the other. But that is not possible now. The communication between places is so rapid now that directly the difference between the rates of interest in any two places is more than sufficient to pay for the expense of sending the bullion, an immediate flow of bullion commences from one place to the other. And this is in exact accordance with the usual mercantile principle that operates in every other case, that if the difference of i>rice of the same article in any two markets is more than sufficient to repay the cost of sending it froni one to the other, it will be sent ; and this movement will continue as long as the dillerence in j^rice continues. Now, if the rate of discount in London is 3 per cent, and that in Paris is 6 per cent., the simple meaning of that is that gold may be bought for 3 per cent, in London, and sold at 6 per cent, in Paris, But the expense of sending it from one to the other does not exceed \ per cent., consequently it leaves 2^ or 2^ per cent, profit on the operation. The natural consequence immediately follows, gold flies from London to Paris, and the drain avUI not cease until the rates of discount are brought within a certain degree of equality. It used to be the common delusion of mercantile men that gold was only sent to pay a balance arising from the sale of goods, and that, therefore, it must cease of itself Avhenever these pay- ments were made. But this is a profound delusion. When the rates of discount differ so much as is supposed above between 278 THEORY AND PKACTICE OF BANKING. London and Paris, persons in London fabricate bills npon their correspondents in Paris for the express purpose of selling them in London for cash, which they then remit to Paris, and which they can sell again for 6 per cent. And it is quite evident that this drain will not cease so long as the difterence in the rates of discount is maintained. Moreover, merchants in Paris imme- diately send over their bills to be discounted in London, and, of course, have the cash remitted them. Now, the only way of arresting such a drain is to equalize the rates of discount of the two places. These simple facts are a perfectly conclusive answer to those writers, and they are many, who complain of the variations of the rate of discount by the Bank of England, and siippose that it is 2:)0ssible to maintain a uniform rate. Conse- quently, at the present day it is the imperative duty of the Bank of England to keep a steady watch upon the rates of discount of neighboui'ing countries, and to follow these variations so as to prevent its being profitable to export bullion from this comitry. On Foreign Loans, Securities, and Memittances, as affecting the Exchanges. 11. Besides the state of national indebtedness, arising out of commercial operations, there are other causes which seriously nflect the Exchanges. In former times, England being more abundant in money and material resources than men, used to subsidize foreign powers to a great extent ; and the method of transmitting such a loan to the best advantage to the remitting coimtry, is an operation of considerable nicety and delicacy. If the smns to be remitted were very large, the exi^ense and danger of the transit of the coin would have been very considei-able in former times ; but since the introduction of railroads, and greater internal security, such considerations would have little intiuence at the present day. But an actual and sudden withdrawal of a very large amount of bullion from a conmiercial country would cause the most disastrous consequences when so many engage- ments had to be met at a fixed time. When such necessities, therefore, did arise during the last war, the operation was cftected by means of bills of exchange, and the object to be obtained was, to i)revent a sudden vacuum beuig caused in the currency of one country ; but, by operating on all the dilferent centi-es of ])ayment of Euro})e, to cause a gradual and equable fiow from all of them to the ])lace of payment. We may give, as an instance, the following, as narrated by Mr. ])Oyd, who had the management of the oi»eration. In the year 1794 the English Government agreed to make a considerable loan to the Enqieror of Germany, and the money was re({uired to be sent from liondon to Vieinia, causing as little disturbance as possible in the English money market : — " The remittance of so large a sum as .t;4,«300,000, 1 considered FOREIGN LOANS, SECURITIES, &C. 279 as a matter of intinito difficulty niid delicacy, so as to prevent its jiroduciiig any remarkal)le elKucIs upon the course of Exeliaiiije. It was necessary to vary the modes of remitting, and to make use of the various means for that purpose presented ])y all the different exchanges of Kurope. It was not necessary to remit bills upon Hamburg only, because it frequently happened that it answered better to remit to Hamburg ui)on other ])laces, such as ]\[adrid, Cadiz, Leghorn, Lisl)on, Genoa, &c., than to remit direct upon Hamburg; and, having constantly orders from Vienna with regard to the rates of the different remittances to be made, our attention was directed to the accomplishment of these orders, on the best possible terms. In fine, it was neces- sary to take bullion, bills direct upon Hamburg, and bills upon other places, all into our means of remittance, and to make the most of these modes of remittance without giving the decided preference to that mode which was the most favourable, because any one mode invai'iably adhered to would soon have exhausted and destroyed that mode; whereas, by turning occasionally to all the modes, and not sticking too long to any one particular mode, we had the good fortune to make upon the M^hole very favourable remittances." We may mention another instance of a similar operation quoted byMr. M'Culloch:— " In 1804, Spain was bound to pay to France a large subsidy, and, in order to do this, three distinct methods presented them- selves. First, to send dollars to Paris by land; second, to remit bills of exchange directly to Paris; thirdly, to authorize Paris to draw directly on Spain. The first of these methods was tried, but was found too slow and exiiensive; and the second and third plans were considered likely to turn the exchange against Spain. The foUowhig method, by the indirect, or circular, exchange was therefore adopted: — A merchant, or honqnier, at Paris, was appointed to manage the operation, Avhich he thus conducted. He chose London, iVmsterdam, Hamburg, Cadiz, Madrid, and Paris, as the princij)al hinges on which the operation Avas to turn ; and he engaged correspondents in each of these cities to support the circulation. INIadrid and Cadiz were the ])laces in Spain from whence remittances were to bo made, and dollars were, of course, to be sent where they bore the highest price, for which bills Avere to be procured on Paris, or any other place that might be deemed more advantageous. The principle being thus established, it only remained to regulate the extent of the operation, so as not to issue too much i)aper on Spain, and to give the cii'culation as much support as jiossible from real busi- ness. With this view, London was chosen as a place to which the operation might be chiefiy directed, as the price of dollars was then high in England, a circumstance which rendered the proportional exchange advantageous to Spain. 280 THEORY AND PRACTICE OF BANKING. " The business commenced at Paris, where the negociation of drafts issued on Hamburg and Amsterdam, served to answer the immediate demands of the State; and orders were transmitted to these places, to draw for the reimbursements on London, Madrid, or Cadiz, according as the course of exchange was most fovour- able. The proceedings were all conducted with judgment, and attended with complete success," The preceding are examples of loans raised in this country ^\'ith the consent of the Government, and, consequently, every care was taken to have them transmitted in such a way as to ]jroduce as little disturbance of the exchanges as possible. But it has become very common for foreign Governments to raise loans in England, without any sanction of the Government at all. During the late unhappy war in America, both the belligerent Governments sent over enormous quantities of their securities or stock, to be disposed of for specie in the European markets for what they would fetch, and the proceeds were remitted either in cash or bills. So, also, vast numbers of foreign companies of all sorts seek to raise capital m England. There is, lastly, to be considered, the sums required by resi- dents abroad for their expenditure. The drafts of the great English and Russian families, on their bankers, at home, affect the exchanges exactly in the same manner as any other drafts. Oil Monetary and Political Convulsions as influencing the Exchanges. 12. As an immediate consequence of the preceding principles, it follows that a political or monetary convulsion in any country will immediately turn the foreign exchanges in favour of that country, if such an event is not prevented by the issue of an inconvertible paper currency. The reason is plain, any political or monetary convulsion is attended by a great destruction of credit. Now, that credit, while it existed, performed the functions of money, but as soon as it is destroyed, there is an intense demand for money to fill the void. Money rises enor- mously in value. Multitudes of persons are obliged to sell their goods at a sacrifice. The consequence is that money, having risen greatly in value, botli with respect to goods and debts, an immense quantity will flow in from neighbouring countries. Thus, in 1801-2 there was a great conmiercial crisis at Hamburg. The rate of discount rose to 1.5 per cent. That immediately drained the bullion from the Bank of England. In 182,5 there was a great commercial crisis in P^ngland. For a considerable period the bank, Vjy making extravagant issues at a low rate of discount, had turned the foreign exchanges against the country. But, no sooner did tlie crisis occur in December, than the foreign exchanges immediately turned in favor of it. Elxactly the same thing ha])penod in 1847. No sooner had the crisis in that year ON CORRECTING AN ADVERSE EXCHANGE. 281 fairly set iu, than tlie exclianges turned in favor of the country. In the French revohition in 1793, and subsequent years, immense quantities of inconvertible paper were issued, that kept all the French exchanges in a very de})ressed state. In 1796 this paper currency Avas annihilated, and the exchanges immediately turned in favor of France. The same thing was observed in 1848. Things were to be had so cheap then that multitudes of persons went over to buy. On the Means of Correcting an adverse Exchange. 13. The preceding paragraphs shew upon what complicated causes these great movements of bullion dejiend, which produce such important consequences. There are three great Economic Quantities — Pkoducts — Bullion — and Debts — all seeking to be exchanged, all flowing from where they are cheaper to where they are dearer. But all this vast superstructure of credit — this mighty mass of exchangeable property — is based upon Gold Bullion. Dif- ferent methods of doing business require different quantities of bullion ; but, however perfect and refined the system may be, we must come at last to a basis of bullion, as its moderator and regulator. If, therefore, the bullion be suffered to ebb away too rapidly the Avhole superstructure is endangered, and then ensues one of those dreadful calamities — a monetary crisis. We liave endeavoured to explain the different causes Avhich produce an adverse exchange, so that if one takes place the pro})er corrective may be applied. If it be caused by a de- preciated currency, there is no cure but a restoration of the currency to its proper state. When, however, it arises from a balance of indebtedness from commercial transactions, there are but two methods of correcting it — an export of produce, and a rise in the rate of discount. It used to be a favorite doctrine that an adverse exchange was in itself an inducement to export, on account of the premium at which bills could be sold. What truth there was in this doctrine can only be known to those actually engaged in such operations. But a very much more certain means of producing an export of goods is a lowering of their 2))'ice. This w^as one of the fundamental objects of the fraraers of the Bank Act of 1844. They ti'uly observed that the prices of goods had often been unduly inflated by the excessive creation of credit, while gold was rapidly flowing out of the country. Thus, when prices were kept too high here, nothing but gold would go. One object of that Act was, therefore, by causing a gradual and compulsory contraction of credit as bullion ebbed away, to lower the prices of goods and encourage an export of them. The reasouinsr of the framers of the Act was undoubtedlv 282 THEOKY AND PRACTICE OF BANKING. correct in that respect. But the only thing is, whether the same object might not be attained another Avay, This is not the pLace to discuss fully the policy of that Act, because there are several other conflicting theories involved in it, which we cannot fully discuss until we come to the consideration of a commercial crisis. It is suflicient to say here, that all the objects of that Act are obtained by i)aying proper attention to raise the rate of discount rapidly as bullion flows out. If the Directors of the Bank had understood and acted upon that principle, there never would have been any necessity for the Act. It is true, we cannot blame them too much, as before 1833 they were prohibited by law from raising it above 5 per cent., a rate wholly inadequate to check a great outflow ; and for many years there was a great prejudice against doing so. We have observed that a difierence in the rate of discount between any two countries more than sufiicient to pay for the transmission of bullion, causes a flow of bullion from one to the other. But it must be remembered that, as all the cost of the transmission both ways falls upon the operator, the difierence "wall be more considerable than might appear at first sight. And, if they be three months' bills, of course, the in-oUt reaped Avill be only one-fourth of the apparent difierence. Thus, Mr. Goschen says, there must be a difierence of 2 per cent, between London and Paris before the operation of sending gold over from France for the sake only of the higher interest will pay. And between other contmental cities, of course, the difierence may be much gi-eater. But whatever the diflTerence may be, the method is absolutely certain. Directly the rates of discount rises here, people cease to export bullion from here, and the continental bankers and brokers increase their demand for English bills. And as the rate rises the demand will increase, until at last the price reaches the specie point, and gold begins to flow in, and as the rate rises more, more powerful will l)e the attraction, until at last the necessary equilibrium is restored between bullion and credit. The state of indebtedness, however, may be so great as to deepen an adverse exchange into a monetary crisis, but what may become advisable to be done in such an emergency, we must defer discussing until a future chapter, when the policy of the Bank Act of 1844 is examined. CHAPTER VI ON THE IIISE AND PEOGKESS OE BANKING. CHAPTEll VI. ON THE RISE AND PROGRESS OF BANKING. Banking prokakly invented by the Romans — Greek Banivers — Chinese Invented Bank Notes — Bank of Venice — Bank of St. George — Bank of Stockholm — Bank op Amsterdam — History op Banking in Scotland. 1. In the preceding chapters vre have endeavoured to in- vestigate the fundamental principles of the Theory of Credit and Banking, and to set forth its mechanism as it actually exists. We must now trace the history of this most important invention. On many points of its practical a])plication there have been, and still continue to be, several couilicting theories. The l)est way to form a judgment of the correctness and merits of these various theories is to give an authentic account of the history of Banking in various countries, which we now proceed to do. At Rome. 2. The business which is technically called Banking seems, as far as Ave can ascertain, to have been invented by the Romans. It is true that there were abundance of money dealers and money lenders at Athens, and other places, but their business seems, as far as we can discover, to have been more analogous to that of those persons we call money scriveners, and hill dis- counters^ than of those Avhom Ave call bankers. For Ave have seen that the business of banking technically consists in creating credits in favor of the persons Avho deposit money Avith the banker, and in pctying debts by transferring sums from one account to anotlier, as Avell as by making all advances in the first instance by creating a credit. Tliis mode of doing business essentially distinguishes a banker from a money scrivener, or hill discounter, Avho actually advances the money itself. This seems to have been the business of the Athenian TpuTTt^ircu, and, if so, they Avere technically bill discounters, and not bankers. The Romans, on the contrary, practised the business, which is technically called banking, exactly as Ave do, nor do we know Avhen it was invented. The earliest notice we have of these banks, or argentaria, is in Livy ix., 40., n.c. 308, where they are spoken of as being already placed in the forum, Avhere they always continued. But he gives no account of the method in Avhicii the bankers transacted their business. The comedies of Plautus are full of allusions to bankers and their business. He 286 THEORY AND PEACTICE OF BANKING. calls them trapezitm^ argentarli^ and danistm. "We have Latin Avords corresponding to the method of keeping banking books. Thus, scribere was to give credit in the books, rescribere, or prescribere, was to transfer a sum from one accovmt to another by means, of a cheque, wliich was cviVieA 2)crscriptio, or attributio. Thus, in the Asinaria ii., 4, 34, Leonida says : — " Abducit domum ultro, et scribit numos." " Of his own accord he brings him home, and places the money to his account." So aeceptmn ferre was to credit a customer's account with money received, expenswn ferre to debit it for money paid. Thus, in the Mostellarla i., 3, 146 : — " Ratio accept! et expensi inter nos convenit." " The accounts between us balance." Plautus only uses the word mensa to mean a bank, in two jilaces. CuivuUo iv., 3, 4 : — " Velut decern minas dum liic solvit omnis mensas transiit." " As before tliis fello\v^ paid me the ten luinae, he had to go to every banker's ; " and m the Pseudolus i., 3, 62: — " Postquam isti a mensa surgunt." " After these bankers broke." But he never uses mensarius for a banker. These persons are mentioned numberless times in his plays. So, also in Terence. J*hormio v., 7, 29 : — " Sed transi, sodes, ad forum, atque illud milii Argentum rui'sum jube rescribi, Pbormio, Phorm. Quodne ego perscripsi porro illis, quibus debui?" " But, Pliormio, be good enough to go over to the forum, and order that money to be put to my account. " Phoem. What ! that for which I have already given cheques to my creditors ? " So Cicero {Epist: ad Atticum xvi., 2) : " Qui de cccc. Hs cc prescntia solverimus, reliqua roscribamus." " Of the remaining four hundred sestertia, I have jiaid two hundred in cash, and I shall send a cheque for the rest." So Orat : pro CaecindVi. *' Se autem habere argcntarii tabulas, in quibus sibi expensa pecunia lata est, accei)taque relata." " But lie himself has tlie banker's books, in which are the accounts of the money paid and received." Altliongh we have seen above that Plautus uses mensa as the counting-house of a private banker, they were never called mensarii. The latter were public oHicers of high rank, who were appointed by the State only in times of great public dis- tress, when the plebeians were weighed down with the accumu- lation of comi)Ound interest, to etfect a com])romise between debtors and creditors, and to advance money from the treasury to citizens in distress, on the security of goods, or land, or cattle. The first appointment was made 348 n.c. (Livy vii., 21.) Tliey were then live in mmiber. On oilier occasions (Livy BANKING IN GREECE. 287 xxiii., 21; XXVI., 3G) they were only tlirce in number. Tliey seem to liave been instituted for very mucli the same purpose as the ino^iti dlpleta, in tlie middle ages in Italy, and Avhicli are still very common on the Continent under the name of monts-de- pie'te. Although there is no evidence to prove that the ancients used bills of* exchange in commerce, as many writers have asserted, in Cicero we find several passages Avhich speak of remitting drafts. Thus, jEJ2:>ist. ad fumil. to Caninius Salustius: — "Se ait curasse, ut cum qUcT?stu p()i)uli i>ecunia j)ermutaretur." "He says that he has taken care that a ti of using the money deposited in its vaults was too strong to be resisted, and on certainlv two, if not three BAMv OF ST. GEURGE. 293 occasions, it suspended payments. Besides the suspension alluded to in Dr. Lewis's tract above quoted, in 1678, it sus- })euded payment again in 1G91, and again from 1717 to 17;^9, when the State appHed the money in its vaults to the pur{)0ses of war. Mr. Cantillon also says that on one occasion it tried to raise a loan by creating credits in the Bank's books, but this was done to such an extent that the credits fell to a discount of 20 l)er cent., as compared with specie. To remedy this, the State was ol)liged to mortgage a part of its revenue to raise a I'und of real current specie, to j^urchase these transfer credits, which had the desired effect of bringing the credits to par. The author does not give the date of this transaction. (A)ialys'is of Trade, etc., 1751), p. 185). The Bank was destroyedl^^ the French in 1797, the same year with that of Genoa. TuE Bank of St. George, at Genoa. 7. The origin of public debts at Genoa is even earlier than those of Venice. In 114S, the Ligurian Republic conquered Almeria and Tortosa, in Si)ain, and found themselves greatly encumbered with debt. Public loans Avere created by means of terminable annuities, which were secured on the taxes and customs duties. In ])rocess of time these loans, or waa'««, greatly increased, and in the 14th century it was thought that something must be done to reduce them to greater order. In 134G it was pro])osed to consolidate them, but the plan was not carricl out then. Towards the end of the century tlie Re[)ublic was torn with internal dissen- sions, and in 1396 Antoniotto Adorno, then Doge for the fourth time, thought it Avould be advisable to apply to a foreign jDower ibr protection. Ajiplication was accordingly made to Charles VI. of France, w'ho sent Jean Le Maingre, Marshal of France, as Governor. At this time there Avere a great number of different otiices for the management of these loans, which were also called compere, and for the management of the revenue, called by a variety of different names. The names of the ])ublic creditors were entered in a book called cartulario, the credit was called colonna, and the Creditor colonnante. The debts were divided into shares of 100 lire each, and made transferable at will. At length, in 1407, these loans fell iiito great disorder from the politi- cal disturbances. The Governor called a council of the Ancients, together with the UjJizJ dl Proalsknie e della Moncta. By their advice, eight of the most highly esteemed citizens were appohited a committee to devise a jilan to extricate the Republic from its difficulties. All the public debts were consolidated, and all the public offices were foi-med into one Company, which took the name of the Ufficio dl San Giorgio. The old loans at 7 and 8 per cent, were jiaid off', and a new single stock at 6 per cent, was created. The Com])any gradually acquired great privileges and power, they were entrusted Avith the collection of the revenue, 294 THEORY AND PEACTICE OF BANKING. and vrere endowed with civil and criminal powers in all matters relating to the taxes. In 1453, Pietro Fregoso was Doge. The Republic was dis- tracted with internal dissensions and the expense of the war with Mahomet II., who was besieging Constantinople, and the Genoese settlement of Pera. The Government ceded to the Company of St. Giorgio, Pera, and its other colonies in the Black Sea, in full property. In the same year it was miable to maintain its authority over Corsica, and it also ceded it to the Company, with full power to equip all forces necessary to preserve these posses- sions. The Company was so embarrassed by the expenses of these acquisitions, that it was unable to pay any dividend on its shares m 1456, mid it obtained the Pope's leave to suspend their papnent for three years. In 1479 it was further released from paymg any stated dividend in future, and allowed to divide Avhatever profits there might be for the year. In the same year a distinguisheil citizen, named Lodovico Fregoso, took Sarzana by stratagem from the Florentines, and the State being too weak to defend it, ceded it to the Company. In a short time it also obtained Serravalle, Castlenovo, Ortonovo, and S. Stefano. In 1512, Pi eve del Pieco, with the territory attached to it, was also given over to it. In 1514 it acquired Ventimiglia and its terri- tory, and in 1515 Levanto and its territory. "In short," says Machiavelli (Istorie Florentine, lib. viii.), " the Company, being always wealthy and well managed, was able to make constant advances to the city, which was always in difficulties. The city first conceded the customs to the Company, as security for the loans, then she assigned towns, castles, and territories, so that the Company had at that time under its administration the greater part of the lands and cities of the Genoese dominions. Every year it sent its deputies, selected by vote, without the interference of the State. And the citizens gi'oatly preferred the rule of the Company to that of the State, on account of the tyranny of the latter, and the excellent regulations of the former. The Company did not interfere in the political contests itself, but it was powerful enough to comi)el the successful i)arty to respect its laAVS. Thus, tliis Company exhibited an extraordinary spec- tacle, Avhich no [)hilosopher had ever imagined, namely, within the same State, and among the same citizens, there was liberty and tyranny, justice and licence, and order and disorder, for the Citmpany alone ijiaintained in tlie city many ancient and vener- able customs, — and if it sliould happen, as was extremely prol)able, that the Company should obtain possession of the whole city, IMacliiavelli expected tliat Genoa would l)ecome even more ilhistrious than Venice. Not\vithstandingt]iis,the Company found that the administration of tliese territories Avas ruining its finaiu-es, and in 1502 it returned tliem to the State. In 1539 the debts which hud been redeemable Mere changed into per- BANK OF ST. GEORGE. 295 petual annuities, tlie operation was called maf/no contratto di consoliddzioae, and tlie Company was put in I'ull possession of 7G kinds of taxes and customs duties. All this time the Company was in no sense whatever a bank, nor ever called by that name. It was called the Casa, or Ufficio di S. Giorgio, or the Adniinistratoridelle Coinpere di IS. Giorgio, and its tinancial business was to collect the taxes, and })ay the dividends upon their shares. In 1G74 they presented a petition to the Government, to be allowed to set up a bank, which was o-ranted in 16*75. And this is the true date of the formation of tlie Bank of St. George. It Avas decreed, that by means of the r>ank, or its credit, or by means of the books of S. Giorgio and their notes, all bills of exchange, and mercantile obligations, Iiowever small, and all payments due in the city from all parts of the world, should l)e paid. The Bank's notes were made the only legal tender in the city for all ]»ayments above 100 lire, and they Avere to be received in payment of all taxes at the treasury. This Bank, in a very short time, ac(|uired great credit, and its business increased so rapidly that it was obliged to open four acMitional offices. This Bank was at the height of its power and reputation when Law visited Genoa, and there is every reason to believe was Avhat furnished him Avith the model of Avhat he afterwards attempted to carry out on a much greater scale in Paris, and Avhich ended in so great a catastrophe. The Bank continued to nourish till Genoa Avas captured by the Austrians in 1746. It had advanced 15 millions of lire to sustain the Avar, and it had spent not only its OAvn money, but also 1,.333,088 lire of its dejiositors. The Austrians plundered it, and it was obliged to sus])end payments. In 1750, the Senate ordered all the note- holders to inscribe their names in a register, called Monte di Co/iservazione, the debts Avere cai)italised in shares of 200 lire, Avhich Avere to be gradually redeemed by lot. Other of its ob- ligations, called 2^('g^i^(', Avere also due to the amount of 64,000 lire. These AA'ere also capitalised, as a Monte Paghe, on the same terms as the others, and the shares Avere made transferable like stock. In 1777 there Avere only 2,251 shares, and 7,663 paghe unpaid, and they Avere then converted into public stock. In 1794, Genoa Avas involved in the Avar of the KeAolution, and it Avas taken by the French in 1797, Avho immediately al)olished the Company of St. George. The public debts Avere placed under the protection of the honor of the State, and the circulation of its notes prohibited. In 1799 the sale of all its effects AA'as ordered, in order to discharge its obligations, but commerce AA'as so utterly prostrated that its property Avas sold at a very Ioav value, and the proceeds Avere insufficient to satisfy all its creditors. Thus ended this extraordinary cor[)oration. Attem])ts Avere made in 1S04, and in 1814, to resuscitate it, but they failed. 296 THEORY AND PRACTICE OF BANKING. Ix Sweden. 8. The Bank of Stockholm, founded 1 66 8, is remarkable as being the first, which, according to the testimony of Law (il/t'V?io«>es s^tr lesianqxes, p. 523. £Jdlt. Guillciumin. 1851). Yoltaire, {Histoire cle Charles XII., p. 33. Edit. 1785), and Hume, (life, hy J. H. Burton, Yol. II., p. 459), invented bank notes in Europe. The money of S^veden was of copper, and very inconvenient to make large payments with. A cart was required to carry a moderate amount of it. To remedy this inconvenience, a public bank was established, in Avhich the merchants deposited their copper money, and received bank notes in return for it, which were used ui j^ayments all through the comitry. Pay- ments were also made by transfers in its book. In 1726 an edict enacted that the notes should be takeii in pajinent of biUs of .exchange. This bank, although first instituted as one of deposit only, seems afterwards to have done commer- cial business ; " For," says M. Gustavo du Pu}'node {De la Monnaie, erson Avho, by makmg a de})Osit of bullion, obtains both a hank credit and a receipt^ pays his bills of exchange as they become due with his bank credit, and either sells or keeps his recei2:)t, according as he judges that the price of bullion is likely to tall or rise. The receipt and the bank credit seldom keep long together, and there is no occasion they should." Surely there is some extraordinary error here. Hoav can a man, upon a deposit of £100, receive both a transferable receipt and also a bank credit for an e([ual amount"? That is as much as to say that, for every deposit, a man received credit to twice the amount. This part of Adam Smith's account of the bank's transactions seems to us to be Avholly unintelligible. The Bank of Amsterdam professed to be a pure Bank of Deposit, that is, to make no use of its funds, but to keej) in its vaults an equal amount of coin or bullion to all its obligations. Its stability Avas scA'erely tested in 1672, in the French invasion, when every one rushed to demand his deposit. They Avere foimd perfectly intact, and, of course, this greatly raised the credit of the Bank. It became the great Avarehouse for bullion for foreigners, as Avell as natives. Notwithstanding its professions, and the solemnities Avith Avhich each successiAC magistracy at Amsterdam swore to keep the treasure intact in the Bank's vaults, John Law shrewdly susi)ected that they did lend it out, and this Avas fully proved in 1794. They had tor a very long series of years, notAvithstanding all their oaths, been advancing 298 THEORY AND PRACTICE OF BANKING. large sums to the Government, and to the Dutch East India Company, as ^vell as to diiferent mnnicipalities in Holland. The first shock vras given to its credit in 1790. In that year (Davies, Hist, of JloUand, Vol, iii., jx 557. Edit. 1851) the East Lidia Company found themselves in great difficulties. For many years they had been suiiermg a heavy amiual loss, and had only been supported by clandestine loans from the Bank, contrary to the oaths of its Directors. Li December, 1790, the Bank found itself in imminent peril from these perpetual advances, and it suddenl)' announced that it wonld in future fix the price at which it wonld pay out the silver held in deposit. The first price fixed inflicted on its holders a loss of 10 per cent., and it refused to pay any deposits of less than 2,500 florins. This, ■which was nothing- less than an ojien bankruptcy, excited the utmost astonishment and alarm. Its receipts immediately fell from 5 per cent, above par to one-half discoimt. This, of course, brought a run upon it, and after a short time the order was rescinded. The public, who at that time had no knowledge of its illegal proceedmgs, and had no ostensible cause of distrust, was pacified for the time. In 1794, the French entered Amsterdam, and, upon in- vestigating the aftairs of the Bank, fomid that it had advanced nearly 11 millions of florins to the East India Company, and various cities. This, of coiirse, was fiital to the Bank, and its notes immediately fell to a discount of 16 per cent. We need not enter mto any further details of* the origin or history of banking in other countries, as what "\ve have already given, sufliciently illustrates the diflerent principles adopted, which is our main object. While we have shewn the extreme erroneousness of the current o]>inions regarding the early origin of some of the most celebrated banks, we may say that the Bank of Barcelona ^vas in reality the oldest in Euroi)e. It Avas founded, Capmany tells us, in 1401, by the municipality, for the use of tlie mercliants. It was a bank both of deposit and dis- count, and the property of the city was pledged for the security of the depositors. It was thus founded 18C years before that of Venice, and 274 years before that of St. George. The Bank of Hamburg was founded in 1G19, on the model of that ot Amsterdam. The only peculiarity in it was that it gave credit on the deposit of jewels, as well as bullion. It is said to be nearly the only one of tlie old banks in Europe which still survives. Historical SJcetch of the Rise and Progress of Hanking IN Scotland. 10. Tlie Bank of Scotland is the first instance in the world of a private joint stock l)ank, formed by ]>rivate })ersons, for the express ])ur])0se of making a trade of banking, dei)endent on their OAvn private cai)ital, and M'holly unconnected with the BANKING IN SCOTLAND. 209 State. It flifforod in kind from uny of the other banks existini^ at that time. The successful institution of the Bank of Encfhuid led to a project beini^ formed to establisli a Bank in Scotland, A merchant of London, Mr. John Holland, was the author of the scheme, and lie got eleven Scotch JNIerchants to join him. They obtained an Act of the Scotch Parliament on the 17th July, 1G95, anthorizing the Crown to grant them a Charter of Incorporation. The principal provisions of this Act are as follows (Acts of the Parluiment of Scotland, vol. ix., p. 494) : — I. The joint stock was to be <£l,200,000 Scots, or £100,000 sterling, and authorises certain persons to receive subscriptions for not less than £1,000 Scots (£83 6s. 8d.), nor more than £20,000 Scots (£6,006 13s. 4d.) for each person, with a deposit of 10 per cent. II. They were allowed to lend on real or personal security, at not more than 6 per cent. ; and, on failure of payment, to sell or dispose of the security i)ublicly. III. They were allowed to transfer their stock freely, or by will. IV. No dividend to be made, but by consent of general meeting, V. The joint stock to be free from all taxes affecting money for 21 years from that date. VI. It was declared to be illegal for any other ComjDany to set up banking for 21 years. VII. Various legal privileges were granted for the more speedy and effectual recovery of debts due to the bank. VIII. Prohibits any sum to be withdrawn from the joint stock. IX. Prohibits the Company, directly or indirectly, from using or employing the joint stock of the Bank, or any of its profits, in any other trade or commerce, except the trade of lending and borrowhig money upon interest, and negociating bills of ex- change. X. Prohibits the Company from purchasing land, or heritages, or advancing money to the Government, upon the anticipation of any sums to be granted by t^arliament, except only those particular ones upon Avhich a credit of loan should be authorized by Parliament, imder the penalty of forfeiting triple the amount, of which one-tifth to the informer. XI. All foreigners Avho subscribed to the joint stock, Avere 12)80 facto naturalized to all intents and purposes. It Mas also provided that two-thirds of the stock must always belong to persons residing in Scotland, The Scotch subscription of £800,000 Scots C£00,660) was begun in November, and filled up at the end of December, 1095. The English subscription of £400,000 Scots (£33,333) was taken up in one day in London, a great part by Scotchmen. As the Scotch at that time were 300 THEORY AND PRACTICE OF BANKING. supposed to know uothing about banking, it was also provided that for a certain number of years the Governor and twelve Directors should be English, and the Deputy-Governor and twelve Directors should be Scotch. However, it was soon found that the Scotch were such good managers, that this arrangement was changed, and all the Directors were Scotch, and thirteen trustees were chosen to manage the English business and affairs in London. No sooner was the Bank fairly established, than, in 1696, the African Company attempted to set up the trade of banking m defiance of the Bank's privilege. This was the celebrated Darien Company, which was organized by "William Paterson, who was one of the founders of the Bank of England. Mr. Holland was Governor of the Bank, but so little was it thought of, that it did not venture to vindicate its privileges against the African Company, for which there was a national phrenzy, and which afterwards ended so sadly. Tlie* Bank was obliged to content itself by strengthening its position by calling up two- tenths of its capital. The African Company soon, however, burnt its fingers with banking, as, in order to rival the Bank, they advanced their notes with great imprudence to several of their own shareholders and others, and sustained great losses, which made them stop. The Bank then began the business of exchanges, but, findhig that they could not compete with private merchants, gave it up. In 1696 they opened branches at Glasgow, Aberdeen, Dundee, and INIontrose; but not finding them to pay, withdrew them. In JNIay, 1698, the rivalry of the African Company being at an end, tlie directors repaid the two-tenths of capital last called up, as being more than necessary for their business. The Bank at first received no deposits from the public ; its business consisted in circulatmg its own notes upon the credit of the subscription that was paid in. These notes were for £100. £50, £20, £10, and £5. It is disputed when they began to issue £1 notes, for, while a i)amplilet, published in 1 728 on their behalf, says that they began to issue them in January, 1699-1700, ]\Ir. Kinnear, a director of the Bank, stated to the Committee of the House of Commons that, though many proposals were made to them to circulate "tickets" or "tokens" of £1, they had always hesitated to ndojjt so novel an experiment till 1704. Which authority is right we have no means of deciduig. In 1701 a great fire destroyed the Parliament Close, in which the bank was, but the cash and all the elfects were safely removed into the Castle l)ythe Earl of Leven, who was Governor of l)oth. In December, 1701, soon after, as it Avould appear by one account, that Ihcy had issued £1 notes, a rumour was spread all over the kingdom that tlic Privy Council were going to raise the value of the coin, Avliich caused a run u])on the Bank, ajul at BANKING IN SCOTLAND. 301 last it was obliged to stop pa}nncnt. A meeting of tlie pro- prietors was held, who declared that all their notes should bear interest until they were paid. Tlie directors also requested the Privy Council to appoint a Committee to examine their books. They reported that the Bank was in the most sound and flourishing condition, and their notes then passed without de- preciation. The directors made a call of one-tenth, and in less than five months \y.ud off all their notes with interest. By the Act of Union between England and Scotland, it was stii)ulated that the coinage of Scotland should be reduced to imiformity with that of Ejigland, and the loss or deficiency to private individuals made good out of the E(piivalent fund. (Art. XV.) The Bank assisted this operation by receiving all the old money and giviTig their own ncjtes, or new money in return, re- ceiving a commission of half per cent. This was successfully accomplished without any disturbance. In September, 1715, the rebellion broke out, which imme- diately caused a run upon the Bank, the directors themselves urging it on, that the money might not fall mto the hands of the insurgents. They then stopped, retaining all the money belonging to the Crown, which was about £:}0,000, which they lodged in the Castle. They then gave notice that all their notes should bear interest, as had been done in 1704. In jNIay, June, and July, 1716, they were all called in and paid. In this year the monopoly of banking granted by their charter expired, and no steps were taken to renew it. It appears that up to this time the profits of the Bank were enormous. A rival pamj)hlet states that the dividend was 35, 40, and 50 per cent., and, accordingly, as we may well suppose, those profits attracted rivals. A cry was got up against them, that they were too niggardly in advancing loans, that they exacted too high interest, and that the concern was altogether too small. In December, 1719, proposals were made to them to unite with the proprietors of the Equivalent fund, to the amount of £250,000, so as to increase the capital to £.'350,000, and share the annual grant of £10,000 (being four per cent, on the amount) in the ])roportion of two-sevenths and five-sevenths. But, as the Bank had only one-tenth paid uj), the proprietors of the E(piivalent iimd were to draw out of the Bank, as might be agreed ui)on, nine-tenths, or £225,000, in notes, so that there might then be a capital of £;35,000 to bank upon. The I5ank rci)lie(l tliat :-r-lst , They had no power by their Act to amalgamate with the E(juivalent, as they Avere limited to £100,000 sterling; 2ndly, That they would not unite at par with the Equivalent at four per cent., while their own stock was worth at least ten per cent. ; 3rdly, That the stock of the Bank was large enough for the country ; and, if they Avanted it en- 302 THEORY AND PRACTICE OF BANKING. larged, they could do it themselves by calls on their proprietors. They also gave other calculations, shewing the absurd nature of the proposals. No sooner were the advances of the Equivalent proprietors repulsed, than another set of persons began another rough wooing, to thrust themselves into a imiou with them. The Edinburgh Society, formed on a pretended plan of insuring against fire, tried to force a junction with them, and, being defeated in this, they tried to get up a run upon them. They got together £8,400 of their notes, and sj^read a report of a run. This, however failed ; and shortly after the Bubble Act passed, by which the society fomid that they were an illegal company, and w^ere obliged to dissolve themselves. The London Assm-ance Com- pany then " proposed " to them, but met with a similar refusal. At the time of the Union, a considerable number of persons, both civil and military, were creditors of the State, and the Equivalent sum stipulated in the Act of Union was not sufticient to discharge their claims. In 1714, they obtained an Act of Parliament, constituting their debts, but no Parliamentary provision was made to pay it till 1Y19, wiien £10,000 w\as set apart for that purpose, to be paid annually, m ]u-eference to all other claims. The Act of 1719 empowered His Majesty, by letters patent, to incorporate the proprietors of this debt into a body politic and corporate — a ]\Ioxte — with powers to do and perform all matters appertaining to them to do, touching or con- cerning the said capital sum ; and the yearly fund, payable in respect thereof, as His Majesty, by the said letters patent, should think fit to grant. In pursuance of this Act, tlie pi'oprietors, who included persons in all ranks of the State, were uicor})orated in 1724; and, by the same letters patent, the King agreed and covenanted with the corporation that he would, from time to time, grant them such other powers, privileges, and authorities, as he la^\"fully might. This was the body of persons w^liom we have seen attempt to force themselves upon tlie Bank of Scotland. When tliey were re]iulsed by that body, they determined to ai)ply to tlie King to grant them powers of Banking in Scotland, in ])ursuance of ills agreement to grant them any powers that he lawfully might. They accordingly petitioned liim to grant them powers to bank in Scotland, limited to such of the company as should on or before ]\richaelnias, 1727, sul>ject their stock to the trade of banking. This ])etition came to the knowledge of the Bank in 172G, and, of course, they did everything they could to opi)Ose it. A cry was got u]) .against them that they were hostile to the House of Hanover — that they charged too high interest for their loans — that they were too particular in the securities they required — that tliey W'ould not lend on their own stock, and other things. To all these vcw>€^tual monopoly of hanking loas a thing so manifestly pernicious, that no jyrivate men could have the assurance to aitn at it, far less coidd any Parliament he so unthinking as to grant it.'''' On the south of the Tweed there was found a Parliament so unthinking as to grant a monopoly of banking to a single company for upwards of 130 years, and the consequences fuUy justified the opmions of the sagacious Scot. The directors of the company were authorized to make calls upon the proprietors, to the amount of one-half of their stock, but there were no means given of enforcing the calls beyond retaining the accruing dividends until the call was satisfied. They got, however, great assistance by having £20,000 deposited with them by the Crown, This was sent down by the Govern- ment to be placed out at interest, to assist the fisheries and manufactures, and several of the directors of the Royal Bank, being among the trustees for managing the fund, voted that it should be ])laced in tlieir own bank. Their charter also granted them unlimited powers of issue. The alarm and jealousy created by the establishment of the new bank hap})ily soon Avore ofl:', as it was discovered that, so far from injuring it, the inevitable con- sequence followed that enlarged exi)erience in commerce Avould enable us to predict ; it increased the prosperity of both of them, so that the stock of the Bank of Scotland rose to 400 per cent., and tliat of the Royal Bank also very high. The Royal Bank had only been in existence two years, when it invented a further deveioj uncut of the system of banking, which, by the imanimous testimony of all ])ersons Avho know that country, has done more to develo2;)e its resources, and promote its agricultural and commercial j^rosperity, than any otlier cause whatever. This is the system of c((sh credits, or cash accounts. This system deserves the most attentive consideration, because it is entirely of the nature of acconunodation, paper, which has fallen into such disrepute in England, from the enormous abuse of it that lias taken place. We slnill not interrupt our present narrative by describing the system here, but refer to it elsewhere. In T7.31, the Bank of Scotland tried again to establish branches at Glasgow, Aberdeen, and Dundee, but, after a trial of two years, was obliged to discontunu' thein, and the ])lan was not tried again till 1V74. OPTIONAL CLAUSE IN NOTES. 305 The unlimited power of issuing " promises to pay," placed in the hands of two liostile parties, must naturally have led to great over-issues, before they acquired sulHcient experience. To protect themselves from the conseijuences of these over-issues, as well as from the attacks of each other, the Bank of Scotland in 1730 in- troduced a clause into their notes making them payable, at the O]>tion of the directors of the Bank, at the end of six months, with a sum equal to the legal interest froni the time of demand to that time. This practice was adopted by all the other bank- ing companies, for the manifest advantages of banking were so strikingly displayed, that after the expiry of the monopoly of the Bank of Scotland, banking com]ianies started up in all direc- tions, and inundated the country ^Y\th notes. When the holders of the notes demanded pajnnent for them, the directors of the companies threatened that they would take advantage of the optional clause, unless the demanders would content themselves with a ])art of what they wanted. Moreover, as there was no restraint upon the amount of their notes, many of the com])anies issued notes for 10s., 5s., and even lower than that. In Perth- shire there were notes for Is., and even for Id., and the Perth Banking Company was founded partly to jjut 'an end to this nuisance. The inevitable consequence folloAved; these paper notes drove all the gold and silver out of the country, and the exoJiange with London fell. Adam Smith says : " While the exchange between London and. Carlisle was at j^ar, that between London and Dumfries would sometimes be 4 per cent, a-gainst Dumfries, though this town is not thirty miles distance from Carlisle. But at Carlisle bills were paid in gold and silver, Avhereas at Dumfries they were paid in Scotch bank notes, and the uncertainty of getting those bank notes exchanged for gold and silver coin had thus degraded them 4 per cent, below the value of that coin." And this Avas at the time when, owing to the degraded state of the English coin, the foreign exchanges were adverse to England, and the market price of gold was £4 per ounce, so that the whole de])reciation of the note was about 6^ per cent. Thus we see at this time, when the Scotch bank notes were at a discount, they were, in fact, inconvertible, or only payable six months after demand, a circumstance of great im- portance, and one Avhich must be especially observed, as this was one of the instances alluded to by Sir Kobert Peel in introducing his Bank Act of 1844. The manifest consequence followed. All the gold left the country, as it ahvays does from the excessive ]iaper issues, and the banks were all obliged to employ agents in London con- stantly collecting money for them, at an exi)ense of seldom less than one-and-a-half to two per cent. Adam Smith says : " This money was sent down by the waggon, and insured by the carriers at an additional expense of three quarters per cent., 306 THEORY AND PRACTICE OF BANKING. or 159. on tlie £100. Those agents were not al-ways able to replenish the coffers of their employers so fast as they "vrere emptied. In this case the resource of the banks was, to draw upon their correspondents in London bills of exchange to the extent of the sum they wanted. When those cor- respondents afterAvards drew upon them for the payment of this sum, together with the interest and connnission, some of those banks, from the distress into which their excessive circula- tion had throAvn them, had sometimes no other means of satisfying this draught but by drawing a second set of biUs, either upon the same or upon some other correspondents in London, and the same sum, or rather bills for the same sum, would in this manner make more than two or three journeys, the debtor bank always paying the interest and commission upon the whole accumulated sum. Even those Scotch banks which never distinguished themselves by their extreme imprudence, were sometimes obliged to employ this ruinous resource. " The gold coin which was paid out either by the Bank of England or by the Scotch banks, in exchange for that part of their paper which was over and above what could be employed in the circulation of the coimtry, bemg likewise over and above what could be employed in that circulation, was sometimes sent abroad in the shape of coin, sometimes melted do"s\ai and sent abroad in the shape of bullion, and sometimes melted down.and sold to the Bank of England, at the higli price of £4 an ounce. It was the newest, the heaviest, and the best pieces only, which were carefidly picked out of the old coin,' and either sent abroad or melted down at home, and while they remained in the shape of coin, those hea^w pieces were of no more value than the light, but they Avere of more value abroad, or when melted down into bullion at home." This passage well illustrates the quotation we have given from Aristoplianes, and is admirably illustrated by what took place in France during the existence of the Assignats, and in England during the suspension of cash payments. At this period the Scotch Banks had got themselves into a very alarming position, from their ignorance of the true principles of regulating a paper currency, as avcII as of tlie effect of an exces- sive issue of i)aper in depressing the exclianges, and causing an exj)ort of gold, and not perceiving that, while in this state, bringing gold into tlie country was like pouring water into a sieve, or like the toil of the Danaides. They had been far too prodigal in granting cash credits, and allowing them to be con- verted into dead loans, Avithout observing the rules tliat Avere specially aj)i)licable to them. And CA'crything seemed to shoAV that matters Avould get Avorse, .as the annihilation of the last Jacobite rebellion in 1*746 had freed the country for ever from the fear of internal distiirljances, and numerouH other companies RISE OF ACCOMMODATION PAPER. 307 were forming to add to the currency, which Avas ah-eady su])eral)uiidaHt. United in a common danger, the two principal banks agreed to combine tlieir intluenee, and ol)tain an Act to remedy this, and tlie Statute 17G5, c. 49, Avas passed, suppressing all notes under 20s., and prohibiting tliose to be issued with the optional claijse, and enacting tliat all such notes should be payable to the bearer on demand. The banks also curtailed their cash credits very extensively, and called up fresh capital. Owing to these combined measures, silver immediately returned into circulation, the value of the Scotch currency Avas restored to par, and from that time to the present, although the issue of bank notes was absolutely free until 1845, the Scotch currency has nevee VARIED FROM PAR. The Bank of Scotland and the Royal Bank continued to be the only chartered banks till 1*746, when the British Linen Company was incorporated, for the purpose of carrying on the linen manufacture, and banking in connection with it. This Company soon found it expedient to discontinue the linen part of their business and confine themselves to banking, and it has since become one of the most powerful and -Avealthy of the Scotch banks, but it did not introduce any new featui-e into Scotch banking. This is the first occasion, that we ai'e aware of, on Avhich that abominal)le system of accommodation j^aper, Avhich is the sure precursor of mercantile convulsion, Avas fully manifested. The Scotch banks seem to have learnt a A^ery Avholesome lesson, and contracted their issues more AA'ithin the bounds of prudence. This Avas a source of prodigious annoyance to a AMSt munber of speculators and adventurers. Tlie ])rudence AA^hich the banks exercised in discounting, not only alarmed, but enraged these projectors to the liigliest degree. " Their ovax distress," says Adam Smith, " of Avhieh this })nulent and necessary reserve of the banks Avas no doubt the immediate occasion, they called the distress of the country; and this distress of the country they said AA'^as altogether OAving to the ignorance, pusillanimity, and bad conduct of the banks, Avhich did not give a sufHcicnty liberal aid to the spirited midertakings of those Avho exerted themselves in order to beautify, improve, and enrich the country. It was the duty of the banks, they seemed to think, to lend for so long a time, and to as great an extent, as they might Avish to borrow. The banks, hoAA-ever, by refusing in tiiis manner to giA'e more credit to those to Avhom they had already given a great deal too much, took the only method by Avhich it Avas noAV possible either to save their oaati credit, or the public credit of the country. " In the midst of this clamour and distress, a new bank Avas established in Scotland, for the express purpose of relicA-ing the 308 THEORY AXD PRACTICE OF BANKING. distress of the country. The design was generous, but the execution was imprudent ; and the nature and causes of the dis- tress wliich it meant to relieve, were not, perhaps, well under- stood. This bank was more liberal than any had ever been, both in grantmg cash accounts, and in discounting bills of exchange. With regard to the latter, it seems to have made scarce any distinction between real and circulating bills, but to have dis- counted aU equally. It was the avowed principle of this bank to advance, upon any reasonable security, the whole ca]iital which was to be employed in those improvements of which the returns are the most slow and distant, such as the improvements of land. To promote such improvements was even said to be the chief of the public-s2:)irited purposes for which it was instituted. By its liberality in granting cash acconnts, and in discounting bills of exchange, it no doubt issued great quantities of its bank notes. But those bank notes being, the greater part of them, over and above what the circulation of the country could easily absorb and employ, returned upon it, in order to be exchanged for gold and silver, as fast as they were, issued. Its coffers Avero never well filled. The capital, which had been subscribed to this bank at two different subscriptions, amounted to £160,000, of which 80 per cent, only were paid up. This sum ought to have been paid in at several different instalments. A great part of the proprietors, when they paid in their first instalment, opened a cash account with the bank; and the directors, thinking them- selves obliged to treat their owai ^proprietors with the same liberality with which they treated all other men, allowed many of them to borrow upon this cash account, Avhat they paid in upon all their subsequent instalments. Such payments, therefore, only put into one coffer what had the moment before been taken out of another. But, had the cofters of this bank been filled ever so well, its excessive circulation must have emptied them faster than they could have been replenished by any other expedient but the ruinous one of draAS'ing upon London, and, when the bill became due, paying it, together with interest and commission, by another draught u])on the same place. Its cofters having been filled so very ill, it is said to have been driven to this resource within a very few months after it began to do business. The estates of tliG proprietors of this bank Avere worth several millions, and by their subscription to the original bond, or contract of the bank, Avcre really pledgcil for answering all its engagements. By means of the great credit which so great a pledge necessarily gave it, it Avas notwithstanding its too liberal conduct, enabled to carry on business for more than two years. When it A\'as obliged to stop, it had in circulation about £200,000 in bank notes. In order to s\ii)port the circulation of those notes, Avhich Avere continually returning upon it, as fast as thev Avere issued, it had been cotistantly in the practice THE AYR BANK. 309 of clraAving bills of exchaiifi^e upon London, of which the number and value were continually increasinur, and, when it stopped, amounted upwards of £000,000. This baid-c, therefore, had, in little more than the course of two years, advanced to different peoi)le upwards of £800,000 at 5 i)er cent. Upon the £200,000 which it circulated in bank notes, this 5 per cent, might perhaps be considered as clear gain, Avithout any other deduction besides the expense of management. But upon upwards of £000,000, for which it was continually drawing bills of exchange ujjou London, it was payhig, in the Avay of interest and commission, upwards of 8 j^er cent., and was, consequently, losing more than 3 per cent, upon more than three-fourths of all its dealings. " The operations of this bank seem to have produced effects quite opposite to those which Avere intended by the particular persons who planned and directed it. They seem to have intended to support the spirited undertakings, for as such they considered them, which were at that time carrying on in different parts of the country, and at the same time, by drawing the Avhole banking business to themselves, to supplant all the other Scotch banks, particularly those established at Edinburgh, whose backwardness in discounting bills of exchange had given some oftence. This bank, no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt, so that, when ruin came, it fell so much heavier both upon them and upon their creditors. The operations of this bank, there- fore, instead of relieving, in reality aggravated, in the long run, the distress, which those projectors had brought both upon themselves and xipon their country. It would have been much better for themselves, their creditors, and their country, had the greater part of them been obliged to stop two years sooner than they actually did. The temi)orary relief, however, which this bank afforded to those ])rojectors, proved a real and permanent relief to the other Scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so backward in discounting, had recourse to this new bank, Avhere they were received Avith open arms. Those other banks Avere enabled to get Axny easily out of that fatal circle, from Avhich they could not otherwise haA^e disengaged themselves, Avithout incurring a considerable loss, and perhaps, too, even some degree of discredit. " In the long run, therefoi'e, the operations of this Bank in- creased the real distress of the coimtry, Avhich it meant to relieve ; and effectually relieved from a A'ery great distress those rivals Avhom it meant to supplant. " At the first setting out of this Bank, it aa* as the opinion of gome people that hoAV fast soever its cofiers might be emptied, 310 THEORY AND PRACTICE OF BANKING. it might easily replenish them, by raising money upon the securities of those to whom it had advanced its paper. Experi- ence, I believe, soon convinced them that this method of raising money was much too slow to answer their purpose ; and that coflers, which were origmally so ill-filled, and Avhicli emi^tied themselves so very fast, could be replenished by no other expe- dient but the ruinous one of drawing bills upon London, and, when they became due, paying them by other draughts upon tbe same place, Avith accumulated interest and commission. But though they had been able by this method to raise money as fast as they wanted it, yet, instead of making a profit, they must have siTfiered a loss by every such operation ; so that, in the long run, they must have ruined themselves as a mercantile company, though perhaps not so soon as by the more expensive practice of dra^Amig and re-drawing. They could still have made nothing by the interest of the paper, which, bemg over and above the circulation of the country could absorb and employ, returned U230n them, in order to be exchanged for gold and silver, as fast as they issued it ; and for the payment of which they were themselves continually obliged to borrow money. On the con- trary, the whole expense of this borrowing, of employing agents to look out for the people who had money to lend, of nego- ciating with those people, and of drawing the proper bond or assignment, must have fallen upon them, and have been so much clear loss iipon the balance of their accounts. The project of replenishing their coffers m this manner, may be compared to that of a man who had a water pond, from which a stream was continually running out, and into which no stream was con- tinually running, but who proposed to keep it always full by employing a number of people to go continually with buckets to a well, at some miles' distance, in order to bring water to replenish it. " But, though this operation had proved not only practicable, but profitable to the bank, as a mercantile company, yet the country could have derived no benefit from it ; but, on the con- traiy, must have suffered a very considerable loss by it. Tliis operation could not augment in tlic smallest degree the quantity of money to be lent. It could only have erected this bank into a sort of general loan oflice for the whole country. Those who wanted to borrow, must h:tve ai)}>lied to this bank, instead of applying to the private persons Avho had lent it their money. But a bank which lends money, i)erha})S, to 500 different people, the greater part of wliom its dii-ectors can know very little about, is not likely to be more judicious in the choice of its debtors, than a ])rivate person who lends out his money among a few people, whom lie knows, and in whose sober and frugal conduct, lie tlunks he has good reason to confide. The debtors of such a bank as that, whose conduct I have been giving some THE AYR BANK. 311 account of, were likely, the greater part of them, to be chimerical projectors, the drawers and re-drawers of cb'culating Ijills of ex- change, Avho would employ Uie money in extravagant undertak- ings, which, with all the assistance that could be given them, they would probably never be able to complete, and Avhich,if they shonld be completed, would never rej)ay the exjtense which they had really cost, would never allbrd a fund capal)le of maintaining a quantity of labor equal to that which had been employed about them. The sober and frugal debtors of private persons, on the contrary, would be more likely to employ the money borrowed in sober undertakings, Avhich were proportioned to their capitals, and Mdiich, though they might have less of the grand and the mar- vellous, would have more of the solid and the profitable, which would repay with a large profit whatever had been laid out u])on them, and which would thus afford a fund capable of maintaining a much greater quantity of labor than that which had been employed about them. The success of this o])eration, thei'efore, without increasing in the smallest degree the capital of the country, would only have transferred a great })art of it from pru- dent and profitable to imprudent and luiprofitable undertakings." This bank, to which this long extract refers, was the cele- brated Ayr Bank, which Avas founded to remedy the alleged distress caused by the niggardly conduct of the existing banks. It was started by a company which comprised the Duke ot Hamilton and many other landed proprietors of immense wealth, and it was based on the fatal delusion that, because the capital and property of its proprietors was undoubted, it might there- fore issue notes to any amount Avithout depreciation. This Avas exactly John LaAv^s theory of money, and this bank is a preg- nant instance of its fallacy. The jximphlet Ave have already quoted from, relating to the bank of Scotland, had already seen and denounced this fallacy, for it said, Avith perfect truth and wisdom, that no matter lohat the capital of a hanking company is, the 2)f^2^G^' c/'cc?/^, in the shaj^e of notes, ichich it can circulate^ bears a certain proportion to the existing specie in the countrg, and this can only be ascertained by experience. Kow, this strikes at the root of John Law's whole theory, because that is based upon the fallacy that bank notes only represent property, and, therefore, may be multij)lied to the extent of any existing property Avithout depreciation — a theory Avhose resnlts may be seen in the history of the Assignats, AA'hereas the real truth and fiict is, that bank notes do not represent any pro- perty Avhatever, but are themselves independent entities, and can only maintain their value, like any other uulependent entities, by bearing a certain proportion to the specie. Nor is Adam Smith correct in what he says, that the operations of banking do not mcrease the capital of the country; there is no more delusive fallacy than this in Political Economy; it is just because 312 THEORY AND PRACTICE OF BANKING. banking does increase capital so rapidly that it is so dangerous. It is just for the very reason that bank credits, whether in the form of promissory notes, or entries and cheq^ies, perform exactly the same functions, and are in all respects equivalent to the creation of so much additional capital, tliat they so fatally depreciate the value of the existing specie, if they are multiplied too rapidly. The fatal error of the Ayr Bank, and of Law's theory is this, not that capital might be increased by banking, but in not perceiving the true natural limits to the increase — in not seemg that the true limits were to be found in its maintaining an equality of value with gold and silver. This unfortunate concern was supposed to have been insolvent within a fortnight after it commenced business. Its mistaken course inflated speculation ; the accommodation bill system, which has been the cause of every commercial crisis from that time to this, promoted by this bank and other speciilators, formed the exact antetype of the jiroceedings of the Western Bank, and its herd of adventurers in 1857. The exports in 1771 and 1772 rose to a height they had never done before, and which they did not again equal till 1787. "While commerce was in this apparently prosj^erous, but in reality bloated and diseased condition, the puncture of a pin was suflicient to make it collapse. On the lOtli Jmie 1772, a partner in one of the greatest banking iirms in London, Neale & Co., decamped with £300, QDO, having been deeply engaged in speculation in funds. This man, named Fordyce, was a Scotch- man, and had a large Scotch connection; these were blown upon by the failure of their London agent, and a complete conmiercial panic began. The Ayr Bank had branches in Edinburgh and Dumfries, and a run began upon it on the l7tli June, 1772, in Edinburgh, and it stopped ])aymenton 25th, along Avith a crowd of speculators. The whole of Scotland was shaken to its foundation. The pa2)er of the Ayr Bank in circulation amounted to £800,000. There had been no disaster similar to it since the Darien scheme, and there has been none since like it, until the failure of the Western Baidc. The credit even of the other banks Avas almost gone. Besides the three Public Banks, only three of the private ones survived. The ])erson who was the immediate cause of the collapse of the rotten bubble of credit being a Scotchman, the London paj^ers teemed with tirades of abuse of everything Scotch. A writer in one of the papers says that the accommodation bill system first sprung \\\) tlien. In the Public Advertiser, July 8, 1772, it says in a letter: "Banking Companies have appeared in almost every corner of the kingdom, and bills of exchange have been multiplied l)y a new method called SwivcUinr/, without any solid transactions." Adam Smitli, however, i)laces it earlier. Speaking of the refusal of the banks to discount to LIABILITY OF SCOTCH BANKS. 313 the extent the speculators wished, he says: "Some of those traders had recourse to an expedient, which for a time served their purpose, tliougli at a mucli greater expense, yet as eft'ectu- ally as tlie utmost extension of bank credits could have done. This ex])edient was no other than the well-known shift of drawing and redrawing ; the shift to which unfortunate traders have sometimes recourse when they are u])on the brink of bankruptcy. Tlie practice of ralsinf/ money in this manne)*had long been known in England, and, during the course of the late war, Avhcn the high profits of trade allbrded a great temptation to over-trading, is said to have been cari-ied on to a very great extent. From England it was brought to Scotland, Avhere in pi-oj)ortion to the very limited commerce and to the very moderate capital of the country, it was soon carried on to a much greater extent than it ever had been in England. The practice of drawing and re- drawing is so well known to all men of business, that it may perhaps be thought unnecessary to give an account of it." And yet a respectable Avitness, Mr. Latouche, deputed by the private bankers of Dublin to give evidence before the Committee of the House of Commons in 1858, says that the accommodation bill system " arose from a new clement, which, when the Act of 1844 was made, did not exist at all, and that was the immense amount of deposits in the hands of Joint Stock Banks paying interest ! !" We may also notice a fact that Avas asserted at this time, especially as it has been brought up again in the recent crisis m Scotland. It was generally, if not universally supposed in Scot- land that three of the chartered banks, the Bank of Scotland, the Royal Bank, and the British Linen Company, were banks with limited liability. It is even positively stated so in the Reports of both Houses of Parliament, in 182G. Recently, however, this has been called in question with regard to the two latter banks. Mr. Hodgson, a Director of the Bank of England, in giving evidence before the late Conniiittee, says, Q. 3,5 V5: " The only bank existing in ScotUuxl -with Ihnitcd liability is, I believe, the Bank of Scotland ; there is, I believe, a very great doubt about the Royal Bank of Scotland, and the British Linen Company, having a limited liability ; I believe that the Bank of Scotland has a i)erfect charter, as perfect as that of the Bank of England ; I believe that, thougli the other two banks, which I have named, have charters conferring certain privileges, it is very nmcli doubted whether in those privileges limited liability is included. Mr. Cayley : Is there not a general impression in Scotland that they are banks of limited liability ? — There has been that imi)res- sion not only in Scotland, but in England, and amongst tiicir own customers ; but of late that oi)inion has been very much shaken, and I believe that the opinion of the Lords of Session noAV is, that those banks have not limited liability." However, there is, in the Puhlic Advertiser oH t\\e 22nd June, 1772, a 314 THEORY AND PEACTICE OF BANKING. letter from an apparently well-informed person, stating that the p7'oprietors of the Jiank of Scotland are fully liable for all its debts, and that their property is icorth several millions, and urging that as a strong reason why the Bank of England should come forward to their assistance. Now, if this be so, it will certainly be a great surprise to common opinion. May it be long before the question in respect to either bank has any practical importance. In 1774, by the Statute of that year, c. 32, the Bank of Scotland was authorized to double its capital stock, and the limit which any shareholder might hold was raised to forty shares. In this year the bank began successfully to establish branches, which has since become so marked a featiire in Scotch banking. Li 1784, by the Statute of that year, c. 12, the capital of the bank was raised to £300,000, and all restrictions as to the amount of stock any proprietor might hold, taken off. In 1792, by the Statute of that year, c. 25, the capital was raised to £600,^000, and by Statute, 1794, c. 19, to £1,000,000, and by Statute, 1804, c. 23, to £1,500,000, of which £1,000,000 has been called uj), and at which it still remains. The next great commercial crisis was in 1793. This also extended to Scotland. This was attributed by the best con- temporary writers to the inordinate multi})lication of the country Tjankers, and the commencement of the revolutionary war. This crisis was most severely felt at Glasgow. Numbers of the most wealthy firms, both commercial and manufacturing, failed. The GlasgoAv Arms Bank, one of the three oldest in the city, stopped on the 14th March. Three-fourths of the country l^ankers in England were greatly shaken. The Bank of England refused all assistance, in spite of all solicitations made to it, foi* which it is severely blamed by Sir Francis Baring and the Bullion lieport. When the Bank adopted this perverse course, universal failure seemed imminent. Sir Jolm Sinclair remembered the precedent of 1697, when Montague had sustained public credit by an issue of Exchequer bills, and thouglit that a similar plan might be followed in this crisis. Mr. I'itt desired him to propose a scheme for the pur])ose, which he presented on the ] 6th April. A Committcie of tlie House of Commons was immediately a]i]iointed. In the mean- time a director of the Koyal Bank of Scotland came up, with the most alarming news from Scotland. The public banks were wholly unable, with due regard to their own safety, to furnish the accommodation necessary to support commercial houses, and the country bankers. That, imless they received iinmediate assistance from Government, general failure would ensue. Numerous houses, wlio Avere perfectly solvent, must fall, unless they could ol)tain temj)orary relief Mr. Macdowall, M.P. for Glasgow, stated that the commercial houses and manufactories SUSPENSION OF CASH PAYMENTS IN 1797. 315 there Tvere in the greatest distress, from the total destruction of credit. That tlie distress arose from the refusal of tlie Glasgou^, Paisley, and Greenock Banks to discount, as their notes Avere poured in u^^on them for gold. This panic was allayed by the Government consenting to issue small Exchequer bills, anil by the activity of Sir John Sinchiir in getthig money sent doAvni to Glasgow in anticipation of tliese exchequer bills. An idea of the great severity of this crisis may be formed from the uiteresting memoirs of Sir William Forbes, of the history of that house. lie says, p. 80, speaking of deposit receipts : — " In ordinary times, the number paid and granted are pretty much the same. " Amoui] it p: lid above, granted in . December, 1792, £10,670 j> January, 1793, 16,916 » February, )j 11,561 »> March, 5» 52,961 J? April, 55 105,075 to 23rd May, >» 66,541 £263,724 " The diminution on current accounts balances was in propor- tion, that is, nearly as much more." The news of the suspension of cash payments by the Bank of England reached Edinburgh by express on the 1st of March. An immediate run on tlie banks took place. The managers of the i)ublic banks Avaived all etiquette, and met at Sir William Forbes's to consider what was to be done. It was agreed to follow the example of the Bank of England, and suspend all pay- ments in specie. A meeting of the principal inhabitants Mas called by the Lord Provost, and attended by the Lord President of the Court of Session, the Lord Chief Baron of the Exchequer, the Lord Advocate, and the Sheriif of Edinburgh. The meeting came to a imanimous resolution to su])port the credit of the banks, and to receive their notes as specie. This resolution Avas advertised m the i)apers, and expresses sent oft' to the principal tOAAiis in the kingdom to inform them of it. The suspension of cash pajinents gave rise to terrible scenes of confusion and uproar. The doors of the banks Avere besieged by croAvds, clamouring for gold and silver in exchange for notes. The demand for small change by the lower classes Avas most; urgent. They adopted the i)lan of dividing the £1 notes into halves and quarters. Spanish dollars, stamped by the ]\Iint, were issued at 4s. 6d., and (piarter guineas Avere coined. An Act Avas speedily passed, to allow those banks Avhich had been in the habit of issumg notes, to issue 5s. notes for a limited period. The panic was allayed, and confidence quickly returned. The 316 THEORY AND PRACTICE OF BANKING. notes were received as readily as ever, tliough the banks reftised to cash them ; and, Avhat was somewhat remarkable, no attempt was ever made by the people to compel them to pay specie, aud not a single action was brought against them, although they were entirely unprotected by any Act of Parliament, and m a short time business proceeded more prosperously than ever. The next occurrence that we may mention, as it was regarded as a jiolitical event, was the foundation of the Commercial Bank in 1810. This was at the time when the high Tory regime was in its highest and palmiest state, and the banks were alleged to carry their politics into their busmess. The Liberal party then determmed to found an opposition bank, which was named the Commercial, which has attained as great an emmence as any of the older ones in public estimation. Its capital, as yet paid up, is £600,000, which, its directors very recently gave the satis- factory assurance to its shareholders, is perfectly mtact, and in addition to that, it has £400,000 of accumulated profits as a reserve fund. This bank subsequently obtained a charter, but the liability of its shareholders is specially declared unlimited. In 1818, it being found that many foreigners availed them- selves of the privilege of naturalization, by purchasmg stock in the Bank of Scotland, this clause in their original Act Avas repealed. The long and dreadful catalogue of banking failures in Eng- land, chiefly owing to the monopoly of the Bank of England, and which were attributed to the issues of the £l notes of the country bankers, made the Ministry of 1826 desirous to abolish them m Scotland and Ireland, at the same time as they did those of England. But this raised such a ferment in the country, that the Government consented that Connnittees of both Houses should be appointed to inquire into the matter. The result was so eminently favourable to the Scotch banking system, that no further interference was attempted. " AVith respect to Scotland," says the report of the Lords, " it is to be remarked that during the period from 1706 to 1797, when no small notes were by law issuable in England, the i)ortion of the currency of Scotland in Avhich payments under £5 Avere made, contimied to consist almost entirely of notes of £1 and £1 Is., and that no hicon- venience is known to have resulted from this ditl'erence in the currency of the two countries. This circumstance, among others, tends to prove that uniformity, however desirable, is not indispensably necessary. It is also proved, by the evi- dence, and by the documents, that the banks of Scotland, wjiether cliartered or joint stock companies, or jn-ivate establishments, have for more than a century exhibited a stability M-liich the Committee believe to be unexam])led in the history of banking; that they sui)ported themselves from 1797 to 1812, without any protection from the restriction by which peel's banking act of 1845. 317 tlic Bank of Eiif^land, and that of Ireland, were relieved from cash payments; tliat there was little demand for gold durinLT the late embarrassments in the circulation; and that in the whole period of their establisl\ment there are not more than two or three instances of bankruptcy. As during the whole of this period a large portion of tlieir issues consisted almost entirely of notes not exceeding £1, or £l Is., there is the strongest reason for concluding that, as far as respects the Banks of Scotland, the issue of ])aper of that description has l>een found compatible with the highest degree of solidity ; and that there is not, therefore, while they are conducted upon their present system, sufficient ground for proposing any alteration, with the view of adding to a solidity Avhich has so long been sufficiently established." The report of the Commons M'as also adverse to any legislative interference with Scotch banking. No interference with Scotch banking took place till 1845, •when Sir Robert Peel, ha\ing carried his Bank of England Char- ter Act and Joint Stock Banking Act with scarcely a breath of opposition, determined to regulate those of Scotland and Ire- land as well. The princi})al provisions of this Act, Statute 1845, c. 38, are as follows: — I. All persons had been prohibited by the Statute 1844, c. 32, from commencing to issue notes after the 6th May, 1844, in the United Kingdom, and all such persons in Scotland as were law- fully issuing their notes between the 6th May, 1844, and the 1st May, 1845, were to certify to the Commissioners of Stamps and Taxes, tire name of the firm and the places Mdiere they issued such notes. II. Tlie Commissioners were to ascertain the average number of such bankers' notes in circulation during the year preceding the 1st May, 1845. - III. Such bankers were mithorized to have in circulation an amount of notes, whose average lor four weeks was not to exceed the amount thus certified by the Commissioners, together with an amount equal to the average amount of coin held by the banker during the same four weeks. Of the coin three-fourths must be gold, and one-fourth silver. IV. In case the bank exceeds the legal amount, it is to forfeit the excess. V. If two or more banks unite, they nve authorized to have an issue of paper to the aggregate amount of issues of the separate banks, as well as the amount of the coin held by the united bank. VI. Notes of the Bank of England not to be legal tender in Scotland. The reader will see that there are some striking points of difference between the restraints laid ujion the English and Scotch banks, for, while the former are bound doAvn to an abso- 318 THEORY AND PRACTICE OF BANKING. lute fixed limit of issue, the latter are permitted to issue to any amount, j^rovided tliey hold an equal amount of coin above their authorized amount. Moreover, if any number of banks miite, they may have an aggregate authorized issue, equal to that of the separate banks ; but in England, if the number of partners of the united bank exceeds six, they forfeit their power of issuing notes altogether. This absurd restriction as to the number of partners in a bank never having had any force in Scotland. The year 1857 was remarkable for a calamity, to which there had been no jirecedent except the Ayr Bank, namely, the suspen- sion of two very large joint stock banks, the Western Bank and the City of Glasgow Bank. The latter, indeed, has resumed business, and, on an investigation of its affairs, it appeared that, out of a capital of above £800,000, it had lost about £70,000 ; having thus a very large paid-up capital intact, it resumed business, and, we may hope that after having received this severe lesson, its business will be conducted on better prin- ciples in future. But the Western Bank was found to have lost not only the whole of its paid-up capital, £1,500,000, but nearly as m\ich more besides. This bank was founded in 1832, so that, in the course of twenty-four years, it lost £3,000,000 of money. The A)^- Bank, in two years and a half, lost £400,000, so that, of tlie two, the latter is pro]iortion- ably the more severe calamity. The failure of the Western Bank, however, has called forth the most bitter attacks upon the general system of Scotch banking, which we shall find to be to- tally unmerited, because it is clearly proved, in the evidence taken before the Committee of the House of Commons in 1858, that during the icJiole course of its career^ it pursued a system which was diametrically opposed to the usual course of the other Scotch hanJcs. The Western Bank began business in 1832, and in the next year had a jjaid up cajntal of £209,170, which was increased year by year, till, in 1849, it amounted to £1,792,850, at wliich it continued till 1852, Avhen a number of shares having fallen into the bank's hands by bankrui)tcy and insolvency, they Avere written off against the ca])ital, Avhich Mas thus reduced to £1,500,000, at which it contiinied till the closing of the bank. The mode of business adopted by this bank, from tlie beginning, was not according to the usual ]»lan of Scotch banking, for Avhile, as ex])lain('d by the witnesses before the Committee of 1858, one very imjtortant feature of it is to keep very large reserves in London, either at their bankers, or in Government securities, the Western Bank invested its means chiefly in local accommoda- tion, and kept very insufficient reserves in London, so much so that, in 1834, its London agents, Messrs. Loyd & Co., dishonored its drafts. It appears that upon this, the other Scotch banks refused its notes, and remonstrated with it for its mismanage- THE WESTERN BANK. 319 ment. On the 30th October, 1833, the directors, in answer to these remonstrances, notified to the otlier banks that they had resolved to invest, in marketable secnrities, a sum amply suffi- cient to prevent such a thiuii; happeninGj again. They promised to commence the necessary o]K>rations in the following January, and complete them hi April, if not earlier. They also engaged to lessen their discounts, and to contiime to do so, in order to have sufficient funds at its command. Upon this promise of better conduct in future, the three chartered banks advanced the Western Bank £100,000 to enable them to purchase these se- curities forthwith. But the Western directors very soon broke their engagement, and reverted to their former mode of business. In 1838 they applied to the ]>oard of Trade for a grant of letters patent, when a number of the other Scotch banks presented a joint memorial against it. They said that they should be want- ing in their duty to the public, as well as their ovm constituents, if they sanctioned, by their silence, such an application : — " The fact is Avell known to you, that while there have occurred, during the ])ast fifty years, periodical convulsions among the banks in England, Avhich have led to the failure of several hundreds, Scotland has, for the most part, maintained a state of general tranquillity, and there have, in the same time, occurred only three or four lailures, and those of a very minor character. The cause of this is notoriously owing, first, to the large capital em- ployed in the Scotch banks, and second, to the system of admin- isti-ation adopted. Capital alone, as has been recently experienced in England, by extending the scale of operations, may only in- crease the mischief. In the like manner, a numerous ])roprietary, constituting a pi-otection to the public against eventual loss, may, by adding to the credit, add to the power of such an institution for evil. The safeguard of the Scotch system has been the uniform practice adoi)ted of retaining a large portion of the capital and deposits invested in Government securities, ca]iable of being converted into money, at all times, and under all cir- cumstances. This requires a sacrifice, because the rate of interest is small, and, in times of difficulty, the sale involves a loss, but it has given the Scotch banks absolute security, and enabled them to pass unhurt through periods of great discredit. " It is not then unreasonable that the managers of the Scotch banks should look ^A-ith favour on a system which, notwithstand- ing their close connection with England, has exempted them from these calamities, and, in the doubt that exists on banking theories elsewhere, it is at this moment sufficient to say that the system established in Scotland has Avorked well, and ought not to be disturbed there. "The Western Bank was established in the year 183 2, and the principle on which it has avowedly acted has been to employ as much as possible of its capital and assets in discounts and 320 THEORY AND PRACTICE OF BANKING. loans, retaining only the cash necessary to meet its current engagements. "As this is a more profitable investment than Government securities, there is always a strong temptation to speculative or inexperienced persons to adopt this course, and if the conse- quences were to aiFect themselves alone, it would be of small moment, but, unfortunately, in banking, this camiot be. The whole system depends upon credit, and the failure of an ill-regu- lated establishment, affects those differently constituted. Such a body, in prosperous times, boldly extends its business, and, from seeing the readiness with which in such seasons commercial paper is discounted, comes to the conclusion, that it is the best and most convertible description of investment that could be foxmd. " Prudent banks, knowing the delusive nature of this expecta- tion, are compelled to increase their own reserve to meet the consequences of this unwise expansion ; and, when the difficulty comes, they must either assist their rival to i)revent an explosion, or must make a heavy sacrifice by selling their securities at a loss. " The Western Bank, acting on this principle, allowed their London transactions to assume such an irregular shape, that their London agents, the respectable house of Jones, Loyd, and Co., took alarm, and in 1834 dishonored their drafts. The Bank of Scotland, Royal Bank, and British Linen Company were compelled to come to their assistance, and made them con- siderable advances. These circumstances occurring in a time when the Money Market was pei'fectly tranquil, shewed the extreme danger of the practice. The Edinburgh laanks insisted on a better system of management being adopted, and that the Western Bank should have invested in Government securi- ties a sum am])ly sufficient to meet emergencies. The Directors, after much discussion, at length, by a resolution dated 30th October, 1834, distinctly assented to tlie requisition, but, as they had so engaged the assets of tlie Bank, as to render it impossible immediately to procure the funds, the Edinl>urgh banks lent them £100,000 for the purpose. For some time the Western Banhmay have acted on this agreement, but the tempta- tion of profit appears to have (jot the better of their prudence, and they now rejmdiate their engagement. " It will be quite apparent that a bank that can employ its whole funds in this manner, is enabled either to divide a larger share of profits than its competitors, or to do business on more favour- able terms; and Ave re]»eat, that if the only consequence of this was to increase or diminish tlie dividends of tlie rival establish- ments, it would be of comi)aratively small inqiortance, but in its result it endangers the existence of every bank in the country, and llic forluncs of a large portion of the commimity. We feel FAILURE OF THE WESTERN BANK IN 1857. 321 that, if letters patent shall be granted to this bank, after what lias passed, it loill be apuhUc sanction and countenance of a nein and inischievous 2^')'incl2)lc, o2')2^osed to the Jjanking system of Scotland. " The question is not, in this instance, whether Government will interpose new restraints on banking companies, butjkvhether they will encourage a violation of the old system, by granting distinction and ])rivileges to a company which, having pledged itself to their observance, now disowns them in its practice, and under these circumstances ajiplies for a charter." This memorial was signed by the Bank of Scotland, tlie British Linen Company, the Commercial and National Banks; and the Charter, if applied for, never was granted. This system of keeping such small reserves in London pro- duced the consequence foreseen in the preceding memorial. In 1847 the Western Bank was in difficulties, and received assistance from the Bank of England to the amount of £300,000 in November and December, 1847, Avhich it repaid m March, 1848. From this time forward till 1852, when a change in the management took place, a rather more cautious course was pursued, but they did what we believe to be totally conti-ary to the usual practice of the otlier Scotch banks — they rediscounted. Tiie following figures shew the amounts of discounts and redis- counts from "l 84 7 to 1852 : — Discounts. Eediscoiints. In 1847 £15,711,438 £656,077 „ 1848 12,088,643 374,707 ,,1849 10,522,022 249,957 ,,1850 12,048,669 290,813 „ 1851 13,322,753 588,247 ,,1852 13,525,332 407,143 At this time the Bank had £356,000 of overdue bills, besides other very heavy locks-up of capital, in one case amounting to £120,000, which was covered Avith insurances on the lives of the obligants, on which it had paid £33,512 as premiums Avhen it stoj^ped. " But even at this time," says Mr. Fleming, " it had a cluster of those people who had manufactured accommodation bills, doing busmess with them." So that in this year, he says, the Bank was not in a satislactory state. In 1852 a new management commenced, and to shew hoAV the practice of rediscounting increased, we give the following figures : Discounted. Rediscounted. In 1853 £14,987,740 £1,682,320 ,,1854 1 8,596,704 3,856,292 ,,1855 19,835,781 4,969,669 „ 1856 20,410,884 5,407,063 „ 1857 till Nov. 9 20,691,415 4,881,221 322 THEORY AND PRACTICE OF BANKING. Thus we see the enormous increase of this most perilous practice during these years, a practice which places the existence of any institution that depends upon it to any great extent, at any moment at the mercy of the will, the caprice, or any acci- dent that may happen to the purchasers of its bills. But •this was by no means the only instance of reckless management. Over and above all the other embarrassments, there were four accounts particularly to which the subsequent calamity was due ; we will shew the state of these accounts in 1852 and 1857— 1852. Macdonald & Co Menteith & Co Wallace & Co Pattison & Co Discounts. Ovei-drawn Account. £ £ 107,116 .... — 83,779 3,523 18,144 .... — 89,678 . 1,154 £188,717 £4,677 ^ Shewing that these four firms were under obligations to the Bank in 1852 to the amount of £193,394. The following was the state of the same accounts in 1857 : — Macdonald . . Discounts. £ 408,716 Overdra^-n Account. £ 5,636 Overdue. BiUs. £ 8,526 Menteith 376,799 67,635 93,129 Wallace 227,464 — — Pattison 336,996 67,253 11,571 £1,349,975 £135,524 £113,226 Being a sum total of £1,603,725 to these four houses alone, when they failed. And, to shew the character of the bills discounted for these firms, of £402,716 bills of Macdonald's current at the time of tlieir failure, £398,349 Avere dishcmoured at maturity; of Menteith's, £376,699 current at their failure, £269,726 were dis- honoured at maturity; of AVallace's, of £226,741 current there were dishonoured £209,534 ; and of Pattison's, of £336,996 current, there were dishonoured £150,749. Soon after the general meeting of June, 1857, the directors requested anollier person to examine the Bank's books, who, after doing so, and allowing all tlie current business of the bank to be good, including the above four firms, found that bad debts to the amount of £573,000 were kept on the books as good, which, after deducting the rest and guarantee fund, amounting to £246,000, made" a loss of £327,000 in the capital of the bank, and the advances to the shareholders, holding 7,626 FAILURE OF THE WESTERN BANK IN 1857. 323 shares in the bank, amounted to £988,487. In the montli of September, 1857, Mr, Fleminpf, llie person whom the directors had requested to assume the temporary management of the Bank, began seriously to inquire into the nature of these immense accounts, and on tlie 7th, the WaUaces acknowledged that they Avere dealing in accommodation l)ills, and he saw that the Macdonalds must be (h)ing the same thing, as the two houses were drawing on the same names. It was found that the ]\Iacdonalds drew upon the 124 accei)tors, only 37 of whom had been inquired about, and of these, reports on 21 Avere extremely bad. But there were 60 or 70 persons whom they drew upon, who made it a regular trade to accept bills for small commission ; in fact, it appeared that they engaged a man in London to procure them accommodation acceptances. As soon as the true nature of these accounts was ascertained, there was no resource but to stop them. The failures of Menteith and Macdonalds, which were the first that became notorious, created a panic on the Stock Exchange on the 10th October, and the price of stock rapidly fell, it being commonly reported that the whole capital of the bank had been engaged in enabling these parties to carry on their bushiess for a series of years. These rumours created a run on the bank, to a sliglit extent, on the following Tuesday, which continued for two or three days, and during that week, ending the 17th of October, the bank paid away about £36,000 in coin, but this was the only run for gold of any amount on the bank, for during the following week it only paid away £4,000, and in the week after that about £2,000, and the whole paid away in coin, between the 10th of October and the 7th November, the Saturday before it stopped, Avas only £44,000. But, during this period, the total deposits demanded Avere £1,280,000, and, except the sum aboA'e mentioned as paid in coin, the whole of these deposits xoere paid in the banJc's own notes, tchich were immediately taken and lodged in the other banks. This dreadful catastrophe deserA-es to be minutely detailed, because it is strenuously asserted by a very influential party, that the small note circulation of Scotland tends to increase a panic among its holders. But in this case, the bank's notes in circulation did not in any way increase the panic. Mr. Fleming says : " I may say that there Avas no nm for the payment of notes all through. There may have been a fcAV notes presented, but I should certainly limit the demand for gold in exchange for notes to £5,000 or £6,000. I do not think it Avould exceed that. Mr. Wilson: In point of fact, the whole pressure upon the bank at any time Avas in respect to its deposits, and not in respect to its circulation ? — JJecidedli/, there teas no pressure in respect to its circulation; so much so, that durmg the last two days for which the bank was in operation, I do not think £1,000 Avas paid away in gold at the head office. The whole 324 THEORY AND PRACTICE OF BANKING. money withdrawn was taken away in notes, and the consequence was that on the afternoon of the 9 th of November, when the bank stopped, there was a very large amount of notes in circula- tion, something about £720,000. Then the depositors became uneasy about tlie security of their deposits, went to the bank, and took the bank's notes ? — Yes. Did they pay them imme- diately into other banks ? — Yes. * * * * "Was there much drain in the provinces upon the balances ? — Not a very large amount, certainly; a wonderfully small amount, in proportion to the total deposits, was withdrawn from the country. — I think you said that at the branches there was veiy little demand for gold ; almost none ? — Almost none.'''' At the same time, a very heavy blow fell upon them from another quarter. The bank, instead of keeping its funds well in hand in London, engaged in exchange operations with America. They had an agent in New York, though, perhaps, not openly and avowedly in that cliaracter, who granted letters of credit upon them, in flivour of persons who wished to raise money, such parties arranging with the agent, the securities to be lodged to meet the bank's acceptances. These credits were not by any means always paid at maturity, but were renewed to a large extent. By this operation, a very considerable portion of the bank's funds was locked up in America, instead of being in London as they ought to have been. At the time of its suspen- sion, its acceptances current, and its obligations to accept, amounted to £317,000, in two months' bills, Avhich, multiplied by six, gives the amount of the year's transactions. The amount of funds locked up in America by their agent there, appears to have been £376,520, against Mdiicli he held railway bonds and current bills. IVLr. Fleming said, Q.bblO: — "It appears to me in many cases, the credits established by Lee upon the Western Bank, have been modes of raising money for the purpose of con- structing American Kailways, and for speculation in stocks, in New York." "The two banks, i.e., the Western and the City of Glasgow," said Mr. Robertson, the cashier of tlie Ivoyal Bank, " were in the habit of acce])ting four months' inland bills drawn from London, Liverpool, and Glasgow, in respect of these credits, wJiich vKis quite condemned by the Hank of England., and all the other hanks in Scotland.'''' The genei-al stoppage and failure of American credit at this time, rendered the expectations of any remittances hopeless from there. And I\Ir. Fleming, Avho undertook the duty of manager on the 15th October, told the directors it was absohitcly essential to make provision for a contingent drain upon (lie (lei)osit money, and also for the American acceptances becoming due. On the 17th October, the directors resolved to apj)ly to the Bank of Scotland. On the 21st, a written application was made to that bank ior assistance, and on the 23rd a meeting having been held FAFLURE OF THE WESTERN BANK IN 1857. i)2o of all the Edinburgh banks, they declined to assist, until applica- tion had been made to the Bank of England. This application was refused. This refusal being telegraphed down to Edinburgh, a meeting of the banks was held the same evening, and they agreed to advance £500,000, on condition that the directors should dis- solve and wind up the concern. After some days' negociation, the Edinburgh banks agreed to forego the comj)ulsory winding up, as the directors of the Western said that they had no power to do so, and advanced the money without tliis condition. Tiiis sum was accordingly advanced on the 29th October, on the promissory notes of the Western Bank, at six months' date, for £510,000, the terms being that the Western Bank should be bound to replace the Edinburgh banks in Consols, at the price of the day. In addition to the loan so obtained from the Edin- burgh banks, the Clydesdale Bank advanced £100,000 on a note of the bank's at six months, with the individual guarantee of the directors, which was discounted at the current rate of 8 per cent. The ^\-ithdrawal of the deposits from the bank, which was almost entirely among the small depositors, had greatly abated, and, whatever might have been the ultimate result, which might have been necessitated in consequence of the examination of the bank's atfairs that Avas then in ])rogress, there was no immediate danger of a catastrophe ; when, on the 29th October, the City article of the Times announced that the Edinburgh banks had resolved to carry the Western Bank through their ditliculties, on condition that they should wind up. The Times reached Scotland on the morning of the 30th, and immediately a fresh pressure commenced on the bank. But this time it was of a different character from the previous one. The first pressure had been among the small depositors, the second consisted of the traders who kept large accounts, Avho, seeing that the Western Bank was going to close, made haste to transler their balances to the other banks and open accounts with them, and it was this pressure which conthuied and made the Bank close its doors on the 9th November, not from a demcrndfor gold, but because the balances of these accounts being withdrawn in the bank's notes, and paid into other banks, the Western Bank was finable to provide for the lyurchase of Exchequer bills from the other banks, to rectify this balance by a draft on London. To shew how mischievous this publication of the terms pro- posed was, we quote from Mr. Fleming's letter to the Bank of Scotland of 31st October, 1857: — " The aiijjlication made a fort- night ago by the Directors of this Bank to the other Scotch banks, for a credit to the extent of £500,000, was based on my calculation that £350,000 or £400,000 would keep our London finance in perfect order, and that the remainder would be a sufficient reserve to meet any probable Avithdrawal of deposits. 326 THEORY AND PRACTICE OF BANKING. This calculation, I still believe, would have proved correct, had the assistance required been c/iven -promptly^ quietly, and free from any condition as to loinding tijy. " But the demands made upon us have considerably exceeded my calculation, from two causes ; first, the notoriety of our financial eml^arrassment, created by the delay in acceding to our application, and the course which tlie ncgociations took from our having been referred to the Bank of England ; and second, the condition as to winding up, which the other banks sought to impose, and the publicity given by the Times to this condition. " It is not easy to say in figures to what extent these causes have respectively operated in inducing withdrawals, or to esti- mate to what extent they may still operate. But as to the past, my own observation here, and the reports from our branch agents, all convince me that the second has been immeasurably more mischievous than the first. Deposits on receipts have beeti withdraicn to a very limited extent indeed, hut balances on cur- rent accounts kept by the trading community have been removed to other banks to a considerable extent. The reason is natural and obvious. If this Bank is to Avind up, traders know that we cannot give them accommodation, and they take the earliest opportunity of arranging for that accommodation elsewhere, and withdraw their balances. " I am hopeful that the mischief already done is not irre- parable. That we retain still a measure of public confidence, is proved by the fact that no fixed deposits of any large amount have been withdravm, and nothing like a run has taken p>lace, and gold has scarcely ever been demanded. " I have already said that there has been no demand made upon us for gold, all sums loithdrawn having been taken in our 01071 notes, and, consequently, the other banks have got the deposits.''^ The Western Bank then asked a further loan from the Edin- burg banks, which, having been discussed for some days, Avas Tinanimously refused. On Saturday, the 7th November, there was, from the heavy withdi-awals of dejiosits in the Jiank's notes, and their lodgment with the other banks, a heavy adverse balance on the exchange of that day. Tlie Edinburgh baid})orted by the mis- management of the Western Bank. There Avas but one house of any magnitude connected Avith Glasgow Avhich susi)ended payment during this ])eri()d, Deimistoun tfc Co., Avho Avere more a Liverpool ami London house than a GlasgoAV one, and Avliose temporary slopjiage Avas brought about by other causes. But this calamity has been seized hold of by persons Avho are hostile to the Scotch system of banking in general, and also to the £1 note cun-ency of Scotland, to condemn them. ]5ut, Avhen we come to investigate the true facts, we shall find that they lend no su])i)ort to tliese charges. For, Avith respect to the first, it is distinclly ])r()ved Ijy tlie most unanswerable evidence, that from the commencement to the close of its career, the Western Bank pursued a system of business tliat Avas totally opjiosed to the well-recognized system of Scotch banking, and unanimously con- FAILURE OF THE WESTERN BANK IN 1857. 329 demnecl by all the well-conducted banks. That, during its ■whole course, it was a subject of terror and alarm to tlie other banks. That its locking up its funds in America was totally condemned by the Bank of P^ngland, and all the other Scotch banks. And the Directors themselves, when, however, it was too late, acknowledged their own misconduct, for, in their first appli- cation for assistance to the Bank of Scotland, on the 2 1 st October, 1857, the Directors say: "On the part of the board of direction, it is right that ice should franJdy say, that they are fully alive to the recJdessness of the past management of the Bank; that its credit has been strained to the extreme point ; and that, in the attempt to make large profits for the proprietary, unwise and undue risks have been run. Feeling all this, the Directors have entered on a course of management, which (although the pre- sent commercial crisis renders curtailment difficult of speedy accomiDlishment) will eventuate in the establishment, on a secure basis, of a business of a safer and a more legitimate^ though certainly of a m,ore limited description, than has for many years been conducted by the Western Bank of Scotland^ Habemus ipsos confitentes reos. The Directors themselves acknowledged that their course of business was not in accord- ance with the usual Scotch banking system. What possible reflection, then, can it be on the recognised sj^stcm that a bank, which went right in the teeth of it, failed ? The very same remarks apply, only, of course, in a lesser degree, to the City of Glasgow Bank. This bank, too, was guilty of speculating in America, instead of keeping its reserves in London ; and it, too, paid the penalty by a temporary suspension. The second charge, too, is equally groundless against the small note circulation. For it is said that these small notes aggravate a panic, and that a j^anic is most likely to commence amongst their holders. But, in this case, the evidence most decisively negatives the supposition that any part of the panic was due to the small notes, and not only that, but it decisively proves that the demand for gold was greatly lessened on account of the notes. Mr. Fleming says, Q. 5532: " I may say there was no run for pajauents of notes all through. There may have been a few notes presented, but I should certainly liniit the demand for gold in exchange for notes to £5,000 or £6,000. I do not think it would exceed that. Mr. Wilson : In point of fact, the whole pressure on the Bank at any time was in respect to its deposits, and not in respect to its circulation? — Decidedly; there loas no pressure in respect to its circulation / so mucli so, that during the last two days for Avhich the bank was in operation, I do not tliink £1,000 was paid away in gold at the head office. The whole money withdrawn was taken away in notes, and the consequence was, that on the afternoon of the 9th November, Avhen the Bank stopped, there was a very large amount of notes in 330 THEORY AND PRACTICE OF BANKING. circulation, something about £720,000. 3Ir. Wilsoyi: Then the depositors became uneasy about the security of their deposits, went to the Bank, and took the Bank's notes? — Yes. 3L\ Wilson: Did they pay them immediately into other banks ? — Yes, 3Ir. Wilson : They thereby indirectly ob- tained payment through the other banks ? — Precisely so ; they transferred their deposits from one bank to the other. 3Ir. Wilson : Did many of the depositors demand gold ? — Almost none; during the week, after the 10th October, there was a slight demand for gold, and in the country, I believe, there was a very slight demand for gold." Mr. Fleming then gave the figures, shewing that the total demand for gold during the whole month, from the 10th October to the 9th November, was only £44,000, of which more than £6,000 was in exchange for notes, but the total demand for deposits and balances on account was £1,280,000 ; from which it follows, of course, that the total pressure on the bank was this : — For gold in exchange for notes £6,000 For deposits taken in gold 38,000 For deposits and balances taken in Bank's notes 1,236,000 £1,280,000 Now, if the Bank had not issued notes, how would this las1> item have been demanded ? Of course, in gold. So that it is quite clear that the power of the Bank to issue notes saved and lessened the demand for gold to that extent. And we have already shewn that it was not any run for gold which made the Bank stop, but its inability to provide for payment of the adverse balance of exchange. But it may be said — See what followed the next morning. There was undoubtedly a run lor gold next morning on some of the other banks. J3ut then there would have been the very same run if there had been no 7iotes at all. And that very run was greatly aggravated, if, indeed, it was not chiefly due to the most unfortunate decision of the other banks to refuse the Western Bank's notes. As soon as the other banks agreed to take the Western'' s notes, the jmnic immediately sub- sided, eve)i though a second ba^ik stopped the same morning. Now, what is the elfect we might natuially have expected from a second l)ank's stojiping in the midst of a panic? Clearly that that panic Avould have been greatly intensified. But in this case it was not so. The City Bank did not open on the Wednesday morning, and yet the whole panic was over by two o'clock that day. The wliole demand on the Royal Bank for gold did not exceed £1,000. Now, without prejudging the question in any way, whether FAILUKE OF THE WESTERN BANK IN 1857. 331 the Scotch £l notes should be suppressed, there is no dis- passionate man who can, after reading the details of this crisis, come to the conclusion that they had anything whatever to do with this pajiic. The great wonder is, that after the unprece- dented circumstance of two great banks sto])ping payment, the panic was so short, and so slight as it Avas, Does any man who knows London think that, if a similar case had lia])])ened there, the consequences would have been so comparatively trifling? The two London banks of most nearly equal magnitude with the Glasgow ones that stoi)ped, are the Union and the London and County. Let us imagine tliat the L^nion Bank of London was to stop payment, and two days after the London and County. Does any man who knows London suppose that in such a case the panic would be limited to one day and a half? No man in his senses would think so. Nor can there, we think, be any reasonable doubt that the refusal of the Edinburgh banks to take the notes of the Western Bank was a most unfortunate one. When the Ayr Bank failed, all the other banks immediately gave notice that they would take its notes at par, because they knew very well that its proprietors were perfectly well able to discharge all the claims upon them. It was perfectly well known that the proprietors of the Western Bank Avere worth many millions of money, and that there was no possible danger of any ultimate loss. Yet the banks on this occasion decided to refuse their notes, Avhich decision they were afterwards obliged to rescind. And this is a very good proof that it was wrong from the first; and immediately that the notes were taken the panic ceased. In the years of the great speculations in railways, numbers of persons wished to carry on the game of speculation by buying shares, and then raising money upon them from bankers. The old banks prudently declined this sort of business, and a number of banks were got up, principally for this business — if, indeed, it can be called busuiess at all — as it Avas, in fact, pure gambling. After a short time, the railway shares went down as fast as they had risen, and all these banks, which Avere called Exchange Banks, Avere ruined, some of them imder the most disastrous circumstances. We have said that one of the principal features of the Scotch banking system is to have a small number of Acry large banks, with a great nuuTber of branches to each. To shew hoAV the system has a natural tendency to become concentrated among a fcAV great establishments, Ave may comjiai'e the existing number of separate institutions, at different periods. In 182G, there Avere 32 independent banks, of Avhich 13 had less than 10 partners, 10 had less than 100, and the remaining 9 had more than 100. Fourteen of these had no branches, 17 had not more branches than 5, and the highest number that any bank had was 30, which 332 THEORY AND PRACTICE OF BANKING. ■was the Commercial Bank. The total number of offices was 159. In 1848, there were 391 branches; in 1855, there were 462 branches, and 17 principal offices; in 1857, there Avere the same number of head offices, with 666 branches; and in 1859, there are 14 separate banks — one, the Union, having 4 head offices — and 597 branches, making, altogether, 615 offices. The following table exhibits the banks at present existing in Scotland : — I PRESENT POSITION OF SCOTCH BANKS. 333 « OH CD O "i- (M CO (M CO I-H ■^ o 't CO OS O fl CO t- lO f^ i- o CO CO CO Oi I-H ^ 2 r-* M '^ »o »o CO o IC 00 00 iC o o Oi e^ iO i- lO 00 i^ o ■^ I-H (M OJ CO o -^ 1 s O GO ^ CO 1— 1 C5^ CO*" crT 1-^ 00 I-H co^ co^ CO*" 05 05 CO Oi lO 00 »o CO 00 00 UO CO CO c^ c< CO IC Ir- ^ I-H o >>*< CO OS (N CO bc-n in i^ 1— 1 » CO CO IC o '^ o -+ CO CO Ci 1-H 1— 1 ^ CO N -S 00 o r Aut Cii-c o 00 CO i> 05 lO i> »o i~- x> o ^ CO I— ( M* CO > ' ■ • M r^ ■ • • • o s rt 1^ ' • a ' ■ ' M w ■ ci ■ ■ B M ts M i 1 . o ,^ ■ +3 o . 8 Ct-I o rt o '3. a o o o CO o o 02 >> Cm o PQ _C3 'S o lies had been voted, but an invasion was imminent, and he was driven to devise expedients for raising money. He opened a voluntary loan, and in less than three weeks £300,000 were paid into the Exchequer, chiefly by the Catholics, But this was quite inadequate to his necessities, and he resorted to other more discreditable means of raising money. He bought up an immense quantity of pepper from the merchants on credit, and immediately sold it at a hea\y loss for ready money. It was debated for several days at his council to coin £300,000 of base money, Avith 3d. of silver in the shilling, but the plan was finally rejected o-wing to the speech of Sir Thomas Howe, a noble argument, which might have been studied with advantage nearly two centuries later. Besides this, the King seized the merchants' bullion and cash in the Tower, to the amount of £120,000. 5. The merchants were in consternation, as this cash was the provision they had made to meet their bills. They immediately met, and drew up and presented the strongest remonstrance to the Council. They pointed out the flagrant iniquity and im- policy of such a proceeding, and after the matter had been debated a whole day at the Council, they finally agreed to let the King have £40,000, upon receiving adequate security for its repayment with interest. The security was given, and the whole of the jirineijial and interest Avas ultimately repaid to them. But, although they had succeeded in this instance in saving their property, the prestige of the Royal honor was gone, they were too wise to trust their money again to such precarious custody, and they wei'e obliged to keep it at home under the care of their own clerks and apprentices. 6. But their treasures were no safer than before. The plebeian cashiers were more dishonest than the King. In process of time, as the war went on, these gentlemen of the quill were seized with a martial ardour; they deserted their desks in multitudes to join the army, and carried ofi" with them their masters' cash. Others lent out their masters' money clandestinely to the gold- smiths at interest at 4d. per cent, per diem, which they kept to themselves. The goldsmiths, as might be expected from their business, had acuter perceptions with respect to the value of the bullion in the coin than the public generally. The money coined during the commotions was of very unequal weight, sometimes as much as 3d. diflerence in the ounce, and most of it heavier z 2 340 THEORY AND PRACTICE OF BANKING. than it ought to have been, according to tlie relative vahie of the metals abroad. The goldsmiths did, what always will be done under such circumstances, they bought iip all the heaviest coins, and melted them for exportation. Moreover, tliey began to lend out at interest the money that thus came into their hands. They advanced great quantities of money to merchants, and others, weekly or monthly, at liigh interest, and began to discount their bills. Findmg this to be very profitable, they began to attract deposits to themselves, by offering interest for them, and allow- ing the depositors to have repayment whenever they pleased. People fomid it much more convenient to leave their money with the goldsmiths, where they could have it whenever they pleased, as well as their interest, than to lend it out on real or personal security. They soon received the rents of all the gentlemen's estates, which Avere transmitted to towu. Five or six stood pre- eminent above their brethren, and Clarendon says that they were men known to be so rich and of so good reputation, that all the money of the kmgdom would be trusted or deposited in their hands. And they then first came to he called Bankers. 7. Their command of ready money soon brought them a much higher customer than the merchants. Notwithstanding the fame and the strength of the Protector's Government, and his un- questionable sincerity in wishing to govern with free parlia- ments, he and they were unable to agree any better than his Royal predecessor had done with them. They were jealous of his power, and kept liim in a constant state of financial embar- rassment. He then applied to the "Bankers" and they advanced him money in anticipation of the supplies. They thus became almost necessary to the Government. 8. The position the bankers had gained under the frugal government of Cromwell Avas not lost imder that of his dissolute successor. The first care of the restored Monarch was to disband the terrible ]Jepul)li(;an armies. But they required to be paid off, and some liundrcds of tliousands of pounds were required to be got togetlicr in a few days. The slow receijits of the taxes were quite inadequate to effect this, and the Muiisters were com- pelled to have recoui-se to the bankers, and they were so Avell satisfied at their pi'oceedings that they declared the King's affairs could not be carried on without their assistance. n. Their method of doing business with the Crown was as follows. As KOf)n as the supplies were granted, tliey were sent for to attend the King. He, liaving consulted his IMinisters as to what immediate sums were required, desired them to be called in, and they were then informed what ready money would require to be ])rovided by such a day. They Avere then asked RISE OF BANKING IN ENGLAND. 341 how mucli they could lend, and what security they would require. Each answered according to his several ability, for there Avas no joint stock among them, one perhaps £100,000, another more, another less. They were desirous of ha\ing 8 j)er cent, for their money, which the King and his Ministers were quite ready to give, as a reasonable remuneration ; but, upon fur- ther consideration, they determined to leave it to the King's own bounty, lest it might afterwards be turned to their disadvantage, mentioning, at the same time, that they themselves paid 6 per cent, for it to their customers, which Avas known to be true. 10. They then received an assignment for the payment of the first money that came in under the Act of Parliament, or tallies upon such other branches of the i-evenue as Avere least charged. But even this was no security, as the King and treasurer nught divert these jiayments to other jjurposes. " Therefore," says Clarendon, " there Avas nothing surer than that it was nothing but the unquestionable confidence in the King's justice and the treasurer's honor and integrity, Avhich Avas the true foundation of that credit Avhieh suj)plied the necessities of the Government. The King ahvays treated them very graciously as his very good servants, and all his ministers looked ui)on them as A'ery honest men." We shall soon see hoAV their confidence in the King's honour was repaid. 11. It belongs to the general historian to relate the terrible doAvnfall of England's greatness in eight years from the death of CroniAvell. The year 166V may be considered as the nadir of the national humiliation. For the first, and, Ave may devoutly trust Avith Macaulay, for the last time, the citizens of London heard the sound of hostile cannon. With extraordinary infatu- ation the Government rushed into a war with Holland, Avhose capital had illuminated Avhen the ncAvs arrived of the death of their terrible antagonist, CroniAvell, and little boys ran about the streets, crying that the devil Avas dead. NotAA-ithstamling the unexampled magnitude of the supplies voted by Parliament, they Avere all embezzled by the courtiers, Avho made fortunes while the sailors mutinied for Avant of pay, and the shi])s Avere unseaAvorthy. The Dutch destroyed Sheerness and Chatham, burned the ships lying there, and uisulted Tilbury. 12. Nothing could be more disgraceful and humiliating than the misconduct AAdiich led to this disaster, but the Avild desj>air, and ridiculous consternation, that took possession of the people of London Avhen they heard of it. The King alone, avIio never Avanted personal courage, and the Duke of York, ke)>t tluir composure, and put to shame the cOAvardice of a general officer, Avho thought himself one of the greatest soldiers in Eurojie, 342 THEORY AND PRACTICE OF BANKING. who declared the Tower not to be tenable, and refused to defend it. Every one, in consternation, rushed to demand his money from the bankers. It was known that they had lent it to the King, and the people believed tliat the regular payments out of the Exchequer could not be made. To quiet the public alarm, the King, on the 18th June, issued a proclamation to say that the payments of the Exchequer would continue as usual, and stating that it was his steadfast resolution to preserve inviolable to all his creditors all the securities and assignments made for repay- ment of their advances ; that he would not upon any occasion whatever permit any alteration or interruption of these securities. He moreover said that he held this resolution firm and sacred in all future assignments and securities to be granted by him upon any other advance of money for his service, by any persons on any future occasion. 13. The insults and ravages of the Dutch were annoying and disagreeable, but they were inflicted by a brave enemy. Charles II., and his Ministers, plunged the nation into depths of disgrace a thousand times more humiliating. He sold himself, bis country, her honour and greatness to the King of France, and. for 20 years England suftered an eclipse in European politics. The public indignation at the ravages of the Dutch, demanded a scajiegoat, and it was appeased by the ruin of Clarendon. Soon afterwards the King astonished and delighted the nation by entering into the Triple Alliance with the very people he had so lately been at war with, and Sweden. It was ostensibly to curb the overweening ascendency of France, and to maintain the Protestant religion. While thus reaping ]jopularity at home and res]3ect abroad for this miAvonted display of firmness and magnanimity, which revived the memory of Cromwell, the infamous traitor signed a secret treaty with Louis binding him- self to re-establish the Roman Catholic religion in England, to unite with him, and destroy the very people with whom he was so ostentatiously in alliance. Bud as the Cabal ^Ministry were, the indelible infamy of this transaction was [leculiarly personal to the King. Jle himself went to Dover to negotiate it; it was he who suggested the most disgraceful articles, and, abandoned as the Ministry were, he thought only two of them sufliciently wicked to V)e entrusted with their knowledge. The treaty was signed in May, lOVO, 14. It was impossible to prevent some hints of what was going on reaching Holland. DeWitt and the States took alarm at the recall of Teinjde, Avhose character for honour and integrity stood so high that his jircsence was considered a sufiicient guarantee of the fidelity of England. Tlie King ordennl him to leave his family at tl-e Hague, and promised his speedy return. Parlia- RISE OF BANKING IN ENGLAND. Si'^ inent met in October. The King left the Lord Keeper to explain his views to them. The Keeper expatiated npon the King's pleasure in meeting liis Parliament, the innnense growth of the power and navy of the King of France, the King's alliance with the Dutch, the neglected and feeble state of the navy, and the necessity of putting it in a position to cope with that of France. He ended by demanding a supply of £800,000 to fit out 50 ships of the line, to make him a match for his neighbours. The House eagerly voted him the sup)»ly asked for, an(l added to it a long homily upon the growth of Popery, and earnestly ])etitioned the King to take measures to sujipress it. The King took the subsidy, instantly prorogued the Parliament, and, with the treaty of Dover in his pocket, published a severe proclamation against Papists, boasting that he had always adhered to the true religion as established against all temptation whatever. 15. No sooner were the credulous Commons duped out of their money and dismissed, than the . King set to work to I^ick a quarrel Avitli the Dutch. They were wantonly pro- voked by a most outrageous insult. A small yacht, not even a man-of-war, was ordered to sail through their whole fleet on their own coasts, and fire upon them if they did not strike their flag to it. The Dutch, who tendered any explanation that the English Government chose to dictate, were studiously insulted. Parliament was prevented from meeting lest they should declare against such atrocious proceedings ; but the money of which they had been duped was soon exhausted by debts and expenses. France had promised to pay £200,000 a-year during the war, a sum, however, quite inadequate to maintain the navy. The axe of Charles I. inspired the King and his Ministry with too whole- some a respect for the English nation to venture again uj)on ship money. In this dilemma the King declared that the stalf of the treasurer should reward the ingenuity of the man who should dis- cover an expedient for " raising the wind." Shaftesbury is said to have the merit of originating the idea, but Clifford rea))ed the profit and the honour. The expedient hit ujion was to shut up the Exchequer. 16. Charles seemed to be most at home in the lowest depth of iniquity. With the treaty of Dover in one pocket, he professed a warm zeal for the Protestant religion ; with his proclamation of 1G67 in the other, he seized upon the bankers' money in the Exche(iuor. When he had performed the s])lendid feat of dui)ing his Parliament out of £800,000, for the ])uri)0se of cutting the throats of the very people to whom they were most attached, it was but sorry game to plunder a few bankers. Nevertheless, the King was so delighted with the peculiar perfidy of the transaction, that, to the promised reward of the 344 THEOEY AND PRACTICE OF BANKING. treasurer's staff, he superadded an ignominious peerage. On the 2nd of Januaiy, 1672, appeared a proclamation, stating that the payments out of the Exchequer should be suspended for one year; but interest at the rate of 6 per cent, was promised. The king seized £1,328,526 ; of this sum £416,725 belonged to Sir Robert Vpier alone. 17. The bankers, it is true, wei'e not many, but the money they had belonged in great part to their customers, and these were 10,000. The coiq:> de finance was so cleverly done that no one, except one or two of the most intimate friends of the conspirators, had the slightest warning. Tlie consternation was dreadful in the City. Numberless merchants were ruined. The distress was felt through all ranks of society. Widows and orphans, who had no other means of investment, had lent their all to the bankers. Many persons Avent mad ; many died of a broken heart; many destroyed themselves. It was at first promised that the suspension should only be for a year ; but year after year passed away, and neither the principal nor the interest was paid. But the intensity of the public suffering was too great, and the jDublic indignation was too fierce to be neglected. "What seems to be a most extraordinary circumstance is, that although so many persons of influence must have been injured by the transaction, there was no notice of it taken in Parliament. At length, in April, 1676, the King was obliged to order the accounts of the creditors to be examined b)^ the Chancellor of the Exchequer. This having been done, in April, 1677, the King issued letters patent, granting to each of the goldsmiths, their heirs and assigns, and for the benefit of tlieir creditors, in lieu and satisfaction of their debts, a yearly rent, part of the hereditary excise, equal to 6 per cent. u]>on the debt, with a clause of redemption, upon the King paying the principal and arrears of interest. These letters were printed and made public on the 23rd of May, 1677, and a bill to ratify them was passed by the House of Lords, on the 10th July, 1678, but, unfortunately, was not presented to the Commons before the end of the Session, and never became law. 18. The interest continued to be paid till Lady-day, 1683, when it ceased. Those were tunes of fiery trial. The recoil of tlu' crimes and cruelty of the Popisli ])lot liad struck down the fomentors of tliat liorril>le delusion. The blood of tlie hostile parties alternately flowed like water from the scaffold. The Koyalists had olttaiiiecl tlie undisputed ascendancy, and payment of the interest due to the bankers imnu'diately ceased. None was paid during the reign of James II. vVt length, in 1689, when the creditors were worn out Avith despair, some of them determined to petition the Court of Exchequer to make an order THE bankers' case. 345 for payment of tlieir claims. The Crown determined to resist payment, and the ease was argued at threat length ; two years were occupied in the arguments and the deliberations of the judges. At length, in 1G91, the Court gave judgment in favor of the petitioners, and made an order on the Exchequer for payment. The Court appealed to the Exchequer Chamber. At that time the Lord Chaiu;ellor, or the Keeper of the Great Seal, sat in the Exchequer Chamber, and was accustomed to receive the assistance of all the Common Law Judges. Lord Somers was Keeper of the Great Seal. In 1697, the case was argued before the whole of the Judges. There were two points to be decided. 1. Whether the letters })atent were good and valid to bind the Crown. 2. Whether the remedy taken by the pe- titioners was the proper one, and if it was in the power of the Court of Exchequer to order payment from the Ti'easury of the sums due to the claimants. On the first point the Common Law Judges mianimously lield that the letters jiatent were good and valid to bind the CroAvn. On the second point they all, with one exception, held that the petitioners had adopted tlie j^roper course in petitioning the Exchequer, and that that Court had power to order payment. The Chief Justice of the Common Pleas alone held that they had not adopted the right remedy ; that the Court of Exchequer had no poAver to order payments out of the treasury ; and that the claimants ought to have petitioned the King himself. The assistant Judges having thus all delivered their opinions, the case remained for the final judgment of Lord Somei's. It is one of the most famous cases in Westminster Mall. The Lord Keeper is said to have expended several hundred pounds in collecting books and pamplilets for his judgment. He carefully abstained fi'om jironouncing any opinion as to whether the grant was good, and bound the Crown ; but, after going over all the j)recedents with extraordinary care and minuteness, and reviewing the history and ])owers of the Court of Exchequer, he held that the petitioners had adopted a wrong remedy, and that the Court had no power to order pay- ment as it had done. It was doubtful whether the Keeper of the Great Seal had power to give the judgment of the Court against tlie opinion of the majority of the assisting .Judges. Three Judges held that he had not this power, but seven held that he had ; he accordingly reversed the judgment of the Court of Exclie(pier. 19. Under such circumstances, it was scandalous and dis- graceful in the Crown to contest the matter any longer. Every one atlirmed the case; the objection was purely technical. The claimants appealed to the House of Lords; the Crown persisted in a streimous and disgraceful opposition, but, on the -.{rd January, IVOO, the Lords finally gave judgment in favour of the 346 THEORY AND PRACTICE OF BANKING. bankers, and reversed the judgment of Lord Somers. One would have thought, that after such aggravated wrong and injustice, the ParHament would have hastened to repair the injury done to these unfortunate men. But the strangest part of the case is yet to come. The judgment of the Court clearly established their right to all arrears of interest ; but they were not paid one farthmg of it. An Act was passed in 1700, that after the 26th December, IVOI, the hei-editary excise should be charged with interest at the rate of 3 per cent, on the principal, until payment was made of one-half of the debt. Thus ended this monstrous iniquity. The principal never was repaid, but was afterwards consolidated with the South Sea Annuities, and still forms part of the National Debt. It has been calculated that the loss to the bankers and their creditors, from arrears of interest and retention of the principal, was nearly three millions, to say nothing of the frightful expenses of such protracted litigation. 20. iSTotwithstanding the political agitation of the period, and the vice and extravagance of the Com't, the nation, from the sheer force of its energy, continued to thrive and progress as soon as it attained a tolerably settled condition, but the want of an adequate supply of circulating medium was felt severely to cramp the operations of trade, and many persons who understood the great benefits which foreign countries derived from the establishment of banks, attempted to induce the Government to erect similar institutions. A great number of projects Avere started in print, some of particularly magnificent dimensions, but, as none of them came to anything, we need not be delayed by them any furthei'. 21. The troubled, but glorious era of 1688, not only destroyed public credit, but, as Avas natural, diminished tlie productiveness of the taxes, and the new Govermnent were obliged to juirchase popularity by abolishing the hearth tax. The toimage and poundage, which in the reign of James II. produced £600,000, fell in 1693, to £286,68'?, and, notwithstanding some additional taxes Avere laid .on, the whole revenue in 1693, was £1,510,318 Such an income Avas wholly inadequate to sustain the feeble and unsettled Government, and the most extensive frauds and rob- beries ])revailed among the jiublic otiicers. Some of these frauds Avere brought to light, and the otlenders ])unis]KMl ; but, though commissioners were a]>pointe(l for the ))urpose of discovering the defaulters, the Commons resolved, in 1701 : "Tiiat it was notorious that many millions of money had been given to his Majesty for the service of tlu; jiublic, which remain yet unaccounted for." It AV'as alleged, tliat in five years, the almost incredible sum of nearly eleA'en millions was thus embezzled. THE bankers' case. 347 22. The chief object wliicli tempted William's ambition to obtain the Crown of P^ngland, was to head the great European alliance againt the overwhelming power of France. No sooner was tlie King pretty firm on his throne than he persuaded the Parliament to agree to a war with their ancient eneuiies. The Parliament was eager for the war, and readily voted supplies, but they were scarce and difficult to be got. The Government, at first, attempted to jiersevere in the old plan of mortgaging the grants to be voted by Pai-liament. Their attempts, however, were not very successful; and, in 1690, Parliament licgan the system of allowing money to be raised on short annuities, which was attended witli good success. The increasing expenses of the war, however, rendered this plan too burdensome, and in 1692 a plan was brought forward for raising duties for the space of 99 years, to pay the interest of an intended loan of X'1,000,000 npon a tontine scheme. The subscribers were to receive 10 per cent, till IVOO, and after that, £7,000 per annum Avas to be divided among the survivors till their number Avas reduced to seven, when, upon the death of each, his annuity Avas to lapse to the CroA^ni. So low Avas the credit of the Government that only £108,100 Avas obtained on these tempting terms, and a clause was introduced by Avhich the subscribers might obtain 14 per cent, upon any life they chose to nominate. But even these two schemes produced only £881,493. 23. All these devices, howcA^er, failed in producing an adequate su])ply of money to supi)ort the Avar, Avhich languished in consequence. The fatal proceedings of Charles II. seem to have ruined the bankers, or, at least, to have deterred them from making advances to Government in their former style. The Government Avere obliged to revert to the humiliating plan of borroAving from every one in the city they could. They Avere obliged to solicit the Common Council of London for so small a sum as £100,000, and if they granted it, the Councihnen had to make hiunble suit to the inhabitants of their respectiA'e wards, going from house to house for contributions, and for these advances they had to pay, m ju-cmiums, discount, and commis- sion, from 30 to 40 per cent. 24. The imhappy bankers, and their assigns, had, in despair of having their rights acknoAvledged by the Ci'own voluntarily, been driven into a court of laAv. Some of them, however, endeavoured to come to an agreement Avith the Crown. When it tried to raise money by Avay of perpetual anmiities in 1691, they thought that they might make terms for themselves. On the 18th January, 1692, their proposal Avas submitted to the House. They said that Avhereas the debt due to the bankers, and their assigns, Avas above £1,340,000 principal, Avith 8| years' 348 THEORY AND PRACTICE OF BANKING. arrears of interest, at 6 per cent, at Christmas, 1691, they proi^osed to forego all arrears of interest, and to advance a sum equal to their principal, on condition that interest at the rate of 6 per cent, should be secured to them by Act of Parliament. This proposal was subscribed by six or seven gentlemen whose principal money amounted to £29,3'78 ; several members of the House, whose principal was £5,400, immediately declared their willingness to accept the same proposals. They believed that most of the others interested would come into the same arrange- ment. After a few days' delay, persons whose principal amounted to £39, 775 came into the proposal. Those who agreed to these proposals were chiefly the assigns of the bankers and their creditors. The bankers themselves declined to join in the arrangement, for fear it might prejudice their case in the Exchequer. When the Committee who brought up this report to the House first met, a proposal was made to them, that certain parties were ready to subscribe a million, on condition of receivmg £65,000 a year, of which £5,000 was to be for manage- ment, and the rest for interest, and that their bills of property or stock should have a forced currency, or be made legal tender, in which case they offered to advance £200,000 in cash, to be ready as a bank to exchange such current bills as should be demanded of them, to give them credit, and support their circulation, and that they should receive 5 i)er cent, on that sum. Tins scheme was devised by Mr. William Paterson, and supported by several Avealthy merchants in the city. The Committee declined to receive tlie ])roposal for giving a forced currency to this stock, but they were quite willing to receive such a plan, and make the stock transferable at pleasure. The proposal broke ofl' upon this diflerence. Paterson and some of his friends Avere willing to waive the forced currency of the stock, but nothing came of it. Such was the first effort of Paterson to found a National Bank. After this failure, no further proposal was made till the begin- ning of 1694, when the increasing public necessities made the Ministry attempt to start another such project. They sent for Paterson, and requested him to organize another plan. His second project was to raise a ca])ital of £2,000,000 at 7 per cent. interest. His influence obtained forty men to subscribe £5,000 each, as a fund to circulate £1,000,000 at 8 i)er cent. The Lords of the Treasury, however, who Avere accustomed to allow 40 per cent, discount on tallies at 8 per cent, interest, Avliich had but four or five years to run, could not be persuaded tliat persons would subscribe at par to a fund Avhich had no ])Ositive deter- mination. This ])lan underwent several niodiiications, but they all failed, and a lottery Avas started to suj)ply the deficiency, Avhich Avas ecpially abortive. Not discouraged by the failure of all these attempts, he ])ersevered, and formed another project, Avhich was to raise and circulate £1,200,000 upon a fund of FOUNDATION OF TIIK BANK OF ENGLAND. 349 £100,000 a-year. Some party jealousy came at the opportune moment to assist Paterson. Mr. Michael Godl'rey, brother to Sir Edmundbury Godfrey, and some persons who were nettled with some transactions with the East India Company, now took Paterson up, and in effect sui»])lanted him ; for, though he con- tinued to advise and assist in the direction of the measure, Godfrey stood foremost in it, and was considered both by the ministers and the Parliament as the efficient man, on Avhom all depended, and to whom all acknowledgments were to be paid. 25. This scheme at last succeeded ; after the details had been settled in concert with the Ministers, it was brought before the Privy Council, and long and anxiously discussed in the presence of the Queen, and at last the Statute 1694, c. 20, was passed, by which the Bank of England was established. 26. Few things can be more surprising than that a system which had been in operation for centuries in Italy, and which had conduced so much to the stability, nay, almost to the exist- ence of several of the Italian Governments, had not been thought of in England before this time. Such, however, was the case. Before the Bank of England there is no instance of any but a commercial State having adopted such a measure. Perhaps it was, that in no State but a commercial one Avas there to be found such a degree of monetary honour, as to induce people to lend their funds upon perpetual annuities u])on the security of the Royal woi'd. The debt created by the establishment of the Bank of England was the first attemjit in England to raise money by Avay of perpetual annuities, and it did not take ])lace ixntil the chief power in the State had finally passed away from the Cro-mi to the Parliament. Only thirteen years after the revolution the King, in his speech to Parliament 30th December, 1*701, presses the House of Commons to take care of the public credit, " which," he says, " cannot be preserved but by keeping sacred that maxim, that they shall never be losers who trust to a parliamentary security." How different from the sentiments of preceding mouarchs ! 27. The Act, Statute 1604, c. 20, incorporating the Bank of England, received the Royal assent on the 25th April, 1694, and its chief provisions are as follows : — 1. After providing for raising certain taxes mentioned in the Act, it directed that the sum of £100,000 a year should be ap- propriated to the encouragement of persons making a voluntary loan of £1,200,000 for the purpose of carrying on the war M'ith France, in the following manner : — 2. The Crown might appoint commissioners, to receive sub- scriptions for the sum of £l ,200,000, before the 1st August, 1 694, 350 THEORY AND PRACTICE OF BANKING. from auy person, native or foreign, bodies politic or corporate, to be paid into the Exchequer, and the said sum of £100,000 per annum was set apart to be paid to the use of the subscribers, their heirs, successors, or assigns. 3. The Crown w^ as empowered to authorize, by letters patent, the subscribers to the loan to assign and transfer their stock and interest, and to presci'ibe the manner of doing so, and to erect them into a corporation, to 1)6 called the Governor and Company of the Bank of England, with all the visual privileges of a corpo- ration, together with the power to acquire and hold lands, rents, tenements, and hereditaments of all descriptions, in as full a manner as any private mdividual, subject to a proviso of re- demption. 4. That in case the whole smn of £1,200,000 should not be paid into the Exchequer by the 1st January, 1695, then the pay- ment to the subscribers should only be at the rate of 8 per cent, on the sum advanced; and that at any time after the 1st August, 1*705, upon Parliament givmg twelve months' notice, and repay- ing the whole of the debt due, the Corj^oration should cease and determine. 5. No single person was to subscribe more than £20,000, and one-fourth Avas to be paid down at the time of subscription, and the remainder before the 1st Januaiy, 1695 ; in case of non- payment of the remainder, the first instalment to be forfeited to the Crown. 6. Unless at least one-half the capital Avas subscribed before the 1st of August, the subscribers were not to be made a corpo- ration, but those who had subscribed might transfer their stock annuities as individual creditors of the Crown. 7. The corporation was strictly forbidden to borrow or give security by bill, bond, covenant, or agreement under their com- mon seal, for any sums exceeding £1,200,000, except they were allowed to do so by Act of Parliament. In case they exceeded this limit, the proprietors were to be liable ui their private capacities. 8. The corporation were allowed to deal in bills of exchange, to buy or sell l)ulli()n, gold, and silver, to lend money on the security of goods and wares, and mercliandize, and if the loan was not repaid within three months of the time agreed u])on, to sell such goods; and to sell goods, the i)roduce of their own lands. 9. But they Mere strictly forbidden, either directly or in- directly, to deal or trade, or to permit any one on their behalf to deal or trade witli any of the money, stock, or effects of the corporation, in buying or selling any goods, wares, or merchandize, imder the penalty of forfeiting treble the value of the goods to any common informer. 10. All the bills obligatory, and of credit, under the seal of FOUNDATION OF THE BANK OF ENGLAND. 351 the corporation made or given to any person, might, by indorse- ment of such person, be freely assigned to any person who should voluntarily accept them, and so by such assignees toties quoties, hy indorsement thereon, and all such assignees might sue therein in their own names. 11. That if the corporation should purchase any Cro^\Tl lands, or advance any money to the Crown whatever, except by the special permission of Parliament, they should forfeit treble the value of all such advances, one-tifth to any common informer, and the remainder to the ])ublic. 12. All fines, amerciaments, and judgments received against the corporation anight be ])aid by the officers of the revenue, out of the annuity of £100,000. In pursuance of this Act, a commission to receive subscrip- tions was nominated on the 15th of June, the Avhole stock was subscribed for in 1 days, and the Charter of Incorporation was issued on the 27th July. 28. This great experiment was regarded with some doubt and misgiving even by its zealous supporters; they feared it could hardly be successful with so moderate an interest as 8 per cent. But several very numerous classes of people regarded it with the utmost detestation. The usurers, whose inordinate gams were checked, were filled with rage. Some said that it would become a gigantic mono])oly, engross all the money in the kingdom to itself, aud combine with the King to set up a despotism. Some inveighed against its granting interest, which they said would draw money away from trade, not perceiving, in the blindness of their passion, that if the Bank alloAved interest to its customers, it must advance money to traders to make it. Some became extremely zealous for the morals of the nation, which were to be placed in imminent peril by the new bank. Some pretended to dislike it for fear it should disappoint the King m the expected supplies. The domestic enemies of the Government were furious against it, because they saw liow enormously it would strengthen the new dynasty. 29. The immense benefit which accrued to the State by the establishment of the Bank, was shewn by the increased vigor with which the war was carried on. The army assumed the oflensive, and in July, 1095, the King undertook the siege of Namur. At this time Mr. Michael Godfrey, the Deputy-Govi-r- nor of the Bank, Avent over to Namur to arrange with the King as to the manner in which the money for the use of the army should be remitted. In the last days of July he ventured too near the town to speak to the King during a heavy cannonade, and was killed at his side. Previously to this he had published 352 THEOEY AND PRACTICE OF BANKING. a pamphlet on the subject of the Bank, which is of great his- torical importance with regard to the currency. It is written in a strain of the warmest congratulation upon the great success of the experiment, which he had taken so leading a part in for- warding. He states that, whereas in the beginning of 1694, the Government tallies were at a discount of £25 to £30 per cent., in addition to the public interest, the Bank took them at par, and from the former heavy discount they had risen to a premium, so that they were then better than money, because there was 7 or 8 i^er cent, per annum benefit while they were kept, which never could have been done without the Bank. He said that those who lodged their money at the Bank had it as much at their disposal as if it were in the hands of the goldsmiths, or in their cash chest, and he certainly countenances an accusation which is constantly brought against the goldsmiths in contem- porary pamphlets ; for he says, that if the money which had been lodged with them for four or five years past had been deposited in the Bank, it would have prevented it from being so scan- dalously clipped, which he predicts would cost the nation some day a million and a half or two millions to repair. He notes it as very sitrprising and quite imexampled, that after the nation had been at war for six years, and had spent £30,000,000, besides great quantities of bullion being exported and captured by the enemy, that there had been so great a fall in the rate of interest instead of a rise, as in all previous wars, winch was entirely due to the Bank, and he predicted that it would, in the course of a few years, reduce it permanently to 3 per cent. He says that, Avithm 30 years of that time, the public had lost between two and three millions by the goldsmiths and scriveners breaking, which would not have happened if the Bank had been established. He says that there were some who were for having a forced currency of bills or tallies, thinking that they might pass as Avell as bank bills, hut they do not consider that it is nothing makes bank bills current, but only because all those tcho desire it can go when they will and fetch their money for them ; and to force anything to pass in payment but money would soon end in confusion. He then enters into numerous arguments to shew that any attempt at a forced currency Avould only end in damaging the jiublic credit. He says that the chief reason of the indignation of the goldsmiths at the ]>ank was that they allowed 2(1. ])er cent, per diem on tlieir bank bills, which drew away customers from them. He says that the interest allowed to the holders of their bills amounted to £36,000 i)er annum. 30. The year 1694 is remarkable as the one in which the first of those speculative manias occurred, which have, on difterent subsequent occasions, seized iipon the nation. All the tricks, all the rogueries, which have been so familiar in the joint stock BAD STATE OF THE COINAGE IN 1695. 358 bul)l)Us of later years, were rife at tliat time, but, it is remark- able tliat while, in later times, these tliinuj.s have always spniii!^ up when there was a i^reater abundance of capital than usual, in time of j)eaee, this was at a time when a costly war liaassed, and received the Koyal assent on the 3rd May, 1095, to j)revent coimterfeiting and clipjiing the coin of the kingdom. This Statute averred that it was notorious that the current coin had been greatly diminished l)y cli])]>ing, rounding, tiling, and melting, and that many false and counterfeit coins had been clipped, for the better disguising thereof, and that these practices had been much occasioned by those who drove a trade of exchanging broad moTiey for clipped money, and other arts and devices. It, therefore, j)rohibited any person from exchanging, lending, selUng, b(n-rowing, buying, receiving, or paying any broad or undipped silver money for more in tale, benefit, profit, or advantage than the same was coined for, and ouglit by law to i)ass for, under a penalty of 10s. for every 20s. so illegally trafficked with. It also enact etl, that wdioever should buy, or sell, or knowingly have in his ])ossession, any clippings or tilings of the coin, should forfeit them, as well as a penalty of £500, and be branded on the right cheek with a hot iron. It forbaile any one but a tiading gi)ldsmith or refiner of silver, ti) buy or sell bullion, under pain of imprisomiient, and enacted Tiumerous other vexatious jienalties and regulations resj)ecting the export of bullion. All these absurd cruelties were wholly inelfectual, and at this time, guineas, which had originally been coined to represent 20s. and had progressively risen, as the silver coin became worse, were current at 30s. of the base trash which passed by the name of silver coin. 32. We shall find that it is of very great importance to fix the exact period when the silver coin was so depreciated, as that guineas passetl at 30s. We shall, therefore, make some extracts from contemporary pamphlets. It says, in one ))ul)lished in 1695 (Some Remarks on a Ue])ort containing an Essay for the Amendment of the Silver Coins bv Mr. W. Lowndes. 354 THEORY AND PRACTICE OF BANKING. London, 1695. Page 6), after speaking of the gradual deterioi*a- tion of the coinage : — " And so, by degrees, as the silver coin was diminished and debased in itself, so it fell in the estimation of the people, and in proportion gold advanced, and also bullion (that is not in itself, but in proportion to the bad money), not that bullion became worth 6s. 5d. an ounce, or Gold 30s. a Guinea in good money, that is, in weighty standard money, but in clipped and counter- feit money, whereof 6s. 5d. Avas not of the true nor esteemed value of 5s. 2d. And, as we ourselves grew sensible of the want of value in money that passed, so did foreigners likewise, and THE Foreign Exchanges soon altered accordingly, so that it cannot properly be said that bullion is advanced much, or that gold is advanced much, or commodities are advanced much, hut that the money that is exchanged for tliem is of much less value than it iiicts, and the new coining of our money will not, as I apprehend, alter the value of bullion, gold, tfcc, but it will bring silver in coin to its due value." After enforcmg and illustrating these views at considerable length, he observes that Mr. Lowndes hoped that the exchange Avith Holland, which was then 25 per cent, against England, might be prevented falling lower, and says, page 16 : — "If guineas continue current at 30s. a tiece, the exchange will continue about the rate it does, exce])t the common and ordi- nary variation, wliich many sudden drafts and remittances occa- sion ; and if guineas fcdl, the exchange will rise in proportion ; AND IF THE SILVER COIN IS REDRESSED, GUINEAS WILL FALL, and there are no other designs whatsoever can effect any considerable altei'ation, for English standard silver and standard gold Avill always be of the same value in Holland, as the same standard silver and gold in England, within 2, 3, 4, and 6 per cent., or thereabouts, and that dillerence happens according to present occasions, and the charge of sending it from one place to another, and the exchange to Holland and other places always govern accordingly." Again, page 1 : — " It is not the exportation of the silver which occasioned the fall in the exchange between Holland and here, but the reason of that is tJie badness of our silver coin. Again, page 20 : — "The Balance of Trade is not the Cause of the Great Fall of the Exc:hange for Holland, jjut the Debasing op our Coin." And he repeatedly declares, that the only way to set matters right was to reform the coinage. He also says that it was his opinion that it was not to the advantage of the kingdom to restrain the exportation of bullion, or indeed of money itself, to any certain (juantity, but to let it be entirely free. GUINEAS AT 30s. 355 33. Wc have already seen Iroiii tlie ])aini)lil('t of Mr. Godfrey that, ill the fut the rest of the Council wer//^, since the error of our coin hath been corrected, that very I'Jxchange is so mtich varied that one hundred pounds here is wortli one hundred and fifteen jtounds there. "And since I have mentioned guineas, I cannot let them pass without some ol)servati(»ns. How eager Mas the contest for keejung them up to that exorbitant value ! and how unwillingly did the money changers, and those whom they had deceived, yield to the alteration ! Whereas, it was Viell known that the reason ichy guineas were so high was the badness of our coin.'''' BANK NOTES AT A DISCOUNT. 359 This is a conspicuous and decisive instance of tlie truth of the principles in the chapter on Exclianges, that a resto- ration of the coinage is alone sufficient to bring the exchanges nearly to par. We then observe that, although at that time, the coin was very scarce, yet the mere fact of the resto- ration of its qitdlity had brought the exchanges to par in October 1696. We must now inquire Avhat the state of Credit was at that time, or the price of Bank notes and P^xchequer tallies. 40. The Bank of England was a Whig project, and had been eminently successful in supporting the Govermnent in the prose- cution of the Avar. It had excited the Avarmest feelings of joy and congratulations among its friends, and the l)itterest feelings of rage and indignation among its enemies, and the enemies of the GoA'crnment. It was not endowed with any monopoly in its favour at that time. The Go\ ernment of William was composed of a mixture of Whigs and Tories. The Tories determined to get up a rival bank on a much larger scale. The capital was to be £2,564,000 advanced to Government, on the same principle as that of the Bank of England, but its trading capital, notes, tfec, were to be advanced solely to landowners for the cultivation of the land at three per cent. It was therefore called a l^cmd Bank. It was Avarmly patronized by the Tory party. The origin of it is variously ascribed to a Mr. Brisco and to Dr. Hugh Chamber- lain. The Bank of England and all its friends, of course, op])Osed it with all the power they could, but the temptation was too great, and it Avas sanctioned by Act of Parliament in April, 1096. The time for taking subscrii)tions Avas limited, in the like man- ner as had been done in the case of the Bank of England. When the subscriptions opened, the Lords of tlie Treasury subscribed £5,000 on behalf of the King, but the other subscriptions amounted only to £2,100 Avhen the time came for its closing. It AA-as, therefore, a total and complete failure. The finances of the State Avere in the utmost diso)"der, great arrears were due to every branch of the public service, some funds Avere Avholly deficient, others produced much less than Avas calculated. In the next Session of Parliament the amount of arrears Avas ordered to be laid before them, and it amounted to the frightful sum of £6,000,459 — more than all the current coin in the kingdom Avas supposed to be. Under these circumstances, Avhen Parliament met in October 1696, Bank notes Avere at a discount of 20 per cent, and Exchequer tallies at 40, 50, and 60 per cent., at the same tinie that the exchanges Avere restored to par. Every one foreboded the total ruin of public credit. The enemies of England rejoiced, and believed that it Avas utterly irretrievable, and that the great European alliance against France Avould be dissolved. 360 TIIEOKY AND PllACTlCE OF BANKING. 41. Under these de])ressing circumstances, Parliament met on the I'Oth October, 1G9G. The King congratuhited the House on the year having ])assed away without any disorder, considering the great disappointment in the funds voted at their hist meeting, and the difRculties which had arisen from the re-coining of the money ; he begged them to find out some expedient for the recovery of credit, which was absolutely necessary, not only with respect to the war, but for carrying on trade. The Commons responded with noble alacrity to the desires of the King ; they immediately passed a vote, that they would not alter the standard of the gold and silver, in fineness, weight, or denomi- nation, and that they would make good all the deficiences on the fimds. They also repealed the Bill for preventing the coining and importation of guineas, as it had only aggravated the public disorders. 42. When the Bank of England was subjected to the mortifi- cation of declaring a partial suspension of payments, it en- deavoured to retrieve its credit by making two calls of 20 ])er cent, each u])on its proprietors, the second of which was j)ayable on the 20tli November. These measures, however, did n(^t elfect their purpose, and the Parliament had to take in hand the great business of restoring the credit of the Bank notes, and the Exchequer tallies. On the 3rd February, 1697, Parliament agreed to increase the capital stock of the Bank, by receiving new subscrij)tions, which were to be made good in tallies and Bank notes. It passed an Act for this purpose. Statue 1097, c. 20. The chief ])rovisions were as follows : — 1. All persons, natives or foreigners, bodies politic or corjx)- rate, might subscribe to the new stock, and the subscriptions might be ]»aid, four-fifths in Exche(juer tallies and one-fifth in Bank notes, upon A\hich the Crown would allow 8 per cent. 2. Before the 24tli July, 1G97, the capital stock of the Bank was to be estinuited, and made up to 100 per cent.; any deficiency was to be made up rateably by the proprietors, and any overplus to be rateably paid back to them. 'S. All such subscribers were to be incoi'jjoiated with the j)roprietors of the old stock. 4. The time when the Crown might put an end to the corjto- ration was prolonged to twelve months after the 1st August, 1710, and repayment of all parliamentary debts. 5, It was enacted, that during the continuance of the Corjio- ration of the Governor and Company of the Jiank of England, no other Bank, or any other corporation, society, fellowshi]*, company, or constitution, in the nature of a bank, shall \k' erected, or established, jiermittccj, sutii'ied, countenancetl, or allowed by Act of Parliament, within (his kingdom. (i. 'I'he liank were allow id to extend their issues of notes THE 13ANK INCREASES ITS CAPITAL. 301 beyond tlio original ('ai)ital of £1,200,000, to the amount ol'ncw capital Avliich should be subscribed, provided that they were made payal>le to bearer on demand; and in case they made default in such payment, they mit^ht be paid on jjresentment at the Exchecpier, out of tlie annuity due to the Bank, All notes above the sum of £1,200,000, were to bear a distintiuishing mark. 7. All the property of the J>ank was exempted fi-om taxes. 8. Bank Stock was to be i)ersonal properly, and not real. 9. It was maile felony to forge or counterfeit any Bank note, or obligation under the Common Seal, or altering or erasing any indorsement on such a note or l)ill. 10. Bank Stock exem])ted from any foreign attacliment. 11. The debts of the Corjjoration foi-bidden to exceed their capital stock; if they did so, the ]\Iend)ers were liable in their private capacity. 12. All persons were forbidden to buy or sell tallies at more than the legal rate of interest, imder the penalty of forfeiting treble the value of the money. 43. Such were the measures taken to restore the crerlit of the Bank, and we observe that their own de])reciated notes, were taken in payment as specie at their full amount. The i)ublic, however, "were still grievously suifering for want of a circulating medium during the slow progress of the re-coinage. The Baid-c of England did not issue notes below £20, -which were of little use for the general purposes of business. The Chancellor of the Exchequer Montague, hit u])on the i>lan of issuing bills upon the Exchecpier for £5 and £10. These bills, at first, ])assed at a small discount, but, upon the second issue of them, £7 12s. interest per cent, was allowed, and they were received in payment of taxes at par. They soon rose to par. The Treasury was authorized to coiitract with any persons to cash these Exchecjuer bills on presentment, allowing them a moderate premium. They were allowed 1 per cent, at first, but the Exchequer bills soon rose above par, and then the interest was reduced to t per cent. Under this Act, upwards of £2,000,000 of Exchequer bills were issued. 44. The new subscriptions to the Bank, under this Act, amounted to £1,001,171 10s.; two himdred thousand jiounds worth of Bank notes and eight hundred thousand of Exehe(pier tallies being taken out of circulation, and received at i>ar in the subscription, raised the value of the remainder, and, in the course of the year, Bank notes which bore no interest were at par, and the bills Avhich bore interest were at a i)remium. 45. 'NVlien we consider the unquestionable services the Bank had rendered the Government, which contributed so greatly to the success of the war, and the pacification of Ryswick, and 862 THEORY AND PRACTICE OF BANKING. when we consider the terrific state of public credit, owing very much to tbe total failure of the Land Bank, we need not be sur- prised that the Bank of England employed those circumstances for the purposes of securing a monopoly to themselves. Nor, considering the ideas of that age, can Ave be surprised that they received it. But, nevertheless, making allowances for all these circumstances, it is one of the most deplorable acts that have come down to our time. The founders and contemporaries of the Bank felt the benefit of its emment services, but the con- sequences of this original sin fell with terrific force on their descendants of the third and fourth generation. The frightful convulsions and collapses of public credit which have taken place during the last three quarters of a centuiy, are chiefly due to this great wrong, and violation of the true principles of trade. English bankmg has never recovered its fjital effects to this day, and many years must elapse before it will arrive at the form to which it is gradually tending, and which it would naturally have assumed, if its development had been left free to the skill and experience of men of business. 46. We have felt it necessary to be thus minute and circum- stantial in the account of this great monetary crisis, because it is of very great importance in the Theory of the Currency, and because it has been very jDrominently noticed in the Bullion Report, and we must now examine the account of it given there. But we must first of all give a statement of tlie Discount on Bank Notes and the Rates of Exchanges during 1696 and 1697. Statement of the Discount per cent, on Bank N'otes. 1G9G. £ s. July 9 16 „ 16 8 „ 28 10 Aug. 25 .... 15 Sept. 12 .... 17 Oct. 10 12 „ 22 18 „ 27 14 Dec. 26 17 1G97. £ s. 1697. £ s. Jan. 30 . . .. 19 Aug. 3 . . ..7 Feb. 18 . . .. 21 „ 26 .. . . 3 10 „ 20 .. .. 24 „ 28 .. ..2 Mar. 23 .. .. 23 10 Sep. 18 . . .. 1 April 3 . . .. 18 Oct. . . . piu". May 20 . . .. 18 June 5 . . .. 13 „ 17 .. .. 13 „ 24 .. .. 10 DISCOUNT OF NOTES AND RATES OF EXCHANGE. 863 Statement of the Rates on the London Exchange during 1695-1696. 1695. April23 31-2 1696. January 24 May 2 July 19 July 28 September 29 October 6 November 6 December 16 < S. E 31-2 31-4 310 31-2 301 30-2 29-3 30-6 38-7 33-9 36-5 36-7 36-8 36-10 37-4 37-6 37-8 3710 In interpreting this table, we perceive that a great cliangc in the figures took place at the end of July, 1696. Some rhe very much, o\\\Qx% fall. The fact was, that it Avas at this period that the new coinage came out in great abundance. This rectified the exchanges, and those from which London received the vari- able price would of course rise: those to Avhich London gave the variable price would, of course, /"a^^: as explained in the Chapter on Exchanges, § 5. These figures denote the Rates of Exchange as paid in coin. But we have a statement of the difierence between the Rates of Exchange as they were paid in coin, or Bank Xotes, during the winter of 1696-97, given in A Collection for the Improvement of Husbandry and 2'rade, thus: — Dec. 16 , IGOC. Feb. 2; t, 16?7, Mar. •2, 1607. Money. Bk.Note. Money. Bk.Note Money. Bk. Note. Amsterdam 37-8 . . 31-19 36-3 . .. 29- 36-5 ... 29-2 Rotterdam 3710 . . 31-10 36-5 .. 29-2 36-7 ... 29-4 Antwerp 37-8 . . 31-9 36-4 .. 29-2 36-fi ... 29-4 Hamburg 36-8 . . 30-9 35-5 .. 28-2 35-9 ... 28-2 Cadiz 46-2 . 47-2 . . 55- . 67- 471 48- .. 58- .. 58- 46-3 47-3 ... 58-2 ... 59-2 Madrid 51-2 . 49- . 16- . 611 . 58- 52- 49- 21- .. 64- .. 60- 52- 49- 22- ... 63- ... 61- Discount on Bank Notes 364 THEORY AND PRACTICE OF BANKING. Having given these tables, wliich are of the utmost importance in the Theory of the Currency, and to which we shall hereafter refer, we may now see what the Bullion Report states. It says, p. 1 V : " The experience of the Bank of England itself, within a very short period of its first establishment, furnishes a very instructive illustration of all the foregoing principles and reasonings. In this instance, the effects of a depreciation of the coin by wear and clip})ing were coupled vnth the effect of an excessive issue of paper. The directors of the Bank of England did not at once attain a very accurate knowledge of all the principles by which such an institution must be conducted. They lent money, not only by discount, but upon real securities, mortgages, and even pledges of commodities not perishable ; at the same time, the Bank contributed most materially to the service of Grovernment for the support of the army on the continent. By the liberality of those loans to private individuals, as well as by the large advances to Government, the quantity of the notes became exces- sive, their relative value was depreciated, and they fell to a discount of 17 per cent. At this time there appears to have been no failure of the public confidence in the funds of the Bank, for its stock sold for £110 per cent., though only 60 per cent, upon the subsciiptions had been paid in. By the conjoint effect of this depreciation of the paper of the Bank from excess, and of the depi'eciation of the silver coin from wear and cli])ping, the price of gold bullion was so much raised that guineas were as high as .30s., all that remained of good silver gradually dis- appeared from circulation, and the exchange ^vith Holland, which had been before a little affected by the remittances for the army, sunk as low as 25 per cent, under par, when the Bank notes were at a discount of 17 per cent. Several expedients were tried, both by Parliament and the Bank, to force a better silver coin into circulation, and to reduce the price of guineas, but Avithout effect. At length the true remedies were resorted to ; first, l)y a new coinage of silver, which restorehlet was Avritten in 1695, when the credit of the Bank was in the most flourishing condition, Avhen he makes this credit a matter of great boast, and he says that the only reason why the credit of the Bank notes was so good, was that their holders knew that they could get their money instantly on demand for them. Mr. Godfrey was killed at Namur, in July, 1695, and Bank notes were not at a discount till IVIay, 1696. With respect to the third allegation, Ave have the most positive and overwhelming evidence that guineas Avere at 30s. in the Spring of 1695, Avhen the credit of the Bank Avas unimpeached, and its notes Avere all paid instantly on demand. 366 THEORY AND PRACTICE OF BANKING. With respect to the fourth allegation, we have already seen that the exchange on Holland Avas at 25 per cent, against England in 1695, nearly one year before Bank notes were at a discount. The litth allegation is entirely eri-oneous. Parliament made no attempt to reduce guineas till February, 1696, when the silver coin had been already called in. The commencement of the sixth allegation is quite wrong in point of time. It is an itnquestionable lact, testified by the most conclusive evidence, that it was the scarcity of money while the old was called in, and before the new was fully in circulation, that caused Bank notes to fall to a discount, and their receiving the old coin at its nominal value, and binding themselves to pay in the nev,'. We have read a considerable number of pamphlets of that period, and they all with one voice attribute the price of guineas, and the adverse state of the exchanges, to the badness of the coin and to that onli/. This Report, then, is not borne out in any of these statements by the authorities they have cited. The only one in which they are correct, is, that the new subscrip- tions in Bank notes and tallies raised their credit, by reducing their quantity, but they have been misled by Di\ Drake in saying that the exchanges began to recover at the same time. Dr. Drake, being a clergyman, and writing some years after the event, probably did not have his attention directed to so minute a point as the exact date when the exchanges rose to par, but we have in the pamphlet already quoted, written by a merchant, and dated on the 22nd of October, 1696, the express fact stated that at that time the exchanges were at par, in consequence of the good coin which had been issued, Avhereas bank notes were still at a heavy discount in June, 1697. 49. We have been thus minute in examining the circumstances of this great monetary crisis because we shall see hereafter that it is of great importance in establishing the true Theory of the Currency, We have, we think, shewn by the most conclusive evidence, that this paragraph in the Bullion Report is full of the gravest chronological errors, in a matter in which minute accu- racy of dates is all important. 50. There was one circumstance which we have not seen noticed by any writer, whicii we may probably suppose contri- buteaid< of England Avere in powfr. The dismissal of the Whigs liad shaken public credit. Tlie unfimdetl debt of the State Avas enonno\is — it aniountecl to nine millions and a half. ]\Ir. Ilarley (afterwards Karl of Oxford), the Chancellor of the Exchequer, i'evivey the last Act. That an anmiity of £100,500 due to them should be reduced to £88,175 after the 25th March, 1718. They offered to advance £2,000,000 at 5 per cent, interest, on Exchequer bills redeemable at one year's notice after 1720, and to circulate some others at 3 per cent. That the interest on the Exchequer bills they held, should be reduced to Id. per cent, per diem, but that no more sliould be issued without their consent. They were further willing to advance £2,500,000 for the public service at the rate of 5 per cent. ])er annum. They demanded that all their pri^'ileges should con- tinue until these sums were redeemed. After a warm debate, the proposals of the South Sea Company were accepted. The Bank of England, however, remonstrated strongly, and petitioned Parliament, reminding tliem of their eminent public services, and recpiested that all tlie ]»ublic stocks might 1)e made transfer- able and ])ayable at the Bank, which duty they imdertook to perform without any profit to themselves, on eondition tliat no further taxes be laid on their capital, or upon their bills and notes. Upon further debate, the proposals of the r)ank of Eng- land were accepted, as M'ell as those of the South Sea Conqtany, and three Acts were passed to carry them into effect. At this time the South Sea Conq)anv appeared t<> have got so com- 2 li 2 372 THEORY AND PRACTICE OF BANKING. pletely the better of the Bank, that they mvited the King to become their Governor, and, on the 1st of February, 1711, an Act was brought in. to remove any difficulties in the way. It was read and passed through both Houses on the same day, and on the next, received the Royal Assent. 63. The skirmish between these two great corporations in 1717, was but the prelude to a much more gigantic contest in 1720. On the 23rd November, 1719, the King recommended the state of the public debts to the attention of Parliament. This was preliminary to the introducing a plan to Parliament Avhich the Ministry and the South Sea Directors had secretly projected, and determmed to biing before Parliament, before any opposition could be organized against it. It was brought before the House on the 22nd January, 1720. The details are given in the Parliamentary History, and are much too long to be inserted here. But the outline was as follows : — They estimated the whole of the pvd^lic debts at £30,981,712 ; they proposed to buy up the whole of these, and consolidate them into one fund, which was to be added to their capital at 5 per cent, interest. For these privileges they oifered a bonus of £3,500,000 to the State, payable in four instalments, to commence at Lady-day, 1721. This astounding jiroposal was brought before the House by surprise, but its terms were not so favourably received as was expected, and gave the friends of the Bank time to I'ally. They reminded the House of the great and eminent services it had done the ])ublic, and obtained five days' delay. 64. The Bank determined not to 1)0 outdone in audacity. They also undertook to consolidate those debts, and add them to their capital. Upon the whole, it was calculated that their ])i-oposal was moi'e advantageous to tlie nation by about £2,000,000, and was payable in less time. The South Sea Company obtained three days' delay to amend their offer. They increased the bonus to the public to £7,567,500, besides other minor pomts. The Bank, in a fit of wild desi)eration, amended their olfer. The chief points were, that for every £100 annuity for 06 and 99 years, they ofiTered £1,700 Bank Stock, and that after the 24th June, 1727, the interest on the whole consolidated funds should l)e I'educed to 4 per cent, absolutely, and thence- forth be redeemable by I'arliament. 65. The contest between these gigantic rivals, was simply which was to devour the other. The debate was long and fierce; Mv. Robert Walpoie was the chami)ion of the Bank, Mr. Aislabie, Chancellor of the Exche(pier, was ])atron of the South S(.'a Company. At lenglli, on the 2iid Api'il, the South Sea IJill was read a lliird lime, and passed by a nKijority of 172 to 55. VICTORY AND COLLAPSE OF THE SOUTH SEA CO. 373 Then it was carried up to the Lortls. The del)ate was equally animated, but, as usual, less garrulous ; it was ended in a single day, and the South Sea carried the day by a n^ajority of 83 to 17. The King closed the Session on the 11th June, and con- gratulated Parlianieut on the good foundation they had prepared for the payment of the national debts, without violation of the public faith. GQ. The price of the South Sea Stock on the Vth April, when the Bill passed, was 310, next day it fell to 290. On the 12th, the directors ojiened their first subscription of £1,000,000 at c£300 for every £100, having first propagated the most enormous falsehoods of alleged trading advantages they had secured in the South Seas. Twice the sum was subscribed, and in a few days the subscriptions were sold at doul)le the price of the first ])ay- ment. Then began the wild delirium — by successive stages, the stock stood at £500 on the 23rank Stock, at the same time, was £260. The great outbreak of the bubble mania had begun .before the prorogation of Parliament, and on tliat day the King had published a proclamation to ]iut them down, but with little effect. By the middle of July the projects before the public required a capital of £300,000,000. One was " For carrying on an undertaking of great advantage, but nobody to know Avhat it is." The witty rogue promised, on a deposit of £2 2s., that each subscriber should receive an income of 100 per cent. In a single morning he received £2,000, mid, of course, immediately decamped. Permissions to subscribe to a future scheme Avere selling at sixty guineas. 67. Then came the fearful collapse ; on tlie 2nd September the stock was at £700. The directors made many vain efforts to retrieve its credit. On the 13th it was at £400. Then the directors were compelled to make humble suit to their van- quished rivals. At the intercession of Walj)ole, the Bank of England agreed to a draft of a contract for providing means to sustain the credit of a mmiber of their bonds. After protracted negociations, the terms were agreed ui)on between the two companies, and brought before the projirietors of the Bank of England, and apjiroved of by them. Before, however, it could be emboilied in a legal form, affairs took a very different turn. A great many of the goldsmiths aiul private bankers had ad- vanced great sums ^ipon the South Sea Stock ; when this fell, it brought a run upon them. ^Nfany of them sto]iped jiaynieiit, and absconded. The Sword lUade C'(ini[)any, who were the cashiers 374 THEORY AND PEACTICE OF BANKING. to the South Sea Company, stopped payment. This portended imiversal bankruptcy. The Bank had been assailed with every species of public resentment because it had hesitated to lend its aid in supporting the Soxith Sea Bonds. Every one looked upon it as the sole piUar of credit, but even the credit of the Bank was now shaken. Tlie general failure of the bankers imme- diately caused a great run upon it. The Bank, in these straits, devised a trick to prolong the pa)^nents. It employed a muuber of clerks to tell out the money which was demanded, as Avell as what was brought in. Payments were made in light sixpences and shillings, and large sums were paid to particular friends, who went out Avith their bags of money at one door, to deliver them to people placed at another, who were let in to pay the same money to tellers, who took time to count it over. These persons were, of course, always served first. By this means time was gained, the friends of the Bank rallied round it, and made large subscriptions to support the company ; the festival of Michaelmas, at which it was usual at that time to shut up the Bank, came, and, when it was opened again, the public alarm had passed off. 68. But something was required to be done to restore public credit. The South Sea Company were permitted to sell an- nuities to the value of £200,000 a year. The Bank bought them at 20 years' purchase, and was allowed to add the £4,000,000 to its cajDital ; it then stood at £8,959,995 14s. 8d. 69. Up to the year 1722, the Bank had divided the whole of its profits among the Shareholders, and had made no resei've for any contingencies. The dividend, therefore, had been extremely variable. It had fluctuated from 18^ per cent, in 1706, to 6 per cent, in 1722. The inconvenience of this was strongly felt, as well as having no fund to fall back ui)on in cases of emergency. These had hitherto been met by making calls upon the pro- prietors. In this year the Directors established a reserve fund, which is called the Rest. 70. Several financial transactions took place between the Government and the Bank, which need not be detailed hero. Upon most of the previous occasions of the renewal of the charter, there had been much })ublic discussion as to the expediency of continuing this monopoly. Tlie ]>ank, however, liad always been able to relieve the continually embarrassed state of the finances, and had thus ]»urchased its privileges. As the time was drawing near for the exjjiiy of the monopoly in 1742, these discussions became more frecpient and animated, and several attempts were nuide to set up banks in such a maimer that they should not violate the clause in the Act of 1709. When the RUN UPON THE HANK IX 171."). 875 time lor tlic renewal came, the Guveriiiiieiit were, as usual, in ditticulties, and tlie Bank aorced to lend them £'1,000,000, with- out interest. To raise this sum, they made a call u})on their proj)rietors, which raised their capital stock to £9,800,000. In consideration of this, their exclusive |)rivileti[es were continued till twelve months' notice after 1st Aiij^ust 1764. Moreover, it was determined to stop up all the loopholes in the Act of 1 709, and the followhig clause was inserted in the Act, Statute 1742, c. 13, s. 5: — " And to prevent any doubts that may arise coneerninti- the privilege or power given by former Acts of Parliament, t:) the said Governor and Cou)\K\uy of excliisiee IxinJciiu/^ and also in regard to the erecting any other Bank or Banks by Parliament, or restraining other perst)ns from banking during the continuance of the said privilege granted to the Governor and Company of the Bank of England, as before recited, it is liereby further enacted and declared, by the authority aforesaid, that it is the true hitent and meaning of the Act that no other bank shall be erected, established, or allowed by Parliament, and that it shall not be lawful for any body politic or corporate whatsoever, erected, or to be erected, or for any other persons whatsoever, united, or to be united, in covenants or partnership, exceeding the nmnber of six persons, in that })art of Great Britain called England, to borrow, owe, or take up any sum or sums of money, on their bills or notes payable at demand, or at any less time than six months from the boiTowing thereof, during the continuance of such said privilege to the said Governor and Company, who are hereby declared to be and remain a cori)oration with the privilege of exclusive banking, as before recited." These words were devised with the utmost care, so as to prevent any other rival, in the most comprehensive manner possible. It was supposed that no legal ingenuity could devise an expedient to evade so extensive a prohibition. But, alas! for the wit of lawyers ! We shall see afterwards that a change in the method of doing banking business, so simj»le, and ajiparently so nnimportaut, as scarcely to deserve attention, cut away the ground from under this Act, and destroyed the monoj)oly of the Bank. But we have many years to look forward to before that event. 71. In September, 1745, the rebellion in Scotland seemed to be assuming formidable [)roportions. The Chevalier captured Edinburgh, and this news produced a run upon the Bank, partly caused, it is said, by the friends of the Prince, both to get money to assist him, as well as to embarrass the Government. Bank notes fell to a discount of 10 i>er cent. A meeting of merchants immediately took place, and 1,(!00 of the most eminent came to a resolution, on the 'iOth, pledging themselves to support the 376 THEORY AND PRACTICE OF BANKING. credit of the Bank notes. It also said that the Directors adopted the same expedient on this occasion, which had been so success- ful in 1720, of paying in sixpences. 72. In 1746 the Ministry were agam m difficulties, from the political disturbances of the preceding year, and they were obliged to apply for assistance to the Bank. The proprietors authorized the directors to cancel £986,000 of Exchequer bills, upon receiving an annuity of 4 per cent., and to create new stock for that purjiose. This increased the paid-up capital to £10,780,000, which was not further augmented till 1782. In 1 750 the interest upon £8,486,000 of the debt due to them from Government was reduced to 3 per cent. 73, In 1759, the Bank began to issue notes for £15 and £10. 74. The practice of giving notes or receipts for deposits pay- able on demand, originated with the goldsmiths, and was con- tinued by the bankers, and was universally followed by bankers at this period. Thus, we have it said by Cantillon : — " The cash for bankers' notes of undoubted capital and credit, such as a ChUd, a Hoare, and a Colebrook, is bxit rarely called for; but if these notes fall mto people's hands who are not their customers, then payment is immediately demanded. The pru- dent banker regulates his conduct by such as make use of his shop. If his notes fill into his brethren's, or uito the hand of a bank such as that of England, nothing M^ill be more pressing than they Avill be for their cash," 75, It is a favorite doctrine wdth some persons, that it is impossible to have an undue extension of credit with a purely metallic basis, and that an improper issue of bank notes is the sole cause of too gi'eat an expansion of credit. Just as if the currency being made of metal could prevent people from giving their " promise to pay," and buying up goods on speculation. The year 1763 is remai-kable as among the first of those great eras of commercial distress and prostration, caused by too great an exi)ansion of credit. And these disasters took place where there was no currency at all but what represented bullion, — Hamburg and Amstei'dam, The progress of the seven years' war had ])robably encouraged great s})eculation among the coiitineiilal meivhants, which involved those coimected with them in ruin Avhen peace came. Two brothers at Amsterdam, named Neufville, were among the princi])al merchants and specnilators who had connections all over the continent. At length their embarrassments became so great that the bankers at Amsterdam could no longer supjjort them, and they failed for upwards of 330,000 guineas, on the 29th July, 1763. Before the MONETARY CRISIS IN 17G3. 377 news of their actual stoppage reached Hamburg, tlie bankers at tliat town Avere thrown into, the greatest consternation l)y hearing that it Avas intended at Amsterdam to allow the NeutVilles to fail. On the 4th August, 17G3, the bankers at Hamburg met to consider how the tottering state of credit in that town was to be supported, when they say : — " We received a fatal express with the terrible news that you, the gentlemen of Amsterdam, would leave the Neufvilles to sink, by which we were all thunderstruck ; never dreaming that so many men in their senses in your city could take such a step — a step which will infalUbly plunge all Europe into an abyss of distress, if not remedied by you whilst it is time. We, there- fore, send this circular and general letter to you by an express, to exhort and conjure you, as soon as you receive this, to under- take still to suj)port the Neufvdlles by furnishing Avhat money they want, and giving them two or three ])ersons of uncjuestion- able probity and skill f©r curators, that their affairs and their engagements may be concluded and tei-minated, Avithout causing a genei'al ruin, Avhich will otherwise infallibly happen. If you do not, gentlemen, we hereby declare to you, that our resolution is taken, that is to say, that, although were present a very respect- able body of rich and respectable men, Ave haA'e unanimously resolved to suspend our own payments, as long as Ave shall judge it proper and necessary, and that Av^e shall not acquit them, or the counter-i)rotests that shall come from you, or any AA'hatCA'er. "This is the resolution Ave have unanimous^ taken, and from which Ave Avill not dejiart, happen Avhat Avill. Tlie fate of the general commerce of all Europe is at i)resent absolutely in your hands; determine, gentlemen, Avhether you shoidd crush it totally, or supi>ort it." The letter, hoAVCA^er, came too late to exercise any influence, as the Neufvilles liad been allowed to fail six days before. A general failure took place, eighteen houses immediately stopped payment. A much greater number in Hamburg immediately foUoAved, and no business Avas for some time transacted but for ready money. The foilures Avere equally general in many others of the chief cities of Germany. A consi)icuous ex- ample that credit may be just as easily abused mider a metallic currency, as under a paper one. This crisis extended to EngUuid, and Smith says that the Bank made advances to merchants to the amount of a million. 76. In 1764 the Bank's Charter expired. The terms of renewal Avere an absolute gift of £110,000 to the nation, and a loan of £1,000,000 on Excheiiuer bills for two years, at 3 per cent, interest. The charter Avns then renewed on these terms tiU tAvelve months' notice after 1st August, 1780, and the repapneut of the Government debt. 378 THEORY AND PRACTICE OF BANKING. 77. In 1772 the first of those great commercial panics took place, in which the Bank was called npon to take a prominent part in supporting commercial credit. The preceding two years liad been distiugnished by the most extravagant overtrading. On the 10th June, 1772, Heale and Co., Bankers in Thread- needle Street, stopped payment, involvmg sevei*al others. The Bank of England and some merchants came forward to support credit, which had the appearance for a few days, of being- successful ; but in ten days' time a general crash ensued. The Avhole city was in consternation, there had not been such a pro- spect of a general bankruptcy since the South Sea scheme. By the measures taken, the panic was at length allayed, but the bankruptcies of that year amounted to the unprecedented num- ber of 525. These speciilations had been general throughout Europe, and in 1773 the crash extended to Holland. About the beginning of the year, the failures of that country were of so alarming a nature, and so extensive in their influence, as to threaten a mortal blow to all public and private credit tlirough- out Europe. They Avere caused by great speculative dealings ui trade, as well as in the ]»ublic funds of diflerent coimtries, and the losses were estimated at £10,000,000. 78. We have, in a previous chapter, remarked that during the course of this century, tlie coinage was progressively deteriorat- ing, and that a Committee of the House of Commons rei)orted, that on a considerable amount of the gold coinage, the deficiency was about 9 per cent.; hi the year 1774, the great re-cohiage was ordered. The market price of gold well illustrates this deterio- ration : — Before the re-coinage. Market Price of Gold. July, 1718 £3 19 10 Jan. 1721 3 18 6 „■ 1730 3 18 11 „ 1754 3 18 5 „ 1701 3 18 10 „ 1772 4 1 After the re-couiagc. Jan. 1782 3 17 G „ 1790 3 17 G And it continued at tliis rate till September, 1797.* 79. Tlic next renewal of tlie charter was in 1781, when, upon the Bank's advancing £2,000,000 at 3 per cent, interest- for three years, tlie charter was renewed till twelve months' notice after the 1st August, 1812, and the payment of the public debt. Tn LONDON BANKERS CEASE TO ISSUE NOTES. 371) ■ - J — »' J — ..~._-, - -^ — eminent public serviees the ]j:nik liad rendered for ninety years, and warmly deprecated any attempt to interfere with its privi- leges. They carried their plan by a majority of 109 to 30. Considering that the 3 per cents, were then at 5S, the offer of the Bank Avas a very great accommodation to the State. 80. It was about this period, though the exact date is difficult to ascertain, nor is it very material, that the London bankers introduced a change in the method of doing their business. Instead of giving their customers notes or deposit receipts for the sums left Avitli them, they gave them cheque books, or books with a miml)er of blank drafts upon themselves. The customer kept these books at his oa\ti house, and, whenever he had occa- sion to make a payment, he filled up one of these blank drafts in the payee's favor, and the banker imdertook to pay such a draft on demand, jirovided he had funds of his customer's in his hands to meet them, just as he was in the habit of pajTiig his own notes on demand. This method of domg business had so many advantages over that of bank notes, that it universally super- seded them in London. From that period London bankers ceased entirely to issue notes, though they never were forbidden to do so imtil the Act of 1844. This change, simple as it may appear, is of great historical interest, for we shall see hereafter that it was this circumstance that destroyed the monoi)oly of the Bank of England. Bank notes, we have seen, are nothing but promissory notes, payable to bearer on demand. So these cheques are simply unaccepted bills of exchange payable to bearer on demand. By a fortunate accident, the oi)portunity that this method afforded of circumventing the monopoly of the Bank, was not discovered till many years afterwards. If it had been, tliere cannot be a doul)t but that Parliament would have put it down very quickly ; Avhen it was discovered, the age of such monopolies had passed away, and the demand of the Bank to have it provided against was refused. 81. The termination of the seven years' war took place in 1703, when it is usually said that this nation finally took that rank in the scale of nations which she at jjresent holds. After long and doubtful contests, in which victory often trembled in the balance, the star of England triumphed over that of France, both in the East and in the West. Coincidently with this, the industrial energies and mechanical genius of the nation burst forth with miparalleled splendour. Previously to this time, Great Britain was probably more backward in great public 380 THEORY AND PRACTICE OF BANKING. works than any State in Europe, She could show nothing that could be compared M-ith the great French and Sj^anish engineer- ing works. The first canal in France preceded the first canal in England by 150 years. The great canal of Languedoc was completed upwards of half a century before the smallest canal was begim in England. And Spain had preceded France by three quarters of a century. She owes the canal of the Ebro to the genius of Charles V. Li Italy, Gerbert, the morning star of modern literature and science, was famous for his hydraulic works in 999. And those of Lombardy, executed in the eleventh century, are still the admiration of modern engineers. The first Act for a work of this nature, however small, in England, was passed in 1755. Facility, quickness, and cheapness of transit are the very foundations of commercial greatness. Brindley, the father of the modern commercial greatness of England, com- pleted the canal from Worsley to Manchester in 1762. This was as prodigious a stride in advance of the age as the opening of the railway from Manchester to Liverpool was in its day. The success of this was triumphant. Then commenced the great era of canal making. Within 25 years the country was covered with a network of canals such as no other country in Em-ope, but Holland, can boast. Taking into consideration the compara- tive wealth of the country at the two periods, the period from 1770 to 1795 Avas fully as wonderful an elfort in canal-making, as the period from 1830 to 1855 was in railway making. Con- currently with this prodigious extension of the facilities of transport, an eqiial extension of the powers of production took place. It would almost seem like a dispensation of Providence, that at this particular period such an extraordinary outburst of mechanical genius took ])lace. It would almost seem that these three men, Brindley, Arkwright, and Watt, were specially raised la}) by Providence to elaborate those miraculous resources, which it is impossible to doubt, carried this country triumi)hantly through that terrific contest Avhich was then just about to bui'st upon the world. 82. It was just at this period that the original sin of the monopoly of the Bank of England began to tell with full force upon the country. Now Avere tlie seeds of future ruin, misery, and desolation, sown broadcast througliout the land. Tlie pro- digious development of all tliese industrial works demanded a great extension of the currency to carry them on. Wliat was required was to have banks of undoubted wealth and solidity to issue such a currency. Bank of England notes had no circula- tion beyond London. Its monopoly i)revented any other great banks being formed, either in London or the country, and it would not extend its branches into the country. Scotland at this time possessed three great and powerful Joint Stock Banks, MONETAUV CRISIS IN 1783. 381 and it was just at this period that tliey began successfully to extend their l)ranches into the country. England re(|uiretl to have a currency, and, as it could not have a good one, it had a bad. Multitudes of miserable sho|)keej)ers in the country, grocers, tailors, drapers, started u]» like nnishrooms and turnecl bankers, and issued their notes, inuiKhiting the country Avilh their miserable rags. Burke says, that when he came to P]ng- land in 1V50, there were not twelve bankers out of London; in I79;i there Avero nearly 400. In 1775 an Act was passed to prohibit bankers issuing notes of less than 20s., and two years afterwards of less than £5. It is no doubt true, that many of the most respectable banking firms of the ]n-esent day, also took their rise at this time, but they were, compara- tively speaking, few. The great majority were such as we have described above. 8.'?. The state of the foreign exchanges, and the condition of coinage about this peri o')X(tio?^s on the Estdhlishmi nt of the Jiioik of JiliKjIaiu.I) greatly blames the directors for their conduct on this occasion. lie says that they at tirst accom- modated themselves to the crisis, but their nerves could not suppnri the daily dcniaiitl l^r guiucas. and, for the purposi- of 384 THEORY AND PRACTICE OF BANKING. checking that deraand, they curtailed their discounts to a point never before experienced; and that if they determined to reduce their issues, it should have been gradual. Their determination, and the extent to which it was carried, came like an electric shock. 90. He says that there are three different causes for a great demand for guineas : — 1. For export. 2. For the purpose of hoarding, from want of confidence in the Government, and in the circulating paper. 3. To enable comitry Banks to discharge their demands, whilst confidence in the Government and in the bank remained entire. That every measure ought to be taken to prevent and miti- gate the first cause, except prohibition or bankruptcy. We may reserve the second till we come to 1797. That the third ought to be viewed, not with indifference, but with a disposition to spend almost their last guinea. He shews, from the state of the exchanges, that it was quite impossible the guineas could have left the coimtry, as the loss on exporting them to Amster- dam was £3 6s. 3d., and to Hamburg £4 2s. 6d. per cent., and it was notorious that large quantities of gold and silver Avere coming in from France. The cause of this was the continued de])reciation of the Assignats. Under these circumstances, he says that the directors acted quite wrongly, they ought to have seen that the guineas would have very soon come back to them, and that they ought, in fact, to have followed the precedent of 1783, which had been so successful. 91. When the Bank adopted this perverse course, universal failure seemed imminent. Sir John Sinclair remembered the ])reccdent of 1097, wlien Montague had sustained ])ub]ic credit by an issue of Exchequer bills, and thought that a similar ])lan might be followed in this crisis. The Minister desired him to ])ropose a scheme for the ])urpose, which he jiresented on the LGth April. A Committee of the House of Commons was imme- diately a])pointed. In the mean time a director of the Royal Bank of Scotland came up with the most alarming news from Scotland. The public banks were AvhoUy unable, Avith due regard to their own safety, to furnish the accommodation necessary to su])])ort commercial houses, and the country bankers. That unless they received immedi.ate assistance from Govermnent, gejieral failure Avould ensue. Numerous houses, Avho were per- li'ctly solvent, must fall, unless they could obtain tem])orary relief. Mr. Macdowall, M P. for GlasgOAV, stated that the com- mercial houses and manufiuitories there Avere in the greatest distress from the total destriu-tion of credit. That this distress arose from the refusal of tiie (41asgOAV, Paisley, and Greenock THE MONETARY CRISIS OF 1703. 385 banks to discount, as their notes were poured in upon thcni for gold. 92. Tlie Committee reported that the general embarrassment of conmiercial credit was so notorious as to call for an immediate remedy, without much examination. That the failures which had taken place had begun with a run on those houses that issued circuhiting i)aper without sufficient capital, but had ex- tended so as to affect many houses of great solidity, and possessed of funds ultimately much more than sufficient to answer all de- mands upon them, but which could not convert those funds into money in time to meet the ])ressure. That the sudden discredit of so large amount of bankers' notes had })roduce(.l a most incon- venient deliciency of the cii'culating medium. These circum- stances had caused bankers to hoard to a great extent. That unless a circulating medium was provided, a general stojipage must take place. That they had requested a number of the most emuient merchants to meet and consider a plan of issuing Exchequer bills to a certain amount, under proper regulations, Avho had unanimously agreed in the propriety of such a course, as the best remedy that could be devised. 93. The Committee recommended that Exchequer bills to the amount of £5,000,000 should be issued under the directions of a board of commissioners api)ointed for that purpose, in sums of £100, £50, and £20, and imder proper regulations. After con- siderable doubts were ex])ressed by Mr. Fox and Ati-. Grey, as to the i)olicy of this extraordinary measure, which was unknown to the constitution and might subvert our liberties, the bill passed. 94. No sooner was the Act passed than the Committee set to ■work. A large sum of money, £70,000, Avas sent down to IManchester and Glasgow on the strength of the Exclu'quer bills, Avhich Avere not yet issued. This imexpected sui)ply, coming so much earlier than was expected, operated like magic, and had a greater effect in restoring credit than ten times the sum could have had at a later period. 95. When the whole business was concluded, a report Avas presented to the Treasury. It stated the knowledge that the loans might be had operated, in many instances, to preA-ent them being required. The Avhole number of applications Avas 338, and the sum applied for £3,855,024, of Avhidi 238 Avcre granted,^ amounting to £2,202,000; 45 for sums to the amount of £1,215,100 AA-ere AvithdraAvn, and 49 rejected. The Avhole sura advanced Avas rejiaitl ; two only of the parties assisted, became bankrupt, all the others Avere ultimately solvent, and in many instances possessed of gi'eat property. A considerable part of 2 c 386 THEOEY AND PRACTICE OF BANKING. the sum was repaid before it "was due, and all the rest with the utmost jDunctuality. So much scrnpiilous care was taken \:o preserve secrecy as to the names of the applicants, that they were not known to that hour except to the Commissioners and their own sureties. After all expenses were paid, the trans- action left a clear profit to the Government of £4,348. 96. Whatever were the prognostications of its futility and danger before it was done, its success was perfect and complete. The contemporary writers all bear witness to the extraordinary effects produced. Macpherson says, that the veiy intimation of the intention of the Legislature to support the merchants, operated like a charm all over the country, and in a great degree superseded the necessity of the relief by an almost instantaneous restoration of confidence. Sir Francis Baring concurs in this view, and adduces the remarkable success of the measure as an argument to shew the mistaken policy of the Bank. The panic was at length happily staid. The failures up to July had been 932, in the remaining five months they were reduced to 372. The gold continued to flow in, and in the last six months of 1793, and din-ing the tAvo following years, money became as plentiful as in time of peace, and 4 per cent, interest could scarcely be got. 97. All contemporary writers bear witness to the wonderful success of this expedient. After careful deliberation the Bullion Report warmly approved of it, censured the proceedings of the Bank of England, and especially cite it as an illustration of a principle which they laid down, that an enlarged accommodation is the true remedy for that occasional failure of confidence in the country districts to which our system of paper credit is unavoid- ably exposed. 98. Notwithstanding all this weiglit of testimony in favor of the hapjn' effects of this measure, some rigid doctrinaries after- wards condemned the proceedings as a violation of the true principles of Political Economy. Even some who helped to devise it, changed their opinion afterwards upon the subject. Thus, Lord Sidmouth, in 1811, observed that he was, upon consideration, inclined to doubt of its wisdom and policy. Lord Grenvilki also said, that from experience and refiection he Avas convinced the measure was founded on wrong policy; as one of those who were concerned in the measure;, he was perfectly ready to avow his error, for lie -was ])crfectly satisfied in his own mind that it was unwise and impolitic. 09. It appears to us that the reply to these objections is short and simple. In the first place, if it were a violation of the true THE POLICY OF THE BANK CONDEMNED. Ohi principles of Political Economy, it immediately resolves itself into a question of loss of capital. It is quite easy to shew tliat all great errors in Political Economy are destructive of ca])ital. They may be estimated in money. Was this measure a pecuniary loss to the country? But what would have been the loss to the country if it luid not been adcijHed Y Who can estimate the destruction of capital that Avould have ensued in the general wreck of public credit ? It might have endangered the safety of the State. But there are other arguments which apjiear to us to be conclusive as to its projn-iety. The general loss of credit Avas chieily caused by a thorough want of conlidence in the currency of the country. The miserable notes of the ma- jority of bankers were utterly blown uj^on. The great desider- atum was a sound currency. Now, Avhat was it that caused such an unsafe currency to be in circulation? It was nothing but the unjustifiable monopoly of the Bank of England. It was this monopoly, which was itself the most flagrant violation of the true i)rin'ciples of Political Economy, which caused the bad cha- racter of the currency. Consequently the measure of the Go- vernment, in providing a currency in which people would have confidence, was merely a correction of the error which had produced these deplorable results. An undesirable one, it may be, but yet no better one was possible under the circumstances. 1 00. Sir Francis Baring and INIr. Tooke both agree in saj-ing that nothing could be more satisfactory than the financial con- dition of tiie country during 1794 and part of 1795. Both agree that the circumstances of the embarrassments, which led to the catastrophe of 1797, began in the latter part of the year 1795. Mr. Tooke places the commencement rather earlier than Sir F. Baring. He states that the winter of 1794-5, was one of the severest"^ on record, and that, in the spring or summer of 1795, apprehensions began to be felt for the growing crops. The prices of all sorts of corn advanced rapidly. The spring of 1795 was very cold and backward, the summer wet and stormy, and the harvest unusually late. Under these circumstances, wheat, which was at 55s. in January, reached 108s. in August. The same scarcity was general tln-onghout Eui'ope and America. France was in a still worse position than England, and the Government, still further to embarrass her and aftbrd relief to this country, seized all neutral vessels laden with corn bound for France ;" it also employed agents to buy corn in X\vi Bsltic ports, where its price had already been raised greatly, in conse- quence of large purchases on accoimt of the French Government. 101. Sir Francis Baring also states (p. 46) that the method in which the Government "contracted the loan that year tended much to aggravate the evil. He says that, in former wars, it 2 c 2 388 THEORY AND PRACTICE OF BANKING. had been usual for the Government to contract with none but the most respectable monied men, who had the undoubted power to fulfil their engagements. On this occasion, the Minister con- tracted Avith men who did not possess those powers, and in order to make good their payments, they were obliged to have re- course to operations on foreign places, which deranged the exchanges, and had a still greater effect on raising the rate of interest in this country. 102. These causes alone Avere sufficient to create a monetary pressure, but, though they would have been inconvenient, there would have been nothing to create alarm in them. They were, however, aggravated and intensified by other circumstances, which we must now relate. 103. The enormous abuses which might be perpetrated by an unscrupulous Government, and the dangerous power which so potent an engine as the Bank of England would confer upon them, had been clearly foreseen by its antagonists, at the time of its foundation, and had inspired them with a well-grounded jealousy. We have seen that stringent precautions Avere taken in the first Act of 1694, to prevent the Bank making any advances to Government, without the express permission of Parliament. It had been the custom, however, time out of mind, to advance for the amount of such Treasury bills of exchange, as were made payable at the Bank, to the amoimt of £20,000 or £30,000, Avhen it Avas usual for the Treasury to send doAvn orders to set ofi" such advances against the accounts to Avhich they properly belonged. If CA'er these adA^ances reached £50,000 it Avas a subject of complaint. In tlie American Avar these limits had been much exceeded, and sometimes reached £150,000. Mr. Bosanquet Avas Governor of the Bank in 1793, and the legality of such proceedings excited grave doubts in his mind, and, after consulting Avith his brother directors, they agreed that it Avas a serious question Avhether the penalties ]n-o\ided in the the Act did not extend to such transactions. They, therefore, thought it Avould be expedient to apply to the Government, to obtain an Act of indemnity, to relieve them from any penalties they might have incurred, and to permit such transactions to a limited amount. Mr. Bosanquet, Avho conducted the negociation with Mr. l*itt, expressly says, that ]\[r. Pitt proposed to bring in a clause Avhich should indemnify the directors to advance to a Ihnlted ((mount. He says, that it was originally intended that tlie |K'nalty should be taken olfoiily in case the advance on Treasury hills should be restrained within a limited sum. Tiiis limited amount Avas intended to be fixed at £50,000 or £100,000. Mr. liosanquet, however, then Avent out of otlice, and was unable further to attend to the negociation. INIr, Pitt Avas much too PITT DECEIVES THE BANK. 389 keen not to sec at once the enormous facilities Government would obtain if this Act M'cre passed. Accordingly, lie pressed it quickly through Pailiament, but he took care to omit any clause of limitation (Statute 1793, c. 32). Never had sucli a formid- able engine been placed in the hands of a Minister. lie was now armed with an unbounded power of drawing upon the Bank, with nothing to restrain him, unless the directors should take the audacious step of dishonoring his bills. The Bank, henceforth, Avas almost entirely at his mercy, and then he plunged headlong into that reckless career of scattering English gold broadcast over Europe. 104. No sooner had Mr. Pitt surreptitiously obtained this power over the Bank, than he set all bounds of moderation at defiance, and, sure of being able to command unlimited supplies at home, he proceeded to send over enormous amounts of specie to foreign powers. In 1793 the subsidy and sums paid to foreign emigrants amounted to £701,475. In 1749 the foreign subsidies were £2,641,053; in 1795 they amounted to £0,253,140. Thus, in three years, the sums sent abroad amounted to upwards of nine millions and a half. These, however, were not the totals of the s})ecie sent abroad on other accounts. In 1793 it was £2,715,232; in 1794 £8,335,592; in 1795 £11,040,236. These great remittances had the inevitable eftect of making the foreign exchanges adverse, and excited tlie greatest alarm in the Baidc parlour. At the same time that this great drain of specie was going on, the Treasury bills increased to an unprecedented amount, and the demands for accommodation from the commer- cial world Avere equally pressing. Nothing could be more un- pleasant than the situation of the Directors, placed between these powerful parties contending for accommodation, which it was daily becoming less in their power to give. So early as the 11th December, 1794, the directors foresaw the ensuing pressure, and made representations to Mr. Pitt. In January, 1 795, it became necessary to ailopt a firmer attitude, and on the 15th they passed a resolution, that with a foreign loan of six millions, and a home one of eighteen millions about to be raised, the Chancellor of the Exchequer must be reciuested to make his financial arrangements for the year, Avithout requiring further assistance from them; and more particularly, that they could not allow the advances ou Treasury bills at any one time to exceed £500,000. Mr. Pitt promised to reduce them to that amount by pajnuents out of tho first loan. 105. lie, hoAA'cver, paid little regard to these remonstrances ; and, on the 16th Ai)ril, they Avere comi)ellcd to remind him that he had not kei)t his promise that the sum should be reduced. They told him that they had come to a resolution that they 390 THEORY AND PRACTICE OF BANKING. •VTOuld not, in future, permit the advances to exceed the stipu- lated sum, Mr. Pitt pretended he had forgotten the circum- stance in the multiplicity of business, and promised that the sum should be immediately paid. Nevertheless, no reduction took place in the amount ; another remonstrance was equally in- effectual, and on the 30th July the Directors informed him that they intended, after a certain day, to give orders to their cashiers to refuse payment of all bills, when the amount exceeded £500,000. Mr. Pitt was not prepared to comply Avith the request, and on the 6th August he applied to them for another advance of two millions and a half, but they refused to take his letter into consideration, until he had made satisfactory arrangements with them for the repayment of the other advances. After some further communications, they agreed to the loan for £2,000,000, 106, The Act of Mr. Pitt had, in fact, deprived the directors of all control over the Bank, The foreign exchanges began to fall rapidly towards the end of 1794, and in May, 1795, had reached such a depression as to make it profitable to export bullion, and this circumstance, as well as the knowledge that several foreign loans Avere in progi'ess, should have warned the directors of the necessity of contracting their issues; such was the course laid down by the directors in 1783, Instead of that, their issues were greatly extended. In the quarter from January to March, 1795, they stood higher than they liad ever done before, though Ave must, in common fairness, acquit tlie directors of the Avhole blame. The amount of their issues in August, 1794, was little more than ten millions; in February, 1795, it had increased to fourteen millions, but this Avas chietly caused by the bills Avhich Avere drawn on the Treasury on behalf of foreign Governments, Avhich Avere made payable at the Bank. The di- rectors had tlien to choose between endangering their own safety, or declaring the Government bankru])t. 107. All these concurrent causes Avhich Ave have detailed, began to produce tlieirfull effects in the autumn of 1795. The drain commenced in Se])tember, and proceeded Avith alarming rapidity. On tlie 8th October, the Bank made a formal com- munication to Government, that it excited sucli serious appre- lieiisions in tlieir minds, that they felt it an absolute necessity tliat the advances to the Government must be diminished. They reminded him of the Avarning they had given in llie beginning of the year as to the danger of the foreign loans, Avhich liad been fully verified, and that nmnerous other ])ayments must shortly be provided for. '^fliat the market ])rice of gold Avas then £4 4s. ])er ounce. Under tliese circumstances, the Bank could lend no further assistance to the Government. On the 23rd of the same month, tlie directors having heard rumours of Pitt's bad conduct to the bank. 391 a new loan, waited on INIr. Pitt, who professed that he had not, at present, the most distant idea ol" one. On tlie 1 8th November, the Governor informed jNIr. Pitt that the drain continued with unabated severity, and that the market price of goM was £4 2s. per ounce, and said that rumours were in cireuhition that another loan was intended, notwithstanding Mr. Pitt's denial of it so lately. Mr. Pitt said that since their last interview the successes of the Austrians had been so great against tlie French, that he was of opinioii that it would highly conduce to tlie common cause to aid them with another loan, not exceeding £2,000,000, but he added that if such a course would be hazardous to the Bank, every other consideration should be overlooked, and the loan abandoned. 108. Parliament met on the 29th October, in the midst of great public excitement and dissatisfaction. The King was saluted with loud hootings and groanings, and volleys of stones were flung at his carriage, as he went to open the Session. The Speech said that he had observed for some time past, with the greatest anxiety, the very high price of grain, and that this anxiety was much increased by the deficiency of the harvest that year. A Committee of the House of Commons was immediately afterwards ai)]x>inted to consider the high price of corn. In December, the House came to strong resolutions as to the necessity of diminishing the consumption of wheat, as much as possible, and the members of both Houses signed an engage- ment to diminish the quantity by at least one-third, and to use their influence to persuade others to do the same; and an Act was passed oflering heavy bounties for the importation of corn. 109. This project of a loan going on, and being now proposed to be £3,000,000, the Court of Directors, after a very solenm deliberation, on the 3rd December, came to the unanimous resolution that, if the loan proceeded, they had the most cogent reasons to a])i)rehend very momentous and alarming consequences from the actual eflects of the last loan, and the continued drain of specie and bullion. In answer to this representation, Mr. Pitt solemnly ])romised them that he should lay aside all thought of it, unless the situation of the Bank should so alter as to render such a loan of no importance to them. 110. The directors at last found that it was absolutely neces- sary to choose between making the Government bankrupt, and taking strhigent measures to restrict their accommodation to the merchants. They resolved to flx beforehand the amount of advances they could make day by day, and gave notice that, if the application on any day exceeded the sum so resolved to be 392 THEORY AND PRACTICE OF BANKING. advanced, ^:)?'0 rata proportion of each applicant's bills should be returned "without regard to the respectability of the party or the solidity of the bills. 111. As matters continued to get worse, the directors had several communications with Mr. Pitt, in January and February, 1796, but the project of the foreign loan being much dwelt upon with much earnestness by Mr. Pitt, on the 11th February they came to a resolution which was communicated to him the same day:— "That it is the opinion of this Court, founded upon its experi- ence of the effects of the late Imperial loan, that if any further loan or advance of money to the Emperor, or other foreign State, should, in the present state of affairs, take place, it will in all probability prove fatal to the Bank of England. " The Court of Directors do therefore most earnestly depre- cate the adoption of any such measure, and they solcumly pi'otest against any resi:»onsibility for the calamitous conse- quences that may follow thereupon," Mr. Pitt replied, that after the repeated promises he had made that no further loan should be made without communication with the Bank, and a consideration of their circumstances, he saw no occasion for these resolutions, and that he should regard them as having been made in a moment of needless alarm. 112. We have already seen, fi-ona INIr. Pitt's conduct in the affair of the clause relating to the advances on Treasury bills, that he was not bound by any veiy scrupulous notions of honour. On this occasion he departed still further from the right path, for, notwithstanding all his solemn promises, so frequently and emi)hatically n\ade, the Directors discovered that remittances Avere still continuing to be clandestinely made. In several interviews with him, the Governor of the Bank stated that he apprehended these remittances were being made, but Mr. Pitt did not offer any explanation, and it was afterwards ascertained that they were going on. 113. Under the influence of all these combined drains of specie, the exchanges with Ilambui'g were in a state of extreme depression, during the first three montlis of 1796. Sir F, Baring shews that during Jainiary tlie profit was £7 10s. per cent.; during Febi-uary €6 10s.; and during JNTarcli £8 7s. 6d. in trans- mifling gold to tliat place. At length the several drains began to diminish. An abundant su])])ly of corn Avas obtained. The cnntimied contraction of the bank issues, and the cessation of the transmission of specie, caused the exchanges to assume a favourable aspect in the beginning of April, and it continued steadily to increase till February, 1797. INCREASING DIFFICULTIES OF THE BANK. 393 114. The stvinociit incas^nrcs adopted by tlic Bank to contract its issues, caused much couijthiiut anioui^st uiercantile men, and a meeting of bankers and merchants was held at tlie London Tavern, on the 2nd April, Avho resolved, that an alarming scarcity of money existed in the City of London, which was caused chiefly, if not entirely, by an increase in the commerce of the country, and the great dimimition of mercantile discounts by the Bank. They resolved that if means could l)e found to augment the circulating medium, without infringing the jtrivi- leges of the Bank of England, so as to restore the amount to what it was before the contraction of discounts, it was the duty of every friend to trade to give such a ])\i\u the most earnest support. The meeting ap])ointed a Committee to prejtare a plan for such a purjiose. Mr. Boyd drew up a long report on behalf of the Committee, which proposed that a Board of twenty-five members should be apjtointed by Parliament, who should be authorized to issue ])romissory notes, payable at six months after date, bearing interest. at l|-d. per £100 per day, upon receiving the value in gold and silver. Bank of England notes, or iii Bills of Exchange having not more than three months to run. The Committee had an interview with the Chancellor of tlie Ex- chequer on the subject, and he informed them that the directors of the Bank had proposed, as a remedy, that the floating debt should be funded, which i)lan he determined to try before adopt- ing their plan. This was accordingly done, but it produced no relief. 115. Mr. Pitt had never fulfilled his promise, so often repeated to the directors, that the advances on Treasury bills should be reduced to £500,000; on the 14th June, 1796, they stood at £1,232,649. At the end of July, he sent an earnest request to have £800,000 at once, and a similar sum in August. They were induced to consent to the first, but refused the second advance. Mr. Pitt said that the first advance Avithout the second M'ould be of no use to him, and begged them to reconsider their decision. The directors, thus pressed, Avere driven to assent to it, but they accompanied it with a most serious and solemn remonstrance, which they desireil should be laid before the Cabinet. They said that nothing under prescjit circumstances could induce tliem to comjily Avith the demand, except the dread of a worse evil following the refusal, and they said that this advance Avould incapacitate them from granting any further assistance during the yeai". They closed their remonstrance by saying : — " They likewise consent to this measure in a firm reliance that the rei)eated promises so frequently made to them, that the advances on the Treasury bills should be completeley tlone away, may be actually fulfilled at the next meeting of l^irliament, and the necessary arrangements taken to prevent the same from ever 394 THEORY AND PRACTICE OF BANKING. happening again, as they conceive it to be an unconstitutional mode of raising money, what they are not warranted by their charter to consent to, and an advance always extremely incon- venient to themselves." However, in November, Mr. Pitt made a fresh demand on them for £2,750,000 on the security of the Land and JNIalt Taxes of 1797, Avhich was granted on condition that the advances on Treasury bills amounting to £1,513,345 were paid out of it. 116. Mr. Pitt took the money, but never paid off the bills. The Directors again sent on the 1st February 1797, to demand payment of them, as they then amounted to £1,554,635 and would in a few days be increased by nearly £300,000 more. Mr. Pitt made many excuses for the non-payment, and promised to make an endeavour do so, but he dropped a hint that another large sum of bills had come in from St. Domingo. Upon being pressed as to the amount, he said that it was about £700,000. The Governor expressed the greatest apprehensions, and begged him to delay the acceptance as long as he could. Mr. Pitt then hinted that he should want a large sum for Ireland, which he said would be about £200,000. The Governor assured him that the drain of cash had been continuous and severe of late, and that such a demand \yould be very dangerous. 117. The enormous failures of the country bankers in 1793, had been followed by a i)ermancnt diminution of the issues of country banks to a prodigious extent. Mr. Henry Thornton, after instituting extensive enquiries in diiferent parts of the country, stated, as the result, that the country bank notes were reduced by at least one half, and that the wants of commerce had caused a very large quantity of guineas to be drawn into the countrj^, to supply their ])lace. Meantime, as we have already observed, although tlie foreign exchanges had become favourable, the Bank still continued to adhere, \vith the utmost severity, to its policy of restriction throughout the autunm of 1796, and during the last three months they were no higher than they liad been in 1782, Avith an amount of commerce many times hirgca- than in that year. Commercial ])ayments required to be made in some medium in which the public had coniidence. As the ])ubli(; could not get not(>s, they made a steady and con- tinuous demand for guineas. Tlie luiUion in the Bank in INlarch, 1796, \vas £2,972,000; in September, £2,532,004; and in l^ecem- ber, £2,508,000. When a drain set in more severely than ever. 118. At this period the political situation of tlie country was in the most gloomy condition. The war-like combinations of Mr. Pitt had totally failed, and all Eui'ope was now smarting under the consequences of their suicidal folly in ineddling with the POLITICAL GLOOM IN 1797. 395 French Republic. Mr. Burke had pronouuceil, in 1V90, that France was, in a political lii^lit, exinniged I'roni the system of Euroi)e; that it was doubtful whether she wouM ever ap|)ear in it aijain. That GuUos quoqiie in bellis Jfoniisse andivimiis wouhl possibly be the language of the next generation. So much for political prophecy! That country, which had been supposed to offer so easy a prey to surrounding nations, and whose epitaph Mr. Burke had suggested, was now the most powerful State in Europe. She had ([uelled internal dissentions in torrents of blood, and poured forth her armies in a resistless torrent to avenge herself upon the haughty States which had pi'csumed to meddle with her domestic condition. Great Britain, which had commenced the war with every other State in Europe as her ally, was now left alone. The Directory had subdued Spain by artifice and negociation, and concluded a treaty with her, offensive and defensive, at St. Ildefoiiso, on the 19th August. The campaign of Napoleon, in 1V90, in the north of Italy, is generally allowed to be equal, if not superior, in brilliancy, to any subsequent one. By a series of marvellous victories, he drove the Austrians out of Italy, and, in the begin- ning of 1797, Home was only saved from conquest by absolute submission at Tolentino; and, within a month, Venice was annihilated, and Austria sued for peace at Leoben. This great reverse of circumstances had strengthened the ])arty who had always been advocates for peace in England, and Mr. Pitt was compelled to make overtures for peace in October, 1796. A British envoy was sent to treat with the Directory, and lie staid in Paris for two months; but, as neither party was sincere, the treaty came to nothing. The fiict was, that ])eace was the fur- thest thing possible from the thoughts of the Directory. After the conquest of La Vendee, they had an army of 100,000 men set free, under a general who is usually acknowledged to have been the equal of Xajjoleon in military talent, and who was burning to emulate his exploits in Italy. "While the i)retended negociations for peace Avere going on, the Directory were or- ganizing an immense expedition for the invasion of Ireland. The orders to sail were transmitted to it several weeks before the British envoy Avas expelled from Paris, and it actually sailed two days before he left. Fortunately this great armada Avas dispersed by a tempest, a fcAV straggling vessels reached Ireland in the last Aveek of December, but the rest AA'ere obliged to put back to France. 110. This terrible menace Avhich had been so long hanging over the country, and Avhose destination it Avas vain to conceal, inspired the utmost alarm, ;md there Avas a continual demand for guineas in Ireland. The year 1797 commenced Avith the most gloomy apprehensions and depression ; the country bankers 396 THEOKY AND PRACTICE OF BANKING. discei'iied that the first burst of the storm would fall upon them, and determined to jjrovide for it, by obtaining as much specie as they could from London, and, accordingly, the drain continued with mcreased rapidity after the beginning of the year. 120. jMr, Pitt had liinted in his intervicAV with the Governor of the Bank on the 1st February, that a loan for Ireland would l^robably be required, which would probably not exceed £200,000, but soon afterwards the directors was struck with dismay on hearing that the amount required was £1,500,000. On the 10th February the directors came to a resolution that before they could entertain any proposal for the Irish loan, the Government must pay off debts to them amounting to £7,186,445, of which they handed him in the details. 121. At this time the banks at Newcastle had a more than ordinary demand upon them for cash. In addition to the manu- factories and collieries, the number of troops stationed in that part of the comitry had been considerably augmented. The banks had imjDorted an extra supply of cash to meet their pur- poses, and were negociating for more when an event happened Avhicli brought on the crisis. A French frigate went into one of the Welch harbours and landed 1,200 men. At the same time an order came down from Government to take an inventory of the stock of the farmers all along the coast, and to drive it into the interior if necessary. Tliese circumstances created a perfect panic among the farmers : on Saturday the 18th February, being market day, the farmers, who at that time of year had the principal parts of their rents in their hands, actuated by the terror of an immediate invasion, hurried into Newcastle the produce of their farms, wliich they sold at very low prices, and immediately rushed to tlie different banks to demand specie. Seeing this universal jtanic, the banks came to an agreement to stop payment on the Monday, if the panic did not subside, which they accordingly did. 122. On the 21st February the state of the Bank became so alarming, tliat the directors resolved that the time had come -wlien they must make a communication to the Government. Tiie (juantity of l)nllion had been rapidly diminishing, and the constant calls of the l)ankers from all ])arts of the town for cash, shewed them tliat there must be some extraordinary reason for it. ]\[r, l*itt was aware that this proceeded from the general alarm of invasion, Avhich he thought was magnified much beyond anything to warrant it. It was agreed tbat a frigate should be sent over to Ilainbiirg to purchase specie. On the 24th of February, the drain l)ecame worse than ever, and inspired them with such alarm for the safety of the House tliat they sent a STOITAGE OF THE BANK. 31)7 deputation to Mr. Pitt to ask him how long he considered tlie Bunk should continue to ])ay cash, and when he should think it necessary to interfere. Mr. Pitt said it Avould be necessary to prepare a proclamation to put a stop to cash payments, and to give ])arlianientary security for the notes. But in that case it "would be necessary to appoint a Secret Committee of the House to look into the affairs of the Isank. The deputation assured him that the Bank would readily agree to this ; and it was resolved to call a meeting of chief bankers and merchants of London, to come to some resolution for the sui^port of public credit in this alarming crisis. 123. The news of the stoppage of the Newcastle banks spread like wildfire throughout the country, and soon reached the metropolis. The drain upon the bankers' coffers noAv became a run ; the first serious apprehensions that danger was imminent, were felt on the 21st of February, but the drain then became imexampled, till on Saturday, the 25th, the cash Avas reduced to £*1, 272,000. Before this, the directors, in a state of utter be- wilderment at the state of the country, had used the most violent eftbrts to contract their issues. In five Aveeks they had reduced them by nearly £2,000,000. On the 21st January they AA'ere £10,550,830 ; on the 25th of February they Avere £8,640,250. But even this gave no true idea of the curtailment of mercantile accommodation, for the private bankers Avere obliged, for their own security, to foUoAV the example of the Bank. In order to meet their payments persons Avere obliged to sell their stock of all descriptions, at an enormous sacrifice. The 3 per cents, fell to 51, and other stock in proportion. 124. On Saturday, the 25th, the Court felt that the fatal hour Avas at last come, when they must for the first time since its institution, come to a total suspension of i)ayments. A meeting of the Cabinet Avas held on Sunday, at AVhitehall, and an order in Council AA'as issued, recpuring the directors of the Bank of England to suspend all payments in cash, imtil the sense of Par- liament coidd be taken on the subject. 125. The King, the next day, sent a message to Parliament, to inform them of the step that had been taken, and rccommeutled the subject to their most serious and immediate attention. Mr. Pitt moved that the message should be taken into consideration the next day, and that he should propose that a Select Committee be appointed to iuAestigate the state of the Bank's affairs, Avhich he believed Avere in the most solid condition. 126. The directors of the Bank had the order in Cotuieil printed and Avidely circulated, and issued a notice of their own. 398 THEORY AND PRACTICE OF BANKING. to say that the general concerns of the Bank were in the most affluent and prosperous condition, and such as to preclude every doubt as to the security of its notes. At this time the cash in the Bank Avas reduced to £1,086,170. 127. The relief produced at the instant, by the definite determination to suspend cash payments and extend their issues of paper, "«'as very great. Within one week it increased its accommodation by nearly two millions. On the same day a resolution was entered into by 4,000 of the merchants, in the city, to combine to support the credit of the notes. 128. Both Houses of Parliament appointed Committees to examine into the affairs of the Bank. The Committee of the House of Commons reported the outstanding obligations of the Bank, on the 25th February, were £13,770,390, and the total amount of their assets, £17,597,280, leaving a surplus of £3,126,890 over and above the debt of the Government, amoun- ing to £11,686,800, which j^aid them 3 per cent. 129. Both Houses reported that it was advisable for the piiblic interest that the suspension of payments should be continued for a limited time, and a bill for that purpose was accordingly brought in. After some debates, which threw very little light on the subject, the Act (Statute 1797, c. 45), Avas passed. Its chief provisions were: — 1. A clause of indemnity to the Bank and all connected with it, for anything done in pursuance of the order in Council. 2. The Bank forbidden to make any payments in cash to any creditors, except in certain cases, and protected from all law proceedings. 3. The Bank might issue cash in ]iayments for the Army, Navy, or Ordnance, in pursuance of an order from the Privy Council. 4. The Bank Avas to make no advance above £600,000 for the pul)lic service, in cash or notes, during the restriction. 5. If any person deposited any sum, not less than £500, in gold, in exchange for notes in the Bank, it might rc})ay three- fourtlis of the amount. 6. It might advance £100.000 in casli to the bankers of London, Westminster, and Southwark, and to the Bank of Scotland, and the Royal I5ank of Scotland, £25,000 each. 7. Payment of debts in l)ank notes to be deemed as payments in cash, if offered and acce]ited as such. 8. No debtor was to be held to special bail, unless the affidavit stated that ])ayment in bank notes had not been offered. 9. Bank notes would be receiAX'd at j)ar, in payment of taxes. 10. Bank might issue any cash it received since 26th February, WAS THE CONDUCT OF THE BANK RIGHT. 399 upon a'ivino^ notice to the Speaker of the House of Commons, and advertisint; in the "IjOikIom Gazette," and on tlie Royal Exchange. 11. The Act to continue till the 2-lth June. 130. An Act was also passed to enable the Bank to issue notes under £5 (Statute 1V97, c. 28), and by c. 32 this power was extended to the country banks, but they were to continue liable to pay nioriey on demand for them, and, in failure of doing so within three days after demand, any justice of the peace might cause the amount and costs to be levied by distress. 131. All banking companies and bankers in Scotland were allowed to issue notes payable to bearer on demand for any sum under 20s. 132. We cannot refrain from noticing that, in the debate on this measure, ]\Ir. Pitt expressed the identical views on the subject of the circulating medium that are the leading principles of this Avork. lie said : " As so much has been said on the matter of a circulating medium, he thought it necessary to notice that he did not for his own part take it to be of that empirical kind which had been generally described. It appeared to HIM TO CO>!SIST IN ANYTHING THAT ANSWERED THE GREAT PURPOSES OF TRADE AND COMMERCE, WHETHER IN SPECIE, PAPER, OR ANY OTHER TERMS THAT MIGHT BE USED." 133. An event of such portentous magnitude as the suspen- sion of cash payments by the Bank of England, of whose efiects there had been no previous experience, could not fail to give rise to the most conflicting opinions as to the necessity of the measure, of the course of conduct of the directors which led to it, and as to the jiolicy which ought to have been adopted xmder the drain which occurred in tlie last week of February, 1797. INIany men of great eminence and ability changed their opinions in al\er times, when they came to look back ujxin the subsequent events. In examining this question, so as to form a just estimate of the conduct of the directors, we must remember that they were not masters of their own policy. They Mere distracted by two antagonistic claims, both of which they conceived it impossible to satisfy, at the same time, namely, that of the Chancellor of the Exchequer and the demands of conunerce. They considered that if they advanced to the Government they must contract their issues to merchants, and, as the Minister was the more powerful and imperious ])arty of the two, they were obliged to yield to his power. 134. Several of the directors being examined before the com- mittees, unanimously attributed the necessity of stopping pay- 400 THEORY AND PEACTICE OF BANKING. ment to the euormoiis ainomit of their advances to Government, and o-ave it as their decided opinion, that if the Government had repaid these advances, as they ought to have done, that this great catastrophe would have been avoided. AVe may take it, therefore, as admitted on all hands, that if they had been repaid by Government, they would have very greatly extended their advances to merchants. The real question, then, is, considering that they were under such advances to GoA'ernment, Avould it have been prudent to have been more liberal in their accommo- dations to merchants ? 135. Mr. Henry Thornton was very strongly of opinion that the excessive contraction of the Bank notes had produced the most injurious effects in shaking public credit of all descriptions. That the excessive reduction of notes had caused an unusually severe demand for guineas, that the great public distrust was directed against country bank notes, and that the Bank of England ought to have extended their issues, to supply the place of the coimtry notes. 136. Ml". Walter Boyd, an eminent merchant, was very clearly of opinion that the restrictions upon the issue of notes by the Bank was the chief cause of the forced sale and depreciation of the public securities, and, if the Bank had only maintained its issues at the same height as they were in December, 1V95, the drain of specie from the Bank, as well as the embarrassments in the mercantile world, would have been avoided, and a great portion of the fall which public securities had experienced, would have been prevented. 137. Mr. George Ellison, who was secretary to an association of a great part of the country banks, considered that the quan- tity of the coin in the country was greater than it Avas in 1793, though a very considerable part was hoarded away owing to the public alarms that were abroad. He attributed the great public distrust to the remembrance of the conduct of the Bank in 1793, when it suddenly contracted its discounts, just at the period when they were most wanted. 138. Tlic Committee of tlie Lords called tlie attention of the House very strongly to these opinions, but they did not venture themselves to pronounce an opinion on their justness. The Com- mittee of the Commons went considerably nearer towards ap- proving of them. In the year 1810, tlie Governor of tlie Bank being examined before the Jiullion Committee, stated, tliat after the ex))erience of their ])oli(;y of restriction, many of tlie directors repented of the measure, and the Bullion Committee explicitly condemned the policy of tlie Bank l)ntli in 1793 and 1797. WAS THE CONDUCT OF THE BANK RKHIT ? 401 139. The Directors ol" the Bank, acting in the midst of such unprecedented circumstances, and so trenienle to export gold, they enlarged them to an extravagant extent, and when the exchanges wei'e extremely lavourable, so that gold was sure to flow in, they restricted them with merciless severity. The issues, which were £1-1,000,000 when the exchange Avas against the country, Avere reduced to £8,640,250, when they had been for several months eminently favourable. It appears, from the entii-e evidence in the reports, that it was this excessive restriction of notes which drained their vaults during the autumn of 1796, and that if they had been more liberal in their issues, their vaults would have been much better replenished with cash. 140. Tliis disaster was the second notable penalty which the country paid within four years for the unjustifiable monopoly of the Bank. Never was thure a more unfortunate examjile of monopolizing selfishness; it would neither establish branches of its own in the country, nor would it ])ermit any other i)rivate company, of power and solidity, to do so, whose credit might have interposed, and aided in sustainhig its own. Moreover, when a failure of confidence was felt in the country notes, it refused to supply notes of its own .to sui)ply their place. The power of issuing what plays so important a part in commerce, was absolutely forbidden to wealthy companies, and left in un- bounded freedoni to private persons, many of whom had no capital or property to supjjort their issues, and whose credit vanished like a i)utt' of smoke, in any p\iblic danger. The Bank, consequently, was left to bear the Avhole brunt of the crisis, solitary and unsui»ported, and finally succumbed. 141. From the foregoing considerations, as well as the weight of authority on the subject, we can scarcely have any room to doubt that the suspension of cash payments was brought about at that particular time, by the erroneous policy of the directors. 2 D 402 THEORY AND PRACTICE OF BANKING. We must, in cmidour, state that it appears open to much doubt whether any management, however skilful, could ultimately have saved them from such a disaster, during- some period of the war. Several of those who concurred in the measure at the time, after their judgment had been corrected by experience, ex- pressed their regret at having done so. Sir Robert Peel, in 1844, said it was a " fatal " measure. Notwithstanding, however, the concurrence of so many weighty autliorities, — and this is pecu- liai'ly a case where great authorities carry much weight, — we cannot help thiiilviiig that it was fortunate that it occurred at this early period. The alarm and dangers which preceded its stoppage were comparatively slight, compared with those which menaced the country after that event. The mutinies in the fleet, the rebellion in Ireland, the enormous accumulation of troops on the heights of Boulogne, flushed with victory, and led by a more fortmiate, though probably not a greater soldier than Hoche, and burning with zeal for the invasion of England, were dangers of such portentous magnitude, as to render it, to the last degree improbable, that any paper currency, convertible into gold could have survived them. That Montague was a greater and more successful financier than Pitt can, we think, scarcely be doubted, and the carrying through the re-comage of the silver, in the midst of so much jiublic distress, was a financial operation, of which the audacity, skill, and success, must ever be regarded with admiration. But it must be remembered that the crisis in that reign lasted a much shorter time than the revolutionary war, and was never fraught with so much real danger to the in- dependence of the country. At that period there was no paper credit, except the notes of the Bank of England, and William was at the head of a great European confederacy against one overgrown power, so that the circujnstances of the two periods were in no way parallel, but rather, we may say, reversed. The confederacy against England at the latter period, was far more menacing and formidable tlian the alliance against France. The fortunes of tlie British Empire were apparently at their lowest ebb in 1798, and there seemed to be but one thing wanting to complete the destruction of the country — the loss of public credit. However great and invaluable are the blessings of a paper currency in time of peace, there does not aj)pear to be any instance of its having successfully withstood the danger of an invasion by a foreign enemy. Even in Scotland, were it had been confessedly conducted upon a better system, and obtained the confidence of the country to a much greater degree, it could not have M'ithstood the dread of invasion, if it liad not been for the timely assistance of the Bank of England. And if it could not do so in that country, where the danger was remote, it is not probable tiiat it could do so in England, where not only it was of Miucli inferior stability, but was the very part of the GREAT INFLUX OF GOLD. 408 empire aimed at, ami first exposed to danger. The constant power of producing jjublic embarrassment by demands for gold would have been a ])()werful weapon in the hands of the enemy, in which they would Iwive found many to sui>])Ort them in this country from political sympathy. This measure, therefore, removed one perpetual source of terror and alarm from the Ministry. We shall shew, in the next chapter, that the great depreciation of the currency which took place some years later, was not by any means a necessary consequence from such a measure, but was produced by the infatuated perversity, both of the Government and of the Bank of England, who, with fatal obstinacy, persisted in a system combining almost every false principle that could be thought of. As the susjiension, then, must, we think, have taken place sooner or later, it was probably advantageous for the country that it did occiu' so early iu the struggle. 142. The presumed scarcity of guineas, which led to the supposed necessity of issuhig the order in Council, also rendered a more abundant supjily of the circulating medium necessary, and an Act was immediately passed suspending, till the 1st May, the Act (Statute iVTo, c. 51) restraining the negociation of small promissory notes. In a few days the Bank caused to be pre- pared and issued £l and £2 notes, and, to supply still further the demand for a small currency, they issued a notice that they had imported a large nundjer of Spanish dollars, Avhich Avere to b« current at 4s. (id. However, it Avas discovered that the dollars were undervalued by 2d. each, so their current value was enhanced by 3d. These dollars were stamped AAith a small kuig's head. The Bank, having put the dollars into circulation at id. each above their intrinsic value, the bullion merchants were not slow in seizing the advantage, and imported an im- mense quantity of similar dollars, which they had stamped in a similar manner. They Avere all called in on the 31st October, 1797, by Avhich time the Bank had put 2,325,099 into circulation. It at first attempted to refuse payment of the forged ones, but they were executed in so close imitation of the real ones that it was impossible to detect them, and tliey were obliged to pay them all. 143. When the actual suspension took place, the foreign ex- changes were highly favorable, so much so as to make it profit- able to import gold, which began to flow in in great abundance. On the 30th May, Mr. ^Maiming stated in the House, that vast quantities of gold had tlowed into the Baid-c, both from the country and from abroad. The Government, however, and the directors of the Bank concurred iu thinking that it would be imprudent to resume payments in cash at the period when the 404 THEORY AND PRACTICE OF BANKING. restriction Act expired, and it was prolonged to one month after the meeting of the next Session of Parliament. 144. Parliament met again on the 2nd November, and on the loth the House of Commons appointed a Secret Committee to inquire whether it was expedient to continue the restriction. On the iTth they reported that, on the 11th of that month, the total liabilities of the Bank were £17,5*78,910, and their assets £21,418,460, leavuig a balance in their favor of £3,839,550, ex- clusive of the Government debt of £11,686,800. That the ad- vances to Government had been reduced to £4,258,140, while the cash and bullion were five times the sum they stood at on the 25th February last, and much above what they had been at any time since September, 1795. That the exchange with Hamburg was unusually favorable, and had every appearance of continuing so, unless pohtical circumstances should aifect it. That no in- convenience seemed to be felt by the bankers and traders of London, for, whereas by law they were entitled to demand three-fourths of any deposit in cash they might make, they had only actually demanded one-sixteenth. They presented a reso- lution of the Directors, stating that the condition of the Bank's aflairs was such that it could with safety resume its usual functions. The Committee, however, recommended that in con- sequence of the state of public affairs, it Avas advisable that the restriction should be continued for a further period. After a short debate, an Act was passed to continue the restriction until one month after the conclusion of a definite treaty of peace. 145. The opposition in Parliament and m the country to the policy of the Ministry was very powerful, and the transactions betA\'een the Bank and the Government were severely commented upon by the leaders of that party in Parliament. They, however, did not venture to divide against the bill. In the course of the discussion, however, Sir William Pulteney spoke witli very great ability against the national evils and inconveniences of the mono])oly of banking by one comi)any, and moved for leave to bring in a bill to establish another bank in case the Bank of England did not resume cash payments on the 24th June. His S])eeches on this and a subsequent occasion were full of ad- mirable argument, but the interests arrayed against him were so strong that leave was refused to bring in the bill by a majority of 50 to 15. 140. Tl»e exchange with Hamburg at tlie time of the sus- ])ension of cash payments was 35-10; it continued to improve tln-oiigliout the wliolc of that year, and in December stood at 38-5, wliicli was about £13 ])er cent, above par; the issues of the Hank were al)oiil I 1 .1 millions during the year. This extra- RENEWAL OF THE CHARTER IX 1800. 405 ordinary state of the exdianijes coiitimied during the whole of 1798 when tliey began gradually to fall, and in March, 1 TOO, they were at 37*7, which was still £11 6s. above par. This was, of course, followed by a very great influx of gold, and at the end of 1798, the Bank had ni)wards of £7,000,000 in its vaults, and the directors expressed their readiness to the Government to resume payments in cash. The Ministry, however, thought it inex- pedient in the state of the country. 147. The harvests of the two preceding years had been un- usually abundant, and in January, 1799, tlie prices of all sorts of corn were extremely low, wheat being 49s. per quarter, and other kinds in proi)ortion; but the Avinter of 1798-9, was ex- tremely rigourous and mifavorable for farming ojjerations. The spring was equally mifavorable, and in May, wheat was at 61s. 8d. This Avas followed by an extremely wet summer and autumn, so that at the end of the year wheat was at 94s. 2d. In February, 1800, the subject of the scarcity Avas taken up in both Houses, Lord Auckland said that it Avas estimated that the produce of last year's crop Avas little more than half average. Under the influence of this unparalleled deficiency the ])rice of Avheat rose in June, to 134s. 5d., and remained at the end of the year at 133s., after having fallen for a short period to 96s. 2d. in consequence of large importation introduced by the tempta- tion of heavy bomities. 148. Under the uifluence of the enormous importation of Avheat, the exchange Avitli Hamburg continued to decline all through the summer of 1799, till in the last Aveek of August, it had fallen to par. It continued steadily to decline after that until, in December, 1 800, it reached 30s. In the mean time the price of foreign gold in coin, Avhich had been at £3 17s. Od. in May, 1797, rose to £4 in December, and continued at that price till September, 1799. In June, 1800, it rose to £4 5s., and in December to £4 6s. 149. The arguments and ability of Sir William Piilteney in advocating the foundation of another Bank, produced great effect, and, ditring 1799, it excited great public interest. Meetuigs were held for the purpose of jiromoting it, and numerous pamphlets Avere published on the subject. The Bank Directors took alarm and, as the Minister was in Avant of a sui>ply, they took advantage of his necessities to obtain a prolongation of their monopoly. The charter had still twelve years to run, but ujion advancing £3,000,000, Avitliout hiterest for six years, Mr. Pitt agreed to renew it for tAA'enty-one years from 1812. Very soon after the opening of the Session in 1800 a bill for this purpose was brought forAvard and passed. 406 THEORY AND PRACTICE OF BANKING. We now see the results of two conflicting theories. For a considerable period there have been two opposite doctrines as to the true policy of the Bank during a great commercial crisis. The one is that the Bank should rigorously restrict its issues, and think of itself alone, and stand i;nnioved amid the universal ruin of the commercial world. The second is that due care should be taken to continue a restrictive policy while the exchange is adverse, but that, when the exchange becomes favourable, the Bank should enlarge its accommodation to siipport houses which are really solvent, but Avhich may be brought down in the general discredit. Each of these theories have been tried, but the supporters of the first, a restrictive theoiy, have quite overlooked one fact. Every banker of experience would tell them that an excessive restriction of credit causes a run for gold. Thus Sir William Forbes, speaking of the crisis of 1 793, says : " These proceedings, which obviously fore- boded a risk of hostilities, were the signal for a check on mercantile credit all over the kingdom ; and that check led by consequence to a demand on hankers for the money deposited loith them, in order to supply the toants of mercantile men.'''' The restrictive theory was likewise explicitly condemned by Sir Francis Baring, Mr. Thornton, the Bullion Committee, and all the most eminent authorities of the times, as we shall abundantly shew ; and tliey expressly condemned an absolute limitation of the bank's issues, because, in certain states of credit, it would cause certain ruin, and a run for gold. They expressly recommended the expansive theory, and we see the results of the two. In 1783, during a great commercial crisis, the Bank restricted its issues until the exchange became favourabk^, and then it freely expanded them, and ])assed safely through the crisis. In 1797, the Directors liaving for some years previously prodigiously extended their issues, while the exchanges were adverse ; and, being at last sensible of their imiirudence, and having conti*acted them so that for a considerable period the exchanges had become fiivourable, continued their j)()licy of merciless restriction long after gold was flowing into the country, and the result was tue STOPPAGP] OF THE BANK. END OF VOLUME I. John King and Comiiany, Limiled, Triiiters, 63, Queen Street, E.G. ,^3 5 7 / UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE UNIVERSITY LIBRARY _, _ This book is DUE on the last date stamped below DEC 16 1950 I LO URL ICLSI QL DEC23M m flPP 919(79 MAR 1 2 te79 REC'D LD-URt OCT 5]i81 fEB 41932 NOV 2 3 1988 Vol ?sjf^ NOV 1 5 1988 111 r--n -],' 12(s.-.l!l) UNIVRRSITYOFCAUFOKNIA AT LOS. ANGKLES llSlSfiK "^°'°'^'^'- LIBRARY FACILITY AA 001 167 737 3 1158 00437 1901 J